honduras: country strategy with the idb (2007-2010)

DOCUMENT OF THE INTER-AMERICAN DEVELOPMENT BANK

HONDURAS

IDB COUNTRY STRATEGY WITH HONDURAS

JANUARY 2008

This document was prepared by the project team consisting of Pablo M. Garcia (CID/CID), Project Team Leader; Laura Alonso (CID/CID); Eugenia Andreasen (CID/CID); Julieta Caunedo (CID/CID); Aída Gómez (CID/CID); Federico Presciuttini (CID/CID); Sergio Ríos (CID/CHO); Susana Sitja (ICF/FMM), and Steven Stone (CID/CHO). Contributions were received from various departments in the Bank through Néstor Roa and Agustín Aguerre (INE/TSP); Caroline Clark (INE/RND); Emma Naslund (SCL/EDU); Michelle Lemay (INE/RND); Morgan Doyle (ICF/CFM); Laura Ripani (SCL/SPH); Jaime Granados and Ziga Vodusek (INT/ITD); Lesley O’Connell (CID/CHO); Gladis Morena Gómez (MIF/CHO); Natacha Marzolf (SCF/INF) and Rebeca Sánchez de Tagle (IIC/CAF). Fernando Quevedo (CID/CID) revised the document

CONTENTS

EXECUTIVE SUMMARY I.

FRAMEWORK FOR FORMULATION OF THE STRATEGY ..................................................... 1 A. B.

II.

THE GOVERNMENT PROGRAM AND MEDIUM-TERM OUTLOOK ...................................... 9 A. B.

III.

Government program ............................................................................................. 9 Medium-term macroeconomic outlook............................................................... 10

THE PREVIOUS STRATEGY AND PORTFOLIO: PRINCIPAL LESSONS FOR THE NEW STRATEGY ....................................................................................................................... 12 A. B. C.

IV.

Introduction............................................................................................................. 1 Key challenges to development in Honduras........................................................ 1

Priorities and achievements ................................................................................. 12 Active portfolio .................................................................................................... 14 Lessons learned .................................................................................................... 14

THE BANK’S 2007-2010 STRATEGY .............................................................................. 15 A. B.

C. D. E. F.

Objective............................................................................................................... 15 Key areas targeted by the Bank ........................................................................... 15 1. Improve the investment climate .................................................................. 15 2. Boost competitiveness ................................................................................. 17 3. Promote the development of human capital................................................ 21 4. Strengthen the institutional framework and risk management and prevention.................................................................................................... 22 Loan scenarios for 2007-2010, and funding composition.................................. 23 Bank exposure indicators, country financing parameters, and fiduciary risk ... 25 International cooperation in Honduras ................................................................ 26 Risks to strategy implementation ........................................................................ 26

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ANNEXES

Annex I Annex II

Lending program Technical cooperation Program ELECTRONIC LINKS TO THE TECHNICAL ANNEXES

Annex III Annex IV Annex V Annex VI Annex VII Annex VIII Annex IX Annex X Annex XI Annex XII Annex XIII

Active portfolio Prior strategy and portfolio Country financial parameters Loan scenarios Exposure indicators Net flow of anticipated resources Debt forgiveness process Debt sustainability International cooperation in Honduras Honduras and the Millennium Development Goals References

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ABBREVIATIONS

AMDC BCH CABEI CAFTA-DR CCIT CFAA CFPs CIPE CNBS CONASA CPAR CPI DEI ENEE EPBA FDI FHIS FSO G-16 GDP GTA HIPC IDB IIC IMF INFOP INTAL MDGs MDRI MIF MSMEs NPV PAHO PBL PPP PRAF

Alcaldía Municipal del Distrito Central [Municipality of the Central District] Central Bank of Honduras Central American Bank for Economic Integration Dominican Republic-Central American-United States Free Trade Agreement Tegucigalpa Chamber of Commerce and Industry Country Financial Accountability Assessment Country Financing Parameters Country Institutional and Policy Evaluation Comisión Nacional de Bancos y Seguros [National Commission for Insurance Companies and Banks] Consejo Nacional de Agua Potable y Saneamiento [National Water and Sanitation Council] Country Procurement Assessment Report Consumer Price Index Dirección Ejecutiva de Ingresos [Department of Revenue] Empresa Nacional de Energía Eléctrica [National Electrical Power Company] Enhanced Performance-based Allocation Foreign direct investment Fondo Hondureño de Inversión Social [Honduran Social Investment Fund] Fund for Special Operations Group of 16 Gross domestic product General Treasury Account Heavily Indebted Poor Countries Inter-American Development Bank Inter-American Investment Corporation International Monetary Fund Instituto Nacional de Formación Profesional [National Vocational Training Institute] Institute for the Integration of Latin America and the Caribbean Millennium Development Goals Multilateral Debt Relief Initiative Multilateral Investment Fund Micro, small, and medium-sized enterprises Net present value Pan American Health Organization Policy-based loan Puebla-Panama Plan Programa de Asignación Familiar [Family Assistance Program]

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PRODEV PRS SCF SEFIN SEP SERNA SIDA SIAFI SIEPAC SIGADE SMEs SOPTRAVI UNDP USAID

Program to implement the external pillar of the Medium-term Action Plan for Development Effectiveness Poverty Reduction Strategy Structured and Corporate Finance Department Ministry of Finance Social Entrepreneurship Program Ministry of Natural Resources and the Environment Swedish International Development Agency Sistema Integrado de Administraci贸n Financiera [Integrated Financial Administration System] Central American Electric Interconnection System Sistema Integrado de Gesti贸n y Administraci贸n de la Deuda Externa [Integrated External Debt Management and Administration System] Small and medium-sized enterprises Ministry of Public Works, Transportation and Housing United Nations Development Programme United States Agency for International Development

Executive Summary Over the past five years, Honduras experienced higher growth than the Latin American average. This growth occurred against a backdrop of relative macroeconomic stability in a favorable international climate, combined with successive debt relief initiatives that benefited Honduras. Although the high growth rates have triggered certain improvements in the social indicators, the growth has not translated into substantive improvements in the living standards of the majority of the population. Indeed, 62% of the population lives in poverty and 42% in extreme poverty. In this context, the country is determined to consolidate the process of growth and to address the pressing social needs of the population.

In their analysis, the Government of Honduras and the Bank agree that the country’s development is linked to the consolidation of growth as a precondition for poverty reduction. Accelerating economic growth in a country with a small domestic market calls for an aggressive policy to expand external markets. Honduras has embarked upon an important process of international integration, the main component of which is the country’s entry into the Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR). To be able to seize the opportunities and face up to the greater competition associated with the process of positioning itself in the global marketplace, Honduras must become more competitive. Improving competitiveness and promoting new investments depend to a large extent on maintaining a macroeconomic framework and institutional conditions favorable to investment.

At the same time, the prevailing levels of poverty and indigence require progress in strengthening a social support network for the most vulnerable sectors through efficient and targeted social spending. Strengthening human capital remains crucial to improving productivity and reducing poverty. In addition, Honduras needs to address crosscutting challenges such as environmental protection and vulnerability to extreme natural phenomena, the effects of which impact broad and diverse sectors. Lastly, in order to work on all fronts to overcome these different sector challenges, it is important to strengthen the country’s governance and institutions.

President Manuel Zelaya Rosales’s administration intends to support the development of an inclusive economic and social system, with markedly pro-poor economic growth centered on equity, and inspired by a legal framework that emphasizes an approach based on rights, not concessions. The Government of Honduras proposes to consolidate macroeconomic stability, so that sustained economic growth translates into job creation and progress towards effective and lasting poverty reduction. The government program also proposes to enhance governance through comprehensive State reform that includes modernizing its management and developing participatory democracy to strengthen social oversight mechanisms to combat corruption. In terms of production, the current administration intends to accelerate growth by means of a diversified and environmentally sustainable production model, improve the investment climate, and generate the conditions necessary for greater private sector participation. To ensure that the benefits associated with integration are realized through the design of an export-based growth model, the Government of Honduras has determined that investments are needed in the sectors holding back export growth, namely road, airport, energy, and

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telecommunications infrastructure. In the social area, the government recognizes the need to advance in the area of human and social development by working in the context of the Poverty Reduction Strategy (PRS), based on the criterion of comprehensiveness in its implementation and an approach that supports access to assets.

In this context, the main objective of the Bank’s country strategy is to help consolidate an inclusive economic growth process that promotes poverty reduction, improves the population’s living conditions, and generates opportunities for the most underprivileged sectors. To attain this objective, the strategy proposes interventions that aim to enhance competitiveness and simultaneously interventions that target the most vulnerable sectors of the population, generating opportunities for their access to the benefits of growth. The Bank will focus its support on four main areas: (i) improvement of the investment climate; (ii) improvement of competitiveness; (iii) human capital formation; and (iv) institutional strengthening and risk management.

To implement the Bank’s country strategy with Honduras, an indicative program of loans is proposed that includes US$431.6 million in financing for the 2007-2010 period in its base-case scenario, with US$443.4 million and US$419.4 million in its high and low scenarios, respectively. The transition from one scenario to another will be determined by changes in institutional conditions, as reflected in the Country Institutional and Policy Evaluation (CIPE). New Bank lending to Honduras during the first half of the country strategy period will consist primarily of investment loans. Meanwhile, technical assistance resources will be provided to enable programmatic development in various areas, the strengthening of fiduciary capacity, and consolidation of the macroeconomic framework. Once progress has been made in these areas, the necessary consensus has been reached regarding sector reforms, and the macroeconomic framework has been strengthened—with the backing of a new program the government is currently negotiating with the IMF—it may be possible to channel resources with other instruments.

Coordination with the rest of the international donors is key to implementation of the strategy. The donor community has a strong presence both in terms of financing and number of donors. The Bank will forge closer coordination with the donor community through the G-16 and sector-based donor round tables. The Bank will continue to play a lead role in coordinating international cooperation in Honduras by organizing consultative group meetings.

Although the economic, social, and political environment is conducive to execution of the Bank’s country strategy with Honduras, there are risks that could affect its implementation.

Chief among them are the political risks inherent in the fact that the current administration does not hold a majority in the National Congress. This could make it difficult to achieve the consensuses necessary to advance its legislative agenda. There are also economic risks associated with fiscal account trends, high oil prices, and the performance of the United States economy. Lastly, the country’s vulnerability to disasters stemming from extreme natural phenomena is a recurring contingent risk in Honduras.

CORE OBJECTIVE: Help consolidate sustainable growth to generate opportunities for the most disadvantaged sectors Country objective and strategy

IDB activities Portfolio*

2007-2008 proposal**

Objective and performance indicators***

Strategic area I: Strengthen the macroeconomic framework and public resource management Maintain a sound Support for efficient public financial management macroeconomic framework Loans through efficient management HO0208 - Support for Strengthened Fiscal Management HO-L1015 - Support for Integrated Public Financial of State resources Management (US$28.5 million) (US$9.39 million) HO0214 - Strengthening and Modernization of the Strategy: National Statistics System (US$1.6 million) Improve public resource HO0223 - Public Management Reform Program management efficiency and (US$14.7 million) effectiveness by: Nonfinancial products a) promoting a comprehensive HO-P1031 - Analysis of Fiduciary Risk of Selected State reform including Government Agencies modernization of State HO-P1035 - Public Expenditure Tracking Survey (PETS) management, aiming for a CFAA and CPAR update managing for results system b) developing participatory democracy through the establishment of citizens' assemblies as a social oversight mechanism c) promoting a number of measures to enhance tax collection efficiency and make the tax structure more equitable

Improve budget planning Number of institutions with a standard deviation smaller than 5% between the approved and the executed budget

Baseline 2006: 20% Target 2010: 60% Improve the interface between SIAFI and other State systems Number of systems connected to the SIAFI Baseline 2006: 0 Target 2010: Interface between SIAFI, HONDUCOMPRAS, Human Resources Systems, SIGADE, Public Investment System, and Government Targets System completed.

Improve transparency in intergovernmental fiscal Technical cooperation relations HO-T1002 - E-Government HO-T1096 - Training Program for Technical Staff at Number of municipios with budget line items and charts HO-T1050 - Support for Planning, Programming and Economic Cabinet Agencies of accounts consistent with the central government Monitoring Based on Results (US$0.27 million) HO-T1079 - PRODEV II Baseline 2007: 0 HO-T1038 - Support for the Public Investment System HO-T1068 - Support for the Consolidation and Digitization Target 2010: 50 municipios and the Economic Cabinet (US$0.2 million) of the National Registry of Identification HO-T1076 – Comprehensive Support for Public Management Fiscal reform Loans

d) simplifying administrative HO0223 - Public Management Reform Program processes (US$14.7 million) Technical cooperation RS-X1071 - Building Social Capital through Fiscal HO-T1096 - Training Program for Technical Staff at Reform Economic Cabinet Agencies Other possible interventions Honduras revenue share-out system Tax evasion estimate Tax expenditure analysis Fiscal alternatives for macroeconomic equilibrium Social public spending Political economy of reforms Study of the tax policy Nonfinancial products PBL to support fiscal reform

Reduce tax expenditure Tax expenditure / Collection Baseline 2006: 30% Target 2010: 26% Improve tax revenue Tax revenue increase, adjusted by potential GDP Target: 1.7% a year

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Country Objective and Strategy

IDB Activities Portfolio*

2007-2008 proposal**

Strategic area II: Improve competitiveness to promote a sustainable growth process Promote equitable economic growth with job creation

HO0207 - Improvement of the PPP Atlantic Corridor (US$46.25 million) HO0116 - Program for Sustainable Strengthening of the Road Sector (US$1.3 million) Strategy HO0224 - PPP Support for Rural Electrification and the Promote development of Energy Sector (US$23.81 million) basic infrastructure CA0035 - SIEPAC Central American Electric critical to economic Interconnection (US$4.9 million)

Support the energy and transportation infrastructure Improve land transportation conditions of priority road corridors HO-L1013 - Multiphase Program for Rehabilitation of Sections of the Percentage drop in operating costs CA-5 PPP Tourism Corridor (US$40 million) Baseline 2007: 0% HO-L1020 - Supplemental Financing for Improvement of the PPP Target 2010: 11% (autos); 10% (trucks) Atlantic Corridor (US$30 million) El Progreso - Tela Corridor HO-L1018 - Logistical Corridor Infrastructure Program (SPS Ring Baseline 2007: 0% Road) (US$20 million) Target 2010: 15% (autos); 14% (trucks) HO-L1019 - Support for the Energy Sector (US$48.55 million) Loans

growth Provide comprehensive Technical cooperation support for the N/N - Support for the Development of Biofuels, Renewable Energy development of MSMEs, HO-T1071 - Environmental Studies and Design of the and Energy Efficiency with special emphasis El Progreso–Tela Tourism Corridor (US$0.56 million) HO-T1093 - Support for Energy Sector Reforms on access to credit

HO-T1095 - Support for Preparation of the Energy Sector Support Loan HO-T1078 - Support for the Strengthening of Puerto Cortés HO-T1077 - Support for the Preparation of the Copan Airport Road Program HO-T1094 - Support for the Development of Mini Hydroelectric Plants Private sector opportunities PRI N/N - Piedras Amarillas / Patuca III (US$35 million) N/N - Puerto Cortés (US$160 million) HO-L1023 - Geothermal Power Project (US$20 million)

Promote the growth of sectors with high production potential and social impact (tourism, maquila, agroforestry, and rural sector)

IIC N/N - Financing to build mini hydroelectric plants Other possible interventions Program to improve the productive corridor Construction of the Copan Airport Road Puerto Cortés Piedras Amarillas Hydroelectric Dam

Objective and performance indicators***

Improve generation and reduce losses of electrical power Installed power generation capacity Baseline 2006: 1158 MW Target 2010: 1305 MW Technical and non-technical losses: Baseline 2007: 25% Target 2010: 20%

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Country Objective and Strategy

IDB Activities Portfolio*

2007-2008 proposal** Comprehensive support for the development of MSMEs Loans

HO0221 - Program to Promote Competitiveness (US$3.25 million) Technical cooperation HO-T1051 - Support for MSME Programs (US$0.3 million) HO-S1004 - Promoting Entrepreneurship among Young Hondurans (US$0.32 million) HO-T1075 - Institutional Strengthening of the Competitiveness Commission (US$0.15 million)

Improve credit access conditions for MSMEs Proportion of total credit of the financial system targeting MSMEs Baseline 2005: 5.15% Target 2010: 15%

HO-L1012- Banco Ficohsa (US$4.2 million) Private sector opportunities PRI HO-L1029 - Banco AtlĂĄndida Project - TFFP (US$5 million) MIF N/N - Employment and Opportunities for Women Entrepreneurs. Aldea Global (US$TBD) - SMEs operating with environmental quality.

