Honduras WT/TPR/S/120
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I. ECONOMIC ENVIRONMENT
(1) INTRODUCTION
1. With a per capita income of around US$900, Honduras is one of the lowest-income countries
in Latin America.  From 1995 to 2002, the annual rate of growth of its gross domestic product (GDP)
ranged from –1.9 to 5.7 per cent, with an average annual rate of growth of 3.1 per cent over the
period.  Owing to the rapid pace of population growth, the rise in per capita income has not beensufficient to exert any significant impact on the population's living standards;  during the period
1998 to 2002, per capita GDP fell, even in real te rms.  Although development indicators improved
during the 1990s, two-thirds of the population still live in poverty.
1
2. International trade plays a crucial role in the Honduran economy.  Exports and imports of
goods and services together accounted for some 95 per cent of the GDP in 2002.  The principalexports are products of the maquila  industry, in particular clothing, and agricultural products such as
coffee, shrimps and bananas.
2  Reflecting in part the fall in prices and exports of traditional goods,
during the period 1999 to 2002 exports showed a negative average growth rate of 2.3 per cent, which
contrasts with the 12.5 per cent growth rate recorded during the period 1995 to 1998.
3. Programmes for the structural reform of the economy and monetary discipline have been the
backbone of economic policy over the past decade.  Measures have been introduced to curtail the
fiscal deficit, although at the Central Government level it has remained high.  Positive results have
been achieved in reducing inflation and, to a lesser extent, decreasing the external debt burden.  The
various agreements concluded by Honduras with the International Monetary Fund (IMF) in the
context of structural adjustment programmes and under the Poverty Reduction and Growth Facility,
together with the opening up of trade within the framework of the WTO and regional integration
initiatives, have been contributory factors.
4. Traditionally, the balance-of-payments current account has shown a large deficit, mainly due
to the substantial deficit in the balance of trade in goods.  The United States is Honduras' leading
trading partner (including the maquila  industry) and also the biggest investor.  Honduras finances a
large part of its current account imbalance thr ough current transfers from Hondurans living abroad,
mainly in the United States, and external aid flows.  Honduras has benefited from debt reductionprogrammes.  In December 1999, it became eligible for the Highly Indebted Poor Countries Initiative
(HIPC) and the relevant decision was taken in July 2000.  For Honduras, the nominal debt reduction
under the HIPC is estimated to be around US$900 million in net current values, taking into account
flows over 15 years.  The challenge for Honduras, will  be to ensure that at least part of the debt
reduction and transfers is used to increase investment in order to achieve the growth rates required toraise the living standards of its expanding population.
(2) 
ECONOMIC STRUCTURE AND STRUCTURAL ADJUSTMENT
5. Honduras' population is some seven million and it is  growing at a rapid annual rate of 2.6 per
cent.3  The rising trend in demographic growth has been accompanied by a move towards
                                                     
1 Republic of Honduras (2001), Poverty Reduction Strategy Paper, Tegucigalpa, August.
2 The term " maquila  industry" used in this Report refers to firms operating under the Law on Free
Zones and the Law on Industrial Export Processing Zones, see Chapters III(3)(iv) and (IV)(3).
3 Population and Housing Census.  Honduras 2001.WT/TPR/S/120 Trade Policy Review
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urbanization:  in 2002, the urban population was 47.5 per cent of the total.  With a per capita income
of some US$900 in 2001, Honduras is one of the poorest countries in Latin America.  Even though
development indicators have improved in recent years, in 2001 around 24.3 per cent of the population
was still living on less than US$1 a day;  in 1999, 66 per cent were below the poverty threshold and
49 per cent belonged to the absolute poverty category:4  It is estimated that the illiteracy rate in 2001
was 19.1 per cent.  The causes of poverty identified are a low rate of economic growth, unequaldistribution of income, a low level of education, lack of infrastructure, and low productivity by the
labour force.
5
6. The agricultural sector's share of GDP has fallen sharply in recent years, down to 13.5 per
cent in 2002 (Table I.1).  This is due to a large extent to the decreased importance of certain crops
such as coffee and a marked increase in manufacturing.  Although the maquila  industry has grown
significantly in recent years, the agricultural sector continues to be extremely important in Honduras
in terms of job creation, with 36.6 per cent of the working population employed in agricultural or
related activities.
7. The manufacturing sector, including the maquila  industry, increased its share of GDP to
20.4 per cent in 2002.  In the same year, services accounted for 60 per cent of the GDP; of particularimportance in the services sector are trade, restaurants and hotels, personal services, and financial
services.  Each of these contributes over 10 per cent of the GDP.
8. Hurricane Mitch and the tropical storm which struck Honduras in October 1998 had a serious
impact on the Honduran economy, affecting the infrastructure, production and exports.  It is estimated
that the cost of repairing the infrastructure damaged and the loss of the principal crops destroyed
amounted to US$3,600 million or over 70 per cent of the GDP.  The IMF granted Honduras
emergency financial aid to offset the effects of natural disasters amounting to 47.5 SDRs (someUS$66 million).  In addition, in 1999, Honduras received official net disbursements from other
organizations amounting to US$224 million, including resources from the Central America
Emergency Trust Fund (CAETF), set up by the World Bank in December 1998.
6
Table I.1
Basic economic indicators, 1995-2002
1995 1996 1997 1998 1999 2000 2001 2002e
I.  GDP
Current GDP (lempiras millions) 37,507 47,763 61,322 70,438 77,096 89,401 99,062 107,870
Current GDP (US$ millions) 3,961 4,079 4,717 5,264 5,437 6,024 6,403 6,565
Per capita GDP (US$) 707 704 789 852 851 913 939 933
GDP at 1978 constant prices (lempiras
millions)6,148 6,368 6,686 6,880 6,750 7,138 7,325 7,511
Real GDP, growth rate (%) 4.1 3.6 5.0 2.9 -1.9 5.7 2.6 2.5
Structure of GDP (% of current GDP at
factor cost)
Agriculture, hunting, forestry andfishing21.5 22.3 23.0 19.1 15.9 16.2 14.0 13.5
Mining 1.9 1.9 1.7 1.8 2.0 1.9 1.8 1.9
Manufacturing 17.8 18.1 18.0 18.6 19.6 19.6 20.3 20.4
Construction 5.5 4.6 4.6 5.1 5.9 5.4 4.9 4.1
Table I.1 (cont'd)
                                                     
