Honduras - First and Second Structural Adjustment Loans and Structural Adjustment Credit Projects

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 15847 PERFORMANCE AUDIT REPORT HONDURAS FIRST AND SECOND STRUCTURAL ADJUSTMENT LOANS (LOANS 2990-HO AND 3257-0) STRUCTURAL ADJUSTMENT CREDIT (CREDIT 2208-HO) June 28, 1996 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Currency Equivalents (annual averages) Currency Unit = Lempira (L$) 1989 US$1.00 = L$2.00 1990 US$1.00 = L$2.00 1991 US$1.00 = L$5.40 1992 US$1.00 = L$5.83 1993 US$1.00 = L$7.26 1994 US$1.00 = L$9.40 1995 US$1.00 = LS10.34 Abbreviations and Acronyms AGSAC - Agricultural Sector Adjustment Credit AML - Agricultural Modernization Law BANADESA - Agricultural Development Bank BANASUPRO - State Corporation for the Distribution of Basic Goods BCH - Central Bank of Honduras CETRA - Negotiable Foreign Exchange Certificate ESAC - Energy Sector Adjustment Credit ESAF - IMF: Extended Structural Adjustment Facility FI-S - Honduran Social Investment Fund IDA - International Development Association IDB - Inter-American Development Bank IFIs - International Financial Institutions IHMA - National Agricultural Marketing Board IMF - International Monetary Fund MDBs - Multilateral Development Banks OECF - Japan's Overseas Economic Cooperation Fund OED - Operations Evaluation Department PCR - Program Completion Report PRAF - Family Assistance Program RIT - Temporary Imports Program SAC - Structural Adjustment Credit SAL - Structural Adjustment Loan SDR - Special Drawing Right UDAPE - Technical Support Unit of the Economic Cabinet USAID - United States Agency for International Development Fiscal Year Government: July 1 - June 30 FOR OFFICIAL USE ONLY The World Bank Washington, D.C. 20433 U.S.A. OfMe of the Director-General Operations Evaluation June 28, 1996 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Honduras - First & Second Structural Adjustment Loans (Loans 2990-HO & 3257-HO) and Structural Adjustment Credit (Credit 2208-HO) Attached is the Performance Audit Report (PAR) on the Honduras First Structural Adjustment Loan (Loan 2990-HO, approved in FY89 and closed in FY90), the Second Structural Adjustment Loan (Loan 3257-HO, approved in FY91 and closed in FY94), and the Structural Adjustment Credit (Credit 2208-HO, approved and closed in FY91), prepared by the Operations Evaluation Department. SAL I for US$50 million was designed mainly to support a short-term stabilization program, introduced in mid-1988, including gradual adjustment of the effective exchange rate, an increase in public sector savings, improvements in the investment program, and reductions in trade barriers, and to mobilize financing to prevent Honduras from sinking deeper into arrears. SAL II for US$90 million and the SAC for US$20 million were, in effect, parts of a single Bank operation designed to support of the overall macroeconomic framework and the new structural adjustment program introduced by the Government of Honduras in 1990, including measures to (i) increase savings and the efficiency of the public sector; (ii) improve incentives for greater private savings and investment in export-oriented activities; (iii) improve the commercial banks' mobilization and allocation of resources, and (iv) improve the productivity of the agricultural sector. SAL I failed to achieve its objectives. Within three months, the stabilization effort was in disarray, and the Bank had to suspend disbursements to Honduras because of arrears before the second tranche was disbursed. Key problems were the Government's lack of commitment to undertake deep reforms during a period of impending elections, the hasty and incomplete design of the stabilization package, and the precarious overall level of external funding, which left no margin for error. The second tranche of SAL I was eventually disbursed in June 1990, during preparation of SAL II. SAL II and the SAC were considerably more successful. Albeit with some delay, roughly 90 percent of the sixty policy actions supported were eventually implemented. Import tariffs and quotas were drastically reduced, interest rate controls were largely abolished, some technical improvements in bank supervision standards put in place, a small number of public enterprises privatized, and intervention in the marketing of agriculture products diminished. However, the Government was not always able to maintain a suitable macroeconomic framework, with particularly serious slippages occurring during 1993. As a result, the benefits of the adjustment program have been mixed to date, with inflation higher, on average, and growth lower than before reforms were started. The burden of the large public sector debt also continues to be a source of concern. On the other hand, real wages for the rural poor, and the agricultural sector as a whole, have benefited from the improvement brought about in internal terms of trade, there has been a modest acceleration of exports, and a correspondingly sharp increase in average savings and investment. Moreover, the development potential of Honduras has been raised considerably. This document has a restricted distribution and may be used by recipients only In the performance of their T official duties. Its contents may not otherwise be disclosed without World Bank authorization. Lessons learned from these operations include the following: the Bank's willingness to provide quick-disbursing finance should be dictated by the credibility and consistency of the reforms being supported, rather than by the calendar of external debt service falling due: specific conditionality should be spelled out up front, rather than left for renegotiation during supervision; and the early and intensive participation by implementing agencies. when they enjoy some autonomy from the central government, is essential in designing conditionality. The PAR ratings are in agreement with those of the ICR for outcome and institutional development. The outcome of SAL I is rated as unsatisfactory; for SAL II and the SAC, as marginally satisfactory. Institutional development impact is rated as negligible for SAL I. and modest for SAL II and the SAC. Sustainability is rated as unlikely for SAL I and uncertain for SAL II and the SAC, a rating which differs from the ICR's rating of likely. The PAR judged that more consistent implementation of reforms, and continued progress in reducing Honduras's public debt will be necessary before the development benefits expected from the SAL II/SAC reforms can be assured. Bank performance is rated as unsatisfactory for SAL I and as satisfactory for SAL II and the SAC. Attachment Contents FOR OFFICIAL USE ONLY Preface. ................................ ................ ..........3 Basic Data Sheet.... .............5.....................................5 Evaluation Summary. ................................................... 11 I. Introduction ........................................................17 Identification of SAL I ................................................. 17 2. Objectives and Contents of SAL I ............................ . .............. 18 Preparation and Appraisal of SAL I...................9..... ...............19 3. Implementation of SAL.............. ...................... ..............20 4. Objectives and Contents of SAL II and the SAC ........................21 Identification, Preparation and Appraisal of SAL II. .............................22 Identification, Preparation and Appraisal of SAC..............................24 5. Implementation of SAL II and The SAC................... .................24 6. Economic Prospects and Financing Requirements.............................26 7. Outcome and Sustainability .............................................27 Outcome ...............................27 Sustainabilitv .......................................................28 8. Bank and Borrower Performance ............................................29 Bank Performance ....................................................29 Borrower Performance..................................... ................30 9. Institutional Development ..............................................30 This report was prepared by John H. Johnson (Task Manager), who audited these operations in December 1995. Eneshi Irene K. Davis, Norma Namisato and Geri Wise provided administrative and technical support. The report was issued by the Country Policy, Industry and Finance Division, Manuel Pefialver, Chief, of the Operations Evaluation Department, Francisco Aguirre- Sacasa, Director. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed wiLhout World Bank authorization. 2 10. Lessons Learned......................................................30 SAL I ..................... ............................. .......30 SAL II and the SAC ............... ....................... ......31 Annexes Table : Honduras: Key Macroeconomic Indicators..............................35 Table 2: Honduras: Debt and Liquidity Indicators, 1984-95 .......... ...............36 Table 3: Honduras: Economic Performance, Pre- and Post-Reform ....................37 Annex A: Structural Adjustment Reforms supported by previous and on-going operations..........39 3 Preface 1. This is a Performance Audit Report (PAR) on the First and Second Structural Adjustment Loans, and the Structural Adjustment Credit for Honduras. 2. SAL I in the amount of US$50 million, was approved on September 15, 1988, and closed on July 5, 1990, fifteen months behind schedule. SAL II, in the amount of US$90 million, was approved on September 13, 1990, and closed on December 31, 1993, a year and a half behind schedule. The Structural Adjustment Credit, in the amount of US$20 million equivalent, was approved on January 29, 1991 and closed on June 30, 1991. Funds of all three operations were fully disbursed. 3. The PAR is based on the Program Completion Reports for SAL I, and for SAL II and the SAC, prepared by the Latin America and Caribbean Regional Office, and issued in 1994 and 1995, respectively, the President's Reports, sector and economic reports, the loan documents, summaries of the Board discussions, a study of the program files, and discussions with Bank staff. An OED mission visited Tegucigalpa in December 1995 and discussed the effectiveness of the Bank's assistance with Government officials, the donors, and private sector representatives. Their kind cooperation and assistance in the preparation of this report is gratefully acknowledged. 4. The report examines the effectiveness of the Bank's strategy in promoting stabilization and structural change in a difficult environment. It comments upon the economic and social benefits and the sustainability of what has been achieved. 5. The PAR was sent to the Borrower for comments. No comments were received. PCR, Honduras - Structural Adiustment Loan (Loan 2990-HO) Report No. 12951 of April 12, 1994; and PCR, Honduras - Structural AdIustment Loan H (Loan 3257-HO) and Structural Adjustment Credit (Credit 2208-HO), Report No. 13884 of February 27, 1995.  