40317 INTERNATIONAL MONETARY FUND AND INTERNATIONAL DEVELOPMENT ASSOCIATION HONDURAS Enhanced Heavily Indebted Poor Countries (HIPC) Initiative Completion Point Document Prepared by the Staffs o f the International Monetary Fund and International Development Association' March 9. 2005 Contents Page Main Conc111sions ...................................................................................................................... 4 I. Introduction.................................................................................................................... 6 I1. Assessment o f Compliance with Requirements for Reaching the Completion Point....7 A. 7 B. Macroeconomic Performance in 2000-04 ............................................................. Implementation o f Poverty Reduction Strategy................................................... 10 C. Preparation and Implementation o f Anti-Corruption Strategy ............................ 10 D. Reform o f the Social Security System ................................................................ 14 E. Strengthening o f Basic Health Services for the Poor........................................... F. Improving Education Quality Through Increased Community Participation......16 16 G. Increasing the Efficiency and Targeting of Safety Nets ...................................... 16 H. Strengthening the Financial Sector ...................................................................... 17 111. Debt Sustainability....................................................................................................... 19 A . Data Reconciliation and Revision of Assistance ................................................. 19 B. Status o f Creditor Participation............................................................................ 20 C. 22 D. Sensitivity Analysis and Long-Term Debt Sustainability Analysis .................... Updated Debt Sustainability Analysis ................................................................. 26 IV. Issues for Discussion.................................................................................................... 27 'Approved by Markus Rodlauer and G. Russell Kincaid (IMF) and Pamela Cox and Danny Leipziger (IDA) - 2 - Boxes 1. Status o f Poverty Reduction and Structural Measures for Reaching the Enhanced HIPC Initiative Floating Completion Point Conditions....................................... 8 2. Selected Social and Demographic Indicators .............................................................. 1 1 3. Tracking Total and Poverty-Reducing Expenditures................................................... 13 4. Macroeconomic Assumptions Underlying the Debt Sustainability Analysis..............25 Figures 1. External Debt Indicators for Medium- and Long-Term Public Sector Debt......................................................................................................... 28 2. 29 3. Sensitivity Analysis (NPV o f Debt to Revenues and to Exports) ................................ Sensitivity Analysis (Debt Service to Exports) ........................................................... 30 Tables 1. Medium- and Long-Term Macroeconomic Framework .............................................. 31 2. Medi~iiii-and Long-Term Balance o f Payments.......................................................... 32 3. Nominal and Net Present Value (NPV) o f External Debt Outstanding as 34 4. o f End-December 1999...................................................................................... Estimated Assistance at Decision Point ....................................................................... 35 5. External Public and Publicly Guaranteed Debt at End-December 2003 ..................... 36 6. Comparison of Discount Rate and Exchange Rate Assumptions at End-1999 and End-2003 ..................................................................................................... 37 7. Comparison o f Net Present Value o f External Public Debt Between Decision Point 38 Net Present Value of External Debt............................................................................. and Conipletion Point ........................................................................................ 8. 39 9. External Debt Service After Full Implenientation o f Debt-Relief Mechanisms ..........40 10. 41 1 1. External Debt Indicators .............................................................................................. Sensitivit j Analysis ..................................................................................................... 42 12. Status o f Creditor Participation Under Enhanced HIPC Initiative .............................. 44 13. Possible Delivery of IDA'SAssistance Under the Enhanced HIPC Initiative.............46 Delivery o f IMF Assistance Under the Enhanced HIPC Initiative.............................. 14. 47 15. Paris Club Creditors' Delivery o f Debt Relief Under Bilateral Initiatives 48 16. beyond the HIPC Initiative ................................................................................ HIPC Initiative: Status o f Country Cases Considered Under the Initiative, February 1 1.2005 .............................................................................................. 49 Appendices I. Debt Management ........................................................................................................ 50 I1 Macroeconomic Franiework ........................................................................................ 52 - 3 - ABBREVIATIONS ACRONYMS AND BCH Central Bank of Honduras BCP Basel Core Principles BOP Balance of Payments CABEI Central American Bank For Economic Integration CAFTA Central American Free Trade Agreement CDC Cominon* ea1th DeveIopinent Corporation ClRRs Coininercial Interest Reference Rates CNBS Uational BanI, ing and Insiirance Cominission DMFAS Debt Management and Financial Analysis System DSA Debt Sustainability Analysis ESAF Enhanced Structural Adjustment Facilitq FDI Foreign Direct Investment FHlS Honduran Social Investment Fund FSAP Financial Sector Assessment Program GDP Gross Domestic Product HIPC Highly Indebted Poor Country IBRD International Bank for Reconstruction and Development IDA International Association for Development IDB Inter-AmericanDevelopment Bank IFAD International Fund for Agricultural Development IF1 International Financial Institutions IHSS Honduran Social Security Institute IMF International Monetary Fund JSA Joint Staff Assessment JSAN Joint Staff Advisory Note MDG MiI1enniiiin DeveIopinent Goal MOF Vinistry o f Finance MOH Ministry of Health NGO Non-governmental Organization NPV Net Present Value ODA 0fficial DeveIopmeiit Assistance OECD Organization for Economic Cooperation and Development ONCAE Public Procurement Policq Office OPEC Organization of Petroleum-Exporting Countries PRGF Poverty Reduction and Growth Facility PRSP Poveq Reduction Strategy Paper PROHECO Honduran Coininunity Education Project SDR Special DraNing Rights SEFIN Finance ministry (Secretaria de Finanzas) SIAFI Integrated financial management system TSC Supreme Audit Institution ("Tribunal Superior de Cuentas") UNCTAD United Nations Conference on Trade and Development UNAT Technical Assistance Unit of the Presidency UPEG Sector Planning and Evaluation Groups UPET Coordinating unit of the Public Procurement Strengthening Prograin WDR World Bank Indicators - 4 - MAINCONCLC'SIONs The staffs of the IMFand IDA consider that Honduras has met all but one of the conditions for reachingthe completion point under the enhancedHeavily Indebted Poor Countries (HIPC) Initiative, as specified in the decision point document. A waiver is recommendedfor nonobservanceof the unmet condition, which refers to the substantive applicationof Basel Core Principles in the financial sector. Completion of the second review of the PRGF arrangement, as recoininended by Fund staff, would provide evidence that Honduras's macroecononiic program is on track, and the government has made significant progress in implementing its structural adjustment program. The staffs consider that, despite a difficult political and economic environment, important progress has been made in the implementation o f the PRSP, which was prepared in broad consultation with civil society and the donor community, and provides sufficient evidence of the government's continuing coniinitnient to poverty reduction. The interim relief provided under the enhanced HIPC Initiative has allowed the government to increase social spendingin recentyears. As indicated in the second PRSP Progress Report. total PRSP spending (adjusted for hurricane Mitch-related programs) increased by a cumulative total o f US$476.2 inillion since 2000. o f which about half (US$236.5 million) was financed through interim HIPC relief. Nevertheless, improvement of poverty indicators has been mixed and the prevailing low income elasticity of poverty reduction in Honduras calls for additional efforts. Based on the debt reconciliation exercise for the completion point, the end-1999 stock of debt in net presentvalue (NPV) terms has been reviseddownwards by US$37.5 million. Under the current framework, for countries that reached the decision point prior to March 2002, the amount o f enhanced HIPC assistance required at the decision point cannot be adjusted downwards without the consent o f the country concerned. The Honduran authorities have not agreed to a revision on the grounds that such a revision could weaken poverty-combatingefforts by reducing the resources available for PRSP programs. As a result, the total relief committed under the enhanced HIPC Initiative would remain as stated in the decision point at US$556 million in NPV terms. The full delivery o f HIPC assistance together with additional bilateral assistance beyond HIPC will reduce the NPV o f debt-to-revenues ratio at completion point to 188 percent as o f end-2003, significantly below the HIPC threshold. Based on these findings, Honduras does not qualify for topping-up. The updatedDSA suggests that the debt remaining after the completion point will be sustainableunder sound policies.With the fiscal adjustment envisaged under the current PRGF program and levels of GDP growth similar to those achieved in 2004, Honduras's external debt ratios are projected to decline over the next 20 years. The accompanying sensitivity analysis shows that under those circumstances the Honduran economy will also be able to withstand temporary external shocks, such as - 5 - terms-of-trade or weather-related shocks. IfGDP growth remainsjust 1'/z percentage point below the baseline projections, however, Honduras's debt ratios would not decline over time. If, in addition, the fiscal balance were to deteriorate, then debt ratios would significantly increase over time and eventually become unsustainable. Hence. a prudent fiscal policy stance and a strategy for sustaining growth are critical for long-run debt sustaiiiabilit) 0 The staffs of the IMF and IDA recommend that Executive Directors approve the completion point for Honduras under the enhancedHIPC Initiative. - 6 - I.INTROD~~CTION 1. This paper assesses the progressmade by Honduras under the enhanced HIPC Initiative and seeks approval of the Executive Boards of the IMF and IDA, respectively,of the completion point under the Initiative. After establishing a three- year track record of good performance, Honduras reached the decision point under the enhanced Heavily Indebted Poor Country (HIPC) initiative in July 2000 (qualifying for assistance under the fiscal window).' At that time, Honduras was expected to reach the HIPC completion point in 2002. A full Poverty Reduction Strategy Paper (PRSP) was completed in July 200 1 and endorsed by the Boards of the IMF and IDA in October 200I. but difficulties in implementing a stable macroeconomic program set back the implementation of the poverty reduction strategy and, thus, delayed the completion point. The government garnered the necessary support for a strong macroeconomic policy program in 2003, and the IMF Board approved a new PRGF arrangement on February 18, 2004. The first annual progress report o f the PRSP and accompanying Joint Staff Assessment (JSA) were presentedto the Boards o f the IMF and IDA in February 2004. A second annual progress report and a Joint Staff Advisory Note (JSAN) are being considered at the same time as this document. In addition, the Board o f the IMF will discuss the staff report for the second review of the PRGF-supported program. 