FUNDARSE (US$0.15 million) N/N - Business Program for Women CCIT (US$0.8 million) HO-M1013 - Expansion of PROCREDIT Financial Services (US$0.4 million) HO-M1006 - Remittance Security and Protection (Banco Ficohsa) (US$5.25 million) HO-M1016 - Implementation of Corporate Governance & Protocol in Family-owned SMEs N/N - Funding facility to strengthen small business finances - BAMER HO-M1021 – Improving the quality of Financial Services for Rural Microenterprises RG-M1131 - Developing Inclusive Business through the Opportunities for the Majority Program N/N - Territorial economic development program in southern Honduras HO/SEP - Local center for rural enterprise productive and marketing linkage.

IIC MSME credit line Other possible interventions Comprehensive support program for MSMEs

Objective and performance indicators***

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Country Objective and Strategy

IDB Activities Portfolio*

2007-2008 proposal**

Objective and performance indicators***

Development of dynamic productive linkages Loans HO-L1010 - Rural Business Development Program (PRONEGOCIOS) (US$27.1 million)

HO0218 - Pro-Bosque Program (US$3.71 million) HO0195 - National Sustainable Tourism Program (US$28.5 million)

Annual growth in agricultural product exports Baseline 2006: US$1.047 billion Target 2010: US$1.31 billion

Technical cooperation HO-S1007 - Integrating small-scale producers into agribusiness chains (US$0.14 million) HO-T1052 - Support for the Honduran Government for CAFTA-DR Implementation

Consolidate the agroexport sector

HO-T1091 - Financing Facility for Productive Initiatives: Phase II. HO-T1092 - Access to Solar Energy in Marginal Rural Areas HO-T1085 - Business Partnership: Facilitating Irrigation for Small Producers HO-T1086 - Improving the Productivity and Competitiveness of Craft Workers in Santa Rosa de Copan HO-T1063 - Support for the Consolidation of the Rural Communication Network

Private sector opportunities MIF HO-M1012 - Financial Management of Agricultural Price Risks (US$0.35 million) HO-M1015 - Improve the Quality and Competitiveness of Agrifood Production in Honduras. Zamorano (US$1.2 million)

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Country Objective and Strategy

IDB Activities Portfolio*

2007-2008 proposal**

Strategic area III: Promote human capital formation as a means to generate opportunities Support human and Improve the quality and coverage of educational services social development Loans HO0141 – Program to Transform 3rd Cycle of Basic Education (US$6.9 million) HO0202 - Middle Education and Labor Program (US$17.9 million) Strategy Technical cooperation Improve the quality Support for Strengthening of the Zamorano Agricultural School and coverage of Study on the impact of education sector operations public education Institutional Strengthening of the Education Quality Measurement Unit (UNCE) Improve access, Nonfinancial products coordination and Analysis of educational expenditure impact of the social Higher Education: financing and accreditation safety net Other possible interventions Vocational training program Support for the social safety net Loans HO0197 - Comprehensive Development of Indigenous Peoples (US$10.82 million) HO-L1009 – PRS-related Social Sector Program (US$17.62 million) HO0222 – Comprehensive Social Protection Program (US$17.62 million) HO0192 - Support for Indigenous and Black Communities HO0220 - Poverty Alleviation and Local Development Phase II Technical cooperation HO-T1059 - Support for Social Safety Net Monitoring (US$0.13 million) TC0110045 - Support for Indigenous and Black Communities (US$0.33 million) TC0211001 - Targeting Vulnerable Children, Adolescents, and Women (US$0.38 million) Other possible interventions Comprehensive Social Protection Program II

Objective and performance indicators***

Improve the quality and coverage of secondary education Number of school days Baseline 2006: 160 days Target 2009: 200 days Target 2015: 200 days Net Coverage - 3rd Cycle (grades 7 to 9) of Basic Education Baseline 2006: 41.4% Target 2009: 48.7% Target 2015: 70.0%

Improve social safety net coverage and institutions Number of beneficiaries of the standard education and health transfer program Baseline 2007: 0 Target 2009: 50,000 Number of implemented interagency service agreements on service delivery in the Solidarity Safety Net Program Baseline 2006: 0 Target 2009: 4

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Country IDB Activities Objective and Portfolio* Strategy Strategic area IV: Crosscutting topics: Justice, environment, and natural disaster prevention

2007-2008 proposal**

Objective and performance indicators***

Justice Energize State modernization

Loans HO0210 - Program to Support Judicial System Modernization Stage II (US$21.1 million)

Improve risk management and environmental protection Other possible interventions Program to Support Modernization of the Judicial System Stage III

Progress in the national legal system 80% reduction in judicial delay for civil cases Baseline 2006: 40% Target 2009: 80% Reduction in civil claim settlement times Baseline 2006: 50 months Target 2010: 15 months

Environment and natural disaster prevention Strategy Improve public sector resource management efficiency and effectiveness Encourage sustainable management of forests and protected areas

Loans HO-0179 - Multiphase Program for the Management of Natural Resources in Priority Watersheds (US$7.96 million) HO-0198 - Bay Islands Environmental Management Program II (US$8.3 million) CA0034 - Sustainable Management of the Upper Lempa River Watershed (US$0.53 million) Technical cooperation HO-T1083 - Institutional Strengthening of SERNA Strengthening of the Risk Management System; N/N – Identification of Natural Disaster Risk Mitigation Investments in Honduras Nonfinancial products

Improve natural disaster response capacity and vulnerability of public buildings Clarity and transparency in the environmental licensing process for public and private projects Baseline 2006: 4 Target 2009: 39

Number of operational hydrometric early warning systems Baseline 2007: 6 Target 2009: 24 Number of Municipal Emergency Committees strengthened Baseline 2007: 20 Target 2009: 200

Other possible interventions Natural Disaster Mitigation Investment Loan *

Amount to be disbursed shown in parentheses. Given the size of the TC portfolio, the list only includes operations with more than US$10,000 to be disbursed during the period covered by the strategy, or operations undisbursed as of July 2007. ** The estimated amount of approvals is shown in parentheses.

I.

FRAMEWORK FOR FORMULATION OF THE STRATEGY

A.

Introduction

1.1

This country strategy with Honduras charts the course of the IDB’s 2007-2010 operations program, the purpose of which is to help the country attain its development goals. Although presented half way through the administration of President Manuel Zelaya Rosales, this strategy nonetheless guided the Bank’s activities with Honduras throughout the referenced period, and incorporates in its financial framework the third quarter 2007 outcomes of the debt relief process.

1.2

The strategy reflects the agreements reached through a dynamic process of dialogue with the government, civil society, and international cooperation agencies regarding the country’s development priorities. It is underpinned by a deep analytical process carried out in coordination with the government and other international donors.

Work on the analytical foundation made it possible to strategically target Bank activities to support effectiveness in the development of the program to be implemented in the framework of this strategy, and coordination with other partners for development in Honduras.

1.3

The document comprises four sections. Section I, Framework for Formulation of the Strategy, presents the key challenges facing Honduras in the Bank’s estimation.

Section II, The Government Program and Medium-term Outlook, describes the government’s program and the macroeconomic prospects. Section III, The Previous Strategy and Portfolio, summarizes the main achievements and lessons learned from both the design and implementation of the previous country strategy. Lastly, Section IV presents the new IDB support strategy for the 2007-2010 period, highlighting the objectives, strategic areas of intervention, and various factors relating to its implementation.

B.

Key challenges to development in Honduras

1.4

The Honduran economy grew at an average of 4.1% a year over the past five years, surpassing the Latin American average for the same period. This growth occurred against a backdrop of macroeconomic stability in a favorable international context, combined with successive debt relief initiatives that benefited Honduras in the 2005-2007 period. These high growth rates triggered a 1.3% per capita GDP growth rate, and improved social indicators. However, this growth has not translated into substantive improvements in the living standards of the majority of the population, despite implementation of a Poverty Reduction Strategy (PRS) in Honduras for over nine years.

1.5

At present, 62% of the population lives in poverty, and 42% is indigent. The situation is worse in rural areas and among the indigenous population, where the poverty rates are 74% and 71%, respectively.

1.6

In this context, the country faces the dual challenge of consolidating the growth process while addressing pressing social needs. Thus, the principal development

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challenge for Honduras is to reduce poverty and indigence levels. Accordingly, the Government of Honduras and the Bank agree that the country’s development is linked to the consolidation of growth as a precondition for generating employment and effective and lasting poverty reduction in the context of the PRS. 1 1.7

Accelerating economic growth in a country with a small domestic market calls for an aggressive policy to expand external markets. Honduras launched a major international integration push premised on the country’s entry into the CAFTA-DR process, but also centered on deepening the Central American market and negotiating several free trade agreements, most particularly the European Union agreement. 2 To seize the opportunities and face up to the greater competition associated with the process of positioning itself in the global marketplace, the country must become more competitive and seek market niches for products with greater value added, so as to promote investment and employment. Improving competitiveness and promoting new investments depend, to a large extent, on maintaining a macroeconomic framework favorable to investment.

1.8

Similarly, given the prevailing levels of poverty and indigence, the country must further strengthen a social support network for the most vulnerable sectors through efficient and targeted social spending. Moreover, strengthening human capital remains crucial to improving productivity and reducing poverty. In addition, Honduras faces crosscutting challenges such as environmental protection and vulnerability to extreme natural phenomena, the effects of which impact broad and diverse sectors of the country. Lastly, in order to work on all fronts to surmount these challenges, the country’s governance and institutions must be strengthened.

1.9

In summary, Honduras’s main development challenges are: (i) to consolidate a stable macroeconomic framework; (ii) to increase the efficiency and effectiveness of public spending, especially social spending; (iii) to improve competitiveness; (iv) to promote environmentally sustainable growth; and (v) to strengthen domestic governance and institutional development. These challenges are discussed below. a. Consolidate a stable macroeconomic framework

1.10

Although the country is enjoying an expanding economic cycle, with growth rates at about 6% a year, certain risks must be addressed in order to consolidate a longterm stable macroeconomic framework. Because Honduras is highly sensitive to changes in the international climate, the macroeconomic upturn, driven in part by a favorable global economy, could rapidly deteriorate should the environment change. This underscores how important it is for Honduras to address the substantial risks its economy faces, in order to consolidate a long-term stable macroeconomic framework.

1

The PRS states that “the fundamental objective of the strategy is to reduce poverty significantly and sustainably, based on accelerated and sustained economic growth whose benefits are distributed equitably.”

2

The multiplicity of free-trade agreements entered into by Honduras and in the negotiation phase clearly points to the need for strengthening the country’s ability to negotiate and its institutional capacity to administer such agreements.

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1.11

Special attention must be given to consolidating the fiscal situation, capitalizing on the opportunities generated by the debt relief. In the past four years, Honduras improved its public accounts significantly, reducing the central government deficit from 6% of GDP in 2003 to 1.1% in 2006. However, progress stalled in 2007, with both the central government and the consolidated public sector deficit growing to about 2% of GDP.

1.12

The principal challenge to expenditures is to rein in the public sector wage bill, especially in the health and education sectors, which account for approximately 9% of GDP. 3 Growth of these current expenditures distracts resources from investments needed in social sectors and other priority sectors.

1.13

On the revenue side, there have been notable improvements in tax administration.

Yet, the tax burden in Honduras amounts to 16.5% of GDP, leaving room to improve efficiency and broaden the tax base, considering the level and number of tax exemptions and breaks. Further pressure on public finances comes from the state energy and telecommunications companies—ENEE and HONDUTEL, respectively. In the case of the former, energy rates have not kept up with costs, and the company reports major technical and non-technical losses, which grew from 20% in 2001 to 25% in 2006. ENEE’s deficit moved from 0.3% of GDP in 2003 to 0.5% in 2006. In the case of HONDUTEL, deregulation of the international calls market in January 2006 affected earnings and could result in the company’s decapitalization. Financial performance was down from 0.4% of GDP in 2003 to 0% in 2006 (after hitting a high of 0.7% in 2004). 4 A regulatory framework is needed to be able to encourage investments in the telecommunications sector.

1.14

Consolidation of the fiscal position makes progress in fiscal reform essential. This would make it possible to finance the spending needed to successfully implement the PRS and boost investments for growth. Expanding the tax base by cutting back on tax exemptions, improving the tax administration, and enhancing management of State-owned companies will be major sources of income.

1.15

Meanwhile, it is necessary to ensure an increase in the quantity and quality of goods and public services delivered to the poor. This can be achieved by improving efficiency, targeting, and transparency in the use of public resources. These goals will not be attained without better targeting of subsidies, increased efficiency at State-owned companies, and sustainable management of the wage bill.

1.16

Honduras’s external debt situation has improved considerably, which has putt the economy on a sustainable path. In recent years, as a result of debt relief granted to Honduras under the HIPC and MDRI initiatives, total public debt fell to 36.6% of GDP in 2006 (58% in 2005), and public external debt to 32.9% of GDP in 2006 (53.6% in 2005). In 2007, the IDB approved the cancellation of commitments contracted by Honduras with the Bank, amounting to US$1,366,800,000

3

The health care and education payrolls account for approximately 75% of the total wage bill.

4

This translated into fewer transfers to the central government, which fell from 1.295 billion lempiras in 2005 to 596.4 million lempiras in 2006.

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(US$1,070,300,000 in principal and US$296,500,000 in interest). Consequently, the country’s external public debt will be down to US$1.951 billion at year-end 2007, 5 equivalent to approximately 16% of GDP at face value (12% in present value).

1.17

Although the findings of the debt sustainability analysis show that, in principle, the debt is sustainable (see Annex X), it is important for Honduras to strengthen its fiscal position and avoid being trapped once again in a debt cycle, which would negate the benefits of debt forgiveness. The historical opportunity provided by a drop in debt service pressure in the public accounts must be seized to consolidate the country’s fiscal position and finance investments needed for development. b. Increase the efficiency and effectiveness of public spending, especially social spending

1.18

1.19

Since 2001, the Government of Honduras has been implementing a comprehensive PRS, the main targets of which are the Millennium Development Goals (MDGs).

Although the poverty reduction spending targets were surpassed, 6 progress fell short of expectations, and the gap between observed poverty rates and the goals widened Poverty systematically. There is little likelihood that 64% Honduras will attain the MDGs for reduction 1.8% 62% 4.0% of extreme poverty, malnutrition, and child 60% mortality (Annex XII).

Social spending inefficiencies are linked to both the allocation and execution of resources. Increases in social spending were essentially used to cover the wage bill, instead of funding important investments.

Although public social spending in Honduras is deemed progressive, it is not pro-poor (46% of PRS program beneficiaries are not poor 7 ).

58%

56%

54% 2002

2004

2006

Extreme poverty PRS target Observed 46%

44%

3.1%

42%

3.8%

40%

1.20

The reason for this is the fragmentation of social spending into multiple programs with diverse degrees of targeting. Social programs targeting the most impoverished segments of the population are usually education programs, family assistance programs (PRAF), food programs, and the Healthy

4.8%

38%

36% 2002

2004

Observed

2006

PRS target

5

Estimate based on SEFIN data.

6

Only in 2006 was government spending below the target set in the PRS (8.3% versus 9.4% of GDP). To a large extent, this was due to the customary drop in investment execution owing to a change of government.

7

Honduras Poverty Assessment: Attaining Poverty Reduction, World Bank (June 2006).

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Schools program, 8 whereas higher education programs, transportation allowances, and health coverage mostly benefit higher income groups. It is important to focus social outlays on fewer programs with greater distributional impact, benefiting the most impoverished segments of the population. To this end, a stringent targeting system needs to be put into practice that makes it possible to validate the roster of beneficiaries in a participatory manner. Also, the absence of a single pay scale for the public sector, the weakness of the meritocratic system, the concentration of government workers and professionals in the two main cities (Tegucigalpa and San Pedro Sula), and the lack of training of municipal workers in rural areas are pressing challenges the country must address.

1.21

Development of human capital remains a key factor for poverty reduction, in addition to helping improve productivity. Honduras presents low levels of secondary education coverage, low levels of quality education, and inefficient sector spending. Net secondary school coverage for 2006 was 39%, substantially lower than the average for Latin America and the Caribbean (68%). Only 37% of adolescents eligible for third cycle (grades 7 to 9) education are enrolled, and only 19% for fourth cycle (secondary school). The problem is even more acute in rural areas. 9 School dropout and repeat rates need to be lowered, and students’ academic performance upgraded.

