Honduras - Structural Adjustment Loan Project

Document of The World Bank FOR OMFICIAL USE ONLY Rqkxt No. 12951 PROGRAM COMPLETION REPORT REPUBLIC OF HONDURAS STRUCTURAL ADJUSTMENT LOAN (LOAN 2990-HO) APRIL 12, 1994 Country Department II Country Operations Division 2 Latin America and the Caribbean Region This document has a restricted distribution and may be used bv recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EOUIVALENTS Currency Unit = Lempira (L) US$1 = L5.541 ACRONYMS AGSAC - Agricultural Sector Adjustment Credit CETRA - Certificado Transferible de Opcion a Divisas para Exportacion (Negotiable Foreign Exchange Certificate) CONADI - Corporacion Nacional de Desarrollo Industrial (National Industrial Development Corporation) ENEE - Empresa Nacional de Energfa El6ctrica (Electric Power Company) ESAC - Energy Sector Adjustment Credit IDA - International Development Association IDB - Inter-American Development Bank IMF - International Monetary Fund OECF - Japan's Overseas Economic Cooperation Fund PCR - Program Completion Report SAC - Structural Adjustment Credit SAL - Structural Adjustment Loan USAID - United States Agency for International Development FISCAL YEAR January 1 - December 31 1. Average exchange rae for 1992  FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General Operations Evaluation April 12, 1994 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Progran Completion Report on Republic of Honduras - Structural Adiustment Loan (Loan 2990-HO) Attached is the Program Completion Report on Republic of Honduras - Structural Adjustment Loan (Loan 2990-HO). Parts I and III were prepared by the Latin America and the Caribbean Regional Office. Part II was prepared by the Borrower. The PCR gives a good and comprehensive account of the circumstances surrounding the genesis and implementation of this SAL. The Bank decided to go ahead with the operation in the absence of an IMF stand-by. The existence of arrears to the IMF impeded an agreement on the use of IMF resources at that time. The main objectives of the program were to stabilize the economy, including clearing arrears with major multilateral and bilateral creditors, and to lay the basis for longer-term structural change. The package of reform measures was modest. Even so implementation was partial and suffered major delays. In the end, the SAL was instrumental primarily in helping Honduras emerge from a period of repeated arrears and bridge financing. This first SAL, as well as the second SAL which is by now fully disbursed, was on IBRD terms even though the country's creditworthiness was questionable at that time. In September 1991, Honduras became an IDA-only country. The outcome was clearly unsatisfactory: the structural reform proposals had little chance of succeeding given the unstable macro environment and weak government commitment, and the financing plan, involving multiple donors, was poorly worked out. The strategy of aiding the arrears' clearance process of a borrower of doubtful creditworthiness with IBRD funds was not sustainable. This point was also raised by the Borrower. Apart from engendering some increased awareness among policy-makers of the gravity of the country's problems, the institutional impact was negligible. Because the structural reform content of this SAL was very limited and because it was followed by several other adjustment operations, it will be audited as part of a cluster audit including subsequent operations. Attachment This doemnt b1a a rutricted distrilhtiom and may be used by recients only in the performance of their official dutis. Ib conentus may not othrwise be discosed without World Bank authoization.   FOR OFFICIAL USE ONLY PROGRAM COMPLETION REPORT REPUBLIC OF HONDURAS STRUCTURAL ADJUSTMENT LOAN (LOAN 2990-HO) TABLE OF CONTENTS PREFACE ............................................. i EVALUATION SUMMARY .................................. ii PART I. PROGRAM REVIEW FROM THE BANK'S PERSPECTIVE ...1.... A. PROGRAM IDENTITY ............. ..1............... B. BACKGROUND ................................... 1 C. PROGRAM OBJECTIVES AND DESCRIPTION .............. 4 D. PROGRAM DESIGN AND ORGANIZATION ............ 4 E. PROGRAM IMPLEMENTATION ........................ 6 F. MACROECONOMIC RESULTS ........................ 10 G. SUSTAINABILITY ...... ........ ................. 11 H. IMPLEMENTATION AND MONITORING OF THE LOAN ..... 11 I. PROGRAM RESULTS ............................... 12 J. LESSONS LEARNED ............................... 14 PART II. PROGRAM REVIEW FROM THE BORROWER'S PERSPECTIVE ... 15 A. BACKGROUND . ................................. 