2. Total assistance to be provided to Honduras under the enhanced HIPC Initiative amounts to USS556 million in NPV terms. This represents a reduction o f 17.8 percent of the NPV o f debt as of end-1999 after assuming full delivery o f traditional debt relief. Based on this commitment. IDA and the IMF will provide debt relief in NPV terms in the amount of US$% million and SDR$22 million (approximately US$30 million) respectively. During 2000-04, Honduras benefited from interim assistance from milltilateral creditors in the amount of US$236in nominal terms, including US37 million from IDA and SDR8.8 inillion from the IMF (US$12 million). The Inter-American Development Bank (IDB) and the Central American Bank for Economic Integration (CABEI) provided HIPC interim assistance o f US$50 million and US$I37 million in nominal terms. Interim relief from the Paris Club has been provided through a flow rescheduling on Cologne terms. Additionally, some commercial creditors have provided interim relief through either flow cancellation or debt restructuring. 3. This paper recommendsthat the Boards approve the completion point for Honduras under the Enhanced HIPC Initiative. Inthe staffs' opinion, Honduras has `Honduras became eligible for HIPC assistance under the fiscal window, as at the time o f the Decision Point the net present value o f Honduras's external debt after traditional debt relief \\as determined to be at 304 percent o f the country`s fiscal revenues. above the HIPC tliresliold of 250 percent. while its exports-to-GDP ratio was 45 percent and its fiscal revenue-to-GDP ratio was 18 percent, exceeding the eligibility thresholds o f 30 percent and 15 percent respectively. made substantial and satisfactory progress on all measures set out in the decision point document, and met all but one of tlie conditions for reaching the completion point. A waiver is recommended for the uiimet condition. 4. The remainder of this document is organized as follows: Section I1assesses Honduras's performance in meeting the conditions for reachingtlie completion point. Section 111 presentstlie results ofthe debt reconciliation exercise and o f the updated debt sustainability analysis. together with several sensitivity tests. It also discusses the status o f creditor participation, Section IV suininarizes tlie main conclusions and Section V presents issues for discussion. 11. ASSESSYIE&T COMPLIAUCEWITH REQUIREMENTSREACHIUC OF FOR THE COMPLETIONPOIKT 5. Staff considers that the policy and reform conditionsfor reaching the completion point were met by end-2004, except for one condition pertaining to the strengthening of the financial sector, for which a waiver is recommended (Box 1). The conditions for reaching the floating Completion Point are established in Section IV o f the Decision Point doclimelit (IDAiR2000- I28 and EBS/00/114). These conditions, which aim to address the challenges to growth and poverty reduction in Honduras, read as follows: (a) maintenance of macroeconomic stability as evidenced by performance under a program supported by a PRGF arrangement, (b) successful implementation o f the full PRSP for at least one year as evidenced in one comprehensive annual report endorsed by the Boards o f IDA and the IMF, (c) preparation and implementation o f a participatory. comprehensive anti-corruption strategy aiid its presentation to the national and international community. (d) reform of the social security system, which is crucial to increase both the coverage and the quality o f health services and ensure a sound pension system, (e) strengthening ofthe basic health services for the poor, (f) improvement in the quality of education by increasing the number of schools with coininunity participation (PROHECO). (g) increase the efficiency aiid targeting o f safety nets, and (11) strengthening of the tiiiaiicial sector by application o f Base1Core Principles. This section discusses Honduras's progress toward meeting these conditions. A. Macroeconomic Performance in 2000-04 6. Staff considers that the program supported by the PRGF has been on track throughout 2004, in compliancewith the first completion point condition. The condition calls for tlie maintenance of macroeconomic stability as evidenced by performance under a program supported by a PRGF arrangement. The IMF Board approved the current PRGF arrangement on February 18, 2004 and concluded the first program review in September 2004. Completion o f the second review of the program supported by tlie PRGF \\auld constitute compliance with this condition. - 8 - Box 1. Status o f Poverty Reduction and Structural Measures for Reaching the Enhanced HIPC Initiative Floating Completion Point Con tions Monitoring Institution - an :ompliance I. Xlaintenance of macroecononiic stabilit!. as e\ idenced b! performance under a programsupported by a PRGF arrangement. Tlie IL1F Board approved tlie PRGF arrangement in Februarq 2004 and tlie first reviem IMF Dons in September 2004. Tlie second re\ ie\\ is presented alongside this document for approval to tlie IMF Board. 2. Successful implementation of the full PRSP for at least one year as e\idenced in one comprehensive annual report endorsed by the Boards oflD.4 and IhIF. Tlie fill1 PRSP was submitted to the IMF and IDA IDAI Done Boards in July 2001 and a first progress report \\as submitted in December 2003. The second progress report is IMF being submitted to the 1MF and IDA Boards alongside this document. 3 , Preparation and implementation ofa participatorj,, comprehensive anti-corruption strategy and its presentation to the national and international community. Key measures include a. Elaboration and publication of a participator) comprehensive anti-corruption strategy in consultation with ci\ ilsociety and the international community. Anti-corruption strategy prepared and IDB Done published b) tlie National Anti-Corr~iptionCouncil in ho\ember 2003. b. 3leasures to strengthen control mechanisms such as the Offices ofthe Comptroller General and of .Administrative Probity. Oftices o f Comptroller General and o f Administrati\e Probit) were merged in IDA/ Dolie lannai? 2003 to creak TSC. TSC personnel has been restructuredand a training program for TSC staff IDB has been prepared and is being implemented. Meastires to strengthen procurement include the creation of OUCAE. its merger \\it11 UI'ET and designation o f its Consultatike Council in 2004. c. Increasing the automaticit! and transparent) o f regulations that affect the private sector. Government passed the Administrati\e Simplification l a c in 2002. reducing average time to register new IDB Dolie businesses. 4. Reform of the social security system, hich is crucial to increase both the coverage and the quality of H health services and ensure a sound pension s~'stem.Key measures include: a. Separation of the health and pension plans ofthe IHSS. Tlie separation ofplans was completed in IDA Done March 2004. b. Strengthening of the regulatory capacity o f the ministry of health, and the improvement o f IDB Done ind qualit! of health s e n ice pro\ision. N o r m for tlie licensing of health facilities \\ere approved iii Ma) 200.1 and 121 liealtli facilities nere rehabilitated and licensed under the health iiiinistt-y's lie\\ health facility ceriitication program. c. I n pensions, the IHSS s!stem will be made actuarially sound, its coverage expanded, and pension IDA Done benefits rationalized to improve the incomes of the neediest. Passage of Decree 80-200I and the raising ofsalav ceilings for pension contributions in 2001 liace placed the social security system on a sound financial footing over tlie niediuni to long term IHSS affiliation \vas increased to almost 500.000 by December 2004. and introduction o f automated identitication card sq stem for IHSS affiliates is \+ell undenvay. IDB Done 5, Strengthening of the basic health services for the poor. (Specific trigger is the delkery o f a basic health services package to at least 100.000 beneficiaries.) During 2004. coverage o f tlie basic package o f primary health care services \\as extended to co\er over 285.000 persons in poor communities 6. Impro\ement in the quality o f education by increasing the number o f schools with community IDA Done participation (PROHECO). (The specific completion point trigger is the implementation o f tlie program in at least 1.350 PROHECO scliools.) A s ofNo\!eiiiber 2004. tlie number o f PROHECO schools had increased to o\ er 2000. 7. Increase in the efficiency and targeting o f safety nets. (Specificall). tlie implementation o f social IDA Don< investment pmjects based on participatory plaiining metliodologies in all beneficiary municipalities.) As o f October 2004. participator? planning processes liace been implemented in a11 Honduran municipalities. including the 87 poorest in~tnicipalities. I,MFI Not fully coniplisd 8. Strengthening of the financial sector bj, application o f the Basel Core Principles (BCP). (Specifically. IDA \\lth. but impro\ ing the efficienc) and soundness oftlie financial system bq substantive application o f BCP to the slglllflcallt banking sector. and b) raising tlie capital adequacy ratio from 9 to I O percent and enforcing it on all progress /hasbzrii commercial banks.) The capital adeqtiac) ratio \cas raised to I O percent at end-2000. and progress toward BCP acliis\,ed compliance has been achieved. especiall> (WaiLer I\ it11respect to reforming tlie legal framework. strengthening Recoininznded) s~ipenision and implementing a program to increase tlie solveiic) of tlie financial system. 4 refomi program to gradually increase sol\ enc! and improve sui?eillance further. and create tlie conditions needed for substantive coiiipliance \\itli BCP iii tlie medium term is tinder implenientation \\it11 IMF and IDA support. - 9 - 7. After reaching the decision point in 2000, growth was initially boosted by the reconstruction efforts following Hurricane Mitch but later fell as a result of external shocks and inadequate policy efforts. The terms of trade continued to decline amid falling coffee and banana prices and growth fell by 3 percentage points, to about 2% percent in 2001 and 2002. Initial progress under the previous ESAF/PRGF arrangement allohed Honduras to reach the HIPC Decision Point in mid-2000. However, the program went off track soon after as fiscal imbalances related to wage pressures and weak tax collections intensified. Public savings dropped sharply on account o f wage increases and the widening fiscal deficit required large domestic financing including extraordinar) transfers froin public enterprises. Meanwhile, financial system fragilities increased and policy making was constrained by social unrest and influential vested interests. 8. I n December 2003, following extensiveconsultationsand consensusbuilding, the government was able to garner the support needed for an economic program with Fund support. The main goal of the program was to address the rising fiscal pressures and create room for anti-poverty spending, bolster growth, and gradually reduce inflation to the level o f the trading partners. Additionally, the program aimed at strengthening the finaiicial sector. 9. The program has already delivered positive results in 2004. Growth accelerated to 4.6 percent and PRSP spending increasedto 8.4 percent o f GDP (from 7.5 percent iii 2003). Meanwhile the fiscal deficit was reduced by 2 percent o f GDP, reflecting an increase of public sector savings. The external position also strengthened substantially despite higher oil prices. on account o f high remittances, higher exports, and capital inflows. Net international reserves increased by US$496 million in 2004, covering 4.8 months o f imports. High oil prices and foreign exchange inflows intensified inflationary pressuresduring 2004. However, inflation has stabilized in recent months reflecting a tightening o f monetary policy and somewhat lower oil prices. 10. Restoring sound macroeconomicpolicieshas been an important achievement, but carrying on the reform agenda and preserving sound policies through the upcomingelection period and beyondwill be ~hallenging.