1.22

The fact that outcome indicators have not improved in step with increased education spending points to the need for better management.10 It is especially important to implement supervisory mechanisms to reduce teacher absenteeism, 11 and mechanisms to assign teachers to high demand areas.

1.23

With respect to the labor market, work force training needs to be improved so worker supply satisfies the demand of the country’s productive sectors. This can be achieved by adjusting middle and high school and higher education curricula to meet market requirements.

1.24

The health sector in Honduras has made great strides in the recent past. In particular, primary health care programs offer better coverage and overall malnutrition has decreased. Nonetheless, some 1.2 million persons still have very limited or no access to health services, and there has been no significant progress in combating subnutrition. It is unlikely Honduras will attain the MDGs by 2015.

8

An estimated 67% of total spending by the Honduran Social Investment Fund (FHIS) and 90% of PRAF spending benefit the three poorest quintiles.

9

While 33.7% of the urban population completed secondary education, and 7% higher education, these figures are 6% and 1%, respectively, in rural areas.

10

In compliance with the PRS commitments, education spending increased in the past six years to 7.3% of GDP, higher than other Central American countries (compare with 3.3% in El Salvador, and 4.8% in Costa Rica).

11

Although the academic calendar stipulates 200 school days, the actual calendar was comprised of 110 days in 2006.

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1.25

The shortfalls in the coverage and quality of water and sanitation services impact the health sector performance indicators––water supply covers 80.9% of the population, and sanitation only 70.1%. Honduras faces the following critical challenges: (i) develop a sector policy and strategy common to all levels of government; (ii) consolidate the reform under way, completing transfer of the Tegucigalpa system to the Municipality of the Central District (AMDC), and giving lead agency status to the National Water and Sanitation Council (CONASA); (iii) fund the Tegucigalpa Investment Plan; and (iv) design and put into operation a potable water investment program for rural areas. c. Increase competitiveness to capitalize on trade agreements and the country’s entry into the global economy

1.26

Honduras must improve its competitiveness to attain sustainable growth driven by external demand. Its greater foothold in the global economy, arising from participation in several trade agreements—among which CAFTA-DR stands out— and China’s larger presence in global markets, make it imperative that Honduras improve its competitive capacity so as to face these challenges and seize the opportunities of this new international environment.

1.27

Several studies have shown that Honduran economic growth is held back by the inadequacy of its gains in productivity, the foundation of business and national competitiveness. 12 The need to boost the competitiveness of the Honduran system of production calls for a more efficient use and operation of the existing infrastructure, and concentration of new investments on eliminating bottlenecks that hamper productive development, in particular in the area of road, port, and energy infrastructure.

1.28

The country’s topography and the location of its sources of growth demand additional efforts to develop a multimodal road network for better connectivity between the urban centers and the agricultural and tourist areas. Honduras has scaled up investments in road construction and upgrading, with special emphasis on improving the Atlantic Corridor of the Puebla-Panama Plan’s International Mesoamerican Highway Network (RICAM), vital to advancing economic integration with the Mesoamerican market. Network expansion needs to continue, including activities to maintain and improve key secondary and small rural roads, to reduce the share of transportation costs in the production cost of goods and services.

In this regard, the challenge is to supplement public investment with private financing for specific projects, and to generate revenues to pay for road maintenance. These actions should be carried out in parallel with improving

12

Agosín, Machado and Nazal (eds.), Pequeñas economías, grandes desafíos. Políticas económicas para el desarrollo en Centroamérica, IDB, 2004; Loayza, Calderón & Fanjzylber, “Economic growth in Latin America and the Caribbean”, World Bank, 2002; Juan Ramón, “Honduras growth performance 19701997”, IMF Policy Discussion Paper, 1998.

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management efficiency at the main ports, especially at Puerto Cortés, a candidate to become a regional port hub. 13 1.29

The serious limitations affecting the energy sector compromise its ability to satisfy short-term demand, and medium- and long-term system sustainability. The country’s energy matrix relies heavily on thermoelectric power. In a scenario of high hydrocarbon prices, this dependence strains public finances, affecting the Honduran external balance. Some of the chief problems facing the sector include rates that do not reflect the cost of supply,14 an inadequate subsidy structure, high technical and financial losses at the State-owned electricity company, and underserved rural areas. These problems are compounded by poor management at the public utility company holding the monopoly over the distribution of electrical power.

1.30

To address these issues in a context of fiscal constraints, the challenge lies in creating the right conditions to promote private sector participation in the electricity sector in order to gradually change the country’s energy matrix. Alternative sources of energy and fuels need to be explored concurrently.

1.31

Private sector participation as an engine for development and employment requires access to sources, terms, and instruments to finance investment. Although the Honduran financial system has improved considerably through bank consolidation, better bank supervision, and the entry of foreign banks, there is still a need to increase and develop financial sector intermediation, with broader coverage and lower costs.

1.32

The financial intermediation process is limited in terms of access to credit for MSMEs, not only for investments, but also working capital. In addition, development of the financial sector has not covered all segments. For example, improvements in the stock market did not produce new financial or hedging instruments. Progress with the institutional and legal framework for banking supervision requires consolidation, and the exploration of options to scale up financial services for the rural sector should continue. Concurrently, clear and stable rules for the conduct of business activities need to be ensured in order to reinforce legal certainty. d. Promote environmentally sustainable growth vulnerability to extreme natural phenomena

1.33

and

reduce

Honduras’s natural environment and biodiversity are an asset. Forests cover 53% of the territory, providing an excellent source of sustainable economic resources. What is more, the country’s natural wealth known to date accounts for 2.5% of world

13

Puerto Cortés is the busiest of the four Honduran ports (Cortés, Castilla, La Ceiba and San Lorenzo), accounting for 81% of cargo movement and 76% of ship traffic. Several studies show that improving port operations would result in a fourfold increase in current capacity at Honduran ports, with no need to build new Atlantic ports for the next 10 years.

14

The consumer price of electricity on average only covers 81% of the efficient cost of supply (assuming losses of 15%).

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flora. 15 Although the contribution of natural resources to GDP has declined in the past 30 years, the population remains highly dependent on their use. The biodiversity and forests are under extreme stress owing to deforestation, especially in farm lands bordering on the humid forests, due to extensive livestock breeding, speculative land clearing, and expansion of the agricultural boundaries by small farmers.

1.34

Environmental management needs to be improved in order to achieve an environmentally sustainable growth model based on sound management of the environmental risks posed by economic activities. The principal challenges facing the sector are: (i) to define ownership rights to exploit land and use natural resources and provide legal certainty regarding those rights; (ii) to strengthen the lead institutions involved in environmental management and use of natural resources, allowing them to discharge their responsibilities and comply with legal provisions in cooperation with the communities, the private sector, and civil society; (iii) to establish a clear set of environmental management incentives; and (iv) to develop environmental management strategies in accord with those of other countries in the region.

1.35

Honduras is highly vulnerable to extreme natural events. The United Nations ranked Honduras as the country most vulnerable to hurricanes in the world (by number of fatalities per million inhabitants), and among the top 20 places in the world in terms of its vulnerability to floods. 16 Accordingly, developing mechanisms to mitigate the impact of these threats is a priority. Disaster risk management should focus on improving the probabilities for PRS success as a major component of the country’s development strategy in the short, medium, and long term. A fiscal risk management strategy is needed that, in the event of a disaster, provides for the physical management of priority public assets, and financial management to cover the cost of contingent obligations. e. Strengthen democratic governance and institutional development

1.36

There are major challenges to governance in Honduras linked to the need for an institutional framework to support enforcement of and respect for laws and regulations. Public sector performance has been hindered by the oversized government, excessive centralization, and institutional weakness in technical, administrative, and financial matters. Managerial capacity development needs to continue based on organizational clarity, management for results processes, decentralized decision-making, and professionalization of the civil service.

1.37

In the 1990s, Honduras embarked on a major effort to decentralize public administration, but much remains to be done. Some of the most relevant factors affecting this process are the need for an administrative decentralization policy that fully takes account of the fiscal implications, the country’s fragmentation into

15

Study of Biological Diversity in Honduras. United Nations, 2005.

16

A Global Report: Reducing Disaster Risk, A Challenge for Development. UNDP, 2004.

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298 municipalities, the high poverty rates in most municipalities, and the lack of qualified personnel at the local level.

1.38

In addition, it is imperative to foster the independence, citizen trust in, and efficiency of the judicial system, 17 continuing the reform initiated by the Government of Honduras that is gradually improving judicial independence, outreach to the citizenry, and institutional capacity. As mentioned in the context of competitiveness, legal certainty 18 is indispensable to an enabling environment for private enterprise. The real and commercial property registration systems under the judiciary require strengthening to further deepen past reforms, such as streamlining the incorporation process for new businesses (from 44 to 21 days), and property registration (from 36 to 24 days). Improvements are also called for in the State’s capacity to stem the growth of organized crime and guarantee physical security.

II. THE GOVERNMENT PROGRAM AND MEDIUM-TERM OUTLOOK

A.

Government program

2.1

The administration of President Zelaya Rosales has assigned top priority to poverty reduction and to improving the living conditions of the Honduran people. The program sets ambitious targets with respect to malnutrition, poverty reduction, and housing, among others. 19 The government proposes to develop an inclusive economic and social system, with markedly pro-poor economic growth centered on equity, inspired by a legal framework that emphasizes an approach based on rights, not concessions.

2.2

The government recognizes that consolidating macroeconomic stability is a necessary, although not sufficient, condition to reduce poverty, so that sustained economic growth translates into new employment opportunities and progress towards effective and lasting poverty reduction. The program also sets out to enhance governance through a comprehensive State reform that includes modernizing its management by adopting a managing for results system, and developing participatory democracy to strengthen social oversight mechanisms to combat corruption. The program also seeks to increase tax collection efficiency while working towards a fairer tax structure.

2.3

In terms of production, the current administration intends to accelerate growth by means of a diversified and environmentally sustainable production model, improve the investment climate, and generate the conditions necessary for greater private sector participation in both the urban and rural sectors. MSMEs, especially those in

17

Only 40% of the population rates the performance of the Judicial Branch as good. Latinobarómetro, 2003.

18

In Honduras, it takes about 480 days and costs 30% of the claim to enforce a contract via judicial channels, compared with 443 and 18% for the countries in the region. WB, Doing Business, 2008.

19

Program targets include eradicating hunger for 450,000 undernourished children, reducing poverty by 15 points by 2015, creating 100,000 jobs a year, undertaking massive housing construction and improvement works, reducing mother and child mortality, and planting 10 million trees.

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the maquila, tourism, agroforestry, and agroindustrial sectors, are central to boosting production. The Government of Honduras is seeking to place priority on these sectors because it believes they are important for production, as well as for their impact on poverty reduction. To ensure that the benefits associated with integration are realized through an export-based growth model, the government has determined that investments are needed in the sectors holding back export growth, namely road, airport, energy, and telecommunications infrastructure.

2.4

In the social area, the government proposes to advance human and social development by working in the context of the PRS and based on the criterion of comprehensiveness in its implementation. The Government of Honduras decided to work on overcoming poverty by adopting an approach that will support access to assets for the poor through a comprehensive policy. Accordingly, government interventions will target four areas: (i) generating capacities; (ii) expanding opportunities; (iii) providing infrastructure; and (iv) ensuring social protection, especially for the poor and extremely poor populations.

2.5

This approach demands a great effort in terms of intervention comprehensiveness, where social programs have to be coordinated with programs to improve the country’s competitiveness and employment opportunities have to be generated. The Government of Honduras wishes to improve the quality of education services, health care, and access to a national social safety net. It is also strongly committed to finding solutions to the housing problem in Honduras, by making headway with the titling and regularization of condominiums, and promoting construction of housing communities.

2.6

The government plans to coordinate these interventions in the framework of the PRS through the “Red Solidaria� [Solidarity Network], which promotes comprehensive, phased, and progressive interventions, reaching out to families in extreme poverty so as to improve their living conditions, and their social and economic development.

B.

Medium-term macroeconomic outlook

2.7

The macroeconomic outlook is generally good, although contingent upon economic policy reforms to be implemented by the Government of Honduras, especially fiscal policy. In February 2007, the country completed a program it undertook with the International Monetary Fund (IMF) is well advanced in the process of negotiating a new agreement. The economy is expected to remain in an expanding economic cycle for the next few years, although growth may be somewhat lower than in the recent past due in part to the possible economic slowdown in the United States. Favorable changes in internal absorption will continue to drive growth, owing chiefly to the expansion of private consumption. The effective growth rate should gradually converge with the potential growth rate of about 4.5% per annum.

2.8

With respect to the external sector, demand for imports is expected to grow at a rapid pace, essentially driven by growth in domestic demand. Despite the anticipated favorable performance of exports, the increase in imports will increase the trade deficit. Nonetheless, the economy is expected to remain relatively stable in

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the external sector thanks to the significant flow of remittances, equivalent to approximately 25% of GDP, and the foreign direct investment (FDI) flows that will gradually grow to US$420 million a year. This will enable the monetary authority to maintain its reserve position. 20 The above scenario is based on the assumption that the Government of Honduras will comply with its commitment to fiscal discipline.

2.9

There are, however, a number of risks that could lead to a more pessimistic scenario in terms of macroeconomic trends. These risks are associated with a sharp economic slowdown in the United States (affecting both exports and remittances), a deterioration of the fiscal situation owing to wage pressures (especially the payroll increase stemming from the agreement with teachers), and a larger deficit for Stateowned companies. This scenario would cause an economic slowdown, with a marked increase in the fiscal deficit, resulting in a gradual increase of the public debt. Moreover, an export and remittances slowdown coupled with relatively stable FDI flows would worsen the international reserves position.

Macroeconomic projections 2006-2009 (base-case scenario)

Annual real GDP growth (%) Annual nominal GDP growth (%) Inflation (CPI) Gross domestic investment (% of GDP) Central government fiscal surplus (% of GDP) Combined government fiscal surplus (% of GDP) Current account (% of GDP) Gross reserves (in months of imports) Foreign debt (% of GDP) Remittances (% of GDP)

20

2006 Activity levels and prices 6.1 10.4 5.5 24.3 Public sector and debt -1.1 -2.1 External sector -3.8 4.4 28.0 25.4

2007

2008

2009

6.0 11.4 8.8 25.0

5.5 10.7 7.0 23.5

4.5 8.2 6.5 23.5

-2.0 -1.9

-1.8 -1.6

-1.5 -1.3

-8.2 4.0 15 26.5

-9.1 4.0 14.0 26.0

-8.4 3.8 13.5 25.5

The assumption is that the terms of trade tend to remain constant, with only a slight downturn. The Central Bank of Honduras will continue to sterilize monetary expansion stemming from a reserve build-up, which could lead to a growing quasi-fiscal deficit. Monetary policy modeling assumes that the authority will set a target for international reserves, while seeking to sterilize most of the monetary impact of such a build-up.

Thus, they would meet the advocated target of a gradual drop in inflation to about 6.5% per annum in 2009.

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Macroeconomic projections 2006-2009 (alternative scenario) 2006 Activity levels and prices

2007

2008

2009

6.1 10.4 5.5 24.3

6.0 11.4 8.8 25.0

4.5 14.0 10.0 22.0

3.9 12.2 8.5 22.0

-1.1 -2.1

-2.0 -1.9

-3.0 -2.6

-2.5 -2.2

-3.8 4.4 28.0 25.4

-8.2 4.0 15.0 26.5

-10.1 3.5 15.0 24.5

-9.5 3.0 15.0 24.0

Annual real GDP growth (%) Annual nominal GDP growth (%) Inflation (CPI) Gross domestic investment (% of GDP)

Public sector and debt Central government fiscal surplus (% of GDP) Combined government fiscal surplus (% of GDP)

External sector Current account (% of GDP) Gross reserves (in months of imports) Foreign debt (% of GDP) Remittances (% of GDP) Source: Prepared in-house with data from SEFIN, BCH and IMF

III. THE PREVIOUS STRATEGY AND PORTFOLIO: PRINCIPAL LESSONS FOR THE NEW STRATEGY

3.1

The Bank’s 2002-2005 country strategy with Honduras provided continuity for the transformation initiated as part of the reconstruction following Hurricane Mitch under the 1999-2001 strategy, and was consistent with the PRS framework. Its design was further aided by the fact that international cooperation agencies and the government developed a common diagnostic basis, achieving a close alignment between the IDB program and the priority areas identified by the country.

A.

Priorities and achievements

3.2

The principal objective of the 2002-2005 country strategy was “to assist the government with its efforts to reduce poverty by fostering stronger growth that can be sustained through greater competitiveness and increased production capacity for the poor.” To attain this objective, the strategy focused the Bank’s action on three strategic areas: (i) to increase the competitiveness of productive activities; (ii) to enhance the development of human capital; and (iii) to strengthen governance.

