USAID CBJ FY 2002: Honduras

Summary: Poverty, especially in rural areas, is the foremost long-term economic problem facing Honduras today. The economy grew slowly over the past decade (at a rate only slightly exceeding population growth), resulting in an overall poverty rate of 66% in 1997. Although the country was moving toward vigorous growth rates and making some progress in addressing poverty, Hurricane Mitch wreaked widespread devastation, dealing a significant setback to economic growth and poverty reduction efforts. With economic reactivation efforts underway, Honduras continues to suffer from insufficient employment generation, especially for the poor. Private investment is constrained by an unfavorable investment climate, including an overvalued currency, lack of credit, high commercial interest rates, deficient infrastructure (electricity, communications, and roads), weak legal institutions, a low level of education and workforce productivity, corruption, and burdensome bureaucratic obstacles. Key policy reforms have been slowed by the political power of those who benefit from current policies and lack a broad understanding of the potential benefits of reform. Small and micro entrepreneurs and producers often do not have equitable or sufficient access to markets and information to respond adequately to market forces.

Key Results: Economic reactivation to meet the needs of the poor is a critical objective in USAID's overall strategy. Activities are targeted to achieve the following key results: 1) an improved policy environment conducive to poverty reduction through economic recovery and growth, and 2) expanded business and financial services to micro and small businesses.

Performance and Prospects: Important progress is being made in post-Hurricane Mitch economic recovery and reactivation. Agricultural and forestry product exports increased to $730 million, a 25% increase over 1999. The economy grew by an estimated 4.8% in 2000, inflation remained at 10.1%, and net international reserves increased to approximately $1.02 billion, or $21 million higher than in 1999. Total Honduran exports of $1.14 billion relative to $2.4 billion in imports resulted in a trade balance of minus $1.3 billion, about the same as 1999. Generally satisfactory economic performance is attributed to recovery in all productive sectors, particularly to increases in agricultural production and growth of the small and medium manufacturing sector. On the other hand, private investment fell short of the CY 2000 target, and the financial sector showed lackluster performance. Although the Central Bank decreased reserve requirements, interest rates remained high (18-34%). The rate of growth of credit to businesses declined from about 70% in 1996-97 to about 18%. The Government of Honduras (GOH) must take concrete steps to improve the financial sector, such as passing a deposit insurance law and taking appropriate actions against weak financial institutions. It is imperative to reduce perceived risks in the financial sector and to reduce commercial interest rates, which are a key condition to accelerated economic recovery. Although key policy changes - privatization, decentralization, justice sector and financial sector reforms - are not expected in this election year, the challenge will be to maintain fiscal prudence so as not to jeopardize prospects of sustaining economic growth in 2002 and beyond.

Despite political posturing associated with this year's national elections, some important progress toward policy reform was achieved. The GOH developed its Poverty Reduction Strategy Program, a key requirement for qualifying for the Heavily Indebted Poor Countries (HIPC) initiative and securing debt relief of up to $556 million (net present value). After over three years of deliberations, the GOH finally passed the law allowing microfinance institutions (MFIs) to accept deposits and develop new financial products. Commercial interest rates declined in 2000, and further declines are expected in 2001, provided the GOH adheres to the International Monetary Fund (IMF) conditionality outlined in the Poverty Reduction Growth Facility. The government's policy focus for this year will be to comply with agreed targets and reforms in the Poverty Reduction Growth Facility, a commitment that is becoming increasingly difficult to fulfill. The key areas for policy action include privatization of the Honduran telephone company and enforcement of capital adequacy rules. The presidential candidates of the two major parties have demonstrated interest in the reform agenda and USAID will provide information and seminars related to key reform issues to the major candidates.

Over 48% of small and micro enterprises in Honduras are now receiving USAID-supported financial services. During 2000, USAID-supported MFIs disbursed $28.6 million to 93,544 active clients (79% women). Despite efforts to restructure portfolios, the delinquency rate of USAID-assisted MFIs increased during 2000. To address this issue, USAID is providing technical assistance to selected organizations to improve loan approval and collection procedures. USAID also provided business development services to women's groups in three cities to develop decorative accessories and artesanal products for exports to major U.S. department stores. A total of 16,041 farmers received land titles under the mass land-titling program supported by USAID. Preliminary findings from an ongoing impact study indicate that farmers have begun using these titles to secure bank financing.