4 Republic of Honduras (2001), Poverty Reduction Strategy Paper, Tegucigalpa, August.
5 Republic of Honduras (2001), Poverty Reduction Strategy Paper, Tegucigalpa, August.
6 The net disbursements were as follows:  World Bank, US$237.4 million;  IDB, US$50.4 million;  and
other negative net flows from other organizations, US$64.2 million.Honduras WT/TPR/S/120
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1995 1996 1997 1998 1999 2000 2001 2002e
Electricity, gas and water 5.4 6.2 5.5 5.1 4.9 4.7 4.3 4.3
Transport and communications 4.7 4.4 4.6 5.0 5.2 5.5 5.9 5.9
Trade, restaurants and hotels 12.0 11.9 11.8 12.3 12.7 12.4 12.6 12.6
Financial and other services 9.2 8.9 9.4 10.5 10.9 10.7 10.9 10.9
House ownership 5.6 5.6 5.5 5.8 6.1 5.9 6.0 6.1
Government administration and defence 5.9 5.9 6.0 6.0 5.9 6.7 7.1 7.4
Personal services 10.3 10.1 9.8 10.6 11.0 11.0 12.2 12.8
Breakdown of GDP by type of
expenditure (% of current GDP)
Total consumption 72.8 74.0 73.5 76.7 80.4 83.3 86.9 87.8
Private 63.5 64.4 64.6 66.6 69.0 70.7 73.0 74.0
Government 9.3 9.5 8.8 10.1 11.3 12.5 13.9 13.8
Gross fixed capital formation 24.0 24.0 25.7 28.2 29.8 26.1 23.6 22.2
Private 14.0 15.2 18.9 22.8 23.5 20.3 16.9 17.3
Public 10.0 8.8 6.8 5.4 6.3 5.9 6.8 4.8
Exports of goods and services 43.7 46.9 46.2 46.4 41.0 41.3 37.9 37.3
Imports of goods and services 48.1 52.0 51.8 54.1 56.0 55.2 54.7 53.0
Gross national savings 27.1 26.4 28.6 28.5 30.2 26.5 25.3 24.1
II.  Fiscal indicators (in percentage ofGDP)
Income .. 23.6 17.4 19.3 20.0 19.0 19.4 ..
Expenditure .. 23.4 22.4 23.3 25.9 25.8 27.0 ..
Overall balance .. 0.2 -4.9 -4.1 -5.8 -6.8 -7.6 ..
III.  Memo items
Population (millions) 5.6 5.79 5.98 6.18 6.39 6.60 6.82 7.04
Net international reserves (US$
millions)198.3 371.3 667.7 897.7 1,371.6 1,490.4 1,637.7 1,851.7
Total external debt (US$ millions) 4,242.6 4,120.6 4,073.3 4,403.8 4,729.2 4,706.0 4,808.0 4,963.7
Total external debt (as a percentage of
GDP)107.1 101.1 86.4 83.7 87.0 78.1 75.1 75.6
Public external debt (US$ millions) 3,969.7 3,775.6 3,630.9 3,792.7 4,119.6 4,101.0 4,229.6 4,396.7
Public external debt (as a percentage of
GDP)100.2 92.6 77.0 72.0 75.8 68.1 66.1 67.0
External public debt servicing
(US$ millions)578.4 676.4 497.4 448.9 330.1 770.7 333.0 263.9
.. Not available.
e Estimated.
Source: Central Bank of Honduras and Ministry of Finance.
9. In 1999, Honduras launched an economic programme that led to the conclusion of an
agreement with the IMF under the framework of th e Poverty Reduction and Growth Facility (PRGF),
which should have ended in December 2002 but the relevant disbursements were not received in their
entirety.7  The targets of the PRGF programme cover, inter alia , the fiscal deficit, increased output,
inflation, and the level of international reserves, as well as more efficient revenue collection and more
rational spending, particularly social spending.  These objectives are set out annually in a Poverty
Reduction Strategy Paper (PRSP), which is discussed with the IMF and the World Bank.
10. Honduras officially requested the World Bank and the IMF to include it in the Highly-
Indebted Poor Countries Initiative (HIPC) in 1998, and was declared eligible in December 1999.  A
decision was taken in July 2000 and it was agreed that the culminating point would be reached one
year after the strategy set out in the latest PRSP had been implemented;  satisfactory progress hadbeen made in respect of certain social and structural reforms;  and macroeconomic stability had been
maintained with the assistance of a PRGF.  Under the HIPC, nominal debt relief is estimated to be
                                                     
7 In September 1999, the Expanded Structural Adjust ment Facility (ESAF) was replaced by the Poverty
Reduction and Growth Facility (PRGF) with the aim of underpinning programmes to stabilize the balance ofpayments in low-income countries and promote lasting economic growth leading to poverty reduction.  Under
the PRGF programmes, loans must be reimbursed over a period of 10 years, with a grace period of 5½ years, at
an annual rate of interest of 0.5 per cent.WT/TPR/S/120 Trade Policy Review
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some US$900 million in net present value nominal terms, taking into account flows over a 15-year
period.8  Of these amounts, US$62.3 million must be invested annually in poverty reduction
programmes.9
11. In 1986, Honduras adopted a Privatization Law, which has been amended a number of times.
The privatization process has been slow a nd the telecommunications (HONDUTEL) and electric
power (ENEE) enterprises still have to be privatized (see Chapter IV(4)(5)).
(3) MAIN ECONOMIC INDICATORS
(i) Production and employment
12. Despite the structural reform efforts made, in recent years, the rate of growth of the Honduran
economy has been both low and unstable, in large measure due to the effects of natural disasters.
Following a period of growth between 1995 and 1998 (Table I.1), in 1999 GDP fell, mainly because
of the damage caused by hurricane Mitch.  In 2000, reconstruction efforts focused on expansion, but
the situation deteriorated once again in 2001 owing to sluggish growth in the global economy, and
GDP only rose by 2.6 per cent, less than the figure envisaged in the monetary programme for 2001.