5 Basic Data Sheet Structural Adjustment Loan (Loan 2990-HO) Key Project Data (amounts in USS million) Appraisal Actual or Actual as % of estimate current estimate appraisal estimate Total project costs 220 120 55 Loan amount 50 50 100 Cofinancing 170 70 41 Cancellation - - Date physical components completed 7/89 7/90 Economic rate of return Institutional performance Cumulative Estimated and Actual Disbursements FY89 FY91 Appraisal estimate (US$M) 50.0 - Actual (US$M) 25.0 25.0 Actual as % of appraisal 50.0 100.0 Date of final disbursement: 07/05/90 Project Dates Original Actual Initiating memorandum July 1988 July 1988 Appraisal August 1988 August 1988 Negotiations August 1988 August 1988 Letters of Development Policy August 1988 August 1988 Board approval September 1988 September 15, 1988 Loan Agreement October 1988 September 28, 1988 Effectiveness November 1988 November 23, 1988 Closing date December 1989 July 5, 1990 6 Staff Inputs (staff weeks) FY88 FY89 FY90 FY91 FY92 FY93 Total Preappraisal 28.9 8.5 37.4 Appraisal 4.2 13.4 17.6 Negotiations 6.9 6.9 Supervision 16.5 4.0 0.8 0.7 22.0 PCR 10.0 10.0 Total 33.1 45.3 4.0 0.8 10.7 93.9 Mission Data Date No. of No. of Staff Weeks (month/year) Weeks Persons Preparation February 1988 2 5 10.0 Preparation April/May 1988 3 8 24.0 Prtappraisal June 1988 2 8 16.0 Appraisal August 1988 1 3 3.0 Negotiations August 1988 1 6 6.0 Supervision I November 1988 2 3 3.0 Supervision II January 1989 2 2 4.0 Supervision M March 1989 1 1 1.0 Supervision IV April 1989 1 2 2.0 Supervision V October 1989 2 2 4.0 Completion February 1993 1 1 1.0 7 Structural Adjustment Loan II (Loan 3257-HO) Key Project Data (amounts in USS million) Appraisal Actual or Actual as % of estimate current estimate appraisal estimate Total project costs 250 250 100 Loan amount 90 90 100 Cofinancing 160 160 100 Cancellation 0 0 Date physical components completed 3/30/92 8/13/93 Economic rate of return N/A N/A Institutional performance Cumulative Estimated and Actual Disbursements FY94 Appraisal estimate (US$M) 90 Actual (USSM) 90 Actual as % of appraisal 100% Date of final disbursement: 08/18/93 Project Dates Original Actual Initiating memorandum 03/29/90 03/29/90 Negotiations 08/07/90 08/07/90 Letters of Development Policy 06/02/90 06/02/90 Board approval 09/13/90 09/13/90 Loan/Credit Agreement 09/17/90 09/17/90 Effectiveness 11/14/90 11/14/90 Closing date 06/30/92 12/31/93 8 Staff Inputs (staff weeks) FY89 FY90 FY91 FY92 FY93 Total Preappraisal 01.3 78.4 00.0 00.0 00.0 00.0 Appraisal 00.0 16.1 00.0 00.0 00.0 00.0 Negotiations 00.0 00.0 29.0 00.0 00.0 00.0 Supervision 00.0 00.0 75.8 50.1 13.7 00.0 Total 01.3 94.5 104.8 50.1 13.7 00.0 Mission Data Date No. of No. of Weeks Date of Report (month/year) persons Identification/Preparation 05/90-06/90 9 2 06/04/90 Appraisal 05/90 12 2 06/30/90 Supervision I 8 2 02/26/91 Supervision II 6 2 05/15/91 Supervision III 6 2 05/19/92 Supervision IV 5 1 09/16/92 Supervision V 2 0.45 01/15/93 Supervision VI 4 1 9 Other Project Data Related Bank Loans and/or Credits FOLLOW-ON OPERATIONS Loan/Credit Title Purpose Year of Status Approval Energy Sector To establish a comprehensive energy 1991 Implementation Adjustment Credit policy/strategy and a sound completed. (Cr. 2306-HO) regulatory framework, strengthen ENEE and improve electricity pricing and resource allocation in the sector, promote petroleum exploration and production, liberalize petroleum trade and encourage private sector participation in the energy sector. Public Sector To support the Government's public 1996 Implementation in Modernization sector reform program aimed at progress. Structural increasing the private sector's Adjustment Credit participation in the economy by (Cr. 6741-HO) and replacing state monopolies in the Related telecommunications, civil aviation, Technical and ports with regulated competitive Assistance Credit environments; increasing the (T-6740-HO) efficiency of the Honduras Social Security System; and introduction of comprehensive human resource management, including employment reform and salary structure rationalization in the civil service and the decentralized institutions.  11 EVALUATION SUMMARY Introduction 1. Honduras is one of the poorest countries in Latin America. During the 1960s and 1970s, the economy grew by 5 percent annually in an environment of macroeconomic stability. However, between 1978 and 1988, economic performance deteriorated, as Honduras experienced sharp terms of trade losses and soaring debt service costs. Initially, these costs were financed through increased bilateral assistance tied to rising Cold War tensions in the region, and financing from the World Bank and other multilateral creditors. This financing enabled Honduras to embark on rapid fiscal expansion, which led to increased spending on costly and inefficient public investment projects, accompanied by greater regulatory intervention and higher protectionist controls. 2. By the end of this period, however, an easing of Cold War tensions led to a sharp decline in security-related assistance. Foreign reserves were rapidly depleted, and Honduras began to incur large-scale arrears to foreign creditors, and fresh sources of finance dried up. 3. Pressed by its creditors, the Azcona Administration appealed to the World Bank for assistance in March 1988. At that time, the Bank's exposure in Honduras represented nearly one- fifth of Honduras's total indebtedness. An important share of these claims were associated with the El Cajon dam project (completed in 1984), which was overdimensioned for Honduras's needs and a significant burden on the finances of the state power company and the Government. SAL I was conceived in part as a means of providing quick-disbursing assistance which, combined with bridge and parallel financing from other donors, would enable Honduras to emerge from insolvency and remain current on its financial obligations. Objectives and Contents of SAL I 4. SAL I in the amount of US$50 million equivalent was prepared in mid-1988 and aimed mainly at supporting short-term macroeconomic stabilization. At the time, because of arrears, Honduras was ineligible for IMF financing. Conditions for disbursement of the first tranche of the SAL were based on fulfillment of modest fiscal, monetary, and trade targets during the latter half of 1988, most of which the Government had already adopted. More demanding stabilization measures were postponed until early 1989, as conditions for second tranche disbursement. In this way, the Bank sought to trigger disbursements by other donors which would enable Honduras to clear its arrears, open the door for an IMF stand-by, and set in motion a phased program of stabilization and adjustment. Implementation of SAL I 5. In the event, SAL I, approved in September 1988, ran into early difficulties. The program was underfinanced, leaving no room for contingencies When the Bank's Board objected to approving new lending until Honduras had cleared all its arrears with the IMF, Honduras was forced to delay payments to Japan's OECF in order to make the requisite paydown. This led to delays in OECF parallel financing. By December 1988, Honduras was once again over the 90-day deadline for arrearages to the Bank, which suspended further disbursements. Efforts to revive the plan in early 1989 faltered on the Government's resistance to fulfill the stronger requirements of second tranche disbursement in the midst of a Presidential election campaign. The stabilization 12 program collapsed, and the second tranche of SAL I languished undisbursed for the next year and a half. Objectives and Content of SAL II and the SAC 6. One month after its inauguration, in February 1990, the newly-elected Callejas Administration received a joint Bank-IMF-IDB mission to discuss the terms of a new stabilization and adjustment effort. The following month, the Government announced a program which included an effective depreciation of the exchange rate, sharp reductions in trade tariffs, large increases in the ceilings on lending rates, elimination of most non-agricultural price controls, deregulation of certain private sector activities, a start on public enterpnise privatization, and the promulgation of a law liberalizing restrictions on foreign investment. With the help of bridge financing from several bilateral donors, Honduras was able to clear its arrears to all Paris Club creditors and to the IFIs. In June 1990, the long-delayed second tranche of SAL I was disbursed, and a Second SAL prepared. Identification, Preparation, and Appraisal ofSAL 11 7. In June 1990, a preparatory Bank mission reached agreement on a Policy Matrix for SAL II with the Economic Cabinet. Under extreme time pressures, the action programs were negotiated in July-August 1990. They were complex, requiring the Government to complete sixty policy actions over a planned 18-month period in four stages-Board presentation and three tranche disbursements. However, due to time pressures, the nature of the conditionality was cloaked at times in ambiguous terminology, to be clarified during the latter stages of disbursement, usually through the elaboration of studies. Some Bank reviewers expressed concern about the Government's limited implementation capacity and about the lack of any technical assistance mi SAL II. However, the Region emphasized the importance of meeting the bridge financing and other debt service deadlines that would enable Honduras to resolve its problem of arrears. Identification, Preparation, and Appraisal of the Structural Adjustment Credit (SAC) 8. Following closely on the heels of Board approval of SAL II, Honduras was declared eligible for IDA financing. The Persian Gulf War had greatly increased the costs of Honduras's imported oil. Therefore, IDA approved a SAC of US$20 million equivalent in January 1991. The only conditions for disbursement were that Honduras maintain a satisfactory macroeconomic policy framework and that it agree to adjust domestic oil prices in accordance with a formula tied to international oil prices acceptable to IDA. Implementation of SAL II and the SAC 9. Albeit with frequent delays, and occasional backsliding, between January 1990 and December 1993, roughly 90 percent of the conditions required by SAL II, and both of the SAC conditions, were eventually fulfilled. Import taniffs were reduced to a maximum of 20 percent; quantitative import restrictions were abolished; most export taxes were cancelled; a revised and improved export incentive scheme was put in place, supported by a new, far more flexible policy of exchange rate adjustment; the tax base was shifted away from a reliance on trade toward income and consumption, and tax administration was streamhned; tariffs for nuo6c serices were increased several-fold in real terms; agricultural guarantee prices and import quotas were eliminated, and most state-owned silos privatized; the food distribution parastatal shifted its 13 activities from serving mainly middle- and upper-income customers to those in low-income neighborhoods; and ceilings on Central Bank rediscount lines of credit and on commercial bank lending rates were raised to positive real levels. 10. Perhaps the most conspicuous failure was the effort in SAL II to redirect the activities of BANADESA, the state agricultural bank away from subsizing credit to middle and large-scale farmers, possibly through liquidation, privatization, or the rechanneling of subsidized credit to the rural fanning poor. The exact terms of the reform were left for definition in a second tranche action program. In the end, although BANADESA did reduce its staff by one-third, the Bank agreed to an action program which allowed BANADESA to continue to provide subsized credit to eligible producers without an income test. This matter has been revisited in a follow-on Agriculture Sector Adjustment Loan still under implementation. 11. Implementation of the macroeconomic program was also far from constant. The stabilization effort began strongly, but encountered serious difficulties shortly after SAL II was approved. The Government failed to satisfy major IMF stand-by targets in September 1990 and December 1990, and was criticized for re-establishing exchange controls and for making inadequate efforts to reduce fiscal spending, particularly public investment spending. However, by the Spring of 1991, stabilization efforts were back on track, and remained so through June 1992. However, during the last eighteen months of the Callejas Administration, serious slippages in fiscal and monetary policy, and the re-establishment of price controls, led to a serious macroeconomic crisis, the correction of which has absorbed the better part of the first two years of the Reina Administration. Economic Prospects and Financing Requirements 12. As of early 1996, the Bank's forecast is for modest growth and declining inflation for Honduras during 1996-98, providing it follows through on its planned stabilization and adjustment efforts. A key requirement is that continued progress be made toward raising national savings rates, which declined sharply between 1990 and 1995, so as to lessen Honduras's reliance on external savings and permit continued progress toward reducing the burden of public debt. This will require continued strong fiscal adjustment efforts through the election period (1996-97), a significant departure from the historical budgetary cycle. Outcome 13. To the extent that SAL I was designed to support short-term, and incomplete, stabilization measures, which failed with the collapse of the Azcona program, its outcome is rated as unsatisfactory. As for SAL II and the SAC, they have supported an adjustment program whose reforms have been carried out, although with some temporary reversals, and whose development benefits to date have only been modest, but whose promise of better future performance for the Honduran economy remains credible. Therefore, these two credits are rated as marginally satisfactory. Sustainability 14. Given the early failure of the 1988-89 adjustment program, the sustainability of the benefits from SAL I is judged as unlikely. The sustainability of the benefits of the adjustment program started in 1990, and supported by SAL II and the SAC, will depend inter alia on 14 continued efforts to reduce the burden of public debt, including additional external debt and debt service reduction and more decisive progress toward reducing the fiscal deficit and the associated burden of public debt. Major new structural reforms in public sector modernization, agriculture, and state enterprise privatization will also be important. The outcome of these efforts will not be know for a number of years. In the interim, the sustainability of the benefits from SAL II and the SAC is rated as uncertain. Bank Performance 15. Quality at entry of SAL I would have benefited from a medium-term focus centered on persuading the Borrower to adopt comprehensive reforms, providing financing over longer periods of time, allowing for a more careful monitoring of performance, and de-emphasizing the threat of default as a justification for accepting half-hearted promises of reform. The experience of countries like Peru demonstrates that, once a proper adjustment effort is underway, problems of severe indebtedness can be quickly transformed by the flood of capital, especially private capital, which follows. 