Announcement of World Bank Lends Seventy-Five Million Dollars to Honduras for Structural Adjustment and Agricultural Credit on September 15, 1988

FOR IMMEDIATE RELEASE Norld Bank 1818 H Street, N.W., Washington, D.C. 20433, U.S.A.* Telephone: (202) 477-1234 BANK NEWS RELEASE NO. 89/7 Contact: Ciro Gamarra (202) 473-8721 WORLD BANK LENDS $75 MILLION TO HONDURAS FOR STRUCTURAL ADJUSTMENT AND AGRICULTURAL CREDIT WASHINGTON, September 15, 1988 -- The World Bank announced today the approval of two loans totaling $75 million to Honduras, to support the government's structural adjustment program and an agricultural credit project. The first loan, of $50 million, will assist the first phase, to be carried out in 1988 and early 1989, of a three-year program, aimed at stabilizing the economy. The main areas covered by the program include public sector reform, the public investment program, balance-of-payments management, credit and monetary policies, and financial sector reform. This is the first structural adjustment loan to Honduras since the World Bank started lending to the country in December 1955. The second loan, of $25 million, will help finance an agricultural development project that includes a nationwide line of credit to support sectoral investments over a two-and-a-half-year period. It is the fourth agricultural credit project in the country supported by the Bank. Structural Adjustment Honduras is one of the poorest countries in Latin America. In the past two years, it has made slow economic progress, with per capita income reaching only $760 in 1987 for a population of 4.3 million that is growing at 2.8 percent a year. In 1987, a series of external shocks highlighted the long-term structural problems affecting the Honduran economy. Coffee prices dropped and net voluntary external financing to the public sector declined sharply, precipitating a balance-of-payments crisis. The financial crisis has continued to deepen through 1988, and the country has been unable to fully service its external debt obligations. Recognizing the seriousness of the problem, the government has defined, in cooperation with the World Bank, a three-year adjustment program to address both short-term macroeconomic issues and medium-term structural issues. The objectives of the program are to achieve growth of exports and efficient import substitution through a more competitive real exchange rate and trade policy reforms, increases in public and private savings, and greater efficiency in financial intermediation. NOTE: Money figures are expressed in U.S. dollar equivalents. -2- The main goals of the first stage of the program, supported by the World Bank loan, are to increase public sector savings to 2.5 percent of gross domestic product (GDP) in 1989 from 0.6 percent in 1987; reduce the fiscal deficit in 1989 by 2.5 percentage points of GDP compared with 1987; promote external balance and increased transparency in the foreign exchange market by permitting a greater proportion of transactions to take place at market- determined rates; stabilize the excess money supply and avoid its inflationary impact; and begin the process of liberalizing interest rates. The program also aims to strengthen public sector management by establishing the basis for restructuring public enterprises and institutions in the medium term. The public investment program will be reviewed in late 1988 to verify that its size and composition are consistent with the adjustment program's goals. The government's program will incorporate measures to reduce the impact of adjustment on the poor. Cuts in public services directed at the poor will be minimized and the World Bank's review of the 1989 public expenditures program will help minimize the negative consequences of cuts in expenditures. By supporting productive employment, the program is expected to enhance the living conditions of the majority of the population. The opening up of the economy should help improve productivity and therefore increase real wages and employment. The first phase of the program was initiated with an emergency plan carried out in February and March 1988. This included a freeze on all public sector salaries and jobs and on expenditures for goods and services and a reduction of financial assistance from the central government to autonomous institutions. The World Bank supported these emergency measures by modifying an earlier $37.4 million loan for the third industrial credit project (approved in May 1986) which permitted accelerated disbursement of the loan. The structural adjustment loan is expected to meet about 10 percent of Honduras' annual gross capital financing requirements for 1988-89, equivalent to about 5 percent of merchandise imports during the period. It will be disbursed in two equal tranches of $25 million; the first upon effectiveness and the second in early 1989 after a satisfactory performance review. Agricultural Credit Agriculture is the most important sector of the Honduran economy, employing more than 50 percent of the labor force, accounting for over 25 percent of GDP, and generating two-thirds of export earnings. The agricultural credit project is expected to improve the rural credit system by rationalizing interest rates, imposing monitorable and enforceable performance criteria by financial intermediaries, and channeling more credit to low-income producers. -3- The line of credit supported by the $25 million loan will finance, among others, livestock development, orchard and tree crops, soil conservation and land improvements, farm machinery, on-farm storage, and small-scale agro- processing facilities. The project includes an extension component to strengthen the project implementing unit's capacity to serve beneficiaries and financing for four special studies. The main benefits of the project will be rationalized agricultural credit policies, greater credit access for low-income producers, improved efficiency in financial intermediation, increased efficiency in production from more intensive use of available resources and greater product diversification. The total cost of the project is estimated at $39.6 million, with the financing balance of $14.6 million to be provided by the government, financial intermediaries and sub-borrowers. The loan will be disbursed over a period of four years. The World Bank loans are for 20 years, including five years of grace, with a variable interest rate, currently 7.59 percent, linked to the cost of the Bank's borrowings. They also carry an annual commitment charge of 0.75 percent on the undisbursed balances. -0-