15 B. LOAN NO. 2990-HO: SAL I .......................... 16 C. MACROECONOMIC RESULTS ......................... 16 D. CONCLUSION ................................... 17 PART III. STATISTICAL INFORMATION ........................ 18 RELATED BANK LOANS AND/OR CREDITS ................. 18 PROGRAM TIMETABLE ............................... 18 CUMULATIVE LOAN DISBURSEMENTS .................... 19 MISSION DATA .................................... 19 STAFF INPUTS ..................................... 19 ANNEX I .............................................. 21 ANNEX . ............................................. 27 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.l   - i - PROGRAM COMPLETION REPORT REPUBLIC OF HONDURAS STRUCTURAL ADJUSTMENT LOAN (LOAN 2990-HO) PREFACE This is the Program Completion Report (PCR) for the Structural Adjustment Loan to the Republic of Honduras, for which Loan 2990-HO in the amount of US$50 million was approved on September 15, 1988. It was disbursed in two equal tranches and was closed on July 5, 1990 upon disbursement of the second tranche, almost fifteen months behind schedule. The PCR was jointly prepared by the Country Operations 2 Division (LA2C2), Department II, of the Latin American and the Caribbean Regional Office (Preface, Evaluation Summary, Parts I and III) and by the Borrower (Part II). Preparation of the PCR was started shortly before a February 1993 project completion mission, and is based, inter alia, on the Report and Recommendation of the President on the Structural Adjustment Loan; the Loan Agreement; supervision reports; correspondence between the Bank and the Borrower; internal Bank memoranda; and discussions with Bank staff and Honduran officials who worked on the adjustment program.   - iii - PROGRAM COMPLETION REPORT REPUBLIC OF HONDURAS STRUCTURAL ADJUSTMENT LOAN (LOAN 2990-HO) EVALUATION SUMMARY 1. Program Objectives. The essential aim of the Government's program was to stabilize the economy while laying the basis for addressing major macroeconomic constraints affecting long- term recovery and growth. This would be accomplished through reform of the public sector and public investment program, improved trade and exchange rate policies, sound credit and monetary policies, and financial sector reform. A secondary objective of the program was to keep Honduras in good standing with major multilateral and bilateral creditors by enabling the Government to make timely debt service payments (Part I, para. 11). 2. The SAL supported the first stage of a three-year adjustment program which consisted of an action plan for 1988-89. The program's components aimed to (i) increase public sector sav- ings; (ii) reduce the 1989 fiscal deficit; (iii) improve tax administration; (iv) strengthen public enterprise management; (v) continue divestiture of public enterprises; (vi) achieve financial solvency for the electric power company; (vii) reorient and control the public investment program; (viii) increase non-traditional exports; (ix) improve the transparency of the foreign exchange market; (x) reduce the anti-export bias of the trade system; (xi) reduce inflationary pressures; (xii) slow the growth of the monetary base; (xiii) avoid the inflationary impact of external debt conversion; (xiv) unify interest rates on Central Bank credit lines; and (xv) strengthen the financial condition of commercial banks (Part I, para. 12). 3. Implementation Experience. The SAL was designed as a first step in support of a longer- term structural adjustment program for Honduras and as a key component of a program for clearing Honduras' arrears to the other multilateral agencies so that lending programs of these agencies would be resumed to support further stabilization measures and structural reforms. The scope of the conditionality under the SAL was relatively modest. The Bank was aware that the measures under the first stage of the reforms would not be sufficient to ensure sustainability over the longer term, but believed that they could be deepened under future adjustment operations. The Bank decided to go ahead without an IMF Stand-by because it viewed the SAL as support for the first phase of a stabilization program to be followed by a formal Stand-by in early 1989 when arrears with the IMF would have been eliminated (Part I, paras. 13-14). 