~ Controlling the public sector wage bill and maintaining strong revenue collection is critical for sustaining a stable macroeconomic framework and adequate poverty reduction efforts. Efforts are also neededto reduce vulnerabilities and improve the resilience to external shocks by introducing more flexibility into the exchange rate regime, further diversifying the export base, and continuing to strengthen the financial system. Additionally, maintaining competitiveness and controlling inflation in the context o f strong inflows fLieled by remittances remains a challenge. 3 Presidential, legislative, and municipal elections are scheduled for November 2005. - 10- B. Implementation of Poverty Reduction Strategy 11, Honduras has complied with the second floating completion point condition, which calls for the successful implementation of the full PRSP for at least one year. The full PRSP was completed in July 2001, but difficulties in implementing a stable macroeconomic program set back the implementation of the poverty reduction strategy, delaying the completion point, which had originally been expected for 2002. A first PRSP Progress Report, presented to the Boards of IDA and IMF in early 2004, indicated mixed progress in the implementation o f its poverty reduction strategy. An important reason for slow progress in achieving the goals established inthe PRSP was the weak macroeconomic framework, especially due to an unsustainable public wage policy, which limited the economy's capacity to sustain growth and the government's ability to spend on poverty reducing programs during 2001-2003. With the preparation o f the first Progress Report, the authorities expanded the definition o f poverty reducing-spending (as recommended by IDA) to achieve a closer link between anti-poverty spending and poverty-reducing outcoines. 12. The second annual PRSP progress report, issued in February 2005 indicates a broadly successfulimplementation of the PRSP, both in terms of poverty-reducing spending and of improvementsin the PRSP indicators. Three out of every four PRSP monitorable goals were met in 2004, in contrast to the record in 2002 and 2003, when only about one-third to one-half of the goals were achieved. PRSP spending has been increased since 2000 despite the phasing out in 2002 o f Mitch-related reconstruction spending (much of it donor financed). Nevertheless, the improvement o f poverty indicators has been mixed (Box 2) and the prevailing low income elasticity o f poverty reduction in Honduras calls for additional efforts to ensure attainment o f all PRSP targets. (The use o f HIPC interim reliefto expand PRSP spending is described in Box 3, using the government's revised definition of PRSP spending and applying a virtual fund approach-as stated in the first-annual PRSP progress report.) Both PRSP progress reports were subject to consultation within the targeted for retirement have been released and 62 new staff members have been hired, leaving only 24 additional hiresto complete the restructuring process. A medium term government and with the Consultative Council o f the PRSP, which includes members o f civil society and the donor community. The staffs o f the Bank and the Fund consider that the country's efforts toward implementation o f the PRSP strategy has been satisfactory over the past year. C. Preparationand Implementation of Anti-Corruption Strategy 13. The third floating completionpoint conditionwas complied with through the implementation of an anti-corruption strategy. The condition calls for (i)the implementation and publication of a participatory. comprehensive anti-corruption strategy, in consultation with civil society and the international community; (ii)measures to strengthen control mechanisms such as the Offices o f the Comptroller General and o f Administrative Probity; and (iii) an increase in the automaticity and transparency o f regulations that affect the private sector. The anti-corruption strategy was prepared and published in March 2002 by a commission set up by the government in consultation with - 11 - Box 2. Honduras: Selected Social and Demographic Indicators Honduras's social and demographic indicatorshave been gradually improving,but greater momentum is neededto reach the MDGs by 2015. The share ofthe population living in poverty has fallen modestly, from 66 percent in 2000 to 64 percent in 2004, while that in extreme poverty declined from 49 percent to 44.6 percent. Secondarq education indicators hake improved, as have certain infrastructure coverage indicators (electricity and sanitation services), which should help technology adoption and FDI in the context o f CAFTA. However, recent advances in two key indicators, primary education and access to water, have been slow. This is worrisome, given that most PRSP goals and MDGs are strongly associated with literacy rates, and access to water is critical for reducing child mortality and malnutrition. Honduras had previously made important advances in both areas and it needs to accelerate the inomentuni in order to achieve its PRSP targets and MDGs. Hondiirds Selected Social and Demographic Indicators, 2000-2004 (In percenrages, e\cepr as noted) Latin Ainerica and Lon Income Indicotol ZOO0 2001 2002 2003 2004 Caribbean Countries 2000-2002 2000-2002 Popii tion lii Total population (inillions ot'iiihabitnntsi ' 6 5 6 6 6 8 7 0 7 1 527 2.195 Global fertilitl rale (births per iioiiiniil " 3 8 2.5 3 56 Life e\pectoiic! at birth (iiiiinbcr ofbtars) 700 70 7 70 6 58 7 Poberty National (oftotal poptilation) \ 6 6 0 644 63.3 63 5 6 4 2 Urban ( o f urban population) ' 55.5 563 58 7 Rural ( o frural population) ' 708 702 703 Evtreine national Ioi'totnI poptilation) " 1 9 0 4 7 4 45 2 44.7 1 4 6 Educiition Illiterac) rate \ 2 5 0 2 4 0 I 9 7 190 18.5 10.8 38 I Net preschool eiirollinent rate I' 2 7 0 2 9 0 Net priinar) enroilineiit rate " 88.3 8 7 0 77.0 9 0 0 882 96 9 Gross priinaq enrollmelit rats .' 99 6 98 3 97.7 101.1 110.2 Coinpiere priinan ediicarion in si\ hears ' 68.5 69 0 69 0 69.0 Ket secondan eiirollineiit rate '' 242 31 0 309 312 38.2 Health iintl nutritioii linintinizatioiis (ofcliildreii tinder one bear) DPT 9 4 0 9 6 0 950 9 2 0 9 5 0 89.0 61 0 Measles 9 8 0 95 0 97.0 ,.. 91 .O 59 0 Malnutrition (of children tinder file hears) " 37 8 32.9 infant inortaiit! (per 1.000 1112birtiis) " 3 6 0 3 4 0 28 2 80 9 Liidzr fi\e inortalit) rate (per 1.000 Ii\e births) ' I 480 450 34 0 121 0 Matrmal inortalit! (per 100.000 like hinhs) 1570 1080 Iiistittitioiialbirths (ot'eupzcted birtlis) " 51 7 1 4 0 454 477 566 43 0 Prenatal care (ot'e\pected pregnant \Loinen) '' 73 0 700 77.0 94.0 9 4 0 Basic infrastructure senices Access to safe \vatu (oipopiiiatioii~ 89 5 82 3 83 4 84 I 86 0 76 0 Saiiitarioii access iii iirbnii popiilatioiis ' 95 3 94 9 95 1 962 Coverag ofelectricir! (of poptilation) I' j 4 i i 5 1 5 601 6 2 1 6 3 7 Sources Morld Dr\eIopiiisiir Iiidicnrors (KDRIfor Lntiii .?"sa iiiid the Cnnbbzaii aiid for Lou Income Cotmtnes. for Honduras ( A )Hotisold Sune) ti.0111the \atluial lmtirtitr ofSratistics (IhE)200 I. 2002. 2003. 2004. (B)UPEG. Szcretai) of Education. (C) EFA-tIOUDURAS~Secretai) of Educatioii 2002. (DJThe \iorld Henltii Orgaiiization Report 2003. (El Morld Bank Database:DDP Time Series. (F) L'PEG, Secretar). o f Hcalth. (G) PRSP Pro&mrss Repoil. (HI E\ESF PRSP Progress Report - 12- civil society and the donor cornmunity,4 thereby fully complying with the first item under this condition. 14. The government's fiduciary and audit control mechanisms were strengthened in 2003 with the merger of the Comptroller General's office with the Office of Administrative Probity, to create the new "Tribunal Superior de Cuentas" (TSC).' Also, the government's procurement mechanisms were strengthened with the creation o f a public procurement policy office ("Ojicina Norn7ativade Contratacidn y AdqziisicioneA". ONCAE). its merger with the coordinating unit o f the public procureinent strengthening prograin ('.Unidad del Programa de EJiciencia y Tiwqm~enciaen 1u.s Coiiiprusy Contrataciones del EJtado", UPET) and designation o f its Consultative Council in November 2004.6The regulations for the decree creating the TSC were issued on J u I ~19. 2003, and a 5-year institutional-strengtheningplan for TSC was prepared. That plan included a personnel restructuring component, the preparation of a medium term training program for TSC staff, and the hiring o f an international expert to support implementation ofthe TSC strengthening plan. The personnel restructuring plan called for the retirement of 188 o f TSC's original staff of 587 employees and the hiring o f 86 new staff with a more appropriate skill mix. As o f December 17, 2004, all the persons training program for TSC staff has been prepared7and a number o f capacity building activities were carried out during 2004. The most substantive elements o f the training program have had to wait until the completion of the personnel restructuring, however, and they are expected to be initiated in 2005. The authorities are currently in the process o f hiring an international expert to help implement the TSC strengthening plan. Finally, to improve the qualitj ofaudits, the TSC completed several manuals on following up on audit recommendations, general n o r m for internal control and audits, and on the norms for government audits. 15. The automaticity and transparency of regulationsthat affect the private sector was increasedthrough passageof the Administrative Simplification Law in 2002. Since then, the average time it takes to register a business located in Tegucigalpa The anti-corruption strategy was prepared by the National Anti-Corruption Council created by Executive Decree 0 15-200I,dated February 16, 2001. The National Anti- Corruption Council was reinstated by President Maduro to oversee the implementation o f the strategy through Acuerdo Ejeczrtivo 064-2002, published in La Gaceta on March 11, 2002. 5 Decree No. 10-2002-E ("Ley del TiflibunnlSuperior de Cuentas"), published in La Gaceta on January 20, 2003. 'Acuerdos Ejeczctivos iVos. 015-2004, 02Y-2004 and 030-2004, published inLa Gaceta on November 20, 2004, and Acuerdo Ejecutivo No. 018-2004, published inLa Gaceta on November 24, 2004. 'Details of the TSC capacit) building plan are in the communication, dated November 12. 2004 (Ojicio 57-2004-DDI-TSC7,from Mr.Roberto Galvez Bueno, TSC Director of Institutional Development. - 1 5 - Box 3. Honduras: Tracking Total and Poverty-Reducing Expenditures The table belon provides an overvieu o f public spendingin Hondurasduring 2000-04. Total public spending is divided into spendingon interestobligations and primary spending, with the latter divided into poverty-reducing spending (denoted PRSP spending)and non-PRSP spending. Total PRSP spending is divided further into poverty-reducing. post-hurricaneMitch reconstructionactivities that were phased out in2002, and other ongoing poverty-reducing programs, denoted Adjusted PRSP spending.This adjustment allows the assessmento f PRSP spending net of the extraordinary expendituredue to Mitch-relatedreconstruction-much of which was financed by donor grants. The figures show PRSP spending accordingto the reviseddefinition introduced inthe context o f the First PRSP APR. The last column on the right shows the cumulative changes in public spendingand of internal and external resource flows with respectto 2000 (the base year). It can be readily seen that the cumulative increasein adjusted PRSP spending during 2001-04 (LS476.2 million) exceedsthe cumulative increase intotal external resource inflows targetedto poverty-reducing programs over that period (US347.4 million), which includes US2363 inillion in interim HIPC relief. (It should also be notedthat the cumulative flow of domestic financing devoted to adjusted PRSP spendinghas been positive.) Fromthis we can conclude that the inflow of external resources intended for PRSP spendingcontributedentirely to higher PRSP spendingand did not lead to a substitution of domestic resources. s Honduras: Central Government Finances 2000 2001 2002 2003 2004 Sum of changes* /n US$ m/ii,ons (2001-04) Total Income 1 1 3 2 0 1,277 9 1 279 1 1,3740 1506 6 909 8 of which donations 59 5 112 2 69 4 77 2 73 0 93 7 Total Expenditure 