16. Reaching agreement with a weak, outgoing government was risky to begin with, but not requiring significant up-front conditionality prior to Board presentation was unwise, given Honduras's poor track record on economic policy management. Likewise, the Bank was slow to recognize during implementation that the reform program had gone off track. The Bank's desire to ensure regular repayment of past claims appears to have outweighed the many reservations expressed about the soundness of the adjustment efforts being supported. On these bases, Bank performance on SAL I is rated as unsatisfactory. 17. In contrast, the decisions to go forward with SAL II and the SAC were preceded by ample signs of the Government's good faith in initiating major reform. Conditionality was significant and comprehensive, if somewhat overly complex and lacking in adequate technical assistance to support weak implementation capacity. Once again, there is evidence that the pressures of meeting a debt refinancing deadline led to undue haste in designing and negotiating these operations. The key agricultural implementing agencies were not sufficiently involved in the design of their own reforms, and understandably resisted the Bank's interpretation of second and third tranche conditionality which implied a much more restrictive future role for them than they themselves had in mind. 18. On the other hand, the Bank's SAL II supervision efforts were of high quality, providing substantial amounts of sound policy advice and technical assistance, and considerable patience and firmness in dealing with potential end-runs of conditionality. Given the few conditions to supervise in the SAC, supervision was less of an issue. However, the timing of the release of SAC funds- in early 1991 when the macroeconomic program was temporarily, but seriously, off-track--could be criticized. Nevertheless, these are comparatively minor flaws. On this basis, Bank performance in SAL II and the SAC is rated as satisfactory. Borrower Performance 19. Borrower performance in the preparation and implementation of SAL I is rated as unsatisfactory, since the adjustment program fell into total disarray less than three months after loan approval. 15 20. On the other hand, SAL II and the SAC raise more difficult issues. It is apparent that the Government overcommitted in relation to what it was able to deliver, but this may have been attributable in part to its weak negotiating position and to the relative inexperience of a new Administration in estimating its capacity to manage broad economic reform. Also, some of the autonomous agencies (e.g., IMHA, BANASUPRO, and BANADESA) were not 'on the same page" as either the Bank or the Government. The result is that the reforms have been implemented with delays and occasional backsliding which has slowed down the supply response to the reforms and the growth benefits to the population. Still, there can be little doubt that, as a result of these reforms, Honduras has a far greater potential for rapid development. Therefore, borrower performance is rated as satisfactory. Institutional Development 21. SAL I, being an operation stressing short-term stabilization, was not designed to strengthen institutional development, and had a negligible effect in this area. By contrast, profound changes in the economic "rules of the game" (the broad definition of "institutional development") have occurred as a result of the reforms supported by SAL II and the SAC. For example, management of the exchange rate is more supple and closely-tied to market forces; competition has been stimulated by the relaxation of import controls and the reduction of Government regulation of prices and marketing; tax compliance has been greatly improved; and Honduran producers are beginning to look outward to world export markets for their most promising opportunities. 22. However, in terms of actually strengthening the capacity of Honduras's public and private organizations (the narrow definition of "institutional development"), far less has been accomplished. This is not surprising, since neither SAL II or the SAC contained technical assistance components. On balance, institutional development must be considered modest. Lessons Learned SAL I * Efforts to keep up with a fast-moving debt service timetable may come at the expense of quality at entry and firm borrower commitment. * Given Honduras's weak implementation capacity and the onset of election-year pressures, the Bank should have required implementation of significant stabilization measures before Board presentation. * The Bank should not have gone forward without a financing plan adequate to meet all critical needs, including full liquidation of arrears to all key official donors expected to participate in the plan. SAL II and the SAC * Earlier and more intensive participation by key implementing agencies in the design of adjustment measures might have significantly increased borrower commitment and reduced implementation delays. 16 * Low-income borrowers will normally require substantial technical assistance at an early stage to ensure adequate capacity to implement complex reforms. * Conditionality needs to be discussed and defined transparently. Papering over future differences with euphemisms risks later delays in implementation, and watered-down conditionality. * The Bank should have devoted more attention to monitoring the quality of Honduras's public investment program, and its rapid expansion in 1992-93, which undermined fiscal adjustment. 17 1. Introduction 1.1 Honduras is one of the poorest countries in Latin America, with a 1994 GNP per capita income of USS610.2 Around half of all households, and over seventy percent of rural households, have incomes falling below the poverty line. 1.2 During the 1960s and 1970s, the economy grew on average by 5 percent annually in an environment of macroeconomic stability, and real GDP per capita rose at an annual rate of 2 percent. However, starting in the late 1970s, Honduras experienced a steep decline in commodity prices (notably bananas and coffee), rising oil import prices, and soaring interest rate expenses on service of its external debt. At the same time, growing regional tensions led to accelerating military expenditures, financed in large part by a major influx of bilateral aid from the United States, and an increase in funding from the multilateral development banks (MDBs). The temporary windfall of external aid during the first half of the 1980s seems to have led to a postponement of economic adjustment In its stead, the government stepped up spending on costly investment projects, increased its intervention in the economy, stiffened protectionist controls, and incurred large fiscal deficits. During the latter half of the 1980s, these policies led to inflationary pressures, overvaluation of the exchange rate (which had remained fixed in nominal terms since the early 1930s), declining output growth, unsustainably high external imbalances, and a tripling in the volume of external debt. Between 1978 and 1988, the average real rate of GDP growth declined to 2.6 percent, insufficient to maintain the already-low standard of living of Honduras's burgeoning population. 1.3 The gradual ending of the Cold War brought about a shift toward negotiation of the regional conflict and a sharp decline in the security-related assistance Honduras received during the late 1980s. During 1987, foreign reserves fell to the equivalent of less than one month's imports, the volume of external arrears rose to the equivalent of 7 percent of GDP, and Honduras faced an imminent cut-off of nearly all its sources of external aid (Annex Tables I and 2).4 Identification of SAL I 1.4 Pressed by its creditors, in March 1988 the Azcona Administration appealed to the Bank for assistance. Its party outvoted in the Congress and faced with new elections in twenty months, 2 Based upon the World Bank Atlas methodology. By far the most important of these was El Cajon, a major hydro-electric project completed between 1980 and 1985. The project was criticized by OEDin its PAR (Report No. 7901 of June 30, 1989) for having utilized demand projections which, even before loan approval, appeared to many specialists to be excessively optimistic, and for having been over-dimensioned, even had these demand projections proven correct. El Cajon proved to be vastly over- dimensioned for Honduras's requirements, and a heavy burden on the finances of the power company and the public sector. 4 As of June 1988, arrears totalled US$125 million, of which USS26.5 million was owed to the Bank, US$16 million to the IMF, and US$15 million to the IDB. It was during this month that the Bank suspended disbursements to Honduras for the first time. 18 the Administration was not well-positioned politically to implement bold reforms. The Bank, for its part, was a principal creditor, with exposure in excess of US$600 million, nearly one-fifth of Honduras's total external indebtedness. A large share of this indebtedness had been incurred in the financing of the El Cajon dam, which a Bank mission carried out in early 1988 identified as the principal cause of the Power Company's (ENEE) poor financial condition.5 A SAL was recommended to address the difficult external situation. In the longer run, the Bank hoped to avoid a situation in which already-high external arrears would lead to Honduras being declared ineligible for all forms of multilateral and bilateral assistance, rendering future financial rescue attempts untenable. Discussions with the IMF suggested that, because of Honduras's arrears and reluctance to devalue the Lempira, a stand-by agreement was highly unlikely before 1989 at the earliest, and that, if action were to be undertaken before then, it would be up to the Bank to take the lead role in support of a stabilization program. The Bank suspension of disbursements in June 1988 only increased the sense of urgency. By mid-1988, the strategy arrived at called for the Bank to orchestrate a series of bridge loans which would make it possible for Honduras to clear its arrears with the multilateral development banks, opening the way for a series of back-to-back quick-disbursing loans, followed in quick succession by policy operations supporting financial, agricultural, and trade policy reforms. 2. Objectives And Contents Of SAL I 2.1 The fundamental objective of the Bank's First Structural Adjustment Loan, as conceived by the Bank in mid-1988, was to initiate a phased program of broad-based adjustment, which would be supported by a series of quick-disbursing operations over a period of several years. However, the immediate problem facing Honduras and the Bank was that, unless the first SAL could be put together before the end of 1988, the prospects for clearing Honduras's rapidly- mounting arrears at some later date (e.g., January 1990, when a newly-elected government would assume power) would be greatly diminished. Moreover, this SAL would have to become, in effect, a surrogate for an IMF stand-by program.8 Fund staff participated in a number of Bank missions during May and August 1988, and assisted in drawing up the SAL I monetary program targets. The Fund's position during most of this preparatory phase was that, if Honduras satisfactorily met the terms of SAL I, then there was a strong probability of a stand-by in 1989.' 