4. Although Bank staff tried during preparation and appraisal to put together a larger financial package for the SAL, these efforts were not successful. Bilateral donors and the providers of bridge financing were unwilling to go beyond amounts finally pledged because of Honduras' arrears and the assurances that providers of bridge financing required. In the circumstances, the Bank considered that the financing plan was tight but adequate, provided that everyone fulfilled his financing obligations on schedule (Part I, para. 17).  - iv - 5. A key component of the financing plan was the US$50 million cofinancing for the SAL from the Japan OECF. However, at the time the SAL was presented to the Board, the cofinancing agreement with Japan had not yet been finalized. Moreover, approval of the OECF loan was contingent upon elimination of Honduras' arrears to the OECF. In fact, elimination of OECF arrears did not take place according to the originally agreed timetable, due to competing efforts to clear IMF arrears. The original financing plan for the SAL, while providing for full payment of arrears to the Bank prior to Board presentation, provided only for a reduction in arrears to the IMF prior to that date, with full elimination of arrears expected during the following month. Due to objections from the Board of Directors, payments to the IMF were accelerated (but not fully paid before Board presentation), in part by deferring payment to the OECF. This delayed initiation of the approval process for Japan's cofinancing of the SAL (Part I, para. 18). 6. Disbursement of the first tranche of the OECF loan would have enabled Honduras to remain current with the Bank. In its absence, arrears to the Bank accumulated and the Bank suspended disbursements in December, 1988. The suspension of Bank disbursements led the Japanese authorities to make final approval of its cofinancing contingent on formalization of a Stand-by Agreement with the IMF. Subsequently, in March 1989, at an IMF Board discussion of Honduras' arrears, all major shareholders declared that further multilateral support to Honduras should be made only after clearance of arrears and approval of an IMF Stand-by. The US Government also indicated that its support for any financial package for Honduras would require an IMF Stand-by. Without external funding, Honduras fell into non-accrual status with the Bank on April 1, 1989 (Part I, paras. 19-21). 7. In an effort to resolve the situation, the Bank proposed a dual strategy to the Government consisting of: (i) a short term action program comprising a stabilization program with the IMF for 1989 and a solution to the arrears problem; and (ii) a medium-term adjustment program for the next three-four years consisting of a second SAL and sector adjustment loans, that would provide the basis for external aid resource mobilization. In May, 1989, Bank staff participated in an IMF mission to continue discussions of the key policy measures requested as prior actions for a Stand-by Agreement. Two prior actions required by the IMF were politically highly controversial from the Government's point of view (raising the proportion of transactions at the parallel market rate, and the valuation of imports at the parallel rate for assessment of customs duties in order to raise fiscal revenues and reduce the budget deficit), and the outgoing, minority Administration did not wish to take such strong action so close to the elections. Given this political context, no agreement could be reached with the IMF, and the preparation of the next phase of the stabilization/adjustment program had to await the election of a new government in November 1989 (Part I, paras. 22-23). 8. Although many of the conditions for second tranche release were met, with the deterior- ation in macroeconomic management, disbursement of the second tranche had to await prepara- tion of a reform program by the new government. After the new Govemment took office, a package of measures was announced in March 1990 that included changes in the exchange rate, actions to increase tax revenues and limit current expenditures, and steps to reduce effective protection. The Govemment requested that the Bank waive the specified conditions for release of the second tranche of the SAL, and substitute in their place actions taken since March 1990. Bank management concurred with the Government that the measures and commitments were of  v sufficient importance as to have complied with, and in some cases, to have exceeded the conditions for the second tranche of the SAL. Accordingly, Bank management recommended to the Board that the second tranche of the SAL be released upon clearance of arrears. The Board granted its authorization in June 1990, and the second tranche was released in July 1990 (Part I, paras. 24-30). 