1470 9 1 653 a 1624 7 i7871 1 7 6 7 7 949 7 of which interest 155 a 137 3 124 a 133 3 129 9 -98 0 Total PRSP Spending 493 1 564 9 497 4 538 1 598 9 226 7 Adjusted PRSP Spending 384 3 445 5 430 8 538 I 598 9 476 2 Financing Domestic 269 7 296 5 299 2 314 9 348 3 180 2 External 114 6 149 0 131 6 223 1 250 6 347 4 of which HlPC relief + 55 5 57 3 53 3 60 0 236 5 Other 104 3 93 5 74 3 169 a 190 6 110 9 Mitch-related PRSP Spending l o a 9 1194 66 6 na na -249 5 Financing Domestic 26 9 5 5 12 3 na na -89 8 External 82 0 113 9 54 3 na na -159 a Total non-PRSP Spending 821 9 951 6 1 0 0 2 5 1 1 1 5 7 1038 9 a21 I Financing Domestic 754 9 787 8 915 4 1 0 1 4 0 963 9 661 4 External 57 0 153 8 87 1 101 7 75 0 159 7 Balance -338 9 -375 9 -345 6 -413 1 -261 1 -39 9 Financing 338 9 375 9 345 6 413 1 261 1 39 9 Net External financing 75 1 176 2 53 3 123 1 73 5 125 5 External resources 204 0 314 5 203 5 247 7 252 6 202 1 Amortization 128 9 138 2 150 3 124 6 179 1 75 6 Internal Deficit Financing 2638 1996 2923 290 1 1876 -85 6 Source SEFlN and UNAT Notes Represents the cumulative change in flows with respect to the base year 2000 Includes USSlO 2 million of interim HlPC debt relief provided to Honduras in 2000 - 14- has been significantly reduced. from 129 days in 2002 to 62 days in the first quarter o f 2004. by streamlining perinit processes.8 D. Reform ofthe Social Security System 16. The government has compliedwith the fourth floating completion point condition, which calls for the implementation of the social security reform plan approved by the IHSS Board on May 24,2000. Implementation of this plan includes (i) the separation ofthe health and pension plans of the IHSS, (ii)strengthening the regulatory capacity of the ministry o f health and the improvement of coverage, efficiency and quality of health service provision, and (iii)assuring that. in pensions, the IHSS SI stein M illbe madeactuarially sound, its coverageexpandedand pension benefits rationalized to improve the incomes o f the neediest. Legislative Decree 80-2001 provided the legal foundation enabling the implementation of significant reforins in IHSS, such as raising contribution rates and contribution ceilings for the health and pension regimes (which had not been changed in 30 years). Also, the Decree ordered the separation o f the pensions and health system into two separate regimes, and the creation o f a third regime to cover professional risks. 17. The I H S S completed the separation of the financial accounting and budgeting systems of the Old Age, Disability and Death Regime from the Sickness- Maternity Regime in March 2004, and has significantly expanded its population coverage.A new pensions department (headed by a separate pensions manager) mas established in April 2004. IHSS also has developed a registry o f affiliates, based on a nem, automated identification card system. The distribution o f cards is proceeding according to plan: by March 2004, 10 percent o f the total eligible IHSS affiliates were registered, and by October, 2004. 34 percent (of a total of 480.000 affiliated contributors) mere registered. B) end 2004. the total number of IHSS affiliated contributors expanded to 498.000. about 16 percent o f the economically active labor force. up from 14 percent in 2003.'" The authorities plan to have all IHSS affiliates registered by end 2005. 18. The regulatory capacity of the MOH is being strengthenedwith the development of the new health facility certification program, which has been developedwith assistance from IDA and IDB. Norms for the licensingof health establishmentswere approved by ministerialdecree in 2004." The licensing program had called for licensing of 10 percent o f all (2,473) private and public health centers and health posts in the country by September 2004. This process has been advancing well, albeit inore slowly than originally envisaged because most health establishments did not meet the established standards and required significantly more rehabilitation than 8 See World Bank (2004) "Doing Business in 2005: Removing Obstacles to Growth". 9 Published in La Gacetaon 14 June 2001, l oLetter o f certification froin the Director o f IHSS, attaching the database o f contributors affiliated uith IHSS as of December 2004. 'I Acuerdo A14inirteriallVo. 934. issued by the Minister o f Health on 20 May 2004. - 1 5 - anticipated. As of end-2004. 121 facilities have been licensed. while another 100 facilities are in the process o f being rehabilitated. According to IDA'S project supervision documents, the resultiiig physical improvements of the primary health care facilities are beginning to generate a positive impact on beneficiaries. The revised plan calls for the licensing o f at least 19 percent o f all health establishments by December 2005 and o f all health establishments by December 2015. 19. The actuarial soundness of the pension system has been assured over the medium term with the passage of Decree 80-2001. This decree introduced a state contribution to the pension system (amountingto 0.5 percent o f eligible salaries) and raised the salary ceilings for pension contributions from L 600 to L 4,800 between 2001 and 2003. which compensated for the inflationary erosion that took place over previous decades. Also, this decree gave tlie lHSS Board of Directors the discretionary powers to revise tlie pension system parametersas neededto maintain its actuarial soundness (in a manner to be determined on the basis of actuarial studies). Three actuarial studies to support efforts to extend IHSS coverage to priority geographic areas and to define the parameters o f the pension and health systems neededto render IHSS actuarially sound were completed in April 2004.'' These studies show that the parameter reforms that have been implemented so far are sufficient to ensurethe system's financial viability over a considerable period o f time: in the absence of further changes, the pension system is projected to generate a growing surplus over the next five years. It is projected to generate a deficit after approximately 35 years, however, eventually requiring further corrective actions. On the basis o f these studies. draft regulations for Decree 80-2001 to improve fiiither the actuarial soundness o f the pension and health regimes have been prepared and submitted to the IHSS Executive Dire~t0rs.I~These regulations have been l2 These three studies refer to (i)Sanigest Internacional S.A. (Fabio Duran-Valverde, Alexander Amoretti & Liliana Velez), "EJtudio Actziarial: Proyecciones Actuariales del Segiiro de Invalidez, Vejezy Muerte del Imtituto Hondurefio de SegziridadSocial", Tegucigalpa, Honduras, Abril 2004, (ii)Sanigest Internacional, S.A. (Fabio Duran- Valverde). 'LInfoiwiede Consiiltoi~in:EstzidioActuarial Seguro de Salud", Tegucigaka, Hondura,. ADril200-1. and (iii)Saiiigest lnternacional, S.A., "Valuacidn Actuarial para Ici Crencidn del Seguro de Rie\goI Profesionnle del Institarto Hondurefio de Seguridad I Social 'I,March 2004. 13 The total contribution rate applied to the salaries o f IHSS-affiliated workers is 10.5 percent, of which 3.5 percent is designated for pensions and 7 percent finances the health insurance sqstein. In the absence o f further reforms, the 3.5 percent o f eligible salaries assigned to the pension system is enough to ensure its financial viability for at least 35 years. This outcome is attributable to the relative youth ofthe program and modest level o f benefits. The system's health insurance regime also will require a parametric response to avoid potential declines in the quality o f service, since contribution ceilings are not indexed to inflation at the present time. Consequently. in the absence of fiirther measures (such as the indexation of contribution ceilings to inflation), the real value o f social security contributions channeled to the health regime would (continued) - 16- discussed by the Directors in various worlishops convened during the second half o f 2004, and agreement in principle has been reached on all but a few items. The authorities expect to conclude the consultation process bq earl) 2005 and to approve the new regulations b] mid-2005. E. Strengtheningof Basic Health Services for the Poor 20. The government has compliedwith this condition, which required the delivery of a packageof basic healthservicesto at least 100,000 beneficiariesin poor communities, with emphasis on primary and maternalkhild health care. The Ministry o f Health has increased delivery o f its basic packageo f primary health care services (emphasizing maternal and infant services) through the purchase o f services o f mobile health teains from NGOs. During 2002-03. coverage o f this package was extended to approxiinatell 100.000 persons living in poor communities, formerly with very limited access to health care. The Ministry also increased its direct provision o f services by roughly 20 percent. During 2004, coverage o f this package was extended further to cover an estimated total in excess of 285,000 persons in poor co~nmunities.'~ F. ImprovingEducation Quality Through IncreasedCommunity Participation 21. The government has complied with this condition, which calls for increasing the number of schools with community participation (denoted PROHECO schools) to at least 1,350, to ensure better coverage, lower urban-rural discrepanciesand higher quality of education in the neediest areas. As of December 2003. there were 1.700 PROHECO schools in operation, mainly in rural areas, which exceeds the completion point target by an ample margin. As o f November 2004, the number o f PROHECO schools increasedto 2,055. employing 3,309 teachers attending to an estimated 93,259 students.I' G. Increasingthe Efficiency and Targeting of SafetyNets 22. The government has compliedwith this condition, which calls for the implementation of social investmentprojects by the Honduran SocialInvestment Fund (FHIS), on the basis of participatory planning methodologiesin all beneficiary municipalities. The aim ofthese participative planning metliodologies is to ensure that coininunities and beneficiaries have a greater say in the selection o f FHIS projects, which has been shown to enhance their quality and the sustainability o f project benefits. FHIS gradually erode, which could result in a decline in the quality of health services and would eventually undermine the effectiveness o f the IHSS. I`To maintain this coverage, the health ministry has signed 28 contracts with 16 NGOs for the provision o f basic health services in specially targeted regions. 15 See documentation. dated 23 December 2004. froin the Minister o f Education certifq ing the number o f schools. teachers and students covered by the PROHECO program. - 17- has been basing its social illvestment projects on participatory local development methods that result in municipal investment plans ("Planes de Inversidn Municipal") since 2000. As o f October 2004. these participative planning processes have been implemented in all (298) municipalities in Honduras, including the 87 poorest municipalities, thereby complying with this completion point target.16In addition, municipal strategic development plans ("Planes E~tratdgicosde Desarrollo Municipal'' - PEDMs) based on these processeshave been completed for 172 municipalities, including 47 o f the poorest ones. H. Strengtheningthe FinancialSector 23. Fund and IDA staff support a waiver of the trigger condition regarding financial sector reforms on the basisof the significant progress being made with the ongoing financial sector reform program.The condition calls for improving the efficiency and soundness of the financial system by substantive application o f Basel Core Principles (BCP) to the banlting sector and raising the capital adequacy ratio from 9 to 10 percent and enforciiig it on all coininercial banlts. While the authorities have made substantial financial reforms, Honduras-like many other countries-is still not in a position to fully applq the Basel Core Principles, given the level o f development o f its financial sector and institutional framework. The regulation raising the capital-adequacy ratio to 10 percent nas approved at 2000 and is being enforced. In addition, the authorities are implementing ail ambitious financial sector strategy that includes: (i)upgradingthe regulator) and supervisory framework (that bringslocal practices closer to compliance with the BCP framework) and improving the bank resolution framework and (ii)strengthening the solvencq o f the system. Significant progress in the implementation of this reforin has been achieved during 2004 (described below) and is programmed to continue in 2005-06. The reform program, which is supported by the Fund (in the context of the PRGF arrangement) and IDA (through present and planned financial sector credits) provides the legal framework needed to promote substantive compliance with the BCP over a medium-term horizon. 