FY 2001 funds will be used to support an improved policy environment conducive to poverty reduction through economic growth ($1,340,000) and improved market access and competitiveness by the poor ($1,900,000). FY 2002 funds will increase financing for policy-related activities to $1,930,000 and continue financing market access and competitiveness activities at $1,800,000.

Possible Adjustments to Plans: USAID is developing business development services in key secondary cities with significant potential for rapid economic growth. The secondary city focus is expected to continue and the range of activities to support these potential high-growth areas may expand. A recent external review of economic reactivation activities suggested that USAID should complement continued policy work with specific concrete activities in the private sector to help develop a productive response to policy changes. These new activities may be similar to those funded with hurricane reconstruction funds that are helping to raise the productivity and income of thousands of Honduran farmers and rural enterprises. Property registration and the formalization of Honduran businesses are major challenges to growth and development of the small and microenterprise sector. USAID is planning to undertake a study of property registration in three secondary cities. Based on the outcome of this study, USAID may work with local institutions and other donors to finance modernization of property registration in Honduras.

Other Donor Programs: USAID is working closely with the World Bank, the Inter-American Development Bank (IDB), and the IMF in macroeconomic, trade policy, and financial sector reforms. Many of the indicators in USAID's policy results framework are the same or similar to those contained in the IMF Poverty Reduction Growth Facility. USAID is collaborating with the IDB to strengthen the Trade Policy Unit in the Ministry of Industry and Commerce and with the U.S. Department of Agriculture to strengthen the Ministry of Agriculture's Planning Unit. USAID has joined the German Development Agency, the IDB, the Central American Bank for Economic Integration, the Honduran Foundation for the Development of Investment and Exports, the United Nations Development Program, and selected Honduran MFIs to develop proposals and programs for small and micro businesses.

Principal Contractors, Grantees, or Agencies: U.S. contractors Chemonics and Barents Group implement economic policy activities and the major share of microenterprise activities. Honduran microenterprise NGOs and the formal banking and credit union system provide microenterprise and small business credit services. The National Unit for Technical Support and the Economic Cabinet, as well as its respective ministries or agencies, are the primary GOH counterparts.

Honduras: 522-001

U.S. Financing

(In thousands of dollars)

	Obligations		Expenditures		Unliquidated
Through September 30, 1999	7,825	DA	3,463	DA	4,362	DA
	0	CSD	0	CSD	0	CSD
	0	ESF	0	ESF	0	ESF
	0	SEED	0	SEED	0	SEED
	0	FSA	0	FSA	0	FSA
	0	DFA	0	DFA	0	DFA
Fiscal Year 2000	3,900	DA	(64)	DA
	0	CSD	0	CSD
	0	ESF	0	ESF
	0	SEED	0	SEED
	0	FSA	0	FSA
	0	DFA	0	DFA
Through September 30, 2000	11,725	DA	3,399	DA	8,326	DA
	0	CSD	0	CSD	0	CSD
	0	ESF	0	ESF	0	ESF
	0	SEED	0	SEED	0	SEED
	0	FSA	0	FSA	0	FSA
	0	DFA	0	DFA	0	DFA
Prior Year Unobligated Funds	0	DA
	0	CSD
	0	ESF
	0	SEED
	0	FSA
	0	DFA
Planned Fiscal Year 2001 NOA	3,240	DA
	0	CSD
	0	ESF
	0	SEED
	0	FSA
	0	DFA
Total Planned Fiscal Year 2001	3,240	DA
	0	CSD
	0	ESF
	0	SEED
	0	FSA
	0	DFA
			Future Obligations		Est. Total Cost
Proposed Fiscal Year 2002 NOA	3,730	DA	12,000	DA	30,695	DA
	0	CSD	0	CSD	0	CSD
	0	ESF	0	ESF	0	ESF
	0	SEED	0	SEED	0	SEED
	0	FSA	0	FSA	0	FSA
	0	DFA	0	DFA	0	DFA

Honduras

Activity Data Sheet

Honduras: 522-001

U.S. Financing