2.2 However, by August 1988, a month before projected Board presentation, the Fund's views had turned considerably more negative on two key points: (a) its perception of the Government's commitment to carry out the program supported by SAL I, and (b) the acceptability of the Government's proposed timetable for fully clearing all arrears to the Fund. On this point, the PAR on the El Cajon Power Project, op. cot.. 6 The same view was adopted, in the same time period, with respect to Argentina. See the Performance Audit Report on the Trade Policy and Export Diversification, Banking Sector, and Second Trade Policy Loans to Argentina (Report SecM94-835 of August 4, 1994). 7 Memorandum of the Acting Division Chief, LATAG of June 23, 1988. Indeed, until July 1988, the Region designated the loan as the "Macroeconomic Adjustment Operation" (Memorandum of the Acting Senior Operations Advisor of June 29.1988). Memorandum of the Division Chief, LA2CO of July 8, 1988. 19 Government's perception was that the IMF was only interested in being paid in full before Board presentation, but was not committed to supporting the adjustment process with a stand-by program. It was only with great reluctance that the Government eventually agreed to make a partial pay-down of its arrears to the Fund (US$10 million of US$23 million total) prior to Board presentation, with a promise to clear the remainder during the last quarter of 1988. However, this proposal was rejected by IMF management, a position which was supported by its two principal shareholders in early September 1988.10 2.3 Even some Bank staff began to question the Government's sincerity in the light of its "backing and forthing" on specific reforms.' But the mainstream Bank view was that, notwithstanding the political risks, a window of opportunity to enact adjustment measures existed during the second half of 1988, made possible by the dimensions of the financial crisis and by a growing awareness engendered among political leaders and the private sector of the need to undertake the agreed reforms quickly.12 Moreover, from the Bank's standpoint, the ratio of financial risks to possible returns appeared to be quite low. On the one hand, failure to act would result in a rapid increase in Honduras's arrears to the Bank, whereas even the maximum program of lending contemplated for the period of 1989-93 would generate only a small increase in exposure (about US$110 million, equivalent to roughly 20 percent of the Bank's then current exposure) . A key concern, however, was that the program of coordinated lending the Bank had worked out with various cofinanciers was very tight and highly vulnerable to any delays by any of the partners. In particular, it was noted, the timing for clearance of Honduras's arrears to the IMF was likely to be critical to the overall success of the effort. Preparation and Appraisal of SAL I 2.4 The Bank's economic analysis, based largely on an Economic Memorandum completed the previous year, identified a long list of urgently needed reforms, to address the excessive external indebtedness and inadequate public savings, excessive protectionism, inefficient public enterprises, and the need for sweeping tax reform. The key problem, as noted earlier, was that, given the deadlines for clearing arrears and servicing the debt, disbursement of the first tranche of SAL I could not be delayed beyond September 1988. Given that the Initiating Memorandum was not approved until the end of July 1988, this left less than two months to appraise and negotiate the operation. 2.5 These time constraints, driven by the calendar of debt service falling due, placed immense pressure on loan designers to keep first tranche conditionality relatively modest, i.e., sufficiently modest so that the Government would need to do little more than it had already decided to do in order to qualify for disbursement. Even these fairly modest measures had to be prepared with to Memorandum of the Division Chief, LA2CO of September 6, 1988. 11 For example, in July 1988, the Government reversed itself on coffee export taxes, raising the levy higher than it had been before its recent reduction. This was regarded as a step which would damage the public's perception of the stability and credibility of proposed policy reforms (Memorandum of LATAG specialist of July 14, 1988). 12 Memorandum of the LAC Vice President to the Senior Vice President for Operations of July 25, 1988. 13 Initiating Memorandum of July 1988. 14 The first tranche conditions included defining a program to achieve savings of L65 million during the last half of 1988, preparing a draft budget for 1989 consistent with the goal of reducing the overall fiscal deficit by 1.8 percent of 20 such haste that, in many cases, fundamental differences and inconsistencies in the meaning of certain first tranche conditions were glossed over.15 The more rigorous measures were postponed for second tranche disbursement. As noted in the PCR, the Bank was aware that even these second tranche measures, by themselves, were insufficient to achieve sustainable stabilization, let alone structural adjustment. However, they hoped SAL I could buy the Bank and the Government sufficient time to negotiate the adoption of a more comprehensive set of measures over the course of several follow-on adjustment operations. 17 3. Implementation Of SAL I 3.1 During the course of Board presentation in September 1988, SAL I was criticized by some members of the Board for the weakness of its conditionality, for being presented without the Government having reached an agreement with the IMF, and for proceeding before the Government had cleared its arrears with the Fund. The Bank staff argued that an agreement with the IMF was imminent, that the Government intended to take deeper measures in 1989, and that arrears with the IMF would be cleared in a matter of months. Nonetheless, four Board members ultimately abstained from voting for the proposal. 3.2 Based upon the criticism received from the Board, Bank management felt compelled to urge the Government to accelerate its repayments to the Fund. Instead of being cleared in December 1988, arrears to the IMF were cleared in October, a decision which, made it impossible for Honduras to reimburse another key co-financier, Japan, until 1989. This led to new delays in receiving Japanese co-financing. By December 1988, less than three months after approval of SAL I, Honduras had fallen more than 90 days in arrears on a portion of the debt it owed to the Bank, obliging the latter to suspend disbursements for the second time in six months. GDP, establishing committees to propose administrative and public enterprise reforms, increasing the coverage of tax rebate (CETRA) certificates to 40 percent of exports, defining a list of imports to be purchased at the free market exchange rate, submitting legislation to eliminate duty exemptions and surcharges, agreeing on a monetary program for September/October 1988, increasing the Central Bank discount rate from 5 percent to 9 percent annually, increasing the proportion of public debt contracted at market rates, and selecting consultants for technical assistance. 15 For example, the memorandum of the country economist of December 7, 1988, noted that, because the appraisal team could not agree with the authorities on the likely evolution of monetary aggregates, including the effects of seasonality, the monthly monetary targets established for first tranche conditionality had to be re-defined using narrow measures of money supply, and that, because of their failure to account for seasonality, these targets exerted an unduly contractionary on the real economy toward the end of 1988. Another concem noted during preparation, but never resolved, was the inconsistency between the proposed undertakings with respect to Central Bank rediscount rates and the levels (and timing) then being negotiated as part of the Fourth Agricultural Credit Project. See the Memorandum of the Acting Division Chief, LATAG of August 16, 1988. 16 Second tranche conditions included actual achievement of the 1988-89 budgetary, monetary, and tax rebate (CETRA) targets, agreement on a program to reform tax collection, preparation of a program to reform the decentralized government agencies, agreement on an action program with monthly targets in 1989 to privatize public enterprises, preparation of a plan of action for the power company, agreement on a public investment program limited to 5 percent of GDP in 1989 (compared with 12 percent in 1988), congressional approval of the legislation on import exemptions and surcharges, agreement on a monetary program for 1989, implementation of the plan to raise Central Bank rediscount rates to 10 percent, and agreement on an action plan to implement the recommendations emerging from the technical studies. Report No. 12951 of April 12, 1994, p. 5. 21 3.3 By February 1989, the Bank had also concluded that the Government's will to reduce the fiscal deficit was rapidly disappearing, as the date for elections (November 1989) approached, and that the 1989 external requirements were far in excess of likely financing availabilities.is By then, most of the members of the economic team had resigned to run for office, further weakening the institutional linkages to the conditionality negotiated. 3.4 During 1989, the fiscal deficit grew to over 9 percent of GDP (from 6 percent in 1988), inflation more than doubled from 9 to 23 percent annually, the gap between the official and the parallel exchange rate, predicted to narrow in the SAR, actually widened, real economic growth slowed from 4.7 percent to 2.1 percent, foreign exchange reserves were virtually depleted, and Honduras was virtually cut off from all sources of foreign assistance and private capital inflows. In short, by early 1989, a scant few month after Board presentation, there was no adjustment program to support, and Honduras's macroeconomic situation, far from improving, had taken a significant turn for the worse. With the suspension of disbursements, the Bank held the second tranche resources in abeyance, and ceased making new lending commitments to Honduras for the remainder of the Azcona Administration and for some months into the new Callejas Administration (i.e., from December 1988 until June 1990). 4. Objectives And Contents Of SAL II And The SAC 4.1 The newly-elected Callejas Administration received parallel missions from the Bank, the IMF and the IDB in February 1990. One month later, the Government announced a comprehensive economic package to remedy a number of critical policy deficiencies which had impeded progress under SAL I. Among these were an effective 50 percent nominal depreciation of the Lemira, the boldest in 60 years, through the inter-bank exchange rate 19; a 5-percent-of- GDP increase in public revenues through large adjustments in public utility tariffs and increases in taxation; dismissal of 6,000 public employees; a reduction in import tariffs from 90 to 40 percent ad valorem; a significant increase in ceilings for all lending rates of interest, except on loans for low-income housing and basic grain production; the elimination of most price and some marketing controls; deregulation of the private sector and the promulgation of a new, more open foreign investment law; modest privatization; and the clearing of all arrears to Paris Club and multilateral donors.20 Although macroeconomic conditions remained difficult in 1990, with negligible growth, inflation at 23 percent, a contraction in per capita income, and a significant increase in the incidence of poverty, the reform measures laid the groundwork for rapid economic recovery in a is Memorandum from Acting Director, LA2 to the LACVP, of February 14, 1989. Notwithstanding this measure, Honduras continued to have three exchange rates: the official rate ofL$2tJSS1, the inter-bank rate ofLS4/US$1, and a black market rate which fluctuated between LS4/USSI and L$5.5/US1 during 1990.. 