3.3

Operations approved during the period covered by the strategy amounted to a total of US$450.9 million. These operations broke down as follows: 47% to the competitiveness area, 32% to development of human capital, and 21% to strengthening governance.

3.4

In general, the strategy proved appropriate for the problems facing the country, and was in harmony with national priorities. Notable among the achievements of the first area, to increase competitiveness, were the furtherance of macroeconomic stability, progress in tax efficiency, improvement of the sanitation infrastructure in tourist areas, and solvency and stability of financial institutions. In particular, major advances were made in the institutional framework of the financial system with passage of a law establishing the jurisdiction of the National Commission for Insurance Companies and Banks (CNBS) as the agency responsible for consolidated supervision, and improved the solvency and capitalization indicators (see Box I).

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3.5

With regard to development of human capital, progress was made in improving the health care system and investing in children from poor families and women, and in schools and sanitation, stimulated by the conditional cash transfer program. In addition, there were improvements to the sewerage system, and advances in solving the housing problems stemming from Hurricane Mitch. Progress was made to reduce urban poverty in downtown Tegucigalpa, and provide access to technology for isolated communities.

3.6

In the third area—strengthen governance—some progress was made in modernizing the National Congress, improving public investment and municipal decentralization processes, and efforts to modernize the judicial system. Approval of a new Code of Civil Procedure and a Criminal Code strengthened the country’s legal framework. Concerning public financial management, the Bank supported advances such as implementation of a new Integrated Financial Administration System (SIAFI). The Bank also supported modernization of the national statistics system and the national accounts update, making it possible to change the GDP computation base year for the first time in 42 years. This update produced better baseline statistics for use in economic policy formulation and evaluation.

Box 1: Main achievements of the previous strategy

Modernization of the Administration of Justice Under the justice program, the Bank supports a sectoral approach to security and justice involving the three pillar institutions of the system: the Supreme Court, the Ministerio Publico [Public Prosecutor's Office], and the Ministry of Security. This approach helped realize significant achievements on several fronts.

Support was provided to strengthen the country’s legal framework through the approval of a new code of civil procedure, a criminal code, and the Witness Protection Act. Progress was also made with respect to sector coverage, processing 100% of the justice backlog from the previous code of procedure. Quality is improving as a result of courses offered jointly to judges and prosecutors and progress has been made in modernizing the infrastructure through implementation of the Interagency Digital File System (SEDI) and citizen outreach improved with the launching of the communication campaign “Meet the Justice Operators.”

Reform of Public Financial Management (PFM) The Bank contributed significantly to improving the PFM business model in Honduras. The new model put the State’s cash position in order through implementation of the General Treasury Account (GTA), and reduced its floating debt. The new SIAFI began operations in May 2006. In addition to being a registry system, the SIAFI is an instrument to facilitate management, substituting the flow of papers by a flow of online data.

Financial system reform

Thus far, the most noteworthy effects of the reform include: (i) budget classifiers consistent with international standards; (ii) implementation of the program budgeting method; (iii) establishment of the GTA; (iv) delegation of payments to the Project Administration Teams (UAP), thus deconcentrating execution of outlays; (v) development of a multiyear, multisource, and multicurrency structure; and (vi) online availability of the State’s financial reporting in real time.

The principal outcomes of this effort were: (i) a substantial improvement in solvency and capitalization indicators; (ii) inspection of 100% of banking institutions and revision and correction of 12 prudential regulations relating to banking entity supervision; and (iii) preparation and approval of a bill giving the CNBS jurisdiction to conduct consolidated supervision and develop appropriate regulations.

The Bank actively supported the government in carrying out structural reforms and build the technical capacity of the National Commission for Insurance Companies and Banks (CNBS). Support was provided to reform prudential standards, modernize the financial reporting systems, conduct an assisted-inspections exercise involving all the banks, train inspectors in risk-based supervision, and implement a financial crisis early warning system.

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B.

Active portfolio

3.7

The active portfolio is undoubtedly one of the Bank’s main assets in terms of accomplishing the new strategy with Honduras. The portfolio presently comprises 32 loan operations totaling US$696 million in approved loans, plus 42 technical cooperation operations and 30 private window operations with the Bank. This portfolio is one of the Bank’s largest in both number of operations and sector coverage. Thus, it is complex to supervise and its strategic impact is broad in scope.

3.8

The sector distribution of the loans has a strong social sector bias (approximately 40% of the total available portfolio), providing support to strengthen the social safety nets, providing services to vulnerable groups and low-income housing, and expanding health care and education service coverage (see Annex III). The breakdown of operating modalities shows the loan portfolio comprises 28 investment projects (two regional), three policy loans, and one performancebased loan. Private sector direct financing (SCF, IIC, MIF, SEP) includes 32 operations totaling US$50.3 million, of which US$14.7 million remain undisbursed. The key challenges to the current portfolio include the need to expedite execution of the water and sanitation programs, ensure the viability of sector disbursements (the Bank’s Honduras portfolio still holds US$32.6 million in undisbursed policy loans), and align social programs with the new PRS framework.

C.

Lessons learned

3.9

Important lessons drawn from both the Bank’s country strategy and portfolio performance were taken into account during preparation of the new strategy. The most important lessons learned include: (i)

The need to further deepen coordination and harmonization with other international cooperation agencies. International cooperation agencies have a large presence in Honduras. More than 30 agencies operate simultaneously covering practically the sectors. Although coordination has improved, it is imperative to do away with inefficiencies arising from the multiplicity of agencies involved in external financing actions. One of the lessons learned in this regard has been that a shared diagnostic assessment in the different sectors has served as the foundation for a rational division of work, to launch common programs gradually, and to reduce the transaction costs borne by the country.

(ii)

The importance of promoting IDB actions in the private sector by strengthening and increasing the participation of the Structured and Corporate Finance Department (SCF) and the Inter-American Investment Corporation (IIC) in the country. Although the Bank has made an effort to increase its private sector presence, progress is just starting to be made. There is a need for more systematic and aggressive action to support various private sector segments in Honduras. More business origination efforts are called for given the scale, type of market, and risks.

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(iii)

Continue working with the country to enhance and strengthen the PRS. This should include identifying mechanisms to promote pro-poor growth, while seeking policies to enable greater asset accumulation in the lower-income sectors.

(iv)

Build more flexibility and adaptability into projects. Because project formulation, approval and execution times have lengthened, some new projects fail to have an impact during the strategy period for which they were devised, thus lessening their relevance. New projects should target the identified problems, but with sufficient built-in flexibility to meet new priorities that may arise during project implementation.

(v)

Provide for greater strategy evaluability. Both the country strategy and IDB projects with Honduras should include not only output indicators, but also outcome indicators and baselines to facilitate ex post evaluations of their effectiveness. This poses a major challenge given limitations in the production and quality of monitoring indicators, and the associated institutional weakness.

(vi)

Concentrate Bank actions on fewer sectors through bigger operations.

A recurring consideration shared by the 2002-2005 country strategy evaluation and the portfolio review reports is the need for Bank actions with Honduras to focus on fewer operations of larger size. The effect will be a gradual decrease in the excessive number of operations in the portfolio that lead to management complications.

IV. THE BANK’S 2007-2010 STRATEGY

A.

Objective

4.1

The objective of the strategy with Honduras is to help consolidate an inclusive economic growth process that promotes poverty reduction, improves the population’s living conditions, and generates opportunities for the most underprivileged sectors. To attain this objective, the strategy proposes interventions that aim to enhance competitiveness while carrying out interventions targeting the most vulnerable sectors of the population, generating opportunities for their access to the benefits of growth.

B.

Key areas targeted by the Bank

4.2

The country strategy hinges on four major blocks seeking to: (i) Improve the investment climate; (ii) Boost competitiveness; (iii) Promote the development of human capital; and (iv) Strengthen the institutional framework and risk management.

1. Improve the investment climate

4.3

To improve the investment climate and promote the investments needed for development, the Bank’s country strategy with Honduras will support strengthening the macroeconomic framework to generate a stable macroeconomic environment

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conducive to attracting funds. In pursuit of this objective, the strategy will support efforts by the Government of Honduras to improve management of public resources so as to optimize efficiency while strengthening and expanding its fiscal structure.

In this context, the Bank’s contributions would focus on the following: (i)

Support greater efficiency in public financial management

4.4

Honduras has been implementing a process to improve the integrated management of public finances, whose core objective is to develop a legal, financial and institutional framework of management for results. Such a system would enable the country to move away from inertial budget formulation based on a historical budget, to one based on annual work plans based on institutional targets. It would also have an integrated, uniform, automated management process for the budget, payments system, and performance evaluation.

4.5

In this context, the Bank’s country strategy with Honduras intends to help the government substantially enhance budget planning, and achieve greater efficiency and transparency in management of public resources. To attain this objective, the Bank will work through interventions currently in execution, and new operations, including PRODEV. The program to help implement development effectiveness. The Bank will continue working with the Government of Honduras through the program Support for Strengthening Fiscal Management (in execution), and a new program (in preparation), to reform the conceptual and operational framework of the budget system and associated subsystems; assist in their implementation under a new management system; and contribute to the reorganization of the Department of Revenue (DEI). The Bank will also support improvements to the flow of information between the different levels of government in order to increase public spending efficiency and effectiveness, enhance transparency in the use of public resources, and promote greater efficiency in customs processes. (ii)

Support fiscal reform

4.6

Revenue efficiency must be improved in tandem with spending management efficiency. This can only be achieved by modernizing and increasing tax administration efficiency. The Bank will support measures to improve tax collection through greater fiscal efficiency and presence, through the modernization and professional development of the DEI, improving the import tax calculation basis, enforcing the tax evasion law, and gradually phasing out tax exemptions and their leakage.

4.7

In this context, the Bank’s strategy with Honduras will help the government achieve greater tax collection efficiency, and lay the foundations for a tax reform to develop a more equitable tax structure. This will involve designing and implementing a reform to increase the quality and quantity of public goods and services delivered to the Honduran population. Technical support will be available to support all these activities, to strengthen the analytical capacity of the economic cabinet agencies, and render the project executing units’ work more efficient.

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4.8

Furthermore, the strategy provides for closely monitoring the economic policy dialogue in order to help reach consensus, given the need for building political viability to undertake such reforms. Accordingly, the country strategy will provide technical assistance to help design a viable reform adapted to the Honduran economic and political context. 21 Given the right conditions, the Bank could follow through with a program to implement the reform.

2. Boost competitiveness

4.9

The Bank’s strategy with Honduras targets its activities in four areas to support the government’s efforts to successfully tackle the competitiveness challenge: 22 (i) reduction of logistical and production costs in transportation and energy; (ii) development of production linkages; (iii) financial intermediation and business development services for MSMEs; and (iv) support for implementation of trade agreements.

4.10

With a view to deepening coordination between the IDB Group and the private sector in the strategic area of competitiveness, the Bank completed its Private Sector Support Strategic Guidelines, 23 highlighting the principal obstacles to private investment, and indentifying strategic lines for future interventions by the IDB Group. These guidelines have been an important input for this strategy. The framework for implementing the strategy contemplates performing the work needed to implement a comprehensive private sector business plan for Honduras. (i)

4.11

Reduction of logistical and production costs.

In the transportation sector, the Bank’s country strategy with Honduras envisages continued support for the implementation of investments and the sector’s institutional framework, advancing the physical integration of Honduras with the rest of Central America under the Puebla-Panama Plan, as well as physical integration within the country. Efforts will be made to improve access to agricultural and tourist centers by promoting road maintenance and proper management and fostering conditions that will boost private investment in the sector.

21

The Bank will provide technical assistance to calculate the incidence of government spending and revenue, as well as to quantify tax evasion and other elements needed to structure a reform aimed at reducing the regressive nature of the current tax structure.

22

It should be noted that Bank interventions in other areas directly impact competitiveness, such as: education, health, job training, legal certainty, or macroeconomic stability. Owing to their specific characteristics, they are addressed under different intervention pillars.

23

Honduras. IDB Group – Strategic guidelines to support the private sector (PS-154).

Honduras Principales Corredores Viales

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4.12

Thus, the country strategy will seek to promote a modern and efficient transportation system, helping the country to complete road rehabilitation work on the CA-5 Norte Highway, lay the groundwork for modernization of the agricultural and tourist corridors (El Progreso–Tela–Trujillo), and secure Puerto Cortés’s position as a prime Central American port.

4.13

The proposed road sector program has several central elements. One is reconstruction of the Tegucigalpa – San Pedro Sula – Puerto Cortés road corridor, extended by the San Antonio–Goascorán stretch, to create a Logistics Corridor (or “Dry Channel”) linking the Cutuco port in El Salvador with Puerto Cortés in Honduras. Another is to support a sustainable investment plan to expand and rehabilitate the CA-5 Norte Highway through existing operations in execution and to supplement support for the development of the logistics corridor by improving the San Pedro Sula ring road. This will make it possible to channel traffic from the CA-5 Highway to Puerto Cortés without crossing through the city of San Pedro Sula, as is currently the case.

4.14

The Bank provides technical and financial support to build the El Progreso-TelaTrujillo Tourist Corridor, part of the government’s strategy to establish new corridors with the potential to develop certain specific areas of activity in which the country enjoys comparative advantages. In this particular case, developing a tourist destination along the Caribbean Sea coast means access must be available for domestic and nonregional tourists. Support will be provided through a multiphase operation, calling first for financing the El Progreso-Tela road segment, subsequently followed by two additional segments, Tela-Ceiba and Ceiba-Trujillo.

In the future, the Bank might also support construction of the agricultural corridor which will have a major impact on southwestern Honduras.

4.15

Port sector support will be forthcoming in the form of technical assistance for the Puerto Cortés development and investment plans, helping with the technical, economic, and environmental feasibility analyses for public investments, and follow-up of the public-private partnership process leading to investments in infrastructure and operational and commercial management of the port terminals.

Given the right conditions, support will be extended through the Bank’s private sector window to develop the port’s grain terminals and containers.

4.16

Concerning the energy sector, the objective of the Bank’s country strategy with Honduras is to increase power generating capacity and efficiency, improve the transmission systems to significantly reduce technical and financial losses, and increase service delivery in rural areas. The Bank will adopt a comprehensive approach, combining support from its public and private sector windows, in

- 19 -

addition to loans in execution. Through the Energy Sector Support Program, currently in execution, the Bank will support improving and extending rural electrification, and strengthening ENEE operations, especially with regard to loss reduction. This operation will be complemented by a new program carried out in close coordination with the World Bank and the United States Agency for International Development (USAID), in which funding for investments in transmission and loss control will have priority. The Bank will also work with the country on the SIEPAC integration process through the Central American Electric Interconnection Program and will provide technical assistance to improve the design and targeting of subsidies.

4.17

In the area of power generation, the Bank will support development of small hydroelectric plants in the short term, first providing technical assistance to indentify and evaluate their technical, economic, and environmental feasibility, then making financing available to investors through the SCF and the IIC for construction of the plants.

4.18

In the medium term, the Bank will provide support through the SCF for large hydroelectric projects—such as Piedras Amarillas—and the construction of a geothermal plant for which the feasibility studies are under way. Complementing these operations, given the need to reduce the country’s energy vulnerability, especially in the context of high international oil prices, technical assistance will be provided to the Government of Honduras to promote power generation from renewable sources, with special emphasis on biofuels. This support will be provided under the IDB Sustainable Energy and Climate Change Initiative. The strategy will sponsor activities to support production of biofuels and biodiesel, and an institutional framework conducive to their production and marketing. (ii)

Development of production linkages

4.19

The Honduran economy needs to consolidate a dynamic comparative advantage by designing and implementing a number of public policies to support sector actions.

Taking this into account, the Government of Honduras identified and will pay particular attention to four dynamic production areas: forestry, tourism, maquila industry, and agroindustry. The Bank will continue supporting these sectors through interventions that are already in the portfolio, and strengthen its activities in the tourism and agroindustry sectors.

4.20

The country strategy will seek to encourage greater efficiency in the allocation of public resources to the tourism and agroindustrial sectors, promoting activities in which the country is competitive. Under the new Rural Business Development Program, support will be provided for investments based on businesses plans linked to the supply chains most likely to generate employment, create value added and, therefore, contribute to a sustainable increase in earnings for the lower-income segment in the rural areas supported by the Red Solidaria. In the tourism sector, the Bank will continue supporting the development of Bahía de Tela and the infrastructure supporting the Copán region, and will encourage sustainable use of the Caribbean Sea. As part of this strategy, the planning and supply of basic

- 20 -

infrastructure is expected to be promoted through partnerships with the private sector, enabling Honduras to better position itself in the market of the so-called geotourism destinations, based on natural and cultural attractions. (iii)

Financial intermediation and business development services for MSMEs

4.21

The financial system has made progress, but such advances have not yet reached the market segment potentially accessible to MSMEs. At present, there is no institutional framework to promote efficient resource channeling to this sector.