24. A comprehensiveassessment (FSAP) undertaken in 2003 revealed important weaknesses of the financial sector.The FSAP found that compliance with BCP was very limited. Honduras' largely complied with 3 o f the 25 BCP, materially non-complied with 20 BCP, and not complied with 2 BCP." In addition, the solvency o f the system was found to be weak due to the adverse impact on banlts' loan portfolio o f Hurricane Mitch 16See letter o f certification from Minister Leoiicio Yu Way Morales (dated 2 November 2004), confirming application o f participative planning methods in all municipalities and attaching a database o f the municipalities for which PEDMs have been completed. l7The FSAP assessed material non-compliance with the first BCP, which has 6 subcategories. One ofthis was assessed compliant, another one largely compliant, and the rest inateriaIIy 11 11 o coinpIiant. - 1 8 - (1 998) and the collapse of coffee prices (1 999 and 2001)-a situation that had not been fully known at the time of the Decision Point (inid-2000). 25. Progress has been made toward compliancewith BCP, particularly from a legal and regulatory standpoint, and strengthening supervision.Consistent with the recoinmendations o fthe 2003 FSAP, a series of laws and several underpinning regulations \\ere approvedthat: (i)improve provisioning and loan classification procedures: (ii)allow for the introduction of consolidated supervision (including off- shores, affiliates and subsidiaries); (iii) grant additional operational powers to the supervisory authorities; (iv)) broadenthe circumstancesthat trigger the need for a bank's action plan: and (vi) improve the bank resolution framework. These measures led to the follo\t ing improveinents in BCP compliance: BCP 1: Objectives, aiitono~iy,powers and resozirces. Political interference was reduced in the CNBS budget. e BCP 2-j; Licensing and Strzictzire. The CNBS was granted further powers to issue and revoke licenses on an ongoing basis. 0 BCP 6-15: Prudential regzrlations and requirements. Loan classification and provisioning rules were brought closer to best practices.A plan was adopted for the coinmercial banks to comply with the new provisioning rules during a 3-year transition period. The authorities are strictly enforcing the gradual reduction o f related-party loans from very high practices. 0 BCP 14-20: Methods of ongoing supervision. The legal framework for consolidated supervision was introduced. 0 BCP 21; Injhrmation requireinents. CNBS was given authority to guide external audits of financial institutions, including by requesting working plans, reviewing audit results. and verifying compliance with the working plans. 0 BCP 22; Formalpon~ei~smpewisoi~s.The bank resolution framework was of overhauled and significantly strengthened. Resolution powers were brought into the CNBS (before the deposit guarantee fund was in charge of bank resolution, and the framework itselfwas weak). The CNBS received additional powers to impose a broader set o f penalties (including revoking the license). 0 BCP 2-25: Cross-border bunking. The CNBS was grantedthe authority to include off-shores, affiliates and subsidiaries under consolidated supervision. 26. The authorities have implemented a program to gradually increasethe solvency of the financial system. The program gives the banks three years (until end-2006) to bring provisioning to the level required in the new regulations. For several banks. this creates a need to bring in fresh capital. This plan will be monitored closely by the authorities. Ifbanks fall short o f meeting these requirements, the CNBS will invoke its new bank resolution framework to address the deficiencies. The gradual approach to - 19- improving solvencq reflects a number of factors: Hurricane Mitch and the coffee crisis had a large adverse impact on commercial bank portfolios, while the creation o f a capitalization fund has not been possible due to a lack of financing. Fortunately. rising bank profitabilit) oming to an improved macroeconomic environment will enable the use o f retained earnings to help finance higher bank reserves, but additional fresh capital continues to be needed. 27. The authorities are taking steps to mitigate the risks associated with this approach. The main risk lies with the lob level of bank provisioningthat will not be corrected until end-2006. This condition makes the financial system more vulnerable to shocks. To mitigate this risk, the authorities are implementing a program to improve its enhanced surveillance methods with support from IDA. These methods include adopting legislation to improve bankruptcy and corporate reorganization procedures, creditor rights, and corporate governance. and the consolidated supervision of all financial groups operating in Honduras. 111. DEBTSUSTAINABILITY A. Data Reconciliationand Revision of Assistance 28. Staffs of IDA and the IMF,together with the Honduran authorities, have reviewed the stock of debt as of end-1999 presentedin the decision point document. As a result ofthis exercise. the NPV ofthe debt owed to some creditors as presented in the Decision Point Document mas revked. These revisions arise from discrepancies with the decision point data discovered during consultations with creditors after the decision point document was published. The main revisions are as follows: 0 Multilateral Creditors. The NPV of debt to CABEI was revised upwards from US$409 million to US$416million. For this creditor, the estimates at decision point omitted a total of US$7.9 million in principal and interest arrears outstanding at end-1999.'' In addition, a revision in the terms o f some IDB loans warranted a downward revision of the NPV of debt owed to this creditor from US$750 million to US$746 million.'9 0 Bilateral Creditors. The NPV oftlie debt owed to the ParisClub after traditional debt relief \\as revised downwards from US944 million to US908 million. There are two main reasons for the revision. First. at the time o f the Decision Point. indiv idual agreements\\ ith creditors follom ing the 1999 Paris Club rescheduling had not yet been signed. Consequently, official data for the rescheduled Paris Club loans were not available, and the data presented were estimates.Additionally, some debt categorieswere incorrectly classified at the time o f the decision point. Is By the time oftlie HIPC Decision Point in June 2000, these arrears had been cleared. l9 Other sinall revisions concerned debts owed to IDA. IMF and IFAD. - 20 - 29. After full implementationof traditional relief mechanisms, the revised end-1999 NPV of debt amounts to US$3,077 million, compared to US$3,114 million estimated at the decision point (Table 3). A recalculation ofthe HIPC assistance based on the revised database nould result in a decrease o f US$39 million inNPV terms, from the decision point estimate o f US$556 millionto US$517 30. The amount of enhanced HIPC assistance required at the decision point cannot be adjusted downwardswithout the consent of the country authorities, for countries that reached the decision point prior to the adoption of the information reporting decision by the Boards.2'The Honduran authorities have not agreed to a revision on the grounds that it would nealten poverty-combating efforts by reducing the resources available for PRSP programs. As a result, the coininitted debt relief under the enhanced HIPC Initiative remains as stated in the decision point at US$556 million in NPV terms and the coininon reduction factor remains at 17.8 percent, as estimated at the Decision Point. B. Status of Creditor Participation 3 1. Honduras has receivedassurances of participation in the enhancedHIPC Initiative from creditors accountingfor about 92 percent of the NPV of HIPC assistance. Most niultilateral creditors, as well as the Paris Club, have been providing interim assistance. The authorities are working toward reaching agreements with all reinaining creditors. Multilateral creditors 32. Debt relief from multilateral creditors under the enhancedHIPC Initiative amounts to USS340 million in NPV terms or 61 percent of total HIPC relief (Table 4). IDA. IMF. IDB, and CABEl have provided interim assistance. The International Fund for Agricultural Development (IFAD) and the OPEC Fund have committed to provide the required assistance once Honduras reaches the Completion Point. 33. Assistance from IDA. Debt relief from IDA under the enhanced HIPC Initiative approved at the Decision Point amounts to US$98 million inNPV terms. Interim assistance was delivered through a reduction o f 50 percent o f the debt service falling due on disbursed and outstanding IBRD credits as o f end-December 1999. During the period July 2000-July 2002, US$37million has been delivered as interim assistance (or US$33 million in NPV terms). The remaining relief will be provided at the Completion Point ''The 2o The debt data are based on parameters prevailing at the end o f each year. HIPC Initiative: Status of Implenientation. The Achievements of Long-Term Debt Sustainability, External Debt Management and Information Reporting in the Context o f HIPC Assistance. IDAISecM2002-0131. March I1. 2002. And, "Information Reporting in the Context o f HIPC Initiative Assistance", approved by the members o f the Executive Board o f the IMF(EBSI02I06) and IDA (IDA/SECM2002-013 l), March 4, 2002. through a HIPC debt reliefcredit to fund the prepaymentof the outstanding stock of IBRD debt and through a reduction of approximately 50 percent of debt service on IDA debt disbursed and outstanding as of end-1999. 34. Assistance from the IMF.Enhanced HIPC assistance from the IMF amounts to SDR22.66 million in NPV term (equivalent to US30.3 million).22Through end- February 2005, the IMF disbursedatotal of SDR8.8 million as interim assistance.The remaining IMF assistance of SDR13.86 million will be disbursed from the PRGF-HIPC Trust to the Honduras UmbrellaAccount as a grant at the Completion Point. This assistancewould cover, on average, 42 percent of Honduras' principal payments falling due to the IMF during the next three years (Table 13). 35, Assistance from CABEI. Enhanced HIPC assistance from CABEI amounts to US$73 million in NPV terms. At the time of the Decision Point a debt relief agreement with CABEI had already been reached 23.Thisagreement provided the required debt reduction in NPV terms through the restructuring of 60 percento f CABEI's loans as o f end-March 2000. which at the time the operation took place amountedto US$251.9 million in nominal terms. A total of US$137 million in nominalterms has already been provided throughout 2004. 36. Assistance from the IDB. Debt relief from the IDB under the enhanced HIPC Initiative amounts to US$133 million in NPV terms. As o f December2004, about U S 4 4 million inNPV terms had been provided as interim assistance during 2001-2003. At the Completion Point. the remaining assistance will be provided through the reduction of debt service paymentsto the IDB on disbursedand outstanding debt as o f end- December 1999. 37. Assistance from the OPEC Fund. The OPEC Fund has agreedto provide HIPC debt relief of US3.6 inillion in NPV terms, as coininitted in the Decision Point document. The modalities of the delivery are being negotiated with the OPEC Fund authorities. 38. Assistance from IFAD. IFAD will deliver its share of assistance under the enhanced HIPC Initiative. amounting to US$1.9 million in NPV terms, at Completion Point through a reduction of 100 percent o f debt service payments on credits outstanding as of end-1999. It is estimatedthat the total assistance could be delivered by 2007. Bilateral creditors 39. Paris Club creditors have agreed in principle to provide their share of assistance under the enhancedHIPC Initiative (US$169 million in NPV terms). Interimassistance has been provided through a flow rescheduling under Cologne terms in "BasedontheUSD$/SDRexchangerateasofend-December1999. 