INFORMATION AND SUPPLEMENTARY LETTER OF INTENT
Approved By
Robert Rennhack (WHD) and Masato Miyazaki (SPR)This supplement provides information on developments and program performance since the issuance of the staff report for the first reviews under the Stand-By Arrangement and the arrangement under the Standby Credit Facility (EBS/15/44). Board consideration of the reviews were originally scheduled to take place in mid-May on a lapse-of-time basis, but were postponed to allow time to assess the fiscal implications of the new social protection law, which was approved unexpectedly by congress in May. This supplement does not change the thrust of the staff appraisal.
A. Recent Developments
1. Congress approved the new framework law for social protection in May.1 The law aims at expanding the coverage of healthcare, pensions, and existing social programs.
The authorities plan to implement the law gradually, so that costs can be accommodated within the program targets and pressures over the public finances are minimized. Based on staff’s assessment, with gradual implementation, the law’s additional costs during the program period can be contained to be consistent with the existing fiscal targets envisaged in the program. Costs are projected to rise further over the longer term. However, improved targeting of social protection programs (which the authorities are working on as part of the program) and the winding down of some programs should also contain the growth of these costs. The authorities have also indicated that they would be prepared to reduce or phase out existing tax exemptions (about ⅓ percent of GDP starting in 2020) to help cover the law’s longer-term costs.
2. The authorities have taken measures against corruption, following revelations of misappropriation of funds at the Honduran Social Security Institute (IHSS) during the previous administration (see supplementary Letter of Intent). The revelations have led to anti-government protests demanding a stronger stance against corruption, including
1 The framework law is described in paragraph 16 of the Staff Report.
September 4, 2015
its investigation by an independent international body. The government is supporting the ongoing investigation by a multi-party parliamentary commission, while calling for a broad and unconditional national dialogue on corruption. It has also proposed five concrete measures to address corruption in the country: (i) the creation of a unit of supervision and support against corruption and impunity at the Public Prosecutor’s Office; (ii) a similar unit for the council of the judiciary and the courts inspectorate; (iii) a special new unit for the security of judges, prosecutors, their families and judicial installations; (iv) a new monitoring entity for the justice system; and (v) a new system of business integrity. As part of the IHSS reforms included in the program (structural benchmarks for September and December 2015), the authorities will also strengthen this institution’s governance through changes to its law. Following the replacement of the IHSS’s management team in 2014, they have also adopted measures to strengthen procurement practices and processes at the institution. To further enhance oversight and accountability, staff encourages the authorities to comply more fully with the provisions of the fiscal transparency code, and also publish the findings of such assessment.
3. Macroeconomic performance in 2015 has been in line with the program.
According to the monthly index of economic activity, real output grew by 3.6 percent year on year in the first half of 2015 led by stronger than expected export demand (2.7 percent in 2014). Against this background, staff has revised the 2015 growth projection slightly up to 3.5 percent. Partly aided by lower fuels prices, headline inflation stood at 3.2 percent year on year in July, the second lowest level in the last 25 years, and broadly in line with the end-year projection of 4.7 percent.
The balance of payments has continued strengthening, aided by the lower international fuels prices and solid export growth. In the first half of 2015, net international reserves rose by over US$370 million to US$2,848.5 million, well above the program target.
Fiscal performance has also been consistent with program targets during the first half of 2015. The combined public sector posted a surplus of 0.8 percent of GDP (adjusted program target for end-June was a deficit of 0.6 percent of GDP). The central
government had a small deficit of 0.1 percent of GDP (end-June adjusted program target was a deficit of 1.0 percent of GDP). The operational margin of the state electricity company (ENEE) has improved, following the elimination of untargeted electricity subsidies since end-2014. Distribution losses, however, remain above 20 percent of electricity output, well above regional averages.
B. Program Performance
4. The completion of the review after June 2015 means that end-June performance criteria, rather than end-December 2014 performance criteria, will govern the completion of the first review under the Stand-By Arrangement. The first review under the Standby Credit Facility, however, will continue to be governed by the December 2014 performance criteria. The authorities met all performance criteria and indicative targets for end-June 2015 as shown in Table 1. The authorities are no longer requesting modification of the performance criteria for end-June 2015.
Table 1. Honduras: Performance Criteria 1/
5. The structural benchmark for June 2015 was met, Table 2. The authorities have made progress in developing a medium-term fiscal framework (going beyond the June structural benchmark that called for presenting a plan for developing such a framework), and additional work is being undertaken to develop a formal fiscal anchor to have a full-fledged and operational fiscal framework. Tax administration reforms are also advancing, in some cases ahead of the program schedule.
Program Adjusted Actual Status Program Rev. prog.
Fiscal targets 2/
Overall balance of the combined public sector (floor) -5,256 -3,345 3,461 √ -14,283 -11,700 Overall balance of the central government (floor) -6,870 -4,959 -707 √ -17,873 -16,900
Overall balance of ENEE (floor) 3/ -1,491 … -395 √ -3,353 -1,648
Public debt targets 4/
Contracting and guaranteeing of new nonconcessional loans
(continuous ceiling, in millions of US$) 600 … 80 √ 600 …
Accumulation of new arrears by ENEE (continuous ceiling) 0 … 0 √ 0 …
Accumulation of new external arrears (continuous ceiling, in
millions of US$) 0 … 0 √ 0 …
Monetary targets
Net international reserves of the Central Bank (floor, in millions
of US$) 2,390 2,406 2,848 √ 2,411 2,730
Stock of net domestic assets of the central bank (ceiling) -27,001 -27,345 -38,706 √ -22,454 -28,625 Indicative targets 2/
Wage bill of the central government (ceiling) 18,850 … 18,459 √ 39,248 38,456
Social spending (floor) 2,384 … 3,985 √ 7,333 9,000
Operating revenue-to-spending ratio of ENEE (floor) 0.97 … 1.04 √ 0.97 1.03
Sources: Honduran authorities and Fund staff estimates.
1/ Definitions as specified in the Technical Memorandum of Understanding.
2/ Cumulative starting in January of the correspondent year.
3/ Excluding government transfers.
4/ Cumulative starting in December 2014. Targets on nonconcessional debt and external arrears are for the combined public sector.
(Cumulative flows; millions of Lempiras, unless specified)
2015 2015
End-Jun. End-Dec.
Table 2. Honduras: Structural Benchmarks
6. Electricity sector reforms continue to move forward, albeit with some hurdles.
The planned reduction of ENEE’s staff has continued as envisaged in the program. The government has also completed the formal process for establishing the new electricity regulator, which is expected to become functional over the coming months. However, little progress was made with reducing distribution losses.
C. Administrative Arrangements
7. The Economic Cabinet has been given overall responsibility for economic policy in Honduras. As a result, the supplementary letter of intent and future letters of intent will be signed by the Head of the Economic Cabinet, the President of the Central Bank, and the Minister of Finance.
Policy Action Status
Met Sourced: Honduran authorities and Fund staff estimates.
Present a program for developing a medium-term fiscal framework with a clear fiscal anchor and fiscal policy targets.
(Qualitative targets for end-june 2015)