Under these circumstances, the country strategy will seek to generate mechanisms to support MSME access to credit, promote financial system development, and enhance the financial intermediation process. The strategy will support government efforts through technical assistance to prepare a sector diagnostic assessment and a specific action plan addressing legal and institutional reforms for the sector.

4.22

Once the requirements are identified, the Bank intends to support sector development primarily through its private sector windows. In this regard. the IIC expects to prepare a credit line for MSMEs to be channeled through local banks, and the IIC’s Small Business Revolving Line will be promoted in Honduras. The goal is to offer standardized loans directly to eligible SMEs. For its part, the MIF will raise awareness about the Line of Activity for Promoting Small Enterprise Financing. Furthermore, technical assistance will be provided as a means to assure better quality and coverage of business development services for MSMEs. In addition, the Opportunities for the Majority initiative will be used to leverage public programs with funds from loans financed by the private sector. A study conducted in Honduras mapped private companies’ perceptions of majority markets and identified more than 30 companies potentially interested in working in these markets. (iv)

4.23

24

Support for implementation of trade agreements

Honduras is undergoing an intense process of trade liberalization that resulted in the conclusion of a significant number of trade agreements. To capitalize on the advantages deriving from such agreements, their proper implementation is critical.

The Bank will provide technical assistance to help the sector implement and make the most of the CAFTA-DR, negotiate an Economic Partnership Agreement with the European Union, and deepen the Central American integration process. 24 Additional support will be forthcoming through several technical assistance initiatives for the public and private sectors in areas such as institutional strengthening to promote exports and attract investments as well as animal and plant health, development of an agricultural insurance market, agrifood safety, technological training, and full participation of the majority in the global economy, among others. Given the right conditions, the Bank could follow through with a programmatic approach to support the required reforms.

See Granados, Giordano, Cordova. Honduras, Desafíos de la inserción en la economía internacional.

INTAL, August 2007.

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3. Promote the development of human capital 4.24

In addition to sustained and equitable economic growth, poverty reduction requires direct, targeted interventions to support the development of human capital and increase productivity among the most impoverished sectors, so as to increase their asset accumulation, thereby enhancing the social mobility of the poverty-stricken, including indigenous peoples and women heads of household.

4.25

As mentioned above, the Government of Honduras has accorded priority to the criterion of comprehensiveness in the implementation of the PRS adopted in order to attain the MDGs. This calls for combining welfare programs (transferring resources to offset the lack of earnings among the most impoverished segments and boost demand for services to develop their human capital) with programs to improve competitiveness and generate employment opportunities for the poor. 25

4.26

The Bank's country strategy will support development of the institutional capacity needed for the formulation, implementation, and evaluation of social policies and programs. Under this strategy, the Bank will continue to support the implementation of the PRS, strengthening its institutional capacity and sustainability by means of education, health, and social safety net programs, the supply of basic social capital (housing, water, sanitation), and improving spending efficiency in these sectors.

4.27

In education, the Government of Honduras proposes to improve education spending quality and productivity, expand coverage, especially in the third (grades 7 to 9) and fourth (secondary) cycles, and conduct a nationwide audit of teachers to gather data to improve teaching quality and performance. Accordingly, the country strategy with Honduras will support increasing third and fourth cycle coverage with quality through alternative education modalities, enabling the country to make progress towards attaining the education MDGs. In addition, the introduction of computer technology in the classroom will be promoted as a tool to enhance teacher performance and encourage students to connect with their environment.

4.28

The country strategy will continue to support building the social safety net developed by Honduras to combat poverty and improve access to basic services for the most underprivileged sectors. The strategy seeks to enhance the institutional framework of the social safety net, develop its interface with the various government agencies, improve its coverage and its coordination with the PRS. In addition, it will help finance the social safety net, emphasizing the PRAF conditional cash transfers program, and FHIS-financed social investments. The rationale underpinning these interventions is to pursue the education, nutrition, and mother and child preventive health care goals.

25

This model calls for a government effort–in its capacity as coordinating agency–to ensure that: (i) infants in poor families receive food and medical treatment through a social safety net, complemented by potable water, basic sanitation, and decent living conditions; (ii) children and young people have greater access to formal and informal education services with a vocational bias, and to basic preventive health care; (iii) young people and adults living in poverty have better access to production factors and investment opportunities; and (iv) older adults and other vulnerable groups receive care though the social safety net.

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4.29

To further support the social safety nets, inclusion of indigenous peoples and afrodescendants in the productive and social development processes will be afforded special attention under the Comprehensive Development of Indigenous Peoples Program, which will be implemented in close collaboration with the World Bank.

The program will promote productive investments in traditional and nontraditional areas to link these groups into the formal economy.

4.30

The health program will be supported through the implementation of a basic health package to strengthen preventive care, and institutional improvements to reinforce the outcomes of sector interventions. The Bank will support these efforts under the Health Sector Strengthening Program currently under way. The program represents an effort to expand health care coverage and improve the quality of mother and child primary care services.

4. Strengthen the institutional framework and risk management and prevention

4.31

The Bank’s strategy with Honduras seeks to develop an institutional framework needed to generate an enabling environment for growth and new opportunities to access the public goods associated with democratic participation. In addition to the above three specific areas of intervention, the country strategy will support the Government of Honduras in its efforts to address three issues that have a bearing on various sectors in a cross-cutting manner: improvement of the justice system, environmental well-being, and prevention of disasters stemming from extreme climatic events.

4.32

Judicial sector progress in Honduras needs to be broadened and consolidated.

Reinforcing security for corporate entities and citizens requires consolidating an independent, credible, and efficient judicial sector whose services are available to the general population. The strategy will address judicial backlogs by strengthening the justice system and criminal proceedings, in tandem with improving all the other institutions relevant to the process. Actions will also encompass strengthening civil and administrative justice, by helping develop a strategic plan to implement the new Code of Civil Procedure, while continuing to consolidate and deepen the ongoing criminal reform.

4.33

To this end, the Bank will continue supporting the justice sector through stage II of the Judicial System Modernization Program, whose objective is to strengthen the Judiciary, the Public Prosecutor’s Office, and the Ministry of Security. A new program is under consideration to support the government’s efforts to update the substantive legal framework stemming from the recent reform, strengthen civil justice capacities by means of refresher courses and training for civil servants, and build and furnish civil courtrooms.

4.34

Maintaining and consolidating a path of sustainable growth is a development priority for Honduras. The sources of growth in Honduras together with urban development put pressure on the environment, an issue deserving immediate attention. The government is moving ahead with a plan to create a Fund for Protected Areas, whereby civil society will supervise, and serve as conduit to

- 23 -

allocate funds to local organizations responsible for the management of protected areas, which constitute a crucial asset for the tourism industry.

4.35

Bank support for this area will permeate all the areas of action identified in the country strategy, providing for the institutional strengthening necessary to incorporate the environmental dimension in public investment and spending processes. The Bank will also provide technical assistance to conduct the environmental studies required for the hydroelectric projects in the process of being selected, to build SERNA’s technical and institutional capacity, to implement the CAFTA-DR environmental chapter, and to reengineer environmental licensing processes.

4.36

The strategy will support institutional capacity-building, and the development of mechanisms and instruments to prevent, mitigate, and hedge disaster-related risks. The Government of Honduras will implement a global risk management strategy including: (i) disaster prevention at the national and municipal level; (ii) mitigation of the physical risk in the territory and in priority sectors, strengthening the regulatory framework for disaster mitigation and response capacity; (iii) creation of a reserve fund for emergencies and to pay for rehabilitation and reconstruction work, thereby reducing the financial gap in the event of moderate disasters; and (iv) progress toward an effective regional financing framework in the event of catastrophic risk.

4.37

The country strategy with Honduras sets out two simultaneous lines of action. The first aims to create a system of incentives to encourage municipalities to invest in disaster mitigation and increase their response capacity at both the municipal and national levels. A second line of action proposes to direct investments towards shoring up the quality of infrastructure critical to social and economic development (such as schools, airports, power infrastructure, ports), identified as especially vulnerable to natural disasters. To this end, the Bank intends to implement support through a potential investment operation targeting the above two lines of action simultaneously and technical support through the Disaster Prevention Fund.

C.

Loan scenarios for 2007-2010, and funding composition

4.38

In the context of the program “Implementation of multilateral debt relief and concessional finance reform at the IDB (document GN-2442), the Bank’s Board of Governors defined the resources available for Honduras as of 2007: a. 2007-2008: transitional criterion allowing the country to approve loan operations with the Bank for up to US$97.1 million a year; 26 b. Starting in 2009: provided performance variables remain at their current levels, annual resource allocation for the 2009-2010 period will amount to US$118.7 million a year. 27

- 24 -

4.39

On this basis, the country strategy with Honduras presents a base-case scenario deriving from the above allocation, and high and low scenarios that differ from the base-case scenario in that the assumption is that a change in institutional conditions will result in a 5% increase or reduction in the Fund for Special Operations (FSO) allocation with respect to the base-case scenario. These assumptions result in an annual allocation for the 2009-2010 period of US$112.6 million in the low scenario, and US$124.6 million in the high scenario. 28 The transition from one scenario to another will be determined by the above-mentioned change in institutional conditions, as reflected in the Country Institutional and Policy Evaluation (CIPE). The active portfolio and the projects included in the base-case scenario will result in a disbursement program estimated at US$332.6 million for the 2007-2010 period, and net capital flows averaging US$64.7 million a year (Annex VIII describes the scenarios in detail).

4.40

New Bank lending to Honduras during the first half of the country strategy period consists primarily of investment loans. Meanwhile, technical assistance resources will be available to develop sector programs in various areas, strengthen fiduciary capacity, and consolidate the macroeconomic framework. Once progress has been made in these areas, the necessary consensus has been reached regarding sector reforms, and the macroeconomic framework has been strengthened, with the backing of a new program currently being negotiated with the IMF, the Government of Honduras may be able to channel resources with other instruments.

The Bank will finance technical cooperation operations with FSO resources, expected to amount to US$1.4 million a year, and will also use technical cooperation trust fund resources.

4.41

The strategy aims to help reduce transaction costs for Bank activities in various sectors—especially energy and transportation—by strengthening its fiduciary capacity. At the same time, and with a similar intent, Bank activities will be targeted, resulting in fewer operations, but with greater impact. The number of active loan operations is expected to drop gradually from 32 operations in execution in late 2007 to 25 at the end of the strategy implementation period.

However, the size of operations is directly linked to the country’s absorption capacity, and this capacity is undermined by the fragmentation of external financing received through numerous loan operations, technical cooperation programs, and grants that overtax the public sector’s weak institutional capacity.

26

This financing will comprise 30% of resources from the Fund for Special Operations, and 70% from the Ordinary Capital.

27

Starting in 2009, an allocation formula based on the enhanced performance-based system will be applied.

This may result in an increase or decrease in concessional resources available to Honduras (GN-2442).

28

In 2009, the Bank will begin to apply the permanent formula for allocating its concessional resources in accordance with the enhanced performance-based allocation system. This may result in an increase or decrease of their availability for Honduras.

- 25 -

D.

Bank exposure indicators, country financing parameters, and fiduciary risk 29

4.42

The IDB exposure indicators are beneath the recommended thresholds, and none of the proposed scenarios would exceed them. They are presented in detail in Annex VII.

4.43

The Country Financing Parameters (CFPs) make up the general financing framework for IDB-financed investment projects. Approved CFPs for Honduras imply making the policy contained in document GN-2331-5 as flexible as possible, since there is no limit for the country on the percentage of Bank financing, or on eligibility of expenditures at the project level in Honduras. Nonetheless, Bank funding for specific expenses will be reviewed at the project level. These CFPs, prepared by the Bank for the country in August 2005, were ratified by the current administration (Annex V).

Category Financing matrix Financing of recurrent costs Financing of local costs Taxes and duties

Parameter Up to 100% No limit at the country level Up to 100% Unrestricted at country level

4.44

In order to evaluate the fiduciary risk, the IDB, in coordination with the World Bank, updated the CFAA in 2006, noting that there had been significant progress in public financial management performance. This progress was bolstered by passage of the Budget Law in 2004, establishing the foundation for a modern, integrated public finance system. Moreover, in May 2006 the central government began to operate with a new SIAFI in order to improve availability, reliability, and accessibility of State financial reporting.

4.45

The national budget and monitoring systems and the spending controls still need to be strengthened, however, and current public procurement arrangements consolidated and integrated within a harmonized system, anchored to real enforcement of the State Procurement Act. Progress in these areas would result in a better alignment of national systems for project execution. The country is making efforts to coordinate procedures among the various donor agencies, but thorny negotiations still surround coordination and cofinancing agreements at the sector level.

4.46

Improving investment project registration and control, funding and execution, which is in the process of being implemented, will enable monitoring of the execution of project funding from external sources, through the SIAFI with separate records for each source of funds. The country strategy also provides for technical assistance to strengthen institutions vital to the execution of Bank operations, such

29

Annex VII describes in detail the exposure indicators for the two scenarios presented in accordance with Bank policies contained in document GN-2442.

- 26 -

as SOPTRAVI and SERNA, and to train executing unit staff. Progress in these areas will help reduce the above-mentioned transaction costs.

E.

International cooperation in Honduras

4.47

International cooperation in Honduras is a strong presence both in terms of financing and number of donors. In 2006, international cooperation resources financed 15.6% of total government spending. The international cooperation portfolio as a whole amounted to US$2.127 billion as of December 2006, of which more than 50% is yet to be disbursed. The World Bank is the second largest international donor after the IDB, with a US$420 million portfolio. Other donors include the Central American Bank for Economic Integration (CABEI), USAID, and the European Union with a portfolio in excess of US$300 million each.

Although international cooperation covers a wide range of areas, it primarily focuses on the social sectors and infrastructure. Annex XI presents a breakdown of international cooperation in Honduras, and the main areas of action.

4.48

As mentioned above, the Bank coordinates closely with the donor community through the G-16 and sector-based donor roundtables. The IDB also coordinates with the IMF and the World Bank on a permanent basis, and most particularly for preparation of this country strategy. Although interagency coordination has made significant strides, resulting in cofinancing and strategic partnerships in a number of areas, such coordination must be deepened to increase the effectiveness and maximize the impact of the various initiatives. To attain this objective, the Bank will continue to play a lead role to coordinate international cooperation actions in Honduras by organizing consultative group meetings and participating actively in the G-16.

4.49

Notably, support for the electricity sector is being coordinated with CABEI, the World Bank, USAID and the IMF. A cofinancing operation to improve the CA-5 Norte Highway is being executed in coordination with the Organization of Petroleum Exporting Countries (OPEC). Other programs relating to this corridor will continue to be coordinated with the Millennium Challenge Account (MCA) and CABEI. Coordination resulted in the pooling of efforts based on a memorandum of understanding between donors/lenders and the government, to build efficiencies in pursuit of achieving the outcomes. In the health sector, the Bank will join Sweden, Japan, the Pan American Health Organization (PAHO), Canada and the Government of Honduras to help finance the National Strategic Plan for Chagas Disease Control (PEN-Chagas).

F.

Risks to strategy implementation

4.50

Execution of the Bank’s country strategy with Honduras assumes an economic, social, and political environment conducive to its implementation. However, a number of risks subsist that could jeopardize implementation of the strategy.

4.51

Political risks. As was mentioned, the current administration is in a difficult legislative situation because the Liberal Party does not hold a majority of seats in the National Congress. Under such circumstances, it can be difficult to achieve the

- 27 -

political consensus needed to push its legislative agenda, or obtain the parliamentary approval and/or ratification of Bank projects. This presents a risk for implementation of the strategy since legislative approval of previously negotiated operations cannot be fully guaranteed. The Bank will continue its dialogue with both branches of government, and will provide technical assistance to promote the generation mechanisms for the actors involved to reach a consensus.

4.52

Sustainability of the solidarity network is at risk, given that it is perceived as a politicized undertaking by some. The weakness of social sector institutional capacity has generated ad hoc coordination mechanisms susceptible to political capture and to gaps in the implementation of the PRS. Given this risk, the Bank is promoting preparation of a biannual plan to implement the PRS in a manner that will consolidate a consensus-based State policy for poverty reduction.

