In mid-2013, Honduras was facing macroeconomic challenges related to significant increases in its already high fiscal deficit and public debt, circumstances that threatened the country’s macroeconomic stability and its ability to fund social programs geared toward poverty reduction. A fragile macroeconomic and fiscal outlook, combined with the country’s high levels of crime and criminal impunity, exacerbated outward migration, foremost the phenomenon of unaccompanied child migration, triggering a humanitarian crisis. Fiscal adjustment was urgently needed to reestablish macroeconomic stability while addressing the needs of the poor and vulnerable. With the inauguration in early 2014 of a new government and the prevailing momentum for change, new possibilities opened in Honduras for the design and implementation of a reform process.
The Fiscal Sustainability and Enhanced Social Protection Development Policy Credit helped Honduras close the financing gap, increase investors’ confidence, and support the design and implementation of structural reforms. Strengthened public-sector staff payroll management and enhanced efficiency of public acquisitions and public debt administration was key to restore fiscal sustainability. The loan supported the creation of a registry of public employees, which facilitated the elimination of ghost workers and improved public-sector wage bill management. The loan also supported efforts to ensure that the poor were not disproportionately affected by the fiscal retrenchment. World Bank resources were thus used to support improved efficiency in social spending by (i) prioritizing the conditional cash transfer program Bono Vida Mejor, (ii) adopting a new targeting formula to eliminate errors of inclusion, and (iii) creating a Single Registry of Participants.
Results Bank Group Contribution
The World Bank, through the International Development Association, provided US$ 55 million to finance Honduras’s Fiscal Sustainability and Enhanced Social Protection Development Policy Credit. The reforms supported by the credit were underpinned by analytical work. Policy dialogue on fiscal consolidation measures and the efficiency of social public spending was informed by Honduras Public Expenditure Review: Towards Restoring Fiscal Consolidation (World Bank 2013). Government reforms in the areas of social assistance and energy were influenced by recommendations from 2013 policy notes on strengthening social protection systems and building an efficient and sustainable energy sector.
A strong partnership among key development partners in Honduras and the Bank was part of the broader support for the government’s reform program among the international community. In December 2014, an International Monetary Fund Stand-By Arrangement/Credit Facility, negotiated in parallel with the project credit, was signed and a US$ 130 million Inter-American Development Bank budget support operation focused on the power sector was approved. All three institutions also worked in close coordination to provide technical and advisory services supporting the Honduran government in implementing the policy reforms.
Macroeconomic stability is the main precondition for inclusive and sustained economic growth, and from that perspective project benefited all Hondurans. In addition to this broad effect, a significant success of the Honduran reforms can be seen in the fact that fiscal austerity did not lead to increased poverty rates, and key social programs were scaled up to cover a higher share of the extreme poor.
Following the project, the Bank continued to support Honduras’s fiscal reform efforts under the First Fiscal Sustainability and Enhanced Competitiveness Development Policy Financing operation in the amount of US$ 50 million, approved in December 2015. The new engagement continued support for government efforts to strengthen institutional arrangements furthering fiscal sustainability and to enhance the regulatory framework promoting competitiveness by fostering competition and improving trade facilitation.
Implementation Completion and Results Report
Honduras Public Expenditure Review: Towards Restoring Fiscal Consolidation