13. In 2002, the Honduran economy was still feeling the effects of the unfavourable international
situation and faced a drop in domestic demand.  In 2002, the industrial production index rose by4.4 per cent compared with the previous year, whereas the agricultural production index increased by
1.1 per cent.
10  It is estimated that GDP rose by 2.5 per cent in 2002, a figure that is in the higher
range of the scale laid down by the Central Bank of Honduras (BCH) in the 2002 monetary
programme.  This rate of GDP growth meant a decr ease in the population's per capita income owing
to the higher rate of population growth.
14. As can be seen from Table I.1, a breakdown of  Honduras' GDP by type of expenditure shows
a relatively high rate of private consumption, financed to some extent by remittances from abroad.  In2002, total consumption accounted for 87.8 per cent of the GDP and private consumption for 74 per
cent.  Consumption's share of total spending increas ed following the rise in remittances from abroad,
and the latter have also made it possible to maintain a figure of 24 to 30 per cent in the rate of
domestic saving.  Partly as a result of investment in the maquila  industry, the share of private
investment in the GDP rose to 23.5 per cent in 1999, but then fell to just over 17 per cent in 2002.
15. The authorities have indicated that the BCH is planning to implement a System of National
Accounts (SCN93), which will change the base year for the National Accounts from 1978 to 2000 and
facilitate comparison with statistics at the international level.  It would appear that there are some
problems regarding the calculation of certain indicators in comparison with others and in certain cases
this has meant particularly high ratios in relation to the GDP, for example, the savings and investment
rates.
                                                     
8 Republic of Honduras (2001), Poverty Reduction Strategy Paper, Tegucigalpa, August.
9 According to the rules governing the HIPC, debt relief is in the form of a proportion of the annual
debt servicing over a period of 8 to 15 years, depending on  the creditor.  The resources freed annually as a result
of this reduction in debt servicing must be used to finance programmes and projects included in the PovertyReduction Strategy.
10 Central Bank of Honduras, Boletín Estadístico , December 2002.Honduras WT/TPR/S/120
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16. Between 1996 and 2002, exports of goods and services saw their share of GDP decline
despite the good performance of the maquila  industry during a large part of this period.  Bolstered by
strong demand for consumer goods, imports increased their share of GDP over the same period.  This
trend is related to the impact of remittances from abroad on consumption.
17. According to the Ongoing Multipurpose Survey of Households, conducted by the National
Statistical Institute (INE), employment overall increased from 1.99 million in 1996 to 2.35 million in2002.  The rate of participation in the labour market fell from 52.7 to 50.9 per cent and there was also
a slight fall in the rate of open unemployment from 4.3 to 3.8 per cent.  Nevertheless, the levels of
visible and invisible under-employment remain hig h, and it is estimated that in 2002 around 31.4 per
cent of the population was under-employed.  The informal economy plays a major role in Honduras
owing to its size and its impact on employment.  According to the World Bank, the informal economy
accounts for around half of the national income.
11
(ii) Fiscal policy
18. The Ministry of Finance is responsible for formulating and implementing fiscal policy which,
according to the authorities, forms part of a polic y whose objectives are to maintain the balance in
government finance, more rational spending in non-priority areas and increased spending in areassuch as education, health and social security as  well as maintaining the levels of the economic and
social infrastructure.
19. The Central Government's accounts have traditionally shown a deficit (Table I.2), whereas
those of the remainder of the public sector show a surplus, mainly as a result of the positive results
achieved by some State enterprises.  Honduras has therefore been implementing a fiscal policy aimed
at lowering the fiscal deficit by increasing revenue and reorganizing current expenditure.  One of the
measures adopted with a view to imposing fiscal discipline was the abolition of the Government'sautomatic access to Central Bank credit in 1997.
Table I.2
Financial accounts of the Central Government, 1996-2002
(Millions of lempiras and percentage of GDP)
1996 1997 1998 1999a 2000a 2001a 2002p/
Revenue 7,983 10,694 13,565 15,440 16,753 19,239 20,924
  Current revenue 7,954 10,342 13,176 14,939 15,862 17,935 19,786
  Tax .. 8,651 11,973 13,620 14,620 16,446 17,278
    Direct .. 2,512 3,377 3,099 3,175 3,759 4,012
    Indirect .. 3,982 6,479 8,546 9,357 10,171 11,095
   Foreign trade .. 2,156 2,115 1,973 2,088 2,513 2,166
       Imports .. 2,068 2,043 1,966 2,083 2,513 2,166
   Non-tax revenue .. 1,691 1,203 1,319 891 1,489 2,508
  Capital revenue 29 25 20 19 11 31 --
  External transfers (including HIPC grants) -- 327 369 482 881 1,273 1,138
Expenditure 10,888 13,718 16,424 19,940 22,756 26,732 26,710
Current expenditure 7,377 9,234 10,288 12,168 14,691 17,538 20,565
  Consumer spending 4,239 5,281 6,275 7,747 10,381 12,701 14,236
Table I.2 (cont'd)
                                                     
11 World Bank, Doing Business (database available at:  http:/ru.worldbank.org/DoingBusiness/
SnapshotReports).WT/TPR/S/120 Trade Policy Review
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1996 1997 1998 1999a 2000a 2001a 2002p/
  Interest payments 1,650 2,084 1,965 1,717 1,438 1,316 1,842
  Transfers 1,650 1,868 2,047 2,705 2,872 3,520 4,487
Current account savings 577 1,109 2,889 2,771 1,171 397 -779
Capital expenditure 2,267 3,024 4,078 6,048 6,485 7,582 6,145
Investment 1,353 1,658 2,265 2,092 2,420 2,326 2,376
Financial investment 148 263 -21 1,503 611 1,389 848
Transfers 766 1,104 1,835 2,453 3,455 3,867 2,985
Debt redemption 1,244 1,460 2,058 1,724 1,580 1,613 2,636
Internal 496 424 781 693 564 649 600
External 749 1,036 1,277 1,031 1,017 964 2,036
Gross deficit (expenditure less total revenue) -2,905 -3,024 -2,859 -4,500 -6,003 -7,493 -5,786
Net deficit (excluding total redemption) -1,673 -1,564 -801 -2,776 -4,423 -5,880 -3,150
Gross deficit as a percentage of GDP -6.1 -4.9 -4.1 -5.8 -6.8 -7.6 -5.3
Net deficit as a percentage of GDP -3.5 -2.5 -1.1 -3.6 -5.0 -5.9 -2.9
Note: There may be slight differences in the totals as they have been rounded off.