9. Program Results: Macroeconomic Performance. The collapse of the SAL financing package and the delay in releasing the second tranche until a new economic program was undertaken by the new government in mid-1990 clearly had an impact on macroeconomic results in 1988-90. Fiscal measures were less successful than planned and the consolidated fiscal deficit increased in 1988 and again in 1989. Inadequate capital inflows resulted in a further accumulation of arrears and forced the Government to resort to more domestic financing than planned. This led to higher inflation, which jumped in 1990 when the new Government introduced a major devaluation of the exchange rate (Part I, paras. 31-33). 10. Sustainability. The reform program initiated with the SAL was continued through three policy-based operations: SAL II, SAC, and an Energy Sector Adjustment Credit. Also, a pro- posed Agricultural Sector Adjustment Credit has been negotiated and is pending Board presentation. Reforms have now gone well beyond the measures initiated under the SAL and reflect government commitment to reformulating economic policy and restructuring the economy (Part I, paras. 34-35). 17. Lessons Learned. There are three main lessons from the SAL. First, the Bank should not have gone ahead without a fully satisfactory set of stabilization measures. The strategy of starting with an easy program and hoping to follow it up with additional measures, expected under an IMF Stand-by, was unlikely to work in an environment where the Government's commitment to stronger reforms was likely to diminish rather than increase as the election approached. Secondly, for the same reasons, the Bank should have required that more of the measures related to the structural reforms be taken as conditions of Board presentation rather as conditions of second tranche. Third, the Bank should not have gone ahead with the SAL without an adequate, well defined and agreed financing plan. A possible fourth lesson is that perhaps the Bank should not have gone ahead with a borrower of doubtful creditworthiness for Bank lending. Honduras' serious economic problems and heavy external debt burden, further aggravated by miliary hostilities in the area, raised questions in the Bank in 1989 about Honduras creditworthiness. Honduras eventually became eligible for IDA funds in late 1990 (Part I, paras. 43-45). 18. The Borrower has reviewed Part I of the PCR and considers that it provides a complete and detailed account of SAL implementation experience, despite the time elapsed since the program was conceived, agreed, and carried out. Two points were singled out for specific comment by the Borrower: the decision to 'backload" SAL conditionality even though the coun- try was entering an election year (Part I, paras. 15, 37, 40-41), and the inappropriateness of continued lending to Honduras on IBRD rather than IDA terms in the late 1980s (Part I, paras. 22, 45).   PROGRAM COMPLETION REPORT REPUBLIC OF HONDURAS STRUCTURAL ADJUSTMENT LQAN (LOAN 2990-HO) PART I. PROGRAM REVIEW FROM THE BANK'S PERSPECTIVE A. PROGRAM IDENTITY Loan Name : Structural Adjustment Loan Loan Number : 2990-HO Region : Latin America and the Caribbean Country : Republic of Honduras Sector : Non-Project Lending B. BACKGROUND 1. The Structural Adjustment Loan (SAL) to Honduras in the amount of US$50 million equivalent was approved by the Board of Executive Directors on September 15, 1988, was signed on September 28, 1988, and became effective on November 23, 1988. The loan was released in two equal tranches of US$25 million equivalent, the first upon effectiveness. The second tranche was not released until July 5, 1990 (some 15 months after the target date) after the program was revised with the new government that was elected at the end of 1989. The structural adjustment program was designed to address both short-term macroeconomic issues and medium-term structural issues affecting the economy through a three-year adjustment program defined in cooperation with the Bank. Although short-term macroeconomic adjustment would ordinarily be supported by the International Monetary Fund (IMF), the existence of arrears to the IMF impeded an agreement on the use of IMF resources. The SAL supported actions, including stabilization measures, to be taken during 1988 and early 1989, and it was expected that an IMF Stand-by would be in place in 1989. 