20 In the first instance, bridge loans provided by the Governments of the United States (US$57 million), Mexico (USS25 million), Spain (US$25 million), and Venezuela (US$40 million) were combined with release of SAL I co- financing from Japan (USS50 million) and US$50 million from Honduras's own reserves to clear arrears to the IFIs during the second quarter of 1990. The bridge loans, in turn, were paid off with the proceeds of subsequent stabilization and adjustment loans from the IFIs during the second half of 1990. 22 framework of stabilizing prices and diminished internal and external imbalances during the succeeding two years.21 4.2 Seeing the significant measures the Government had adopted, sentiment grew within the Bank for releasing the second tranche of SAL I, which had been dormant for 18 months, as a signal of support for the adjustment program of the new Government. The request for a Bank waiver in June 1990 took the position that the new measures adopted by the Callejas Administration "fundamentally complied with, and in many cases exceeded, the conditions set for [release of the second tranchel in SAL 1.1122 The key conditions cited as exceeding original SAL I second tranche conditions included the large fiscal revenue adjustment, the reduction in public employment, the divestiture of several public enterprises, the effective devaluation of the exchange rate, the reduction in import duties and the elimination of all import exemptions and surcharges, a virtual freeze on the real growth of domestic banking system credit to the public sector, and the raising, not only of the ceilings on Central Bank rediscount rates, but also on commercial bank lending rates. This favorable assessment of the early adjustment achievements of the Callejas Administration was accepted by the Board, which approved second tranche release in June 1990. One month later, Honduras signed its first stand-by agreement with the IMF in over a decade. Identification, Preparation, and Appraisal of SAL II 4.3 On this basis, preparations for SAL II moved into high gear with the preparation of an Initiating Memorandum, also in March 1990. By June 1990, a preparatory mission reported that it had reached agreement on a draft policy matrix with the Economic Cabinet, comprised of the Ministers of Finance, Planning, Agriculture, Economy, the Central Bank, and the heads of all the public enterprises to be included in the program. It also noted that representatives from the private sector had confirmed their overall support for the adjustment program. 4.4 Upon closer examination, the number and complexity of conditions negotiated appears to have exceeded Honduras's limited capacity for imolementation.. The Policy Matrix called for the implementation of sixty policy actions spread over four stages (Board Presentation, and three tranche disbursements). The ICR notes that concerns were expressed by a number of participants in the March 1990 Loan Committee Meeting on the Initiating Memorandum about the capacity of various agencies to implement these reforms, and about the fact that SAL II included no technical assistance to strengthen this capacity. To these concerns, the staff emphasized "the importance of timing to resolve Honduras's arrears."24 4.5 Indeed, the minutes of the negotiations, which took place in mid-July 1990 and in early August, suggest there were difficulties in reaching agreement on the action programs and timetables for some areas of agriculture and tax reform, all taking place under extreme time 21 The PCR on SAL II and the SAC contains a detailed and excellent discussion of the Bank-Government dialogue and the policy reforms adopted during this period. See Report No. 13884 of January 20, 1995, paragraphs 8-72. 22 Honduras - Structural Adjustment Loan (2990-HO): Release of the Second Tranche, Board Document No. R90-ll8 of June 11, 1990. Memorandum of the Lead Economist to the LAC VP of June 4, 1990. 24 ICR, SAL II, ibid, para. 14. As of May 1990, Honduras had accumulated arrears of USS240 million to the IFIs, of which US$147 million was owed to the Bank, USS56 million to the IDB, and US$37 million to the IMEF. 23 pressures. Driving the pace of loan processing was Honduras's insatiable need for fresh finance to meet obligations falling due, notably bridge financing maturing in September 1990. Indeed, the rush was so great that the Bank could not wait for Honduras to be recertified as IDA-eligible, even though this was widely regarded as an indispensable step to avoid piling up additional unserviceable debt on what Honduras already had. 4.6 A review of the policy matrix (Annex A attached) confirms this impression. In a number of cases, the nature of the conditionality being sought appears to have been cloaked in ambiguous phraseology, so that the actual substance and implementation of the reforms could be deferred to the end stages of disbursement. Working out these ambiguities required, in effect, renegotiating the terms of the loan conditionality during supervision. 4.7 Examples of this can be found in the area of agriculture, which proved to be particularly contentious during much of implementation, and a major source of delay in tranche release.25 In regard to IMIHA, the grain marketing parastatal, and BANASUPRO, the food marketing parastatal, although the Bank pressed for language which would have privatized, or otherwise abolished their operations, the compromise language ultimately settled upon called for a "rationalization program" to be developed during 1990-91, followed by "satisfactory progress toward rationalization targets" at second tranche disbursement, followed by more "satisfactory progress [toward].. .rationalization targets" at third tranche disbursement.26 And, whereas the Bank thought it had agreement from BANADESA, the Agricultural Credit Parastatal, that it would henceforth withdraw from subsidized financing of medium and large-scale farming, the actual language of the second tranche conditionality called for Bank-Government agreement on a "program for the reorganization of the agricultural credit system." 4.8 As the Borrower noted in its generally favorable assessment of the SAL II experience, "despite initial delays ascribable to the vagueness of the term 'rationalization' and to the fact that the two institutions did not participate in the early stages of program design and implementation, significant advances have been achieved so far toward this end." Indeed, for nearly two years after SAL II was approved, IMHA maintained, and in some instances increased, the intensity of its intervention in grain marketing through new price controls, reserve stocks, import permits, etc. Similarly, BANASUPRO established new supermarkets in middle and upper-income areas, contrary to the Bank's verbal understanding that it would limit its presence to low-income neighborhoods. The important thing is that, in the end, these two entities have been greatly reduced in size and a significant portion of their assets sold to the private sector. But this required countless hours of negotiation, correspondence, and close Bank monitoring to achieve. Had preparation and appraisal taken a more thorough approach, these institutions might have acquiesced in implementing these reforms more expeditiously. Ultimately, the agricultural reforms originally supported by SAL II were deepened by the Agricultural Sector Adjustment Credit approved in FY94. 4.9 The sixty policy actions of SAL II, although large in number and almost overwhelming in complexity, gave rise over the period of 1991-93 to a rich and fruitful dialogue between the Bank and the Government, during which the two sides were ultimately able to agree upon, and see implementation of: (a) a deepening of trade liberalization through further reductions in maximum 25 The delays accumulated to eighteen months by the date of actual third tranche release. 26 SAR Report No. P-5355-HO of August 10, 1990; Annex 4, p. 3 24 tariffs to 20 percent, the elimination of all quantitative import restrictions and most export tariffs, the maintenance of flexible exchange rate policies, and the introduction of a revised export incentive scheme; (b) public policy reforms, including an increase in public sector saving between 1989 and 1993 of over 4 percent of GDP , improvements in tax administration, a shift from reliance on trade taxes toward income and consumption taxes, increased public tariffs, improvements in the 1990-91 investment programs, and a strengthening of public enterprise management; (c) reform of agriculture by eliminating guarantee prices and import quotas, the privatization of all but one of IHMA's silos and a reduction in its intervention in grain marketing to cases of emergency disruption of grain supplies; (d) a transformation of BANASUPRO from a general food merchandiser to a distributor targeted in poorer neighborhoods: (e) a sharp reduction in Central Government subsidies; (d) financial reforms aimed at more flexible interest rates, consolidation of public sector lines of credit, and the strengthening of the monitoring and prudential regulation of commercial banks; and (e) modest poverty reduction, chiefly in rural areas, by policies to liberalize trade and exchange rate policies, target assistance to the poor, and accelerate overall economic growth. In this respect, it is fair to say that SAL II achieved the vast majority of its major relevant operational objectives. Identification, Preparation, and Appraisal of the Structural Adjustment Credit 4.10 By November 1990, Honduras had been declared eligible for IDA credits. The Structural Adjustment Credit, approved in January 1991, was primarily designed as a vehicle for providing Honduras with additional concessional resources to finance the increase in imported oil costs occasioned by the Persian Gulf War. Its only two conditions were that (a) Honduras's macroeconomic policies be certified as sound , and (b) that the second tranche conditionality of SAL II be amended to include a clause requiring implementation of a formula for domestic oil price adjustment. 5. Implementation Of SAL II And The SAC 5.1 Albeit with frequent delays, and occasional backsliding, roughly 90 percent of the conditions required by SAL II and the SAC were eventually fulfilled.27 Perhaps the most conspicuous failure has been the effort to scale down and redirect the activities of BANADESA, although, the parastatal has reduced its staff by over a third since 1990, and has sharply reduced the scale of its credit subsidies. Nonetheless, BANADESA and the Government continue to view this bank as the major source of farm credit for producers of all income groups. 5.2 Implementation of the macroeconomic program was also far from constant. Adjustment efforts wavered from strong to weak during 1990, as the Government failed to achieve major stand-by policy objectives in September 1990, and again in December 1990, re-established partial exchange controls and made inadequate efforts to reduce fiscal spending, particularly public investment which soared to over 10 percent of GDP. 27 Because of the subordinate nature of the conditionality in the SAC, reference to SAL I will henceforth be taken to refer to both loans simultaneously, unless otherwise noted. 25 5.3 However, by the Spring of 1991, macro-policy reforms were once again on track. GDP growth accelerated to 3.3 percent in 1991, inflation declined to 21 percent, the fiscal deficit was nearly halved to 3.6 percent of GDP, and net international reserves increased to the equivalent of almost two months of imports, the highest level in five years. All of this was accomplished, despite a nearly 10 percent decline in Honduras's terms of trade between 1989 and 1991, which would double to 20 percent by 1995. 5.4 Tangible improvement continued in 1992, as real GDP grew by 5.6 percent and inflation fell to 6 percent. However, the fiscal deficit increased to 4.8 percent of GDP, due to an acceleration of public sector investment, as external financing became more readily available, and the external current account deficit expanded from 5 percent of GDP in 1991 to 6.6 percent in 1992. 