Honduran Lempira Could be Devalued

The International Monetary Fund (IMF) may want Honduras to devalue the currency, according to the report issued reviewing Honduras’ macroeconomic policy.

The good news, is that they project a gradual recovery in economic activity for Honduras in 2010.

Executive Board Assessment

The “Executive Directors noted that the global slowdown and domestic political tensions in 2009 had an adverse impact on the Honduran economy. This led to a sharp deterioration in macroeconomic imbalances, fueled in part by expansionary policies. Directors stressed that it will be necessary to take prompt measures to restore macroeconomic stability and support the incipient economic recovery, and to establish the conditions for sustained long-term growth. The authorities’ renewed efforts to strengthen its dialogue with the Fund are welcome.”

“Given the large deterioration of the fiscal position, Directors recommended a strategy aimed at reducing the public sector deficit and improving the composition of expenditure. This will require continuing strengthening tax administration and expenditure management (including effective control of the public sector wage bill and subsidies) and adopting a multi-year budgetary framework supported by prudent public debt management. A comprehensive reform of public enterprises and public pension funds will also be necessary to improve their efficiency. This strategy will help create fiscal space for higher public investment and social spending, and allow a timely response to adverse shocks.”

“To keep inflation under control and protect the international reserve position, Directors supported a tightening of the monetary stance. They underscored the need to halt central bank financing of the public bank. Directors noted that the de facto peg of the lempira to the U.S. dollar has been an important nominal anchor. Nonetheless, to safeguard competitiveness and strengthen the external position, Directors deemed appropriate considering a gradual increase in exchange rate flexibility, supported by fiscal consolidation, wage moderation, and a prudent monetary policy.”

“Directors noted that the domestic financial system has weathered the crisis relatively well. They advised continued vigilance and a strengthening of the financial sector safety net. They welcomed the authorities’ intention to address the shortcomings identified in the 2009 Financial System Stability Assessment (FSSA), including by focusing supervision on controlling risks, effectively enforcing capital charges and provisioning requirements, and enhancing liquidity monitoring. They commend the authorities for their efforts to address deficiencies in their Anti-Money Laundering/Countering the Financing of Terrorism regime, and encouraged to further align it with international standards” … excerpts.

Read the full report on Honduras here: IMF.org

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