23 The agreement was signed on April 2000, prior to the Decision Point. - 22 - April 2004. This agreement also covered arrears accumulated since early 2002 when the previous agreement with the Paris Club-arranged in 1999 after the devastations o f Hurricane Mitch-expired. Bilateral agreements following the 2004 rescheduling have been signed with all Paris Club creditors except for Japan. Italy, Denmark, and the Netherlands. Most of the signed agreements provide relief in excess o f the terms agreed at the 2004 Paris Club meeting. Following the completion point, most Paris Club creditors are expected to provide debt relief beyond that required under the enhanced HIPC initiative. The beyond-HIPC relief is estimated at about US$540 inillion in end-2003 NPV terms. 40. Of the seven non-Paris Club bilateralcreditors, only Costa Rica has already agreed to provide HIPC debt relief to Honduras.Non-Paris Club official creditors account for about 8 percent ofthe debt relief committed at the decision point. Costa Rica's central bank has indicated its willingness to provide reliefon comparable terms. The modalities, however, have not been decided and would still require congressional approval. Venezuela has made an offer to refinance the debt at concessional terms, but, as the implied debt relief would have fallen short of HIPC terms, the authorities did not accept the offer. Colombia, Guatemala, Kuwait, Mexico, and Taiwan Province o f China have indicatedthat they do not intend to provide reliefto Honduras. 41. Honduras' commercial debt is small and the two largest creditors have already granted debt relief. At end- 1999, coinmercial debt amounted to less than 0.5 percent of the stock o f external debt in NPV terms. The Commonwealth Development Corporation (CDC) and Lloqds Bank, representing 85 percent of the NPV o f commercial debt, have already provided debt relief. The CDC has been canceling debt service falling due since October 2000 and will forgive the remaining stock o f debt at the time o f the HIPC completion point. Lloyds Bank participated in an IDA Debt Reduction Facility buyback operation in 2002. One claim is currently under litigation and the remaining commercial creditors did not participate in the IDA Debt Reduction Facility buy-back operation as they failed to provided sufficient documentation to support their claims. C. Updated Debt Sustainability Analysis External debt situation at end-2003 42. The DSA included in the HIPC decision point document has been updated jointly by the Honduran authorities and the staffs of IDA and the IMF.The stock o f debt disbursed aiid outstanding was updated on the basis o f end-2003 loan-by-loan information provided by the authorities. This information has been reconciled with creditor statements from all multilateral aiid Paris Club creditors, as well as several non- Paris Club creditors. The exchange rates and discount rates used for calculating - 23 - Honduras' nominal stock of debt and the NPV of debt as of end-2003 are presented in Table 6." 43. Based on the reconcileddata, Honduras' nominalstock of disbursed and outstanding debt reachedUS$4.84 billion at end-2003, compared with US$4.38 billion at end-1999." Oftlie total nominal debt at end-2003, 64 percent was owed to multilateral creditors, 36 percent to bilateral creditors, and 0.1 percent to commercial creditors. Honduras' largest official creditors at end-2003 were the IDB and IDA, accounting for 27 percent and 24 percent oftotal debt, respectively. 44. I n NPV terms, the end-2003 stock of debt amounted to US$3.85 billion or 306 percent of central government revenue,but full delivery of debt relief would significantly reduce the level of debt. After a hypothetical application of traditional debt relief, the NPV would be reducedto US$3.60 billion, equivalent to 286 percent o f central government revenue. Assuming full delivery of enhanced HIPC relief would further reduce it to US$2.89 billion, or 23 1 percent of revenue. And finally, estimated bilateral relief beyond HIPC o f about US$543 million would lower it to US$2.35 billion, representing 188 percent of revenue. 45. Notwithstanding the anticipated decline due to debt relief, the 2003 NPV of debt to revenue ratio considerably exceeded the projected value at the decision point. Considering the delay experienced in reaching the completion point, the ratios should be compared only after assunied delivery o f enhanced HIPC relief. At the time o f the decision point, the NPV of debt to revenue ratio was projected to decline to 170 percent by end-2003. The revised number, however, is 61 percentage points higher at 23 1 percent. As presented in the table below, the most important factors behind the upward revision of the NPV of debt to revenue ratio compared to the projections made at the decision point have been lower GDP growth and changes in discount rates. At the decision point, real GDP was projected to grow at an average rate of 5.3 percent in 24 The HIPC DSA framework differs fiom the new debt sustainability framework for low-income countries, both conceptually (the indicative debt burden indicators are based on the quality of countries' policies and institutions) and methodologically (using different definitions for debt ratio denominators and discount and interest rates). Notwithstanding these differences, applying the LIC DSA framework would not alter the main results. If Honduras' debt sustainability is assessed under the new framework, the relevant ratios after HIPC relief Lvould be below the indicative burden thresholds, and would remain below throughout the period o f analysis. For further information on the LIC DSA framework see: "Debt Sustainability in Low-Income Countries: Proposal for an Operational Framework and Policy Implications", SMi04127 and IDA/SecM2004-0035 and "Debt Sustainabilitl in Low-Income Countries-Further Consideration on an Operational Frame\$ork and Policy Implications." SM/04/3 18 and IDAiSecM2004-062911. 25 The debt data are based on the parameters prevailing at the end o f each year. - 24 - 2000-02 and 6.0 percent in 2003-2005. Actual GDP growth between 1999 and 2003, however. averaged on14 3.6 percent. thus leading to much lower nominal GDP and accordingly government revenue. The GDP effect alone explains an increase in the ratio by 57 points. Discount and exchange rate changes led to an additional increase by 45 percentage points. However, this was partially offset by lower than envisaged new borrowing and other factors. Honduras: Breahdoan of tlie Incresae of \P\ of Debt-to-Retenue Ratio as of end-2003 I/ Percentage Points Percent of t o t d increase VP\' ofdebt-to-revenue ratio (as prujected at Decision Point) 170.4 \P\ ofdebt-to-re\enue riitio (iictu;ilj 230.6 Total increase 60.3 loo'%> 1. Due to changes in tlie parameters 45.0 7" ai\+ due to cliaiiges 111the discotilit iates 32 I 53% OM due to cllaiiges in tlie excliaiige iates I 2 9 21% 2. Due to unanticipated new borro!+ing (18.1) -3O'X) ollw due ro louer than expecred disbuiseinents (2.2) -4% o'u due to liiglier coiicessioiiality o f the loans (15 9) -26% 3. Due to changes in re\enue 63.3 IOS'%> O'U due to louer ie\eiiur 0uu)mic) 6 1 I O % o ' u due to Iouei GDP 57 2 95% 5. Other factors 21 (30.0) -SO'%, \leiiioi andum itein \ P \ ofdebt-to-re\eiiue 13tioatiei bilareral debt ieliet'be)oiid HlPC assistance 3; I89 9 Souices Staff esrlniiites I)\P\' of debt-to-rr\enue ratioafwi riiliiuicsdHIPCassistance 2' Due to ie\isioiis in tlie eiid-lI9 darabasc aiid clinnges 111the tiiiiiiif aiid ineciiaiiisins o f deii\'eiy o f assistance coinpared to the assumptions in tlie decision point piojectlons Onninl) due ro delays 111reacliiiig tlir Completion PoiiitJ 3. .After full deli\en as of elid-200.3 External debt outlook, 2004-2023 46. The full delivery of the remainingdebt relief after the completion point will reduce Honduras' external public debt to a sustainablelevel. The nominal stock o f debt after full delivery of additional bilateral assistance beyond HIPC i s estimated to reach US$4.15 billion by end-2005, coinpared to US$4.84 billion in 2003 and US$5.05 billion in 2004. This is equivalent to US$2.67 billion inNPV terms by end-2005, or 174 percent o f central government revenue.26In addition to the anticipated 26 Based on end-2003 discount and exchange rates. As interest rates have recently increased. a revision ofthe discount rate would further lower the NPV o f debt. - 25 - debt relief, the recovery o f central government revenue due to measures taken in the context o f the PRGF supported program, has also contributed to lowering the debt-to- revenue ratio despite significant new external borrowing o f US$427 inillion in 2004 and a projected US$328 million in 2005. 47. Long-term debt sustainability will need to be supported by the authorities' macroeconomicframework that envisagessound macroeconomicpolicies and steady growth of per capita GDP (Box 4; Appendix 11).Continuing structural reforms, prudent macroeconomic policies, and international trade agreements (including CAFTA) are expected to improve the environment for private sector development. Growth is expected to accelerate to 4% percent in the medium term before gradually declining in line with slower population growth. Fiscal policy will support private sector growth by limiting the fiscal deficit to a level that can be financed by concessional external loans. The current account deficit is expected to stabilize at about 3% percent o f GDP in the medium tern--a level that is expected to be financed by F D I and official loans on concessional terms. Gronth in key export sectors, including inaquila and tourism, a partial recovery in the terms-of-trade, and continued growth o f remittances are all important factors in this scenario. Box 4. Honduras: Macroeconomic Assumptions Underlying the Debt Sustainability Analysis Economic growth. Gro\+th is expected to reach 4% percent in the medium term. Inthe long run, stable per capita GDP growth combined with decelerating population growth rates and will lower economic growth reaching 3% percent by 2023. Inflation is expected to gradually decline to 2% percent by 2009 and remain at that level thereafter. Central government revenues are projected to decline slightly to 19.3 percent o f GDP in 2006 and then stabilize at that level. New disbursements of external loans will decline gradually from 3.7 percent o f GDP in 2005 to 2.7 percent bq 2008 and remain at that level thereafter. Following graduation froin IDA, disburseinents from the Bank and the IDB are expectedto gradually shift to non- concessionalterms. Foreign grants are expectedto decline from 3.4 percent of GDP in 2005 to 2.0 percent in the long run. Exports o f goods and services will gro\v by 7-8 percent annually in nominal U.S. dollar terms. This will raise its share o f GDP from currently 41 percent to 46 percent in the long run. Current account deficit. Assisted by continued, albeit slower, growth o f remittances and improvements in the terms of trade, the current account deficit is expected to decline and then remain at about 3% percent of GDP in the medium and long tenn. - 26 - 48. Honduras's debt and debt-service burdens are projected to decline progressively under the baseline macroeconomicassumptions.The trajectory o fNPV o f external debt-to-revenues is projected to decline froin 174 percent in 2005 after full delivery o f debt reliefto about 151 percent in 2012 at which level the ratio stabilizes. Meanwhile, the NPV o f debt-to-exports ratio is projected to decline froin 89 percent to 69 percent between 2005 and 2023. External debt service ratios, on the other hand, exhibit a different pattern: Honduras's external debt service is projected to decline as a share o f GDP froin 3.3 percent in 2003 to 1.6 percent in 2007 and then gradually rise to 2.2 percent by 2023 as amortization payments increase on account o f shorter average loan maturities. As a share ofexports, debt service payments decline to about 4 percent in the medium term and then rise to 5 percent by 2023. D. SensitivityAnalysis