5.5 As elections approached, policy discipline was greatly relaxed in 1993, the last year of SAL II disbursements. Although GDP growth continued at a high rate (6.1 percent annually), public sector savings declined by over 2 percentage points of GDP, capital expenditures rose by 3 percentage points to 14.6 percent of GDP, mainly because of ambitious projects in the public enterprises, and the fiscal deficit exceeded 10 percent of GDP. higher than it had been before SAL II was initiated. Despite the introduction of price controls in November 1992, inflation accelerated to 13 percent in the following year, the Lempira was sharply depreciated, and large net capital outflows reduced reserves to the equivalent of 1.3 months of imports, from 2.6 months at the end of 1992. Reflecting the widening fiscal imbalance, the current account deficit rose to 9.2 percent of GDP. 5.6 Underlying this poor performance were structural rigidities in spending on public wages, investment, and service of the public debt, which the SAL II and the SAC have only tangentially addressed. For example, in 1994, Honduras had one of the highest fiscal spending ratios in Latin America, at nearly 36 percent of GDP. Although SAL II had conditionality requiring Bank review of the content and the levels of the 1990-91 investment programs, the levels permitted were generous. 28 Conditionality covered selected current expenditures, but left overall current fiscal spending roughly unchanged in GDP terms. 5.7 In recent years, a number of initiatives have been taken to reduce the debt burden. Honduras was able to reschedule its debt with the Paris Club for the first time in 1990 under very favorable conditions, then again in 1992 under enhanced Trinidad terms. Most outstanding payment arrears to Paris Club creditors were settled by the end of 1994, and remaining arrears to Latin American official creditors and commercial banks were eliminated in January 1996, as part of a third round of rescheduling agreements and first-time debt-reduction operations with foreign commercial bank creditors. Since 1991, all Bank operations have been financed on IDA terms, and, for the last three years, Honduras has received IDA reflows equivalent to 90 percent of the IBRD's interest payments. The IDB is now assisting in establishing a strategy to further reduce debt and debt service, and to increase debt reconversion. 5.8 These laudable efforts, many of them closely linked to Bank adjustment operations, have begun to bear fruit, as the burden of Honduras's debt has slowly decreased (Annex Table 2). The ratio of external debt outstanding and disbursed to exports of goods and non-factor services 28 During 1990-95, public investment averaged 11 percent of GDP. 26 declined from 333 percent in 1990 to 260 percent in 1995, while the ratio of total public sector debt to GDP declined from 122 percent to 99 percent. Still, there is little doubt that Honduras's level of indebtedness will remain a heavy burden for years to come. In 1995, interest payments consumed about one-fifth of current fiscal revenues. And recent Bank projections suggest that, under a scenario of strong policy adjustment and a moderately benign external economic environment, the stock of public debt, roughly equal to GDP in 1995, will continue to decline in relative terms, but is likely to remain above 80 percent of GDP through the turn of the century .29 Therefore, Honduras will continue to need substantial external assistance in coming years, without which the country would face serious financing gaps. 5.9 However, it is important to note that the Public Sector Modernization Credit approved in January 1996 does seek to address the rigidities in non-interest public spending through an accelerated program of privatization, streamlining, and public investment programming. Together, the reforms are projected to produce a permanent reduction in public spending of around 3 percent of GDP. 5.10 A second difficulty, also alluded to in the PCR, was the large number and complexity of the conditions requested. For example, the 24 conditions required for second tranche disbursement required nearly one calendar year, and more than a staff-year of Bank resources to negotiate and resolve. 6. Economic Prospects And Financing Requirements 6.1 With successful implementation of the reforms supported by the international community, the Bank and the IMF have projected that export-oriented output growth averaging 4.5 percent annually during 1996-98, implying an annual growth of 1.5 percent in income per capita, is consistent with a gradual reduction of inflation to international levels and external equilibrium. 6.2 However, achieving these objectives will require strengthening national savings, which has fallen sharply during the reform period to date, from 19.5 percent of GDP in 1990 to 13.7 percent in 1995. The savings effort required -- an increase to nearly 20 percent of GDP in 1997 -- will require a major contribution from the public sector. This would in turn require a significant departure from the historical budgetary cycle, in which the deficit has worsened markedly during 30 election years. . 6.3 Honduras' balance of payments prospects have improved recently, as a result of the increase in international coffee prices, combined with the effects of the large real devaluations and trade liberalization measures adopted during the 1990s. The terms of trade have consequently improved modestly during 1994-95. A large contribution has been made by non-traditional exports, mainly through the establishment of "maquila" industries. 29 President's Report, Public Sector Modernization..., ibid., Annex C5, p. 13. 30 Elections will be held in November 1997. 27 7. Outcome And Sustainability Outcome 7.1 Development benefits over the six years of policy reform (1990-95) have been modest. As shown in Table 3, progress has been far from uniform across different measures of performance:31 * Domestic saving and investment have been boosted significantly by reforms, raising the potential for growth; * But rising fiscal revenues (from 22.3 percent of GDP to 26.1 percent).have been diverted mainly into financing more public investment (up from 7.2 percent of GDP to 10.3 percent), whose inefficiency has reduced the growth payoff (the average incremental capital-output ratio (ICOR) has been pushed up from 2.4 to 8); * Overall fiscal spending is up, and, therefore, scant progress has been made in reducing the fiscal deficit, from an average of 7.1 percent of GDP to an average of 6.0 percent. * Increased taxation and uncertainty due to hesitant, and sometimes inconsistent, implementation of reforms has blunted the private sector investment response (up from an average of 10.7 percent of GDP to 13.1 percent); * And average inflation has shot up (from an average of 5 percent annually to over 20 percent annually); * Real GDP growth has slowed down, from an average of 4.0 percent per annum during 1984-89, to an average of 2.9 percent during 1990-95; * A slow-growing economy combined with rapid population growth (3 percent per annum) has meant that real per capita incomes actually declined slightly during 1990- 95, after having grown by less than 1 percent annually during the period before reforms (1984-89); * Slow economic growth has created few jobs, so unemployment and underemployment, and levels of poverty, have remained high during the reform period, at around 30 percent of the active labor force.32 * However, the shift toward outward-oriented growth has increased openness (import elasticity up from 0.9 to 1.3; real export growth up from 0.6 percent annually to 3.1 31 See Annex Tables 1, 2, and 3. Unless otherwise noted, all comparisons are averages for the periods 1984-89 and 1990-95, respectively. Indeed, one of Honduras' most dynamic job-generating sectors, the maquilas, has received a severe setback with the completion of the NAFTA agreement with Mexico. Significant migration of footloose industries to benefit from Mexico's privileged access to North American investments reflects the dampened appeal of Honduras' low-wage labor. 28 percent), and benefited the rural poor (real wages of rural laborers up 64 percent between 1988 and 1993). * The economy remains small and highly vulnerable to changes in the external environment, not only because of its dependence on a few export commodities, but also because of the declining, but still large burden of public debt (stock of debt down from 122 percent of GDP in 1989 to 99 percent in 1993), especially external debt (debt- service burden of 37 percent of exports of goods and services in 1994). 7.2 Still and all, Honduras has made substantial progress during this period toward improving resource allocation and laying the groundwork for long-term sustainable growth: * Trade incentives have shifted markedly from an inward to an outward orientation; * Price controls have been largely abolished; * The exchange rate adjustment mechanism has become far more flexible; * The agricultural sector has benefited greatly from improved prices, reduced uncertainty about land tenure, and the greatly reduced public interference in marketing and production; * Financial controls have been partially liberalized, although disintermediation continues; * Honduras's efforts to target services to the poor have been praised, even if this praise must be tempered by the recognition that public social services remain highly inefficient; and * The commitment to deepening reform by the current Administration, after some initial wavering, has become more visible during 1995-96. 7.3 It is always difficult to separate the impact of three such operations so closely spared in time. But, to the extent that SAL I supported short-term and incomplete stabilization measures, which failed with the collapse of the Azcona program, its outcome is rated as unsatisfactory, notwithstanding the fact that its second tranche was disbursed to support a more promising successor program. As for SAL II and the SAC, they have supported a program whose development benefits to date can only be described as tepid, but whose promise of better tomorrows for the Honduran economy remains credible. These credits are rated as marginally satisfactory. Sustainability 7.4 Given the failure of the 1988-89 adjustment program, its principal raison d'etre, the sustainability of SAL I is judged as unlikely. With respect to the on-going adjustment program, sustainability will require continued efforts to reduce the burden of Honduras's external debt, more rapid advances toward privatization and fiscal stabilization, and a more consistent Governmental commitment. Sustainability of the benefits from SAL II and the SAC is rated as uncertain. 29 8. Bank And Borrower Performance Bank Performance 8.1 On balance, the identification, preparation, and appraisal of SAL I would have benefited from a more medium-term focus, centered on the search for viable reforms, providing financing over longer periods of time, allowing for more careful monitoring of performance, and placing less emphasis on futile efforts to stave off default, which eventually occurred anyway. Piling on additional indebtedness in 1988 made little sense, given that Honduras had no realistic prospect of ever being able to repay all the debt it had already contracted. The argument that the Bank needed to refloat Honduras before its arrears became overwhelming should have been questioned more seriously. The experience of countries like Peru and Argentina demonstrate that, once the proper reforms are in place, the problems of even severely-indebted countries can be quickly transformed by the flood of private and official capital which follows 8.2 Reaching agreement with a weak, outgoing government was risky to begin with, but not requiring significant up-front conditionality prior to Board presentation was unwise, given Honduras' poor track record on economic policy management. The Bank persisted in bringing SAL I to the Board, despite warnings from the IMF and from some internal reviewers that the measures supported by the operation were insufficiently bold, and that the Government's commitment to adjustment was insufficiently strong. Likewise, supervision was unsatisfactory, because the Bank was slow to recognize that the adjustment program had gone off track. Indeed, as late as June 1989, Regional staff were still attempting to devise a way to achieve disbursement of the second tranche of SAL I, seemingly more concerned with maintaining the flow of external finance then with the question of whether the resources would be well-allocated. Eventual use of the second tranche in support of the adjustment program of the Callejas Administration, while a sound decision for redirecting project resources, does not alter the fact that the resources were originally intended to support a different set of adjustment policies carried out by a different government. Throughout the SAL I experience, the Bank's desire to ensure smooth repayment of past claims appears to have outweighed the reservations widely expressed about the soundness of the adjustment efforts being supported. On this basis, Bank performance on SAL I is rated as unsatisfactory. 