4.53

Economic risks. Although the Government of Honduras has strengthened fiscal revenue by improving its collection capacity, strong pressure from some sectors to increase the wage bill jeopardizes the existing fiscal equilibrium. Unless the fiscal situation is consolidated, the macroeconomic stability of Honduras will be at risk and the country might have to resort to nonconcessional financing, which would worsen its external position. At the same time, as stated above, the country is exposed to external risks. The most serious are the rise in international oil prices, which affects domestic prices, and the possible United States economic slowdown, which would negatively impact Honduran exports and the flow of remittances. This could put attainment of the objectives outlined in the country strategy with Honduras at risk. In an effort to limit and predict the effect of possible external shocks, the IDB will support the efforts of the Government of Honduras to maintain a sound fiscal situation. The country strategy also emphasizes development of an efficient and diversified energy system, enabling the country to ride out the current high oil prices. It further aims to promote the development of a diversified export model and a solid financial system.

4.54

Risk of disasters due to extreme natural events. The vulnerability to disasters is a recurring contingent risk in Honduras, one that could affect both fiscal accounts and the country’s competitive and social situation. Such disasters would therefore have a major impact on the Bank's country strategy with Honduras, as operations would need to be redirected to respond to needs stemming from the natural disasters. This risk will be addressed by building government capacity to mitigate the risk of natural disasters, an area considered one of the strategic elements of this IDB country strategy with Honduras.

Annex I Page 1 of 2

LENDING PROGRAM PUBLIC SECTOR: Table 1: 2007-2009 Lending Program and Pipeline Number

2007-2010 operations program and lines of activity

Year

Amount (millions of US$)

Investment Climate HO-L1015

Support for integrated public finance management

2008

28.55

HO-L1030

Fiscal reform support (PBL)

2009

29.6

Competitiveness HO-L1010

Rural business development (PRONEGOCIOS)

2007

27.1

HO-L1013

2007

40.0

2007

30.0

HO-L1018

Road rehabilitation of sections of the PPP Tourism Corridor (El Progreso-Tela) Supplemental financing for improvement of the PPP’s Atlantic Corridor (CA-5) Logistical corridor infrastructure (SPS ring road)

2008

20.0

HO-L1019

Energy sector support II

2008

48.55

HO-L1033

Agriculture corridor (Olancho-Trujillo phase)

2009

40.0

HO-L1034

Competitiveness and implementation of trade agreements Caribbean coast tourism

Pipeline

29.6

Pipeline

20.0

2009

30.0

HO-L1020

HO-L1035

Human Capital HO-L1032

Comprehensive support for the social safety net

HO-L1028

Secondary education

Pipeline

30.0

N/N

Strengthening of the health care system

Pipeline

25.0

Institutional Framework and Risk Management HO-L1031

Reduction of vulnerability to extreme natural events

N/N

Justice

2009

19.1

Pipeline

20.0

Subtotal 2007

97.1

Subtotal 2008

97.1

Subtotal 2009

118.7

Annex I Page 2 of 2

PRIVATE SECTOR: SCF/IIC Table 2: Tentative Loan Program (SCF and IIC) Thousands of U.S. dollars Number HO-L1023 HO-L1029 N/N N/N N/N

Project Name 2008 –2009 program Geothermal energy (SCF) Banco Atlántida- TFFP (SCF) Piedras Amarillas/ Patuca III (SCF) Puerto Cortés (SCF) Financial Services (IIC)

Table 3: Lines of Activity SCF/IIC Lines of Activity Mini hydroelectric power plants Large hydroelectric power plants Lines of credit for MSMEs Participation in public-private partnerships in infrastructure

Amount 20 5 35 180 10

Annex II Page 1 of 5

TECHNICAL COOPERATION PROGRAM, MIF AND NONFINANCIAL PRODUCTS Table 1: 2007 Nonreimbursable Technical-Cooperation Operations Thousands of U.S. dollars Number

HO-T1067 HO-T1069 HO-T1070 HO-T1075 HO-T1095

HO-T1062 HO-T1063 HO-T1066 HO-T1071 HO-T1074 HO-T1085

Project Name FSO Support for implementation of rural business development program Support for implementation of energy efficiency and biofuels program Support for labor markets in Honduras Institutional strengthening of the Commission for the Defense and Promotion of Competition Support for preparation of energy program II Subtotal FSO Other Funding Strengthening of agribusinesses through e-learning programs Support for consolidation of the rural communications network Coordination of the SIDA-IDB Partnership in Honduras Environmental studies and designs for the El Progreso-Tela tourism corridor Consolidation of the National Registry of Natural Persons in Honduras Business partnership: facilitating risk-taking by small producers Subtotal other Funding

Amount (US$000) 140 350 350 150 150 1,140 380 280 40,5 560 34 500 1,794.5

Annex II Page 2 of 5

Table 2: 2008 Nonreimbursable Technical-Cooperation Operations Thousands of U.S. dollars Number

HO-T1082 HO-T1083 HO-T1096 HO-T1099 HO-T1111 n/n

Project Name FSO Management training for executing units Institutional strengthening of SERNA Training for technical staff in Economic Cabinet agencies Support for preparation of the social safety net program Competitiveness in Honduras: analysis of industry clusters Institutional strengthening of the Office of the Public Prosecutor

Subtotal FSO Other Funding HO-T1076 Comprehensive support for governance HO-T1078 Support for the strengthening of Puerto CortĂŠs HO-T1090 MDG: managing the decentralization of health services

Amount US$000 300 300 300 200 100 200 1,400 300 200 100

HO-T1092 Access to solar energy in disadvantaged rural areas

750

HO-T1094 HO-T1100 HO-T1101 HO-T1102

250 700 600 500

Support for the development of mini hydroelectric power plants (SERNA) Preinvestment studies for the San Pedro Sula road infrastructure program Biofuel action plan Strengthening of the risk management system and identification of investments to mitigate the risks of natural disasters in Honduras HO-T1104 Promotion of gender equity and social inclusion Subtotal Other Funding

80 3,480

Annex II Page 3 of 5

Table 3: Technical cooperation operations, Employment, Poverty, and MDG Fund Thousands of U.S. dollars Number

Project Name

HO-T1081 Study on the generation of jobs to boost the young labor force and minimum wage study n/n Study to identify strategies to promote savings and credit among indigenous peoples and Afro-descendants n/n Study on the status of physical resources of the health service delivery units n/n Construction of methodologies to evaluate the impact of the multisector Red Solidaria program n/n Study on the impact of the operations in the education sector n/n Study on the implementation of the PRS update and analysis of: (i) its institutional framework, (ii) progress in the development of its programmatic lines, (iii) la participa n/n Evaluation of the methodology and process developed in the application of standardized tests to measure quality of education in Honduras n/n Evaluation of the operation of alternative education modalities (SAT, SEMED, EDUCATODOS) and their contribution to the Honduran education system n/n Evaluation on the implementation and outcomes of education management models at the local level (PEC, ADEL and PROHECO) Subtotal Employment, poverty, and MDG Fund

Amount US$000 330 150 450 580 200 500

100 100 500 2,910

Annex II Page 4 of 5

Table 4: 2009-2010 Pipeline窶年onreimbursable Technical-Cooperation Operations Thousands of U.S. dollars Project Name

Amount US$000

Strengthening the relationship between the Executive and Legislative Branches

150

Support for strengthening the Escuela Agrﾃｭcola Panamericana (el Zamorano) Support for preparation of the health program Support for the design of participatory budgets Support for preparation of the fiscal reform PBL Support for phase III of the modernization of justice loan Update of the study of upgrading in dynamic industrial clusters Support for review of the PRS Preparation of a consultative group Improvement of the productivity and competitiveness of craft workers in Santa Rosa de Copﾃ｡n COHCIT support program

400 200 350 250 300 850 300 250 600 400

Annex II Page 5 of 5

Table 5: MIF Program Thousands of U.S. dollars Number

Project Name

MIF Amount US$000

Programa 2007 HO-M1012 Financial management of agricultural price risks. AHIBA HO-M1013 Creation of new microfinance institution

477 3,975

HO-M1015 Improving the quality and competitiveness of agrifood production in Honduras

1,529

HO-M1018

Railroad business competitiveness in the Central-North, rural, and periurban areas

HO-M1020 Improvement of microfinance services for the rural sector in western Honduras

HO-M1006 HO-M1016 HO-M1019 HO-M1021 HO-M1022

n/n n/n n/n n/n n/n n/n n/n

Subtotal 2007 2008 Program Banco Financiera Comercial Hondureùa S.A. (Ficohsa) Pilot program for the development and implementation of corporate governance in family-owned businesses Diversification of urban and rural financial services of MFIs in Honduras Improving the quality of financial services for microenterprises in rural Honduras Incentives for financing small businesses Subtotal 2008 Pipeline Promote the supervision and competitiveness of small and medium-sized enterprises in Honduras. COHEP SMEs operating with environmental quality. FUNDARSE Women’s entrepreneurship. CCIT Support for remittances. BAMER Increase in rural microfinance services Financing facility for productive initiatives. CODESPA Quality and expanded coverage of business development services for micro, small, and medium-sized enterprises (MSMEs). REDMICROH

149 149 6,279 5,200 700 100 1,820 400 8,220

800 150 800 500 150 2,000 1,800

n/n

Piedras Amarillas hydroelectric project

500

n/n

Business partnership: facilitating irrigation for small producers. AMANCO

500

Annex III Page 1 of 3

Table 1: Current Portfolio by Strategic Area * PRS objectives

Projects

Objectives and outputs

Strategic objective I: Improve the investment climate

1546/SF-HO Program to support the strengthening of fiscal management Amount: US$15 million To be disbursed: 62.6%

I.A. Efficient public financial management

1112/SF-HO Modernization of the statistics system Amount: US$4 million To be disbursed: 21% 1059/SF-HO Efficiency and transparency in government procurement Amount: US$14.58 million To be disbursed: 5%

I.B. Fiscal reform

To help Honduras better manage its government finances, so that the services delivered by the State can be financed equitably and efficiently. Outputs: SEFIN procedures manual, reengineering of customs and tax processes DEI, implementation SIAFI, implementation of IMF standards for collection and analysis of economic statistics BCH, implementation of SIERP. Promote the efficiency and transparency of government procurement on a sustainable basis. Outputs: strengthening of INE in the quality of the surveys conducted and the gathering of data (SEN), implementation of an ongoing training system, improved production of primary statistics consistent with international standards.

Improve efficiency and transparency in government procurement. Design and implement the National Procurement System. Strengthen the procurement systems of SANAA, FHIS, SOPTRAVI, SAG, SESAL, SEDUC, and SEFIN.

1748/SF-HO Public management reform program Amount: US$30 million To be disbursed: 49%

Help the Government of Honduras improve economic administration through a gradual reform of public management that supports more effective and efficient use of resources.

1748/SF-HO Public management reform program Amount: US$30 million To be disbursed: 49%

Help the Government of Honduras improve economic administration through a gradual reform of public management that supports more effective and efficient use of resources.

Strategic objective II: Improve competitiveness 1565/SF-HO Improvement of the PPP's Atlantic Corridor Amount: US$50 million To be disbursed: 92.5%

1106/SF-HO Program for sustainable institutional strengthening of the road sector II.A. Reduction of logistical and Amount: US$ 6.44 million To be disbursed: 2.5% production costs 1584/SF-HO Support for the energy sector PPP Amount: US$25.06 million To be disbursed: 95.12% 1095/SF-HO SIEPAC Central American Electric Interconnection System Amount: US$50 million

Improve the competitiveness of Honduras and support the process of integration with the other PPP countries. Outputs: expansion and rehabilitation of two sections of CA-5 Norte, improvement of highway safety.

The objective of this multiphase program is the orderly and sustainable development of road infrastructure. The objective of the first phase is to strengthen SOPTRAVI's capacity to identify, select, and program sector needs.

Increase the efficiency of the electricity sector and help improve the living conditions of the poorest population groups through rural electrification. Outputs: Expanded and improved rural electrification, operational strengthening of the ENEE. Create and implement a competitive electricity market. Mobilize private sector resources to expand the region's generation and distribution capacity.

To be disbursed: 9.8% II.B. Financial intermediation and business development services for MSMEs

1125/SF-HO Competitiveness and foreign trade program Amount: US$10 million To be disbursed: 12.7% 1623/SF-HO National sustainable tourism program Amount: US$35 million

Facilitate the process of Honduran economic integration into international markets in the context of the trade agreements in force. Outputs: trade negotiation impact studies, export promotion plan, integrated trade information system, SME linkage, foreign trade strategy design and validation workshops, opportunities for public-private partnerships.

Contribute to the country's sustainable tourism to improve social and economic conditions in areas with tourism potential.

Outputs: increase in jobs and tourism in affected areas, improvements in tourism infrastructure, installation and improvement of basic public services to promote investment.

II.C. Development of production To be disbursed: 77.1% linkages 1506/SF-HO Multiphase sustainable forest development program - Pro Bosque

Increase the economic, social, and environmental benefits of the forestry sector in Honduras. Outputs: development of policies and regulations, monitoring of land and felling, implementation of sustainable forest development zones

Annex III Page 2 of 3

Amount: US$6.55 million

policies and regulations, monitoring of land and felling, implementation of sustainable forest development zones (ZODEFS), implementation of a project management system for investment.

To be disbursed: 51.7% 1125/SF-HO Competitiveness and foreign trade program II.D. Support for implementation Amount: US$10 million of trade agreements To be disbursed: 12.7%

Facilitate the process of Honduran economic integration into international markets in the context of the trade agreements in force. Outputs: trade negotiation impact studies, export promotion plan, integrated trade information system, SME linkage, foreign trade strategy design and validation workshops, opportunities for public-private partnerships.

Strategic objective III: Promote the development of human capital 1069/SF-HO National education reform program (third level basic education and secondary education) Amount: US$23 million To be disbursed: 4.6% III.A. Education 1552/SF-HO Secondary education and job training program Amount: US$20.6 million To be disbursed: 86.9% 1568/SF-HO Social safety net program Amount: US$20 million To be disbursed:69.2%

1804/SF-HO Social sector program to support the Poverty Reduction Strategy Amount: US$27.9 million

Improve the educational administration model and increase the coverage of third-level basic education in rural and periurban areas. Outputs: implementation of basic education centers, distribution of the flexible package of educational services, transformation of basic education, education reform social marketing plan.

Further the goals set out in the poverty reduction strategy (PRS) by enhancing education coverage and quality in the third and fourth cycles of secondary education and improving the employability of youths and adults. Outputs: expand education coverage with quality at the secondary level (third and fourth cycles) through teacher training, infrastructure works, subsidies and grants for low-income students, support for technical schools, infrastructure improvements in rural schools; implement a management system for education administration, design a strategy to promote education policy; provide training for unemployed workers in businesses; set up a web-based job exchange and job brokerage service.

Help improve the human capital of the country's poorest families, through a comprehensive social safety net strategy. The goal is to promote changes in the behavior of families and encourage their active participation. Outputs: family prevention, ongoing care for children under two, improvements in the functionality of the AsociaciĂłn de Padres de Familia, implementation of the school plan, management information system installed, training for staff in rural or periurban areas.

The general objective of the program is to support social reforms that will make implementation of the updated 2006-2010 Poverty Reduction Strategy (PRS) more effective as a planning instrument for economic and social development, and for reducing poverty in Honduras. The specific objectives are to: (i) target the delivery of basic social services more squarely on the extremely poor; (ii) introduce the concept of comprehensiveness in PRS projects and programs; (iii) foster management by results; and (iv) protect priority PRS programs by establishing physical and financial targets.

To be disbursed: 63.15% III.B. Social safety net

1689/SF-HO Integrated development of indigenous peoples Amount: US$11.1 million To be disbursed 93.1% 1478/SF-HO Poverty reduction and local development program, Phase II Amount: US$35 million

To be disbursed: 70.1% 1090/SF-HO Support for indigenous and Afro-descendant communities Amount: US$1.55 million To be disbursed: 6.5%

Help improve the living conditions of Honduras’s native peoples and help them to achieve integrated and sustainable development on the economic, social, cultural, and environmental fronts. Outputs: place native peoples issues on the public agenda and public administrations, support production-oriented investments through a strategic plan, provide training in resource administration, make improvements in the levels of inclusion of women.

Help improve the living conditions of the poor by providing greater access to basic social services with community participation. Outputs: Provide basic public services such as water, health care, education, electricity, training, and technical assistance to local governments, disseminate good management practices, formulate a three-year public investment plan, improve tax collection, install a municipal information system accessible via internet, install a national training system for municipios.