and Long-Term Debt Sustainability Analysis 49. The sensitivityanalysis highlightsthe importance of sustaining economic growth and prudent fiscal policies.This section examines the implications for debt sustainability under more pessimistic assumptions than those included in the baseline scenario described above. Three scenarios are examined and compared to the baseline case in term o ftheir impact on the ratio of debt to central government revenues andthe ratio o f debt to exports of goods and services. Alternative Scenario 1:Higher Fiscal Deficit 50. This scenario considers a permanent deterioration of the fiscal position starting in 2006. Revenues are lower by 1 percent of GDP and expenditures exceed the baseline assumptions by 1 percent of GDP from 2006 onwards. The resulting increase in the fiscal deficit o f 2 percent o f GDP is assumed to be financed by additional external loans. Under this scenario the debt ratios increase steadily over the next 15 years (Figures 2 and 3). The NPV of debt to exports reaches about 105 percent by 2020 while the NPV o f debt to revenue ratio rises to about 240 percent by the same time and continues to increase thereafter, albeit at a slower pace. to reach 244 percent by 2023, only slightly below the HIPC threshold o f 250 percent. This scenario demonstrates the importance o f sustaining the fiscal adjustment under the PRGF program and controlling external borrowing, even on concessional terms. Alternative Scenario 2: Terms-of-Trade Shock 5 I. The second alternative scenario considersa temporary external shock. A deterioration in the terms-of-trade lowers nominal export growth by 4 percentage points from 2006-1 0. Real GDP growth remains 1% percentage points lower over the same time period before returning to the baseline growth path. The additional balance o f payments need is initially financed fully through external borrowing and then gradually replaced through lower imports by 2010. The additional borrowing, combined with lower growth, and thus government revenue, would raise the debt ratios to 186 percent o f revenue and 94 percent of exports by 2009. From 2010 onwards. as export and GDP growth return to the baseline level, debt ratios would fall again and gradually approach the baseline paths iiithe long run. - 27 - Alternative Scenario 3: Lower GDP Growth 52. This scenario shows the effects of permanently lower GDP growth. The assumed shortfall o f growth (by 1% percentage points annually) would result in annual growth rates o f 3 percent in the medium term, comparable to the historical average over the past 20 years. Under this scenario. the debt ratios would initially decline but then increase froin 2012 onwards. While the NPV o f debt to export ratio would eventually stabilize at slightly below 90 percent, the NPV of debt to revenue ratio would continue to increase and reach 200 percent by 2023. While debt still appears sustainable under this scenario, public finances could not uithstand a further deterioration as this would lead to further increases in the debt ratios. Long-term debt sustainability 53. The precedingscenarios underscorethe importance for Honduras of sustaining the fiscal adjustment as well as maintaining sufficient long-run economic growth. While the stock o f debt remains significant even after the completion point, it is sustainable under sound policies. Ifthe fiscal adjustment envisaged under the PRGF program and the acceleration in real gronth that has already been achieved can be sustained over the long- run. debt ratios will decline over the next 20 years. Under those circumstances, the economy can withstand teinporarq external slioclts, such as terms-of-trade and weather-related shocks. Lo\$ aberage tiscal deficits and sufficient long-run GDP growth are crucial, honever. IfGDP growth Mere to remain only 1% percentage point below the baseline projections, debt ratios L+ouldincrease again by 2012. Ifin addition the fiscal balance were to deteriorate, it would render the debt unsustainable. Hence, responsible fiscal policies and a credible strategy to sustain growth are critical for long run debt sustainability. IV. ISSUES FORDiscuss~olv 54. Executive Directors may wish to focus on the following issues and questions: Do Directors agree that the waiver on the condition referring to the substantive application o f Basel Core Principles to the banking sector is warranted. Do Directors approve the completion point for Honduras on the grounds that Honduras has made substantial and satisfactory progress on all measures set out in the decision point? Do Directors agree that sufficient assurances have been given by Honduras's other creditors to coininit enhanced HIPC lnitiative assistance to Honduras, as approved at the decision point? Do Directors agree that Honduras's PRSP and expenditure-tracking mechanism provide adequate assurances that assistance provided under the enhanced HIPC Initiative and other sources will further poverty-reduction efforts? - 28 - Figure 1, Honduras: External Debt Indicators for Medium- and Long-Term Public Sector Debt (Inpercent) I50 Stock o f Esternal Debt in Net Present Value TemisEsports I40 I30 I30 I20 -- After Traditional debt reliei inecliaiiisins 120 i i n c After Enhanced HlPC assistaiice 1 10 ---=-Afiel- bilareral debt reliefbe)oiid HlPC assistance 100 90 80 1 70 60 -- 50 1: 2003 200.' 2007 2009 2011 2013 2015 2017 2019 2021 2023 300 , 1 300 Stock ot't~ternnlDebt 111Net Present Value Terms!Re\enties 275 - 275 ~ \ 250 - ,, - - - ;\tier Traditional debt relief ineclianisiiis 250 \ - 1_1 i\firr Enhanced HlPC assistance 225 - \ , 225 4c "22 * * -After bilateral debt reliefbeyolid HPC assistance 200 - " * , * 200 I75 - 175 ~~ I50 - 150 ~~ 2004 2006 2008 2010 2012 2014 2016 2013 2020 2022 Sources: Honduran authorities: and Bank-Fundstaff estimates and prqjections. - 29 - Figure 2. Honduras: Sensitivity Analysis (In percent) 300 300 NPV of Debt to Re\eilties 250 250 200 200 I50 I50 IO0 100 40 50 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 I 5 0 150 NPV ofDebr to Exports -Base Liiie sceiial'io I It- AlteiiiatiLe sceiiaio I-HigherFiscal Deficit - ' I30 130 ,Alteiiiati\ e sceiiaiio Il-Tenns-of-Trade Shock - Alremiiri\e sceiiario Ill-Loner COP Gronth I10 I10 90 90 70 70 50 50 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 Sources: Honduran authorities: and Bank-Fund staff estimates and prqiections. - 30 - Figure 3. Honduras: Sensitivity Analysis (In percent) Debt Service-to-Exports - BCIS Liiic sceiiario .f .-\lteiiiati\e xeiiaiio I- Higher Fiscal Deficit -ilrerliati\ e sceiiaiio 11-Teiiiis-of-Tiade Slioch I , 2004 2006 2008 2010 2012 2013 2016 2018 2020 2022 Sources. Honduran authorities: and Banl~-Fundsrat'festimates and projections. - 3 1 - 3 x r - 0 e r - r - c c " ~ ~ = T - 3 N 0 -e 2 = 0 7 7 3 r-, N, -; 9 q N 0 PI - 32 - e - a a r - c c r - 5 0 - 3 0 r - c c t - a c-, a a x c e r - X r - x W r - P r - P c - r r u C ' C ' P W L n m - - e - 3 - 3 P O m P 9 y - % " W N u a - -0. q49- -1 N u m - N e - 3 3 m x - e , r = - - - 33 - - 7 - 0 2 3 P-?-.sa m - 3 - P P 5 C e - c c P P P P - ? - - a = P P r - P N - Y c c - 34- Table 3. Hoiiduras: Nominal and Net Present Value of External Debt Outstanding as of End-December 1999 1/ NPV ofdebt Nominal Debt After Rescheduling 21 From Decision Point Revised From Decision Point Revised ( In millions of U.S. dollars) Total 4,288.2 4,382.2 3,114.1 3,076.6 Multilateral institutions 2,757.0 2,759.8 31 1,908.0 1,910.1 IBRD 185.4 185.4 192.4 192.4 IDA 840.7 840.7 355.6 355.6 IDB 1.086.3 1,083.7 749.9 746.1 IMF 210.4 210.4 169.9 169.9 CABEI 390.9 396.8 409.4 415.5 IF4D 19.3 19.0 10.5 10.1 OPEC Fund 23.8 23.8 20.4 20.4 Bilateral and commercial 1331.2 1,622.4 1,206.0 1,I66.5 Paris Club 1,2 13.2 1.306.7 944.0 908.4 Canada 18.1 21.1 8.0 12.0 Denmark 11.3 12.4 6.0 5.0 France 47.7 53.5 29.0 32.I German! 104.4 109.6 41.0 44.3 Ital) 151.1 164.4 83.0 84.2 Japan 47I.2 529.0 525.0 494.5 Yetherlands 20.4 20.7 13.0 12.1 Norna) 2.2 3.3 1.o 2.0 Spain 236.1 235.0 167.0 159.2 Si1itzerlaiid 5 , l 5.5 3.O 2.8 Lnited States 145.6 152.0 68.0 60.2 hon-Paris Club official bilateral 272.5 272.7 247.0 243.9 Colonibia 22.7 22.7 20.0 20.2 Costa Rica 27.0 27.0 26.0 25.9 Guatetnala 30.1 30.1 28.0 27.3 Kunait 38.7 38.6 36.0 33.7 Me\ico 56.8 56.8 53.0 53.8 Taiwui. Pro\ ince of China 71.5 71.5 60.0 59.6 Venezuela 25.7 25.9 24.0 23.4 Commercial creditors 45.4 43.0 15.0 14.2 Bofa and Santander 1.8 1.8 0.6 0.6 Columbus Latinoaniericana 0.2 0.0 0.1 0.0 CDC 19.4 19.4 6.5 6.4 Deutsch Sudamerikanische Ban 0. I 0.1 0.0 0.0 First Securit4 2.9 0.7 1.o 0.2 Laboratorio Bagu 3.2 3.2 1.1 1.1 Llo>dsBank 17.5 17.4 5.8 5.8 Smiss Bank 0.4 0.4 0.1 0.1 Sources: Honduran authorities; and Bank-Fundstaff estimates I/Public andpublici) guaranteed debt onl~. 2/ Assumes a stock-of-debt operation on h'aples terms (67 percent NPV reduction) and at least comparable action bq other official bilateral and commercial creditors. 31Includes USS7.9 million in arrears and a reiision of IDB loans' teims. 4/ Data rehision are due to better data availability. especiall> troin the 1999 Paris Club, loans reclassificationand strategies assumptions re\ isioii. - 3 5 - I - 36 - Table 5. Honduras: External Public and Publicly Guaranteed Debt at End-December 2003 1/ (himillions 0fU.S. dollars) N P V of Debt 31 Legal Situation 21 After Enhanced After Aditioiinal Nominal Debt N P V o f Debt HIPC Bilateral Assistance Total 4,844.9 3,849.2 2,898.7 2,356.4 \lultilateral institutions 3,106.7 2,263.8 1,973.2 1,973.2 I B R D 84.7 89.1 28.4 28.4 IDA 1.146.6 655.1 588.9 588.9 IDB 1,287.5 1.005.2 880.8 880.8 I M F 171.4 148.5 115.9 115.9 C A B E l 320.7 302.5 302.5 302.5 I F A D 62.4 36.3 33.9 33.9 OPEC Fund 24.9 22.9 18.5 18.5 N D F 8.4 4.2 4.2 4.2 Bilateral and commercial 1,738.2 1.585.4 925.5 383.2 Paris Club 1,465.1 1.345.8 763.1 41 220.8 41 Canada 16.2 15.1 ... ... Det mark i 10.3 8.6 ... ... France 70.1 69.4 ... ... Gemiany 134.0 88.3 ... ... Ital) 223.2 162.4 ... ... Japan 501.8 543.2 ... ... Netherlands 20.4 20.5 ... ... Nornaq 8.4 7. I ... ... Spain 330.6 267.8 ... ... S\vitzerland 6.9 4.8 ... ... Liiited States 113.2 158.5 ... ... Kon Paris Club official creditors 267.5 234.0 161.4 161.4 Colombia 20.0 20.9 13.1 13.I Costa Rica 17.5 16.1 7.2 7.2 Guateiiiala 23.1 14.5 4.8 4.8 Kuwait 49.2 45.5 39.2 39.2 Mexico 56.8 40.1 18.3 18.3 Taiwan. Pro\ ilice o f Chilia 85.2 81.3 71.5 71.5 Venezuela 15.7 15.7 7.4 7.4 Cotiiniercial 5 6 5.6 0.9 0.9 Bofa and Santander 2. I 2. I 0.6 0.6 Columbus Latinoamericana 0.0 0.0 0.0 0.0 C D C 0.0 0.0 0.0 0.0 Deutsch Sudamerikanische Bank 0.1 0.I 0.0 0.0 First Security 0.7 0.7 0.2 0.2 Laboratorio Bagu 2.4 2.4 0.0 0.0 Lloyds Bank 0.0 0.0 0.0 0.0 Swiss Batik 0.4 0.4 0.1 0.1 Sources: Honduran authorities: and Bank-Fund staff estimates. I/Figures are basedon data as ofend-2003. 21 Retlects the external debt situation as of end-2003. and includes the 1996 and 1999 Naples flows. 100 percent debt cancellation froni CDC and the IDA bu>baclc for LloSds. 3/ Assumes full deli\er) o f I-IIPC assistance as ofetid-2003. 4/ Paris Club creditors deliver their share ofassistacce as a group. Actual delivery modalities are defined on a case-by-case basis. - 37 - Table 6. Honduras: Comparison of Discount Rate and Exchange Rate Assumptions Discount Rates I! 2, Exchange Rates (In percent per annum) ( U.S.dollar per currency) At Decision At Completion A t Decision A t Completion Point Point Point Point End- I999 End-2003 End-1999 Elid-2003 cItrrenC) L1.S. dollar 7.04 4.47 I.oo I.00 Domestic curretic! 5.59 4.20 0.07 0.06 Special Dra\\inp Right 5.59 4.20 1.37 1.49 Euro 5.47 4.63 I.oo I.26 .Austrian shillings 5.47 4.63 0.07 0.09 Belgian franc 5.47 4.63 0.02 0.03 Canadian dollar 6.67 5.18 0.69 0.77 Swiss franc 4.27 3.21 0.63 0.8 I Chinese Yuan 5.59 4.20 0.27 0.12 Deutsche mark 5.47 4.63 0.5 1 0.64 Danish kroner 5.32 4.77 0.14 0. 17 Spanish peseta 5.47 4.63 0.01 0.01 Finnish niarkaa 5.47 4.63 0.17 0.2 1 French franc 5.47 4.63 0.15 0.19 Pound sterling 6.70 5.37 I.62 I.78 Italian Lira 5.47 4.63 0.00 0.00 Japanese yen I.98 I.70 0.01 0.0I Kuvaiti dinar 5.59 4.47 0.30 0.29 Nor\\egian kroner 6.64 5.30 0.12 0.15 Netherland guilder 5.47 4.63 0.46 0.57 S\+edish kroner 5.80 5.00 0.12 0.14 Venezuelan b o h ar 5.59 4.20 0.002 0.001 IDB unit o f account 5.59 4.20 1.55 1.63 hlemorandum item: Paris Club cut-offdate: June I. 1990 Sources: O E D : and IMF. li7ieri7nrioi7iii Fiiiiii~iniSrariirics I/Thediscountrates usedaretlie aLerage commercial interestreference rates(CIRRs) for the respecti! e currencies o\er the sii-iiioiith period ending in December 2003 for tht completion point and in December 1999 for tlie decisioi: point. 