8.3 Quality at entry of SAL II and the SAC was satisfactory, on balance. The Bank deserves considerable praise, along with the IMF, the IDB, and several important bilateral donors, for having provided such timely support, both in terms of policy advice and finance for reform, to a reform-minded, but hard-pressed administration. The sixty actions being sought were significant, for the most part, and more-than-adequately comprehensive. However, for these same reasons, the operational design nearly overwhelmed the Government's weak implementation capacity. The key line agencies (notably IMHA, BANADESA, and BANASUPRO) needed to be more involved in the design of their own reforms, if only because of their capacity to cause lengthy delays. And the amount of technical assistance arranged was surprisingly meagre for a country of Honduras' institutional capacity. Supervision of SAL II can be considered highly satisfactory, based on the outstanding technical support given to the elaboration of the numerous action programs and the generally firm Bank response to Governmental attempts to evade conditionality. On the other hand, the quality of supervision of the SAC can be challenged in the light of the dubious decision to proceed with loan disbursement during early 1991, precisely at the moment when the Government's macroeconomic efforts were faltering. Overall Bank performance on these two operations is rated as satisfactory. 30 Borrower Performance 8.4 Borrower performance, both during preparation and implementation of SAL I, is rated as unsatisfactory, since the adjustment program fell into complete disarray less than three months after the operation was approved. On the other hand, SAL II and the SAC raise more difficult issues. It is apparent that, during preparation, the Government over-committed in relation to its capacity to deliver. However, it is hard to know whether such over-promising was deliberate, or merely a by-product of Honduras's relatively weak negotiating position, and, perhaps, some inexperience with the management of broad societal change. Similarly, there is considerable evidence of backsliding, delay, etc. during implementation. Clearly, some of the autonomous agencies (e.g., IMHA, BANASUPRO, and BANADESA) were not "on the same page" as either the Bank or the core economic ministries with respect to the kind of reforms being contemplated and the extent to which they should be carried out. Nevertheless, the bottom line is that the reforms were, by and large, satisfactorily clarified and implemented over time, and, if deepened and continued, have great potential impact. Hence, borrower performance is rated as satisfactory. 9. Institutional Development 9.1 Viewed in its broadest sense, it is apparent that the adjustment program supported by SAL II and the SAC brought about profound changes in the economic "rules of the game". An exchange rate system which bad been rigid for sixty years was changed to a market-based auction system. A framework of highly protectionist production incentives has been significantly moved toward an outward orientation. Widespread Governmental regulation of economic affairs has been gradually replaced with a framework providing greater leeway for private sector decisionmakers. On the other hand , organizational capacity experienced little improvement, given the virtual absence of any technical assistance component in either loan. On balance, therefore, institutional development under SAL II and the SAC must be rated as modest. 10. Lessons Learned 10.1 There are several lessons which emerge from the Honduran experience with adjustment lending: SAL I * Efforts to keep up with a fast-moving debt-service timetable may come at the expense of sound adjustment operations and firm borrower commitment. * The Bank should not have gone ahead without a more comprehensively-defined stabilization program, given the urgency of taking strong measures, the absence of a stand-by agreement, and the Bank's awareness of Honduras's weak implementation capacity. 31 * The Bank should have required more of the conditions to be met before, rather than after, Board presentation. * In general, experience has shown that reforms do not thrive during election years, in Honduras or elsewhere. * The Bank should not have gone forward without a plan of financing adequate to meet all of Honduras's financing needs, including liquidation of all arrears to official donors. SAL II AND THE SAC * Earlier and more intensive participation by the key implementing agencies in the design of adjustment measures might have helped diminish the lengthy delays during implementation, due to the lack of a common perspective between the Bank and the agencies about what needed to be done and why. * Adjustment reforms are usually demanding and complex, particularly in low-income borrowers like Honduras. Therefore, technical assistance needs to be provided at an earlier stage, and on a more intensive basis, than was the case with these three operations. * Conditionality needs to be discussed and defined in transparent, specific language. Papering over future differences with euphemisms, such as "enterprise rationalization", has longer-term costs, frequently in delayed, watered down implementation. * The Bank needed to devote more sustained attention to the quality of Honduras's investment program, and to its growing size, both of which had an adverse impact on the fiscal deficit and on the development benefits reaped from the adjustment program.  33 Annexes  Table 1: Honduras: Key Macroeconomic Indicators 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 Real GDP (%) 4.3 4.2 0.7 6.0 4.6 4.3 0.1 3.3 5.6 6.1 -1.5 3.6 Real Per Capita GDP (%) 1.0 0.9 -2.6 2.7 1.3 1.4 -2.9 0.3 2.6 2.9 -4.5 0.6 Real National Wage (1989 = 100) 100 94.8 87.6 94.7 96.9 Real Wage, Rural Poor (1988 = 100) 100 118 124 163 137 164 Real Exports, GNFS (%) 2.8 6.4 -6.4 2.6 -4.0 1.9 0.5 -2.0 8.0 -1.1 -0.7 13.7 Real Imports, GNFS (%) 13.2 4.4 -5.9 -7.7 0.9 2.1 -2.5 6.1 7.0 7.0 -1.0 5.5 Fiscal Deficit/GDP (%) -10.8 -7.8 -6.2 -4.8 -5.2 -7.5 -6.0 -3.6 -4.7 -11.7 -7.0 -3.2 Fiscal Revenues/GDP (%) 21.1 22.7 22.6 22.8 22.6 22.1 23.0 24.7 26.0 25.1 28.4 29.4 Public Investment/GDP(%) 11.3 8.9 6.6 5.1 5.5 5.7 6.8 7.2 11.0 14.3 12.3 10.2 Private Investment/GDP (%) 6.3 8.4 8.0 12.3 15.9 13.4 13.6 13.6 13.7 13.4 12.7 11.3 Real Exchange Rate Index (1989=100) 61.5 59.9 67.7 72.6 74.5 100 123 113 113 118 Consumer Prices (%) 4.7 3.4 4.4 2.5 4.5 9.9 23.3 34 8.8 11.0 21.7 28.5 Terms of Trade Index (1989=100) 95 99 113 95 100 100 92 93 82 72 81 79 Sources: Honduras: Country Economic Memorandum/Poverty Assessment, Report No. 13317-HO, November 17, 1994; and the President's Report for the Public Sector Modernization Structural Adjustment Credit, Report No. P-674 1-HO, January 19, 1996 Table 4.1, "Agricultural Self-Employed Who Do Not Hire Labor"; from Honduras: Impact of Policy Reforms on the Incomes of the Poor, Report No. 14396-HO of June 29, 1995. Table 2: Honduras: Debt And Liquidity Indicators, 1984-95 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 Cur. Acc. Bal./Cur. GDP (%) -11.8 -9.9 -7.1 -8.0 -7.4 -8.0 -9.1 -9.3 -10.0 -13.3 -11.8 -7.4 DOD (US$mil.) 2285 2729 2974 3299 3307 3385 3714 3383 3594 3866 4418 4501 Of which, IBRD/IDA (USSmil.) 355 450 546 655 617 607 635 677 672 715 775 777 Net Disbursements, World Bank 50.3 32.3 11.1 -1.0 15.8 1.7 -14.1 33.0 16.1 33.9 17.0 1.0 Arrears (US$ million) 207 285 359 433 475 503 278 212 163 258 216 129 DOD/XGS(%) 265 295 290 342 316 312 333 309 308 303 303 260 01 Debt Service/XGS (%) 22.9 24.7 29.1 35.4 36.5 19.2 34.9 28.2 32.3 28.4 29.7 29.3 Govt. Debt/GDP (%) 122 102 115 120 131 99 GDl/GDP (%) 17.4 17.3 13.9 17.4 21.0 19.1 20.2 19.7 22.9 27.0 23.5 21.3 GDS/GDP (%) 10.1 11.7 11.5 13.5 16.8 13.7 19.5 20.3 19.3 18.4 14.3 13.7 Sources: Honduras: Country Economic Memorandum/Poverty Assessment, Report No. 13317-HO, November 17, 1994; and the President's Report_for the Public Sector Modernization Structural Adjustment Credit, Report No. P-674 1-HO, January 19, 1996. 37 Table 3: Honduras: Economic Performance, Pre- and Post-Reform 1984-89, Avg. Ann. 1990-95, Avg. Ann. Growth (%)3 Growth (%)"' Real GDP 4.0 2.9 Real Per Capita GDP 0.8 -0.2 Real Exports, GNFS 0.6 3.1 Fiscal Revenues/GDP (% Share) 22.3 26.1 Public Investment/GDP (% Share) 7.2 10.3 Private Investment/GDP (% Share) 10.7 13.1 Investment/GDP (% Share) 17.9 23.4 Fiscal Deficit/GDP (% Share) -7.1 -6.0 Consumer Prices 4.9 21.2 Cur. Acc. Bal./GDP (% Share) -8.5 -10.2 Ext. Debt Outstanding/XGFS (% Share) 303 303 Domestic Saving/GDP (% Share) 12.9 17.6 Incremental Capital/Output Ratio" 2.4 8.1 Import Elasticitv36 0.9 1.3 33 Simple arithmetic average. ~"Simple arithmietic average. 1989-94. 36  39 Annex A STRUCTURAL ADJUSTMENT REFORMS SUPPORTED BY PREVIOUS AND ON-GOING OPERATIONS 40 ANNEX A: STRUCTURAL ADJUSTMENT REFORMS SUPPORTED BY PREVIOUS AND ONGOING OPERATIONS Structural Adjustment Loan I (Ln. 2990-HDS, S50 million) Fiscal Year: 1989 Status: Closed Closng Date: July 5, 1990 Accomiishments Before Board Presentat7on Second Tranche* Subst7tute to Second Tranche Implement action program to reduce The value of aggregate expenditures Agreement reached with the IMF public sector deficit by at leas 0.7/ for 1988 of the consolidated public Status: met of GDP in 1988 Status: met sector reduced by no less than L40 million Implement an increase in the scope of The deficit of the consolidated public New exchange rate regme and large the Negotiable Foreign Exchange sector duning the last six month of devaluation of average exchange rate Certificates (CETRA) in export trans- 1988 reduced by no less than L65 Status: met actions to benefit all non-tradimonal million exports Status: met Redefine import categones of essen- Enact and promulgate a law setting Fiscal acuons to increase central gov- tial items and initiate action program forth the central government 1989 ernment revenues, limit current ex- to transfer up to 40% of total imports budget, and approve budget for penditures and reduce overall public to the CETRA market Status: met autonomous insttutions sector deficit Status: met Fulfill monthly targets in 1988 Prepare administratve reform pro- Take steps to reduce the maim monetary program Status: met gram to improve tax collection proce. import taniff from 90% to 40% and dures eliminate all exemptions and ost surcharges Status: met Raise rediscount rate of the Central Prepare reform program for autono- 1990 tax package and 1991 budget to Bank to at least 9% Status: met mous mstutions to be nutiated dur- increase revenues and limit current ing 1989 expenditures approved by Congress Status: met Subut to Congress required legisia- Prepare month-by-month action plan Define for the state owned holding tion for the elimunation of surcharges for 1999 for execution of CONADI's company's program for entepse and tax exemptions on imports privatzation program divestiture Status: met Status: met Submit to Congress a 1989 public Prepare action plan for 1989 to ra- Implement restnctive monetary policy sector budget with measures to in- tionalize ENEE's expenditures Status: met crease public sector savngs by at least 2% points of GDP Status: met Agree with Bank on 1989 investment Increase Central Bank rediscount program for the consolidate public rates to 10% and begin program to sector liberalize interest rates Status: met a The whole set of conditions for Second Tranche release as originally established in the 198-9 program was waived in 1990 and substituted with actians taken by the new administraton which were considered to have met in eassace and gone beyond the requirements of the ongmal program. 