.. Not available.
-- Zero.
a Estimate.p Provisional.
Source: Honduran Ministry of Finance.
20. In order to harmonize its taxation policy with that in other Central American countries, in
1998 the Government introduced fiscal reforms, including a reduction in corporate income tax from
42 to 25 per cent, the gradual elimination of taxes on net assets and exports, and a zero per cent tariff
on raw materials and machinery and industrial equipment.  In order to offset this loss of revenue, the
sales tax was increased from 7 to 12 per cent.  Under the programmes agreed with the IMF, Honduras
has been controlling spending in non-priority sectors;  nevertheless, the fiscal deficit remains high.
The authorities consider, however, that these are manageable levels.
21. New measures were adopted to control spending under Decree No. PCM-003-2001, adopted
in April 2001, which envisages a 15 per cent reduction in current spending in the various sections of
the central and decentralized Government administration, except as regards health, education andother programmes of a social nature.  In addition to measures to control spending, there are also
provisions to improve the tax administration systems.  Despite the objectives fixed, the share of
current public expenditure in the GDP has increased in recent years and in 2001 amounted to 17.7 per
cent of the GDP, compared to 14.8 per cent in 1 998.  Total expenditure, including investment and
debt redemption payments, accounted for 27 per cent of the GDP in 2001.
22. On the other hand, revenue's share of GDP has remained relatively stable (19.4 per cent in
2001), even though attempts have been made to improve revenue collection.  External transfers,including grants under the HIPC, constituted an important complement to current revenue;  current
and capital transfers represented 7.4 per cent of the GDP in 2001.
23. As mentioned above, Honduras' fiscal balance has recorded increasingly larger deficits since
1997;  in 2001, the Central Government's gross deficit rose to 7.6 per cent of the GDP (Table I.2).  InHonduras WT/TPR/S/120
Page 7
2002, the deficit amounted to 5.3 per cent.12  Although this performance occurred in the context of a
policy to cut spending by 17 per cent, the current expenditure/GDP coefficient rose to 19.1 per cent.
24. Income tax and sales tax constitute the main sources of revenue, accounting respectively for
around 19.7 and 30.9 per cent of the current revenue in 2002.  Earnings from customs duties and other
import taxes amounted to 11.3 per cent of current revenue over the same period, down from a figure
of 14 per cent of revenue in 2001.  These latter percentages are much lower than the 20 per centrecorded in 1997 and reflect the reduction in average tariffs in recent years.  In 2001, the ratio
between the collection of customs duties and imports of goods was 5.4 per cent.  In addition to
various taxes on imports, up to 2000 taxes were also imposed on exports of bananas and other
products.  These taxes were progressively reduced and were abolished in 2001.
25. External and internal debt provide the major share of financing for the fiscal deficit.  A large
part of external financing is on preferential terms.  Eighty-five per cent of the internal debt is financed
through the issue of bonds, usually at market interest rates.  The public debt (external and internal) is
high in comparison with GDP and reached a figure of 70.8 per cent in December 2002.
26. Some of the major problems facing Honduras in the fiscal sector are the pressures caused by
the high rate of internal and external debt, demands for salary increases from organized social sectors,demands by private economic agents in the production and financial sectors, and requests for
education and health resources from low-income sectors of the population.  In 2002, the Government
introduced multiyear budgets, covering four years, in order to include medium-term elements in its
budgetary decisions.  The first multiyear budget is for the period 2003-2006 and is for information
purposes because the Constitution, the Basic Finance Law provide that annual budgets must be
approved by the National Congress for each fiscal year.
27. The 2003 budget forecasts a deficit of around 2 per cent of GDP for the whole of the non-
financial public sector.  Taking into account the estimates in the 2003-2006 multiyear budget, it is
hoped that the deficit will gradually be reduced (see Outlook below).
13  The 2003 budget increases
current expenditure by some 17 per cent, and it is hoped to increase revenue by 21 per cent.
(iii) Monetary, exchange and pricing policies
28. The institutional provisions governing the formulation and implementation of monetary
policy in Honduras are to be found in Articles 342 and 343 of the Constitution of the Republic of
Honduras, the Monetary Law (Decree No. 51 of 1 February 1950, amended by Decrees Nos. 128 and
136-94 of 22 November 1996 and 12 October 1994 respectively) and in the Law on the Central Bank
of Honduras (Decree No. 53 of 3 Februa ry 1950, amended by Decree No. 228-96 of
17 December 1996).  Article 342 of the Constitution of the Republic of Honduras stipulates that theissue of money is a State prerogative and is given practical effect by the Central Bank of Honduras
(BCH).  Pursuant to the Law on the Central Bank of Honduras, the Bank's governing body is the
highest authority as far as formulation of monetary policy is concerned.  In practice, the objective
fixed in the Law on the Central Bank is to achieve price stability within the framework of an annual
monetary programme that has specific inflation targets.  The monetary programme also sets anobjective for the level of net international reserves .  Without establishing targets, the BCH monitors
trends in exchange rates.
                                                     
12 Information supplied by the Ministry of Finance.
13 The 2003 budget and the 2003-2006 multiyear budget are available online on the website of the
Ministry of Finance at:  http://www.sefin.hn/Presupuesto%202003/indexp.html.WT/TPR/S/120 Trade Policy Review
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29. The main monetary policy instruments are, in order, open market transactions and
management of legal reserves.  In recent years, open market operations have been given greater
flexibility, firstly, by diversifying the time-limits and then by issuing securities denominated in
dollars.  In August 2001, Absorption Certificates denominated in Dollars (CADD) with exchange risk
coverage were introduced for use in open market transactions.  In 2001, a mechanism for the
temporary repurchase of government securities by means of repos was also introduced.14  On several
occasions in 2002, the BCH authorized an extension of the limits for the issue of CADD and
Monetary Absorption Certificates.15
30. During the major part of the 1990s, the BCH maintained high levels of legal bank reserves,
amounting to up to 40 per cent.  In 1997, reserve requ irements were split into two components:  the
legal reserves as such and the mandatory ratio of investment.  The figure for legal reserves washarmonized for all institutions and lowered to 12 per cent, a figure that has remained in place since
then.  Lower inflation meant that the BCH could follow a somewhat more expansive policy from 1998
onwards, when the requirements on mandatory investme nt applicable to deposits in national currency
began to be eased.  In 2001, these requirements fell to 3 per cent for all financial establishments and in
2002 they were abolished.  According to the authorities, this freed up resources which were notchannelled to domestic credit but simply led to substitution of assets and meant greater participation
in auctions of securities and foreign currency.