The program's general objective is to improve the climate for investments in infrastructure in the indigenous and Afrodescendant communities of Honduras.

Strategic objective IV: 4. Strengthen the institutional framework and risk management and prevention 1115/SF-HO Modernization of the justice system, Phase II IV.A. Justice Amount: US$30 million To be disbursed: 56.3% 1113/SF-HO Bay Islands environmental management program, Phase II Amount: US$12 million To be disbursed: 54.8%

IV.B. Environment and disaster prevention

1077/SF-HO Multiphase natural resources management program in priority watersheds (Phase I) Amount: US$25 million To be disbursed: 19.9%

Strengthen the rule of law through the implementation, consolidation, and enforcement of institutional and legal reforms in the justice system; improve services delivered to citizens; and improve citizen participation in the legal process. Outputs: implementation of legal reform, dissemination of laws, training of personnel in legal proceedings, purging of files, procedure manuals, integration of judicial information in information systems.

Consolidate the environmental management program created during the first stage, setting in place a decentralized institutional framework that supports environmentally and socially sustainable tourism in the Bay Islands. Outputs: Training for tourism operators, management plans for protected areas, progress in environmental regulation, sanitation services installed, potable water and solid waste treatment, new property registry, increase in municipal tax revenues, control of contracts for mitigation measures.

Spur processes that can achieve sustainable rural development, help reduce poverty and leave critical rural areas in the selected watersheds less physically, economically, and environmentally vulnerable, and thereby improve communities’ quality of life and their prospects for sustainable development. Outputs: development of technical and resource management capacity: agricultural production sustainability, water resource management, forestation, natural risks; investments in priority subwatersheds, improved financing mechanisms.

Annex III Page 3 of 3

1082/SF-HO Trinational program for sustainable development in the upper Lempa River basin Amount: US$3.3 million To be disbursed: 5.1%

Improve the quality of life of the inhabitants of the upper Lempa River basin, through actions that promote sustainable development in the target area and that seek to break the cycle of poverty and destruction of natural resources. Outcomes: natural disaster warning systems, equipped communities, SME financing for production diversification, rural road development and reforestation, equipment for local government.

Other areas of work 1786/SF-HO Low-income housing program Amount: US$30 million To be disbursed: 96.5% Investment in basic social capital: housing and water and 1048/SF-HO Potable water and sanitation investment program sanitation Amount: US$26 million To be disbursed: 78.9% 1793/SF-HO Supplement to the potable water and sanitation investment program Amount: US$30 million To be disbursed: 99% 1619/SF-HO Improvement of health conditions Health Amount: US$16.6 million To be disbursed: 79.1% 1123/SF-HO Peace and citizen coexistence project for the municipalities of the Sula Valley Safety Amount: US$20 million To be disbursed: 67.35% Disbursements updated through 30 August 2007.

Improve the housing and habitat conditions of low- and middle-income Honduran families. The purpose is to better enable the government to meet multiple demands in the housing sector, giving families greater access to formal housing and basic urban services. The program has two phases: ( i) innovative instruments and monitoring of the housing sector (though SOPTRAVI) and (ii) housing subsidies.

Contribute towards efficient and sustainable potable water and sanitation services by promoting and consolidating reform at a local level. Outputs: technical assistance to disseminate policies and education on the use of potable water, autonomous water and sanitation operator set up and operating under agreements with each municipality, installation of systems to measure potable water use, municipal management model based on consensus with civil society.

Supplement for project 1048/SF-HO

Bring about significant improvements in a series of indicators associated with efforts to expand health coverage and enhance the quality of maternal and child services, to improve maternal and child mortality and morbidity indicators over the medium and long terms. Outputs: vaccination services, family planning education, increased number of duly-monitored deliveries.

Improve the levels of peace, coexistence and citizen security in the Sula Valley Region, through comprehensive activities for crime prevention and institution-building for security institutions, and promotion of human development. Outputs: training for municipal employees, installation of the integrated information system for citizen security ( SISC), training for young people and parents, improvement of infrastructure for comprehensive learning centers, training for community police, formulation of a communication and citizen-awareness strategy.

Annex IV Page 1 of 3

PREVIOUS STRATEGY AND PORTFOLIO SUMMARY OF THE BANK’S OPERATIONS PROGRAM Table 1: Programming and approvals 2002-2006 – Programming under the previous strategy (US$ millions) Loan

Programming under the 2002 Bank’s country strategy (BCS) Amount programmed under the BCS Scenarios Amount approved Low Base High

Number Name in the BCS Sustainable growth and competitiveness HO0128 Supplement to Puerto Cortés sewerage program HO0198 Bay Islands environmental management program II HO0116 Sustainable strengthening for the highway sector HO0221 Promotion of competitiveness in the business sector HO0189 Support for trade negotiations HO0219

Current status (January 2008)

4.5

4.5

4.5

18.3

Disbursed (repayment).

12

12

12

12.0

In execution (42.8 % disbursed).

7.6

7.6

7.6

7.6

5

10

10

10.0

In execution (US$1,159,583 cancelled; 94.94% disbursed).

In execution (86.1 % disbursed).

3.5

3.5

3.5

30.0

0

25

25

25.0

HO0192

Support for financial sector strengthening (PBL) Global credit program

20

30

30

30.0

HO0218

Pro/Bosque

20

20

20

17.5

HO0174

Supplement to the potable water and sanitation investment program Environmental management system for marine and coastal areas on the North Coast and the Pacific Coast Electricity transmission and supply (rural electrification)

0

14

14

30.0

In execution (38.4% disbursed, with US$9,950,000 cancelled through debt forgiveness program).

Approved.

0

0

16.2

35.0

In execution (8.75 % disbursed).

20

20

20

35.0

In execution (1.65% disbursed).

HO0195

HO0224

Disbursed.

Annex IV Page 2 of 3

Number HO0199 HO0207

Programming under the 2002 Bank’s country strategy (BCS) Amount programmed under the BCS Loan Scenarios Amount approved Name in the BCS Low Base High Reactivation of the rural economy, Phase II 0 0 20 30.0

Current status (January 2008)

Multiphase sustainable highway rehabilitation program I

20

40

53.8

50.0

In execution (7.13 % disbursed).

Modernization of the administration of justice

30

30

30

30.0

In execution (42.1% disbursed).

HO0175

Municipal Development San Pedro Sula II

9

9

9

9.0

Cancelled (debt forgiveness process).

HO0205

Valle del Sula public security program

20

20

20

20.0

In execution (30.1 % disbursed).

HO0223

Public sector strengthening program (PBL)

12

30

30

30.0

In execution (50.37 % disbursed).

HO0208

Budget and tax management modernization

10

10

10

15.0

In execution (49.8% disbursed)

0

30

30

30.0

Disbursed (repayment).

4

4

4

4.0

In execution (79.0% disbursed).

Governance HO0210

Development of human capital HO0212 Support for poverty reduction (PBL) HO0214

Modernization of the statistics system

HO0220

Poverty reduction and local development II

30

35

35

35.0

In execution (29.8 % disbursed).

HO0215

Labor market program

10

10

10

7.2

Disbursed

HO0140

Consolidation of health sector reforms

20

20

20

7.2

Support for poverty reduction (Phase II)

22

30

30

30.0

N-D

Annex IV Page 3 of 3

Number HO0202

HO0222

Programming under the 2002 Bank’s country strategy (BCS) Amount programmed under the BCS Current status Loan Scenarios Amount approved (January 2008) Name in the BCS Low Base High Strengthening of secondary education 17.4 17.4 17.4 30.6 In execution (17.6% disbursed; US$10,000,000 canceled in debt forgiveness process).

Comprehensive social safety net program 28 28 28 20.0 In execution (28.1% disbursed).

TOTAL 325 460 510 583.4 Note: Loans with no entry in the current status column were not approved during the 2002-2006 period. However, during the period of the strategy, the following loans were added: HO-197 for US$11.1 million; HO0211 for US$15.7 million, and HO0217 for US$4.5 million. Moreover, eight sector loans were approved: two in 2003 for a total of US$1.5 million; two in 2004 for US$23.25 million; one in 2005 for US$16.6 million, and three in 2006 for US$65.9 million.

Annex V Page 1 of 1

HONDURAS: COUNTRY FINANCING PARAMETERS1 Category Financing matrix or cost sharing: limit on the proportion of the costs of individual projects that the Bank can finance

Parameter Up to 100% of the project cost

Financing of recurrent costs: limit that could apply to the total amount of the recurrent costs that the Bank would finance.

No country limit.

Financing of local costs: the Bank finances local costs in foreign exchange.

Yes.

Taxes and fees: Is there a tax or fee that the Bank would not finance?

No.

1

Explanation The Bank may finance up to 100% of the costs of individual operations, but will do so selectively after considering: (i) the country’s general commitment to financing its general development program; (ii) the country’s commitment to financing the particular sector or subsector that the Bank’s support is targeting; and (iii) the portfolio implications under the overall lending scenario proposed in the current country strategy.

Based on specific projects and at the government’s request, the Bank may finance recurrent costs after carefully considering that they: (a) are part of the project; (b) are necessary to the project’s development objectives; and (c) are productive in the context of the specific project being supported. To determine whether, and to what extent, they are subject to financing in each case, the Bank will consider their fiscal impact and their impact on indebtedness in the short and medium terms.

At the request of the country and if the costs are eligible, the Bank may provide foreign exchange financing for local costs. When local costs are funded in local currency, there is no policy restriction, except expenditure eligibility.

Currently, taxes and fees in Honduras are considered reasonable and nondiscriminatory. At the borrower’s request, the Bank’s financing may cover taxes and related fees that represent additional cost in the procurement of goods and services, provided the Bank deems the amounts of such taxes and fees reasonable. Charges additional to the cost of a service under the heading of income taxes will not be recognized.

The Financing parameters for Honduras were adjusted and adapted to the Bank using the parameters prepared by the World Bank, as established in document GN-2331-5, and will be processed pursuant to the guidelines established in that document.

Annex VI Page 1 of 2

FINANCING SCENARIOS As a result of the debt cancellation process, the Bank approved, through document GN-2442, the general guidelines for concessional resource allocation to the group of countries that participated in the process, one of which is Honduras. These guidelines include a new allocation mechanism that will be fully implemented beginning in 2009 and considers a transition period for 2007-2008.

This new mechanism would operate in two stages: − In a first stage FSO funds would be allocated through the new Enhanced PerformanceBased Allocation (EPBA) system,1 which takes into account the country’s performance indicator, built on the basis of the Country Institutional and Policy Evaluation (CIPE) and a portfolio indicator; the per capita national income; and the population. − In a second stage, and once the FSO allocation for the country was determined, the new guidelines establish the use of an OC and FSO blended structure. In this blend, the proportions of each of the funds are determined on the basis of country debt sustainability indicators. Based on the debt sustainability analyses, a priori Honduras would not have a risk in the medium term, so the respective combination would be 30% FSO and 70% OC. In terms of the allocation for the 2007-2008 transition period, the combined application of the new methodology with the methodology used to date set the annual allocation at US$97.1 million.

Assuming that both the indicators that establish the enhanced performance-based allocation (EPBA) and the debt sustainability indicators remain constant in 2009 and 2010, the resulting allocation for those years would be US$118.7 million. This represents an increase in the FSO allocation of US$6.5 million (from US$29.1 million in 2007 to US$35.6 million from 2009 onward). This scenario is considered the Base Case.

Assuming changes in the CIPE that in turn generate changes in the EPBA capable of altering the FSO allocation by 5%, two alternative lending scenarios emerge (high and low depending on whether the variations are considered positive or negative in the CIPE). In the case of the high scenario, the annual allocation for the 2009-2010 period would come to US$124.6 million. In the low scenario, it would fall to US$112.6 million.

1

The formula taken into account in the EPBA is α i

=

Ai ∑ Ai

con

2

−1

Ai = Pi Yi N i

0.5

. Here, P is a country performance

i

indicator, built on the basis of the policy indicator (CIPE) and a portfolio indicator; Y is per capita national income; and N is the population.

Annex VI Page 2 of 2

Table 1: Honduras, Annual Allocation 2009-2010 according to EPBA (Millions of U.S. dollars) Annual Allocation Total allocation 2007-2008 2009-2010 2007-2010 FSO OC Total FSO OC Total High 29.13 67.97 37.4 87.2 97.1 124.6 443.4 Base 29.13 67.97 35.6 83.1 97.1 118.7 431.6 Low 29.13 67.97 33.8 78.8 97.1 112.6 419.4 NOTE: To build the scenarios, the following was assumed: population of 7.1 million inhabitants; per capita gross national income of US$1,030 in 2004; portfolio indicator of 4.95. The CIPE varied in each scenario so that the FSO allocation would fluctuate by 5% of the allocation for the base-case scenario. In the first case, the CIPE is 3.85; in the high scenario it is 4.07; and in the low scenario it is 3.62.

Scenario

Annex VII Page 1 of 1

EXPOSURE INDICATORS *

Indicators HO portfolio IDB portfolio* (18%) high scenario HO portfolio IDB portfolio* (18%) base-case scenario HO portfolio IDB portfolio* (18%) low scenario IDB debt service/total external debt service (30%) IDB debt service/exports (8%)

2006 0.6 0.6 0.6 21.9 1.6

High scenario Projections 2007 2008 2009 0.7 0.9 1.1 0.7 0.9 1.1 0.7 0.9 1.1 8.7 20.3 20.2 0.6 1.0 0.9

2010 1.252 1.250 1.245 20.6 0.9

Source: Own calculations based on the macroeconomic framework (Katz, 2007) and projected disbursements under this strategy’s base-case scenario. Calculations based on information from the Central Bank of Honduras, the IMF, and the IDB’s Finance Department. IDB portfolio performance was estimated based on the 2007 budget provision and the portfolio data in the 2006 financial statements. *

The percentages in parentheses indicate the thresholds recommended by the Bank’s policy.

Annex VIII Page 1 of 1

ANTICIPATED NET RESOURCE FLOWS

Table 1: High Scenario Loan disbursements(a) Amortizations (principal) (b) Capital flow (c=a-b) Interest and fees (d) Subscriptions and contributions(e) Net cash flow (c-d-e)

2005 64.9 32.2 32.7 17.3 0.0 15.4

2006 91.6 32.3 59.4 17.4 0.0 41.9

2007 77.2 10.3 66.9 4.8 0.0 62.0

2008 96.7 20.6 75.0 10.3 0.0 65.8

2009 77.2 21.2 54.8 11.2 0.0 44.8

2010 84.4 21.7 62.7 12.4 0.0 50.3

2007 77.2 10.3 66.9 4.8 0.0 62.0

2008 95.6 20.6 75.0 10.3 0.0 64.7

2009 76.0 21.2 54.8 11.2 0.0 43.6

2010 83.8 21.7 62.1 12.4 0.0 49.7

2007 77.2 10.3 66.9 4.8 0.0 62.0

2008 94.4 20.6 75.0 10.3 0.0 63.5

2009 74.0 21.2 54.8 11.2 0.0 41.6

2010 81.5 21.7 59.8 12.3 0.0 47.5

Table 2: Base-case Scenario Loan disbursements(a) Amortizations (principal) (b) Capital flow (c=a-b) Interest and fees (d) Subscriptions and contributions(e) Net cash flow (c-d-e)

2005 64.9 32.2 32.7 17.3 0.0 15.4

2006 91.6 32.3 59.4 17.4 0.0 41.9

Table 3: Low Scenario Loan disbursements(a) Amortizations (principal) (b) Capital flow (c=a-b) Interest and fees (d) Subscriptions and contributions(e) Net cash flow (c-d-e)

2005 64.9 32.2 32.7 17.3 0.0 15.4

2006 91.6 32.3 59.4 17.4 0.0 41.9

Annex IX Page 1 of 1

CHRONOLOGY OF THE DEBT FORGIVENESS PROCESS

1992

-

-

2004 2005

-

1996

-

2005

-

2005

-

2007

-

-

Paris Club First bilateral and commercial debt restructuring guaranteed by Japan, the Netherlands, Switzerland, Spain, Canada, and the United States, in the amount of US$42.4 million in amortizations and US$30.5 million in interest.

Restructuring of an additional US$189.3 million. France, Canada, the Netherlands, and Spain forgave 50% in interest and amortizations while the other members accepted changes in the maturities and grace period.

Restructuring of US$361 million (2004) and US$316 million (2005) pursuant to the application of the Cologne terms. This involved a reduction in the debt stock of US$147 million in 2004 and US$206 million in 2005.