41 cont. SAL!I Before Board Presentanon Second Trancne Subsnrule to Second Tranche Set forth list of non-essential items and all such measures as shall be necessary to ensure that foresp ex- change for the import of itms m the list will not be available at a rate which is lower than market Enact law to eliminate import duty exmpton and certam surcharges Meet targets of monetary program Submit Fowth Agricultural Credit Project to the Bank's Board Present Bank with action plan to strengthen ability of the Supermten- dency of Banks to monxtor commer- cial banks transactios 42 Structural Adjustment Loan II (Ln. 3257-HDS, S90 million) Fiscal Year: 1991 Status: Closed Closrnz Date: Dec. 31, 1993 and related Structural Adjustment Credit (Cr. 2208-HDS, S20 million or SRD14.3 million) Fiscal Year: 1991 Status: Closed Closrng Date: June 30, 1991 Accomplshments Before Board Presentanon Second Tranche Third Tranche Congressional approval for phased Import tariffs revised to the effect Import tariffs revised to the effect adjustment of tariff regime Status: that the maxmumn tariff shall not that the maxinum tariff shall not met exceed 35% and the miimum shall exceed 20% and the minimum shall not be lower than 4% of the value of not be lower than 5% of the value of the imported item Status: met the imported item Status: met Modify the exchange rate regime and Eliminate import restrictions for Eliminate unport surcharges for agri- adjust exchange rate from U2/31 to agricultural products Status: met cultural products Status: met LA.21SI Status: met Abolish requirement for import li- New export regime put in effect censes Status: met Status: waived Eliminate Foreign Exchange Certifi- Temporary export taxes reduced or Temporary export taxes reduced or cate (CEEX) incentives Status: eliminated in accordance with De- eliminated in accordance with De- met cree 18-90 Status: met cree 19-90 Status: met Funush to the Bank recommenda- Submit to Congress a bill of law for tions and action plan for a new ex- revising the tax system Status: met part incentive regume Status: met Congressional approval of 1990 Consolidated public sector savings of budget to reach public sector savings at least 0. 5% of GDP in 1990 of 0.5% of GDP and overall deficit Status: waived of 6.9% Status: met Reduce 3,000 public sector jobs Status: met Fumush to the Bank recommend- ations and time table to reduce trade dependence of tax structure Status: met Allocate L98 million in 1990 to sup- Present to Congress bill to increase Meet savings target Status: met port emergency food and employ- NFPS savings to 1.7% of GDP ment programs Status: met Status: met Meet LS3 million target for public investment program Status: met Agreement on a I8-month tax ad- Progress in canying out a program of Further progress in canying out 11amistrnOn reforn program Status: administranve reforms to Strngthen o f adMistrattv f a the tax collection capacity of the stegithin the tax collection a0ity Finance Secretariat Status: waived of the Finance Secretanst StaMMs met 43 cont. SAL II and related SAC Before Board Presentarzon Second Tranche Third Tranche Issue satisfactorv 1991 investment Meet target Status: met program Status: met Approve 1990/91 financial programs 1990 savings of SANAA and HON. 1990 savings of SANAA and HON. for SANAA and HONDTE. to DUTEL at least 0.3% of GDP DTEL at least 1% of GDP Status: increase efficiency and savings to Status: met met 0.3% of GDP in 1990 and I% in 1991 Status: met Agree on action plan to replace guar- Announce replacement of corn gua- Have in place a flexible price System antee price system for corn with a antee price system by flexible tanff for corn Status: Met flexble taniff system- and climnate and eliminate all other guarantee guaranie prices on other agricultural price systems for agricultural prod- products Status: met ucts Status: partial waiver for cof- fee and sugar Prepare rationalization program for Progress in achieving BANASUPRO Further progress in achieving BANASUPRO and IAA Status: and iMA ranonalizanon targets BANASUPRO and IMA ratiocali- met Status: met zation targets Status: met Maximum financial assistance to Financial assistance to BANASU- BANASUPRO from Treasury and PRO reduced to a maximum of L2 Central Bank LA million in 1991 million Status: met Status: met 1991 budget for education and health Progress in carryng out food and in at least the same proportion as in employment programs. Furnish the 1990; and for food and employment Bank a financing plan for the sotal at least the same amount as in 1990. sector restructuing program Status: Furnish the Bank with a social sector met restructuring program. Set parame- ters to measure progress in carrying out food and employment programs Status: met Adjust rediscount interest rates for credit to small farmers to rates for other credits Status: met Increase lending iterest rate from Revise interest rate ceilings Status: Revise igterest rate ceiling quarterty 17 to 19% and Central Bank redis- met Status: met count rates to producers of basic amins Status: met Adopt program to eliminate directed Progress in the implementation of credit lines by the Central Bank program Status: mes Status: met Limit subsidized credit to the Limit subsidized credit to the amount in 1990 Status: met mamt in 1990 Status: met Asip rediscount credit lines in the Centra Bank to agreed nats. UPCA (agrcultuzai FOVI (hous g) and FONDE (indusal) Status: met 44 cout SAL II sad related SAC fbre Board PresentMon Second Tranche Third Tranche Ratio of equity to total assets and off Ratio of equity to total assets and off blance-shect items at Ieast 5% on balance-snect items at least 5.5% 12131190 Status: met Status: met Fwmsh the Bank a propm for the -S mti.M of the aiculanzrai inanctal syM status: met Revise interest rate ceilings Status: The commercial banks will have rnclassified their portfolio in 5 cate- gones based on instruczons and supervision from the Central Bank Status: met The commercial banks will have made progress implemenang tares in those five categaries Status: met Added Condition for related SAC Adjust the domestic prices for oil products as to reflect changes in world market prices Status: mes 45 Energy Sector Adjustnent Credit (Cr. 2306-HDS, S115.18 million or SDR 85.6 million including IDA reflows) Fiscal Year: 1992 Status: Onioina Closing Date: June 30, 1995 AccomDlishments Before Board Presentanon Second Tranche Third Tranche (as aed by the April 22. 1995 -Rils of Thid Tranche (Waiver of two Coa- Initiate a program of technical assis- tance for strengthening ENE's management and opeations, carrying out an institutional reform study of power subsctor, carrying out a study of interfuel subsutution. and assist- ing the ol/gas expioraion bidding process and the petroleum deregula- tion program Status: met Remove tariff seting authonty for major public enterpnses from the - legislative branch and place it in PURC Status: met Adopt agreed principles for invest. ment project selection Status: met Complete study to investigate the Furish the Association the action consequences of inter-fuel substitu- plan based on the study Status: met tion Status: met Issue guidelines to be applied to the Public Utility Regulatory Comrms- sion (PURC) for the power subsector Status: met - Strengthen institutional framework Carry out funcions of National En- Cary out functions of NEC and for the sector by creating NEC and ergy Commission (NEC) and PURC PURC pumiant to decree 43-91 and GTE Status: met pursuant to decree 43-91 and Law Law 85/91 and to regulations and 85/91 and to regulanons and guide- guidelines for power subsector lines for power subsector Status: Status: met met Develop and implement contract Furnish Association with action plan Implement reforms in the power plan with ENEE. including perform- of reforms in the power subsector subaector followmg the acmon plan ance and staff reduction targets based on the results of the mstitu- Status: met Agree with ENEE on electrcity loss- tional reform study Status: met reduction program Status: met Prepare operational and financial Achieve progress in the impltmi. Achieve ftther progress in the im- rehabilitattan action plan for ENEE taion of OFRAF including the con- plementation of OFRAP including (OFRAP) Status: muet tract-plan Status: me tbs conuact-plan Status: waver Inplement average electricity tarff Increase average electricity tanff to Ianrse average electrcty tariff to increases of 60% and 24.3% in Sept. no less than 90% of ENEs long- at least be equal to EN 's long-t 1990 and June 1991 Status: met rn marginal coa Status: met amal cos Status: met 46 cOL ESAC Before Board Presentaion Second Tranche Third Tranche Elimiate all subsidies expressly designated for electraciry conSUMp- tion Status: met Prepare and initiate implementation Achieve progress m the implemen- PLP implemented Status: waiver of Petroieum Liberalization Program tation of PLP Status: met to deregulate petroleum subsector Status: met Furnish the Association a certified Furnish the Association certified copy of the audit report on expendi- copies of the audit reports on ex- tues financed with proceeds from penditures financed with proceeds the First Tranche Status: met from the First and Second Tranches Status: met Hire consultants to assist in (a) ne- gotiatmg oil exploration contracts. (b) establishing monitorng system, and (c) impliementng the PLP Status: met Furwsh the Association with draft Issue regulations Status: met regulations to Decree 194/84 Status: met 47 Agricultural Sector Adjustment Credit (Cr. 2540-HDS, S114.23 million or SDR 81.98 million including IDA reflows) Fiscal Year. 1994 Status: Ongoing Closing Date: June 30, 1995 EXDected: Dec. 31. 1995 Accomoiishments Before Board Presentanon Second Tranche Third Tranche (a asssd by the Apni 12. 1995 "Releas of Seaond Trann" whud wawves one coe ditionj Initiate implementation of Land Progress in the implementation of Further progress in the implement- Tenure Action Plan Status: met the Land Tenure Plan Status: met ation of the Land Tenure Plan Progress in the implementation of Further progress i the implement- the Forestry Action Plan Status: met ation of the Foresuy Action Plan Satisfactory 1993 annual operating Approve TOR to carry out annual Cetified copies of the reports of programs and budgets for the sector audits of INA's ana AFE's records INA's and AFE's operations based and for SRN, INA, UHAA, AFE and and accounts Status: met on agreed TOR BANADESA Status: met Approve policy support program and Progress in the implementation of Further progress in the implement- financing satisfactory to EDA to the agreed Public Admunistration ation of the agreed Public Adami- strengthen sector planning, manage- Action Plan Status: met stration Action Plan ment and implement capabilities for proposed policy reforms Status: met Satisfactory progress in the imple- An action plan to unplement the Progress in the implementation of mentation plan of BANADESA recommendations of the Agricultural the action plan Status: met Credit Study has been ftrmshed to the Association Status: met Progress in the implementation of a Further progress in the implement- plan of action to divest BANADESA ation of the action plan to dives Status: met BANADESA Law 31-92 containng satisfactory All legal instruments necessary to modifications to the land tenure and implement operation of Cajas Ru- forestry policies. Status: met rales are issued and duly published Status: waiver Satisfactory basic principles to es- The Cajas Rurales in operation are The Cajas Rurales in operation ar tablish and operate rural credit banks carrying out activities in accordance canymg out activities in accordanee and regulations to establish and op- with the provisions of Legislative with the provisions of Legislative crate the land credit fund Status: Decree 31-92 and related legal in- Decree 31-92 and related legai in- met struments Status: not applicable suWments Regulations to implement the en- The Special Land Credit Fund is The Speal Land Credit Fund is acted land tenure and forestry chap- carrying out operations in accordance carrying out operations In acdanc ten of Law 31-92 satisfactory to IDA with the provisions of Legislative with the provisions of Legislative Status: met Decree 31-92 and related regulations Decree 31-92 and related repalatims Status: not applicable A certified copy of the audit report of A certified copy of the audit reports the expenditures unanced out of the of the expenditures financed out of proceeds of the First Tranche has dos proceeds of the First and Somd been funished Status: met Tranche has been fushed