31. Although the requirements for reserves in national currency became more flexible, the
requirements for deposits in foreign currency rema ined stringent.  In addition to a legal reserve of
12 per cent there is a mandatory investment requirement of 38 per cent, except for amounts of no less
than US$10,000 deposited for at least one year, for which the reserve requirement is 15 per cent.
16
The continued high levels of reserves for deposits in foreign currency are intended to lessen exposure
to exchange risks in the balances of banking establishments and avoid the impact of excessive
monetization of reserves on monetary supply, which could make it difficult to meet the inflation
targets.17
32. At the same time as the legal reserves coefficients decreased and domestic credit became
more widely available, interest rates started to fall, as can be seen from Table I.3.  The decrease ininterest rates has meant a smaller margin between the lending and borrowing rates, although a figure
of 12 per cent in 2002 highlights the poor competitiveness of the financial system and the presence of
a financial risk component that remains significant.
33. The BCH has been increasingly successful in keeping inflation under control, thanks to a
prudent monetary policy and the effect of the real appreciation of the lempira (see below).  Inflation,measured in terms of the change in the consumer price index (CPI), has continued to fall since the
mid-1990s (Table I.3).  In 2002, although the average annual trend in the CPI (7.7 per cent) remained
within the 2002 monetary programme's target of 8 per cent, the inter-annual December-December rate
                                                     
14 In 2001, the Governing Board of the BCH issued a decision amending the Reglamento de
Negociación de Valores Gubernamentales  so as to allow the BCH to acquire Government securities on a
temporary basis.
15 Central Bank of Honduras, Boletín Estadistico , Volume LII, No. 12, December 2002.
16 Resolution No. 255-8/2002, of 9 August 2002.
17 Because there is a semi-fixed type of exchange rate, any increase in the level of monetization of
reserves has a partial effect on both monetary supply and exchange rates.Honduras WT/TPR/S/120
Page 9
generally used by the BCH to evaluate its goals slightly exceeded this target at 8.1 per cent.  The
reason was the more rapid pace of inflation towards the end of the year, caused to a large extent by
higher petroleum prices and the ensuing increase in transport costs.  In June 2003, the inter-annual
inflation rate was 7.2 per cent.
34. Honduras applies an "exchange rate within craw ling band" system.  The BCH has a system of
public bidding for foreign currency (SAPDI) used to allocate the foreign currency required byeconomic agents.  The exchange rate is determined  daily in auctions and cannot deviate more than
7 per cent from the base rate.  The weighted average exchange rate in successful auctions is used as
the reference exchange rate and as the official exchange rate on that day.  The base exchange rate is
adjusted every five auctions according to the differential between the inflation rate in Honduras and
the inflation rates of its leading trading partners, also  taking into account exchange rate trends against
the United States dollar in those countries.
Table I.3
Main monetary indicators, 1995-2002
(Annual rates of change)
1995 1996 1997 1998 1999 2000 2001 2002
Money and credit
M1 money supply 18.4 26.9 33.8 12.7 21.8 4.7 5.2 14.6
M2 money supply 19.8 38.5 43.3 16.8 21.2 16.6 8.3 11.3
M3 money supplya23.8 51.0 39.6 18.4 22.2 18.2 14.1 13.2
Net domestic credit 11.1 41.9 29.2 16.7 1.8 22.8 17.5 6.8a
Weighted interest rate
Deposit rate (annual average) 11.25 11.84 15.31 15.27 15.63 13.41 12.03 10.61
Lending rate (annual average) 26.95 29.75 32.07 30.55 30.15 26.82 23.76 22.69
Legal reserve requirementsb
Legal reserve requirement for
commercial banks34 34 12 12 12 12 12 12
Legal reserve requirement for
savings companies21 21 12 12 12 12 12 12
Legal reserve requirement for
financial companies15 15 12 12 12 12 12 12
Legal reserve requirement for
short-term bonds15 15 12 12 12 12 12 12
Investment requirements for
commercial banksn.a. n.a. 19 13 13 7 3 0
Investment requirements for savings
companiesn . a . n . a .955530
Financial investment requirements
and short term bondsn . a . n . a .333330
Inflation
Consumer price index (average %
change)29.5 23.8 20.2 13.7 11.6 11.1 9.6 7.7
Exchange rate
Average exchange rate
(lempira/US$)9.47 11.71 13.00 13.38 14.18 14.84 15.47 16.43
Exchange rate end of period
(lempira/US$)10.34 12.87 13.09 13.81 14.50 15.14 15.92 16.92
Real effective exchange rate index
(1995 = 100)c, d100.0 100.5 108.7 119.5 123.2 128.3 133.3 133.0
Terms of trade (1995 = 100)c100.0 94.0 90.5 92.2 92.4 91.3 83.7 84.9
n.a. Not applicable.
a The foreign currency is valued at the exchange rate prevailing at the end of the period each year.
b End of period.c Information from the BCH.
d An increase in the index means real appreciation.
Source: WTO calculations based on information from the Central Bank of Honduras and the Economic Commission for Latin America
and the Caribbean (ECLAC).WT/TPR/S/120 Trade Policy Review
Page 10
35. Banks and foreign exchange bureaux are obliged to sell 100 per cent of their daily purchases
of foreign currency to the BCH at the reference exchange rate on the prevailing currency market on
the day of the purchase.  The BCH must offer at least 60 per cent of the foreign currency it purchases.