Highly Indebted Poor Countries (HIPC) Debt Forgiveness Initiative The IMF and the World Bank launch the HIPC Initiative in order to prevent poor countries from facing indebtedness situations that they cannot manage and can in turn allocate a growing portion of their revenues to poverty reduction.1 After showing good performance in the implementation of its Poverty Reduction and Growth Facility (PRGF) with the IMF and successfully carrying out its poverty reduction program, Honduras reaches the completion point. With the completion point, multilateral creditors forgave US$297 million in debt service, of which US$135 million were already confirmed2 (the remaining amount will be forgiven as the respective payments come due). Subsequently the country received additional debt relief from a group of bilateral creditors, through the Paris Club, for US$846 million.

Multilateral Debt Relief Initiative (MDRI) In order to ensure fulfillment of the Millennium Development Goals, the G8 promoted the MDRI, which provides 100% relief for the amount of eligible debt that countries have with the IMF, the World Bank (IDA), and the African Development Fund.3 Under the MDRI, the IMF granted US$155 million in relief and the World Bank forgave US$1.186 billion.

IDB debt relief The IDB cancelled US$1.367 billion in nominal value (principal and interest) of the debt contracted prior to December 2004. As a result, the NPV of the external debt of Honduras represented only 13% of GDP and 32% of the value of exports.

In the context of this debt forgiveness, it was agreed that the countries would cancel loans with the Bank that had been approved but that had still not been fully implemented. Based on the benefits received by Honduras under the initiative, it had to cancel the undisbursed balances of loans in the amount of US$75 million.

1

According to Cologne criteria, a country is eligible provided it meets the following conditions: per capita income below US$925, NPV of the debt over exports above 105% or NPV of the debt over income above 250% and good structural adjustment results for three years.

2

At February 2007.

3

For the IMF, eligible debt is any debt contracted by December 2004. For the World Bank, the contracts prior to December 2005 will be considered eligible.

Annex X Page 1 of 3

DEBT SUSTAINABILITY IN HONDURAS A country’s public debt sustainability depends on the public sector’s ability to generate sufficient revenue to meet 100% of its debt service obligations. A debt sustainability analysis can be used to look at two factors. The first is the fiscal-balance path that will render a given public debt stock (measured as a percentage of GDP or tax revenues) sustainable. In the second approach, medium-term projections are made in advance for fiscal policy variables and parameters relating to economic fundamentals (real growth rate, interest rates, etc.). Based on these assumptions, a path is plotted for the public debt that the government could assume and service. The literature defines a debt path as sustainable if the debt-to-GDP ratio remains constant (or declines) over time.

The debt sustainability analysis that appears below follows the second of the abovementioned criteria. The analytical approach used is the “Low-Income Country Debt Sustainability Framework,”1 which can be used to simulate the future course of indebtedness indicators under various scenarios. This analytical framework facilitates the evaluation of the sensitivity or robustness of the results to shocks in the economy,2 making it possible to test the strength of the public accounts with respect to various negative shocks such as: (i) a permanent deterioration in the fiscal outcomes; (ii) a slowdown in economic growth; (iii) an increase in the real interest rates paid on public sector debt; (iv) an increase in the real exchange rate that raises the local currency cost of the debt denominated in foreign currency; and (v) a drop in exports.

In applying this analysis framework to Honduras, consideration has been given to historical data, projections from the Central Bank’s monetary program, and the outcomes of the Macroeconomic Consistency Framework. Importantly, all these simulations assume that the NPV of debt is as calculated subsequent to traditional debt relief (Paris Club), the HIPC Initiative and MDRI, and the additional relief granted by the IDB in early 2007.

The assumptions are as follows: •

Baseline scenario: Average primary balance for the combined central government of -2.7% (2007-2010) and -2.5% (2011-2026); GDP growth rate of 4.9% (2007-2011) and 4.5% (2012-2026); nominal interest rate (average) of 1.8%; and total resources (including grants) as a percentage of GDP, 18.7%.

•

Shock to external flows: Assumes a shock during two periods consisting of a decline in the rate of external flows (grants) equal to the historical average minus one standard deviation.

1

Given the financial features of borrowing by poor countries, long repayment terms, and subsidized interest rates, net present value (NPV) is used as a more accurate measure of debt sustainability.

2

In particular, a temporary shock is applied (two periods).

Annex X Page 2 of 3

•

Combined shock: Assumes a shock (in the baseline scenario) during two periods to growth rates and to the primary balance or current account, depending on whether the focus is public debt or external debt, respectively. The magnitude of the shock for each variable is equal to the historical average minus one-half a standard deviation.

The findings of the analysis indicate that the country’s external public debt is sustainable. In addition, assuming changes in the dynamics of the main macroeconomic variables, the debt sustainability will not change substantially. Thus, in alternative scenarios—the first, a combined shock (to the fiscal balance and economic growth), and the second, to grant flows—debt in GDP terms would trend upward in the medium term, but would then turn downward to finish between 5 and 15 percentage points of GDP above the baseline, respectively. Moreover, external public debt as a ratio of exports will behave in a similar manner, staying below the 150% threshold that the IMF recommends as sustainable for countries with the features of Honduras.

NPV of external public debt (as % of GDP) 35% 30% 25% 20% 15% 10%

Baseline scenario

Shock to external flows

2026

2025

2024

2023

2022

2021

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

5%

Combined shock

Annex X Page 3 of 3

NPV of external public debt (as % of exports) 100% 90% 80% 70% 60% 50% 40% 30% 20%

Baseline scenario

Shock to external flows

2026

2025

2024

2023

2022

2021

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

10% 0%

Combined shock

According to these results, Honduras would qualify as a low-risk country in terms of debt sustainability. This means that the allocation of a combination of new financing by the IDB should be 30% FSO (concessional rates) and 70% Ordinary Capital.

Annex XI Page 1 of 1

HONDURAS: INTERNATIONAL COOPERATION PORTFOLIO BY STRATEGIC AREA Reimbursable and Nonreimbursable Funds (millions of U.S. dollars) Macroeconomic framework and public management Efficient public financial management

Fiscal reform

Competitiveness to promote growth and reduce poverty Energy, road, and port infrastructure

MSMEs

Dynamic production clusters

Social and human capital formation Improved quality Social safety nets of education

Labor market

Security and justice, environment, and natural disaster prevention Improved justice

Environment

Natural disaster risks

Other work areas Financial system, security, and health

Total Amount

Approved Available Approved Available Approved Available Approved Available Approved Available Approved Available Approved Available Approved Available Approved Available Approved Available Approved Available Approved Available Approved Available CABEI EU

50.0

38.4

234.5

228.1

30.2

9.8

3.6

3.3

29.3

20.5

FAO IAEA IDA

28.8

25.2

IFAD

24.1

15.0

15.0

13.0

N.D.F.

0.2

0.0

101.5

39.8

18.8

7.2

OAS OPEC

30.0

0.1 9.5

9.5

UNDP

1.3

0.1

UNFPA

0.5

0.1

17.0

22.9

40.1

11.2

18.0

17.5

7.9

7.9

4.0

2.0

67.3

16.7

1.0

1.0

0.1

0.1

72.6

23.3

8.8

3.1

14.5

18.1

11.8

15.3

15.0

14.3

0.0

25.6

7.0

60.8

54.8

357.8

315.7

44.8

32.0

84.3

20.8

291.1

129.5

0.9

0.9

1.9

1.9

24.7

13.5

16.5

3.7

12.4

11.9

0.0

0.0

14.1

1.2

7.5

UNAIDS

0.1 0.1

0.1

0.3

WFP

15.3

66.3

26.4

5.0

1.5

1.4

0.9

0.4

0.1

0.1

0.1

2.7

0.7

0.1

0.0

China

10.0

10.0

1.0

0.5

21.7

8.0

Finland

4.8

1.4

2.3

1.0

0.8

58.6

36.2

52.9

31.6

0.1

0.0

31.5

20.1

0.1

0.1

34.8

5.9

38.2

7.4

3.1

1.9

3.6

1.9

15.3

6.4

0.1

France

206.1

3.1

6.4

Canada

0.1

426.2

5.0 0.1

0.3

0.3

3.7

0.9

32.7

18.5

7.1

2.4

0.6

0.6

0.6

0.6

28.0

22.8

102.3

71.6

India

30.0

2.4

30.0

2.4

Italy

45.0

4.9

45.0

4.9

5.0

0.9

29.4

8.6

2.5

1.9

32.7

14.9

54.0

11.9

Germany

19.7

10.0

8.5

Japan

2.6

0.9

Korea

6.0

6.0

Kuwait

54.0

11.9

6.4

14.8

0.1

0.1

Sweden

2.6

1.5

Switzerland

1.4

0.2

1.0

0.6

20.1 3.2

4.3

19.9

9.5

8.5

15.2

4.0

4.5

7.0 24.2

Netherlands Spain

21.4

1.6

1.0

21.7

8.0

1.2

0.2

15.1 164.7

7.0

27.7

21.9

30.5

3.7

0.7

0.2

7.1

190.6

52.6

70.7

46.8

89.4

455.0

153.6

128.4

89.1

1.2

2.3

0.1

0.1

5.0 20.7

0.0

6.1

1.6

1.0

35.6

5.2

110.4

39.5

4.7

1.7

61.7

14.2

3.3

0.5

Taiwan U.K. USA TOTAL

139.0

100.6

18.2

14.2

28.6

28.0

513.5

343.6

42.2

32.7

* There is a possibility that these funds will be reassigned to energy infrastructure works.

0.0

0.0

29.5

19.9

66.4

42.3

163.0

80.2

26.5

3.6

410.6

154.7

1.0

0.6

334.5

154.4

2127.6

1103.9

ANNEX XII Page 1 de 1

Table 1: Progress towards the Millennium Development Goals Millennium Goals

Goal

Selected indicators by goal

Halve, between 1990 and 2015, the proportion of Percentage of the population living on less than people whose income is less than US$1 per day. US$1 per day (PPA. 1993) Objective 1: Cut extreme poverty by half

Halve, between 1990 and 2015, the proportion of Percentage of the population below the minimum people who suffer from hunger. dietary energy consumption level Reduce the incidence of poverty by 24 percentage points. (*) Reduce the incidence of extreme poverty by 24 percentage points. (*)

Poverty rate Extreme poverty rate

Objective 2: Achieve universal primary education

Ensure that, by 2015, boys and girls are able to complete a full course of primary schooling.

Objective 3: Promote gender equality and empowerment of women

Eliminate gender disparity in primary and secondary education by 2005, and in all levels of Ratio of literate women to men ages 15 to 24 education by 2015.

Objective 4: Reduce the under-five Reduce the under-five mortality rate by two thirds. child mortality rate Objective 5: Improve maternal health

Objective 6: Combat HIV/AIDS, malaria, and other diseases

Child mortality rate (deaths per 1,000 live births)

37.8

23

23 (2002-04)

Likelihood of reaching target

18.9

Likely

11.5

Likely

50

Unlikely

30

Unlikely

64.7

79.4 (2004)

100

Unlikely

1.07

1.11 (2006)

1

Very unlikely

11.6

Very unlikely

45.5

NA

NA

Unlikely

35 (1991-96) 182

Have halted and begun to reverse the spread of HIV/AIDS by 2015.

Number of AIDS cases (asymptomatic/AIDS)

NA

Have halted and begun to reverse the incidence of malaria and other diseases.

Prevalence of malaria (cases per 100,000 inhabitants) Prevalence of tuberculosis (cases per 100,000 inhabitants)

Proportion of population with access to sustainable sanitation

20.7 (2004)

2015 target

62 (2006) 42 (2006)

Mortality rate (deaths per 100,000 live births)

Surface area protected to maintain biological diversity (millions of hectares)

2005 progress

74.8 (2001) 54.2 (2001)

Reduce the maternal mortality rate by three quarters between 1990 and 2015.

Integrate the principles of sustainable development into country policies and programs Objective 7: Ensure environmental and reverse the loss of environmental resources. sustainability Halve the proportion of people without sustainable access to potable water and basic sanitation services.

Objective 8: Develop a global partnership for development

Percentage of students who begin first grade and reach sixth grade

1990

23 (2001-06)

119 (2000)

5.287/17.560 (1985-2005)

1.131

206

NA

Very likely

77.7

45.9

NA

Very likely

0.73

2.9

NA

NA

50

69

75

Likely

Further develop an open financial and commercial system based on predictable and nondiscriminatory rules and regulations.

Average tariffs

41.9

6.2

NA

NA

Financial support for the agricultural sector (% of total loans to private sector)

18.7

4.4

NA

NA

Address the special needs of less developed countries.

Address the debt problems of developing countries through domestic and international measures.

Proportion of official aid for bilateral development not subject to conditions

NA

NA

NA

NA

(*) Target established by the Poverty Reduction Strategy.

Debt service as a percentage of goods and services exports

72 29.3

63 (2004)

6.8

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Agosín, M.; Machado, R y Nazal. “Pequeñas Economías, Grandes Desafíos. Políticas para el Desarrollo en Centroamérica”. Washington, DC, BID. 2002.

Alonso, E., “Evaluación de las políticas de promoción de inversiones y exportaciones en Honduras”, FIDE, Tegucigalpa. 2005.

Banco Central de Honduras. “Flujos de inversión extranjera directa en Honduras año 2006 y expectativas para 2007”, Subgerencia de Estudios Económicos. 2007.

Banco Central de Honduras. “Actividad maquiladora en Honduras año 2006 y perspectivas 2007”. Subgerencia de Estudios Económicos. 2007

Banco Central de Honduras. “Programa Monetario 2007-2008”. Marzo, 2007. (disponible en http://www.bch.hn/download/fmi/Programa_Monetario_2007_2008.pdf).

Banco Mundial. “World Development Report 2006: Equity and Development”. The World Bank and Oxford University Press. 2005.

Banco Mundial. “Country Economic Memorandum. Challenges to Higher Economic Growth”. Report No. 29145- GT. Marzo 2006.

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BID. Honduras: Documento de Diálogo de Políticas. Banco Interamericano de Desarrollo.

Mimeo 2006 Echebarría, K. Informe sobre la situación del Servicio Civil en América Latina: Departamento de Integración y Programas Regionales - BID. 2006 Edwards, S. y Vergara R. “Fiscal Sustainability, Debt Dynamics and Debt Relief: The Cases of Nicaragua and Honduras”, Serie de Estudios Económicos y Sectoriales.

Washington, DC, BID. 2002 ESA Consultores “Los servicios de agua para los pobres de Centroamérica, México, República Dominicana, y Haití”. Mimeo, 2007

FMI. “Honduras: Third Review Under the Three Year Arrangement Under the PRGF”.

Fondo Monetario Internacional. 2005.

Frenkel, R. y Ross, J. (2004). “Real Exchange Rate, Wages and Employment”, mimeo, CEDES. Godinot, Xavier y Wodon Quentin (Ed.). “Participatory Approaches to Attacking Extreme Poverty Cases”. Studies Led by the International Movement ATD Fourth World. Banco Mundial. Abril, 2006.

Granados, J. et al., “Honduras: Desafíos de la Inserción en la Economía Internacional”, INTAL. Documento de trabajo Nº 31, Buenos Aires. 2007.

IMF and IDA. Joint Staff Advisory Note on the Poverty Reduction Strategy Paper, Second Annual Progress Report. 2005.

Izquierdo, A. y Montiel, P. “Remittances and Equilibrium Real Exchange Rates in Six Central American Countries”. Banco Interamericano de Desarrollo. Mimeo 2006.

Juan Ramón. “Honduras Growth Performance 1970-1997”, IMF Policy Discussion Paper.

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Klasen, S. “In Search of The Holy Grail: How to Achieve Pro-Poor Growth?”, Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ). 2001.

Kose, M.A.; Rebucci, A.; and Schipke, A. “Macroeconomic Implications of CAFTA-DR,” in Central America. Global Integration and Regional Cooperation. IMF Occasional Paper No. 243. 2005.

Loayza, Calderón y Fanjzylber. “Economic Growth in Latin America and the Caribbean”, Banco Mundial. 2002.

Márquez, M., Barreix, A.y Villela, L. Recomendaciones y Mejores Prácticas para la Tributación de PYMES. Banco Interamericano de Desarrollo. Mimeo, 2005.

Martínez, C y Támola, A. “The Impact of Remittances on Poverty, Income Inequality and Social Welfare in Honduras”. Banco Interamericano de Desarrollo. Mimeo, 2007.

Mikkelsen, J: “A Model for Financial Programming”, Western Hemisphere Department, IMF working Papers. 1998

PNUD. “Informe Nacional de Desarrollo Humano. Honduras: Hacia la expansión de la ciudadanía”. PNUD Honduras. Mayo, 2006.

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