2/ For all Euro area cut-rencies. the Euro ClRR is used. For the Kanaiti dinar. the U.S.dollar ClRR is used for conipletion point calculations (compared to the decision point calculdtions. when the SDR ClRR was used), in accordance to the explicit peg ofthe dinar to tlie U.S. dollar in the beginning of2003. For all currencies for which the ClRRs are not abailable. tlie SDR discount rate is used as a pros) - 38 - n n + u z + u E L L c 'F m f o. o. m 0 0 N i L 0 u n 0 - E 4 J hI e; e; 0 0 .-5c .-D& n I 3 3 - 39 - - 40 - N, m c - N x u m .e m - u m c u - i j m u T " u m c _ m u 0, 15 u * e - c m - 0 . 0 1 3 N P r, N - - m a m e, - - 4 1 - - 42 - d e' -mnm.3, 0 P, u " a - m e, PI c - < * e :,3- I r 5 e - - 0 e i " r- - - r! * e e/ r m P I 5 P, - L? "- e m m - In - c- N -- - u' e' e, - t a m e: =- - N e - c c * e O CI m e/ N, - - r- - m - b ? -* e 3- e m' - 43 - x u - u rr, 3 P 3. - - - e Q, m. u N s w -sc u - N N O * - e x 0 - 0 -P e m * m r. = - - v i u - s - e m - 44 - - 45 - - 46 - 3 2 3 3 - 0 w i n in- 0 0 c c c 0 3 3 - 3 * i n ' " 0 0 N in- 3 o13 0 d o 3 N -10 - 0 13U 10 N N PI Pi in '0-3 ci - 3 PI m cd d > > 3 - m o r? N CI v, in, r, m c? 3 . s 3 - c? c c , 3 c in 3 - c c 3 c g o 3 * e - 0 - o r : m - N c d c, .. 3 0 3 3 c 0 0 c c PI Pi 3 3 3 3 U 0 0 O N r i . - 2LL 2 L - 47 - - u r - -oTT " 51 m IC, rn Ds vr ci - r - 3 x - - 3 m 8r -- a - 2 - r - - - e - -o - m - o 2 \ 3 - 48 - -p- 0 3 - 49 - Corrected:4/0I/05 Table 16.HIPC Initiative: Statusof CountryCases ConsideredUnder the Initiative, February11,2005 Target EstimatedTotal NPVLevels Assistance ofDebt-to- l/ Percentage Nominal Debt Completion Decision (In millions0f U.S.dollars, present value) ReductionServiceRelief country Point of NPV Exports Multi- Point m Worldrevenue (In millionsof lateralpercent) Bilateral (in Total IMF Bank Debt2/ US.dollars) Completion point reachedunder enhanced framework Jul. Benin 00 Mar. 03 150 265 77 189 24 84 31 460 Bolivia 1,302 425 876 84 194 2,060 originalframework Sep. 97 Sep. 98 225 448 157 291 29 54 14 760 enhancedframework Feb. 00 Jun. 01 I50 854 268 585 55 140 30 1.300 Burkina Faso 553 83 469 57 231 930 originalframework Sep. 97 Jul.00 205 229 32 196 22 91 27 400 enhancedframework Jul. 00 Apr. 02 150 I95 35 161 22 79 30 300 topping-up Apr. 02 I50 129 16 112 14 61 24 230 Ethiopia 1,982 637 1,315 60 832 3,275 enhancedframework Nov. 01 Apr. 04 I50 1,275 482 763 34 463 47 1,941 topping-up Apr. 04 I50 707 155 552 26 369 31 1.334 Feb. Ghana Jul. 04 144 250 2,186 1,084 1,102 112 781 S6 3,500 Guyana 591 223 367 75 68 1,354 originalfromework Dec. 97 May 99 107 280 256 I 65 35 27 24 634 enhancedframework Nov. 00 Der-03 I50 250 335 132 202 40 41 40 719 Dec Madagascar 00 Oct-04 150 836 474 362 19 252 40 1,900 Mali 539 169 370 59 185 895 originalframework Sep. 98 sep.00 200 I21 37 84 I4 43 9 220 enhancedframework sep.00 Mar. 03 150 417 132 285 45 143 29 675 Feb. Mauritania 00 Jun M 137 250 622 261 361 47 100 50 1,100 Mozambique 2,023 1,270 143 443 4,300 originalframework Apr. 98 Jun. 99 200 1.717 1,076 641 125 381 63 3,700 enhancedframework Apr. 00 01 I50 306 I94 112 18 62 27 600 Dec. Nicaragua 00 Jan. 04 150 3,308 2,175 1,134 82 192 73 4,500 Niger 663 235 428 42 240 1,190 enhancedframework Dec. 00 Apr. 04 I50 521 211 309 28 170 53 944 topping-up Apr. 04 I50 143 23 119 14 70 25 246 Senegal Jun. 00 Apr. 04 133 250 488 212 276 45 124 19 850, Apr. Tanzania 00 Nov 01 150 2,026 1,006 1,020 120 695 54 3,000 Uganda 1,003 183 820 160 517 1,950 Apr. 97 Apr. 98 202 347 73 274 69 I60 20 650 Feb. 00 May 00 I50 656 110 546 91 357 37 1,300 Decision point reachedunder enhanced framework Cameroan Oct. 00 Floating IS0 1,260 874 324 37 179 27 2,800 chad May. 01 Floating 150 170 35 134 18 68 30 260 Congo, Rep. of 03Jul. Floating 150 6,311 3,837 2,474 472 831 80 10,389 Dec. Gambia, The Floating 150 67 17 49 2 22 27 90 Dec. Guinea 00 Floating 150 545 215 328 31 152 32 800 Dec. Guinea-Bissau 00 Floating 150 416 212 204 12 93 85 790 Honduras Jul. 00 Floating 110 250 215 340 30 98 18 900 Dec. Malawi 00 150 643 163 480 30 331 44 1,000 Dec 00 Floating 150 452 56 397 44 228 71 800 and Tomb principe Dec. Floating 150 97 29 68 24 83 200 Mar. Leone Sierra 02 Floating 150 600 205 354 123 122 80 950 Dec. Zambia 00 Floating 150 2,499 1,168 1,331 602 493 63 3,850 Decision point reachedunder original framework Catedlvoire 98 Mar. 31 141 280 345 163 182 23 91 6 4/ 800 Total assistance 32,002 15,541 16,325 2,532 5/ 7,577 54,093 Preliminary HIPC document issued Bunmdi ... 150 801 120 68l 24 414 92 1,313 61 ... 91 250 1,027 918 166 438 37 3,900 Sources:IMFand WorldBankBoard decisions, completionpint documents, decision point documents, preliminary H I P C d n t s ,and staffcalculations 1/ Assistance levelsareat countries' respective decision or completionpints, as applicable. In percent of thenet present valueofdebt at the decisionor completion point(as applicable), after the full use oftraditional debt-reliefmechanism. 31 Cote d'lvoire reacheditsdecisionpint under theoriginal framework in March 1998. The total amountofassistance committed thereunder was US$345 million in NPV terms. 4/ Nomeschedulable debt to non-Paris Club official bilateral creditors andLondonClub, which was already subject to a highly concessional restructuring,is the excludedfromthe NFVof debt at the completion point in the calculation of this ratio. 5/ Equivalent to SDR 1,718 million an SDR/USD exchange rate of 0.6635,of February1I, 2005. at as 6/ It is suggested that enhanced HIPC relief for Cote dlvoire overtake the commitments made under the original HIPCwork frame - 5 0 - APPENDIX I H onduras-De bt Management Institutional framework 1. Under the 2004 organic budget law (Ley Organics de Presupuesto), the Ministry of Finance (MoF) and the Central Bank (Banco Central de Honduras, BCH) share the responsibility for public debt management. The commission for public credit (comisidn de cre'ditopziblico), which is formed by both institutions and chaired by the MoF, formulates the general policy for public debt (domestic and external). While the MoF is in charge of negotiating external public sector loans as well as negotiating debt relief, all new external loans require approval by the MoF, the BCH, and finally by Congress. However, there are two exceptions: the BCH can contract and manage external debt for balance o f payments purposesmithout approval by the MoF and Congress, and external debt contracted by municipalities requires such approval only ifguaranteed by the government. Debt service payments o f the government are initiated by the MoF and executed by the BCH. The MoF publishes a quarterly public debt report while the BCH takes the lead on economic analysis and data provision to the Fund and the Bank. Debt management 2. The authorities have been using UNCTAD's Data Management and Financial Analysis System (DMFAS) as their loan database management system since 1988. The software is set up in network between the Ministry o f Finance and the Central Bank to allow each institution to manage its part o f the loans' portfolio. Additionally, the network allows BCH staff to access the information on the MoF database for analytical purposes. A direct electronic link between DMFAS and SIAFI-the MoF's financial accounting system-is expected to be operational b j June. Government staff are familiar with the DMFAS and seem comfortable using it. 3. Additionally, the DebtPro software is used by BCH staff as a debt management tool for debt relief projections, such as Paris Club rescheduling or HIPC completion point simulations. In the past, however, there have been problems o f data consistency between the DMFAS and the DebtPro databases. To address this problem, the authorities are planning to upgrade to the 5.3 version o f DMFAS which includes a module that can perform long-term debt sustainability assessments using the DMFAS database. This will render the use of a parallel DebtPro database for long-term debt service projections unnecessary.The ability to make consistent and accurate debt service projections and to perform debt sustainability assessments will be essential after graduating from the HIPC initiative. 4. Private sector external debt is recorded for statistical purposes by the BCH. Systematic information is available for the banking sector and exporters. Coverage o f other debtors, such as importers, is incomplete. Accurate recording o f private sector external debt is becoming more and more important considering increasing private capital flows and the trend towards direct cross-border banking inthe region. - 5 1 - APPENDIX I Policy coordination 5. Cooperation between the MoF and the BCH is adequate, although there is rooin for improvement regarding timely information sharing and database reconciliation. In that regard, the planned upgrade of the DMFAS system should improve the consistency o f actual data and economic projections. The BCH is also training MoF staff to help the MoF fulfill its mandate under the new budget law to do more analytical work - 52 - APPENDIX I1 Honduras-Macroeconomic Framework 1. The authorities' medium and long-term macroeconomicframework envisages steady growth o f per capita GDP supported by sound macroeconomicpolicies. The strategy involves continuing structural reforms and consolidating prudent macroeconomic policies. Reforms would focus on strengtheningthe development of human capital and basic infrastructure, improving the environment for private sector development, and using international trade agreements to boost growth. Private investment in maquilas, tourism, energy, and telecoininunication are important elements for sustaining growth over the medium- and long-run. Growth is expectedto reach4% percent inthe medium term. Inthe long run. stable per capita GDP growth combined with decelerating population growth rates will lower economic growth to 3% percent by 2023. 2. Fiscal policy will support private sector development and ensure long term fiscal sustainability by limiting the deficit to a level that can be financed externally by loans from the international financial institutions and bilateral donors.New disbursementsofexternal loans are expectedto decline gradually froin 3.7 percent of GDP in 2005 to 2.7 percent by 2008 and remain at that level thereafter. Accordingly, net public sector external borrowing will decline to 1.8 percent by 2008 and eventually decline to 1.5 percent by 2023. Following graduation froin IDA, disbursementsfrom the Bank and the IDB are expectedto gradually shift towards non-concessionalterms. Foreign grants are also projected to decline gradually over the medium- and long-term. To avoid the need for domestic financing. the current level of revenues needs to be maintained as a share of GDP and a sound and sustainable public sector wage policy is essential. 3. Monetary policy aims at reducing inflation gradually to about 2% percent, in line with the level of Honduras' main trading partners. Improvingmonetary policy instruments and operations will assist prudent monetary management. Moreover, gradually introducing more flexibility into the exchange rate regime and strengtheningthe financial sector will reduce the economies' vulnerability to external slioclts, while at the same time facilitating monetary policy. 4. Assisted by continued. albeit slower, growth of remittancesand improvements in the t e r m of trade, the current account deficit is expected to remain at about 3% percent of GDP inthe medium and longterm. This current account deficit andthe reserve accumulation neededto maintain an adequate reserve cover can be financed by a combination o f foreign direct investmentand official external loans. Meanwhile, increasing trade integration will raise the level of both exports and imports as share o f GDP. The extraordinarily strong growth of remittances is not expectedto persist, and more moderate growth rates are expectedto leadto a stabilization o f remittances as a share of GDP, following the experience inother countries.