A large proportion of these flows of foreign currency are derived from export earnings and, according
to the provisions of the Law on Foreign Currency Earned from Exports, it must be handed over to the
BCH and converted into lempiras.  Depending on th e product, exporters must hand over the foreign
currency to the BCH within 20 or 85 working days after the exports have been shipped.  Exports from
free-trade zones and exports to other countries belonging to the Central American Common Market
are exempt from this requirement.  Another substantial source of foreign currency is remittances from
abroad.  In addition, the Central Bank receives foreign currency from international loans and grants
made to Honduras.18
36. The information from the BCH shows that during the period 1995-2002 real appreciation was
around 33 per cent.  Despite this, nominal depreciation of money in 2002, combined with the gap
between the internal and external inflation rates, resulted in a real depreciation of approximately
2.1 per cent that year.  The cumulative real appreciation in the lempira in recent years has meant that
the export sector has become correspondingly less competitive.
(iv) Balance of payments and external debt
37. Since the early 1990s, the balance-of-payments current account has recorded large deficits;
the deficit in 2002 was US$243 million, corresponding to 3.7 per cent of the GDP (Table I.4).
38. Imports of goods have increased rapidly in recent years, at an average rate of 9.2 per cent
between 1995 and 2002, whereas the average annual increase in exports was only 4.9 per cent.  The
modest performance of exports is mainly due to the decline in exports in 1991 and 2001 as a result of
the effects of hurricane Mitch in 1999, the lower volume of coffee, timber, silver, zinc and tobaccoexported and the fall in international coffee prices in 2001.  The export figures do not include the
output of the maquila  industry which is not recorded as exports of goods.  Exports by the maquila
industry – recorded as sales of services corresponding to the value added of the activity – have seen
an upward trend in recent years, with the exception of 2001, when there was a slight contraction.  As
the maquila  industry is included in the services balance, in Honduras the latter has had a surplus since
1997 (US$233.6 million in 2002).
39. Net transfers from abroad have seen a sustained increase in recent years, rising to
US$957 million in 2002 (Table I.4) or 14.6 per cent of GDP.  The main item in these transfers is
private transfers (including remittances from family members), which amounted to US$704.3 million
in 2002, an increase of almost 32 per cent in comparison with 2001.  Private transfers finance and arean essential element of domestic demand, especially a large part of domestic consumption.  Part of the
US$200 million that Honduras received as official transfers in 2002, the aid received from the United
States, Japan, the European Union and its member States was particularly important.
40. The balance-of-payments capital account traditionally has a surplus and recorded net revenue
of US$187.8 million in 2002, to a large extent due to capital flows for private investment and to netentries of capital going to the government sector, even though these varied.  In the banking sector, net
flows of capital have been negative since 1999, partly as a result of the regulations requiring that
external debt be adapted to the capital and capital reserves of financial establishments, as well as the
                                                     
18 According to information from the Central Bank, in 2002 the BCH received foreign currency
amounting to US$3,246 million, of which 85.6 per cent cam e from the purchase of foreign currency derived
from exports of goods, maquila  services and remittances by family members;  3.4 per cent from disbursements
for the public sector external debt;  and 11 per cent from other sources.Honduras WT/TPR/S/120
Page 11
liquidity and credit market requirements in the years following hurricane Mitch.19  The level of net
international reserves in the financial system was US$1,851.7 million at the end of 2002, comprising
US$1,235.1 million in the BCH and US$616.6 million in the rest of the financial system.
Table I.4
Balance of payments, 1995-2002
(in US$ millons)
1996 1997 1998 1999 2000 p/2001 p/2002 p/
Current account balance    -193.9    -169.8    -128.2    -240.9     -245.6    -293.4 -243.0
Balance of goods and services    -470.6    -481.8    -615.7    -977.8 -992.5 -1,222.6 -1,200.0
Balance of goods -341.3 -504.4 -758.6 -1.291.8 -1,233.4 -1,416.1 -1,433.6
Balance of services -129.3 22.6 142.9 314.0 240.9 193.5 233.6
Exports of merchandise and services  1,944.30  2,223.7  2,504.1  2,310.9 2,600.7   2,517.5 2,517.5
   Merchandise exportsa/ 1,417.6  1,534.3  1,611.9  1,217.8   1,436.2   1,391.3 1,370.7
   Freight and insurance on merchandise       16.7       17.9       19.3       14.6 17.2        16.7 16.4
   Travel costs     115.0     145.6     167.6     208.0      259.8      256.3 291.1
   Dividends and interest       29.0       40.6       55.2       72.2      104.1        81.5 60.0
   Government transactions       38.0       41.0       45.0       47.0        50.0        55.0 57.8
   Maquila  value added     203.7     312.7     454.9     538.5      575.4      551.5 559.7
   Other     124.3     131.6     150.2     212.8      157.9 165.2 161.8
Imports of merchandise and services  2,414.9  2,705.6  3,119.8  3,288.7   3,593.1   3,740.1 3,717.5
   Merchandise imports f.o.b.  1,758.9  2,038.7  2,370.5  2,509.6   2,669.6   2,807.4 2,804.3
   Freight and insurance on merchandise     170.1     198.6     234.3     247.3      263.8      275.8 275.1
   Travel costs       60.0       62.0       81.0       94.0      119.6      127.6 130.6
   Return on foreign direct investment       70.0       60.0       70.0       43.6        70.0        75.2 84.9
   Interest on the external debt and other     217.4     193.2     193.6     192.1      186.8      154.0 141.0
   Government transactions        8.2        9.2       10.3       11.0        13.8        14.0 14.2
   Other     130.4     143.9     160.1     191.1      269.5      286.1 267.4
Transfers     276.7     312.0     487.5     736.9      746.9 929.2 957.0
Capital account balance     227.2     227.4     171.8     335.6        68.4 230.7 187.8
Long term       84.9     115.5     179.5     426.3      177.0 254.7 80.5
  Private sector     103.3     112.6     170.4     291.2      298.8      197.4 127.3
     Direct investment       90.0     127.7       99.0     237.3      282.0      195.0 142.9
     Loans       13.6      -15.1       71.4       53.9        16.8         2.4 -15.6
     Debt arrears       -0.3 0.0 0.0 0.0            0.0 0.0 0.0
  Government sector       -8.8      -55.0      -30.3     168.8       -48.9      123.7 -10.0
     Loans       45.7      -27.8       -0.4     223.6        18.5 127.3 41.5
     Debt arrears      -54.5      -27.2      -29.9      -54.8 -8.0           0.0 -47.7
     Other 0.0 0.0 0.0 0.0       -59.4        -3.6 -3.8
  Banking sector        9.6       57.9       39.4      -33.7       -72.9      -66.4 -36.8
     Loans       -6.4       57.9       39.4      -32.1       -69.8      -66.4 -35.2
     Debt arrears       -3.2 0.0 0.0       -1.6 -3.1         0.0 -1.6
     Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Short term     142.3     111.9       -7.7      -90.7     -108.6      -24.0 107.3
  Private sector       42.7     138.0       13.7      -18.3       -28.2        22.7 18.8
  Government sector       99.6      -26.1      -21.4      -72.4       -80.4      -46.7 88.5
Errors and omissions and capital not determined       68.1     130.9       97.7     121.3      123.5 62.4 118.7
Overall balance     101.4     188.5     141.3     216.0       -53.7 -0.3 63.5
Change in international reserves(- increase)    -173.0    -296.4    -230.0    -473.9     -118.8    -147.3 -214.0
Debt renegotiation       18.4     107.4       69.7       57.9      250.7 83.4 19.1
Arrears renegotiation       -1.0      -25.7      -30.0       -2.0     -158.8 -12.0 0.0
Change in debt arrears       53.1       29.1       39.0       93.3        13.6 -13.5 74.8
Debt conversion            0.0       -4.0 0.0 0.0 0.0 0.0 0.0
Debt forgiveness for the year        1.1        1.1       10.0       36.9        16.4 39.5 31.0
Debt forgiveness        1.4        1.1       19.4        2.5        31.9        19.0 0.0
Reduction in arrears as a result of external debt
forgiveness      -1.4       -1.1      -19.4       -2.5       -31.9      -19.0 0.0
Debt servicing payment with CAETF funds            -            -            -       71.8        44.9         17.3 13.3
Reimbursements HIPC initiative            -            -            -            -         5.7        32.9 12.3
a/ Includes non-monetary gold and exports of electric power.
p/ Provisional.
Source :Central Bank of Honduras.
                                                     
19 Central Bank of Honduras, Memoria Anual  2001, page 19.WT/TPR/S/120 Trade Policy Review
Page 12
41. In 2002, Honduras' external public and private debt amounted to US$4,963.7 million,
corresponding to 75.6 per cent of the GDP.  The external public debt incurred by Honduras amounted
to US$4,396.7 million in 2002, or 67.0 per cent of the GDP.  Of the total external debt, 63.7 per cent
corresponds to commitments with multilateral financing organizations, 30 per cent to debt with
bilateral creditors, and 6.3 per cent with private creditors.20  The BCH estimates that some 73.5 per
cent of the total debt is on preferential terms.  Servicing the public external debt in 2002 amounted toUS$263.9 million, of which 64 per cent corresponded to capital payments and 36 per cent to interest
payments.
42. Honduras benefited from the rescheduling of its debt servicing with creditors from the Paris
Club, in accordance with the Naples terms, and also from the deferment of payments granted after
hurricane Mitch, until March 2002.  In 2002, this debt relief was estimated to be someUS$83.2 million.  The actual relief obtained the same year under the HIPC was US$35.3 million.
(4) 
TRADE IN GOODS AND INVESTMENT FLOWS
(i) Composition of trade
43. Honduras' main exports are products of the maquila  industry, especially clothing.  The value
added of exports by the maquila  industry recorded in the balance of payments amounted to
US$559.7 million in 2002;  they are not classified as exports of goods, however, and do not appear in
the Comtrade database.  The exclusion of exports by the maquila  industry and imports of related
inputs from the Comtrade means that exports by the textiles and clothing sector and imports of inputs
used in the sector are significantly undervalued.
44. Excluding the maquila  industry, Honduras' major exports are coffee, bananas and shrimps
(Table AI.3).  The trend in Honduran exports between 1995 and 2001 shows a substantial reduction in
the share of coffee exports in total exports, due in part to the sharp fall in international coffee prices.
The decrease in coffee exports was partly offset by an increase in exports of other products belonging
to the agricultural sector, for example shrimps, a product that saw a noticeable increase in view of the
better climatic conditions that year and technical improvements in handling farmed shrimps.
45. Although agricultural products' share of total exports declined during the period 1995-2001,
the share of manufactures (including semi-manufactures) increased from 9.1 to 27 per cent.  Exportsof manufactures that have seen the greatest increase include chemicals, which more than tripled their
share of total exports, in particular soaps and detergents.  There has also been a substantial increase in
exports of mining products.
46. Honduras' imports mainly consist of manufactures (Table AI.4).  Import patterns remained
relatively stable between 1995 and 2001, with the exception of imports of foodstuffs and automobileproducts, which increased, and textiles and made-up articles, which decreased.
(ii) Geographical distribution
47. The principal market for Honduran exports is the United States (Table AI.1).  Although the
volume of exports to Germany fell between 1995 and 2001, exports to El Salvador and Guatemala
increased significantly, underlining the intensified regional integration efforts.
                                                     
20 Central Bank of Honduras, Memoria Anual  2002.Honduras WT/TPR/S/120
Page 13
48. Although there is no data on maquila  trade by trade partner, bearing in mind the strong
presence of the United States as far as investment in the maquila  industry is concerned (see below), it
can be assumed that it is the main destination for exports by this sector.  Data from the United States
Department of Commerce shows that imports recorded as coming from Honduras amounted to
US$3,126.5 million, compared with US$774.5 million in Table AI.1 under the heading of Honduran
exports to the United States, which leads to the assumption that gross exports to the United States bythe maquila  industry may have amounted to over US$2 billion, although the net value was
considerably less.
21
49. Honduras' trading partners have benefited from an expanding market and increasingly open
trade.  The United States is the main source of imports, corresponding to 43.6 per cent of total imports
in 2001, but again imports do not include those to be used in the maquila  industry.22  Imports from the
United States have, however, tended to increase slowly, below the rate for total imports.  Regarding
Central American countries, imports from Guatemala, El Salvador and Panama, as well as from
Mexico, saw their share of total imports increase (Table AI.2).  Other important trading partners as far
as imports are concerned are the European Union countries and Japan.
(iii) Foreign direct investment
50. Flows of foreign direct investment to Hondura s have been boosted by the entry into force of
the 1992 Investment Law, which abolished the majority of exceptions to national treatment
(Chapter II(3)), as well as by the amendments to the Law on Free Zones, contained in Decree
No. 131-98, which extends the Law's benefits and provisions to the whole of Honduran territory, and
also by the benefits granted to the maquila  industry under the free-trade zone regimes.  Lastly, the
enhanced economic stability, achieved by means of structural reform programmes that have lowered
the rate of inflation, has also promoted investment.
51. Flows of foreign investment have increased significantly in recent years, from less than
US$50 million annually at the beginning of the 1990s to US$282 million in 2000, before falling to
US$195 million in 2001 (Table I.5).  Cumulative FDI that year amounted to US$1,684 million.  The
United States is the main source of foreign invest ment, accounting for 27 per cent of FDI in Honduras
in 2001, but there has also been a substantial increase in investment from Costa Rica, Guatemala andPanama in recent years.  El Salvador and Mexico  are other large investors.  Between 1997 and 2001,
the manufacturing sector received the largest share of investment, 28 per cent of the total, followed by
trade and hotels and restaurants, with 27 per cent, and mining with 13 per cent.  Most of the
investment in the manufacturing sector is in the clothing industry (67 per cent in the maquila
industry).
23
                                                     
21 Information available on the internet site of the Bureau of Economic Analysis of the United States
Department of Commerce at, http://www.bea.doc.gov/newsrel/archive/2002/trad1302.pdf.
22 The United States Department of Commerce records exports to Honduras amounting to
US$2,415 million, whereas Comtrade indicates a value of US$1,307 million.
23 Foreign Investment Advisory Service (joint service of the International Finance Corporation and the
World Bank) (2001), Honduras:  The climate for foreign direct investment and how it can be improved ,
September 2001.WT/TPR/S/120 Trade Policy Review
Page 14
Table I.5
Flows of foreign direct investment 1997-2001a
(In US Dollars thousands)
1997 1998 1999 2000 2001
By country investing
United States 50,499 33,049 113,855 64,241 52,600
El Salvador 25,839 7,653 13,908 7,879 9,240
Guatemala 6,088 5,190 3,355 11,085 10,847
Costa Rica 7,554 5,588 6,442 21,187 24,107
Panama 676 973 19,475 15,100 18,088
Mexico 6,677 1,183 4,613 -139 207
Spain 305 1,649 5,884 7,785 9,785
United Kingdom 12,983 6,609 2,567 14,957 4,289
Switzerland 1,310 3,746 6,948 -4,051 -1,250
Italy 7,209 11,885 -3,606 13,625 7,624
Germany 1,212 4,187 157 219 189
Japan 4,348 1,898 124 -- 1,151
Canada -- 11,999 55,100 36,058 15,057
Other 3,000 3,711 8,516 94,056 43,069
Total 127,701 99,321 237,337 282,000 195,001
By economic activity
Agriculture, hunting and fishing 3,662 -9,491 54,364 39,270 20,000
Mining and quarrying 4,201 12,063 58,160 28,022 20,859
Manufacturing 48,960 23,142 46,519 88,616 55,963
Electricity, gas and water 10,596 23,996 1,293 2,377 1,770
Construction 11,005 13,999 -3,517 14,722 10,958
Trade, restaurants and hotels 28,133 22,770 58,122 83,512 61,485
Transport, storage and communications 1,701 3,500 10,572 12,137 12,034
Financial establishments, insurance -- -- -- -- --
Immovable property and business services 12,751 7,792 11,485 13,344 11,933
Other 6,693 1,550 341 -- --
Total 127,701 99,321.20 237,337 282,000 195,001
-- Zero.
a The totals may not coincide with the cumulative flows as they have been rounded off.
Source:  Central Bank of Honduras, 20 September 2002.
52. According to the calculations of the United States Department of Commerce, total foreign
direct investment in Honduras amounted to US$1,3 26.3 million in 2000, of which 63 per cent was by
the United States.  The same source estimates that FDI in the maquila  industry was US$646.9 million
in 2000, of which 70 per cent came from the United States.  Of the 230 firms active in the maquila
industry in 2001, 172 were foreign owned;  in 95 firms the capital came from the United States (41.3
per cent of the total);  in 63 firms the capital came from various Asian countries (27.4 per cent);  andin 14 firms the capital came from other countries.
24
(5) OUTLOOK
53. The Government's medium-term goal, both under the Poverty Reduction Strategy and under
the Government Plan, is to achieve a high and sustained rate of economic growth, marked by equity,
macroeconomic stability and fiscal sustainability.  To this end, the Government has proposed a series
of intermediate objectives, for example, maintaining a balance in government finance so as to avoid
inflationary pressure;  redirecting resources to more productive uses and enhancing the efficiency andquality of public spending, while extending the coverage and scope of programmes aimed at social
sectors;  decreasing to the maximum extent the pub lic sector's need for financing through internal
resources in order to ensure that the private sector has funds available to finance its production
activities and generate economic growth and employment;  and pursuing a monetary and exchange
                                                     
24 Central Bank of Honduras (2002), La Actividad Maquiladora en Honduras 2001, Tegucigalpa.Honduras WT/TPR/S/120
Page 15
policy commensurate with the economic growth and competitiveness needs of private production
sectors.
54. According to the BCH's 2003 monetary programme,  quantitative estimates show that inflation
at the end of the year will be around 7.5 to 8 per cent, but this will depend inter alia  on the trend in
international petroleum prices.  The macroeconomic conditions in which the Honduran economy is
developing indicate that during 2003 the GDP should increase by 3 to 3.5 per cent in real terms as aresult of the recovery in traditional exports and the dynamic performance envisaged for public and
private investment (especially in the telecommuni cations, energy and housing sectors), as well as a
better-performing agricultural sector.  It is also planned to keep the net international monetary
reserves in the Central Bank at a level that does not fall below the figure for the end of 2002, so that
this year the gross international reserves of the BCH exceed four months of imports of goods andservices.