2. In the 1970s, the growth of GDP in Honduras averaged 4.5% per year, stimulated by high public and private investments. While exports grew at an average annual rate of 3.7 percent, imports grew more rapidly throughout the 1970s, reaching more than 40 percent of GDP by the early 1980s. Emerging balance of payments problems were managed in the early 1980s by borrowing from bilateral and multilateral institutions. During most of the 1980s, real GDP growth declined to an average of 2.5 percent annually, national savings fell and public sector deficits averaged over 8 percent of GDP. Between 1980 and the end of 1987, Honduras' total external debt almost doubled to about US$ 3 billion, of which over two thirds was owed to official creditors. When external sources of finance began to dry up in 1987, the Government resorted to external arrears and domestic borrowing to finance the public sector deficit.  - 2 - 3. Behind the poor economic performance of the 1980s lay deep-seated structural problems. Honduras' development strategy, as of the other Central American Common Market countries, had been based upon import substitution behind high protective barriers and had relied on extensive government intervention via credit subsidies, price controls and tax incentives. This had resulted in a large and inefficient public sector, extensive administrative controls over economic activities which discouraged efficient private sector development, an export sector dependent on a few agricultural products, a trade regime that discouraged the growth of non- traditional exports, inefficient financial intermediation contributing to low domestic savings and excessive reliance on external finance. An equally important factor constraining development was the low level of investment in human resources, limiting improvements in the skills and productive capacity of the labor force. 4. In April 1987, the Bank issued a Country Economic Memorandum for Honduras (Report No. 6332-HO) that analyzed and highlighted the problems enumerated above and how their con- tinuance had been supported by an extraordinary amount of foreign assistance over a number of years. A draft of the report had been discussed with the Government at the end of 1986, and in 1987 a number of Bank missions visited Honduras to follow up on these findings and to agree on a lending program with the Honduran authorities. The Government requested that the Bank support a major macroeconomic adjustment program through a series of Bank-supported operations in the agriculture, public sector, trade, and financial sectors. While receptive in principle, as a precondition, the Bank insisted that important macroeconomic reforms be undertaken. 5. During 1987, a series of external shocks unmasked the long-term structural problems affecting the Honduran economy. The price of coffee, Honduras' most important export, fell by 41% and net external financing to the public sector plummeted, precipitating a balance of payments crisis. External arrears accumulated and on December 1, 1987, the Bank suspended disbursements under ongoing loans to Honduras because debt service had become more than 75 days overdue. To ensure that appropriate policy measures be taken and arrears not reach unmanageable levels, a series of missions was mounted in late 1987 and early 1988 to develop a program to clear the arrears and to prepare a structural adjustment loan (SAL) covering the medium term. At the same time, discussions were held with the IMF, the United States Agency for International Development (USAID) and the Inter-American Development Bank (IDB) and donor representatives directly and through the Consultative Group for Honduras, chaired by the Bank, to develop financial support for clearing arrears and carrying out the program of structural adjustments. Arrears to the IMF blocked formal discussions between IMF staff and Government officials on a stabilization program during 1988. However, IMF and Bank staff worked closely together during the preparation of the SAL in developing program targets and a payment/ disbursement schedule with the Government. 6. A Bank mission visited Honduras in February 1988 to discuss with the authorities: (a) a solution to the existing arrears with the Bank; and (b) a program of macroeconomic adjustment to address the liquidity crisis in the short term and lay the basis for structural adjustment in the medium term. As a result of the mission, the Government began to define, in cooperation with the Bank, a three-year macroeconomic adjustment program to address both short-term and medium-term imbalances. The objectives of the three-year program were to achieve: (a) growth  - 3 - of exports and efficient import substitution through: (i) market-determined valuation of foreign exchange and (ii) trade policy reform aimed at reducing the anti-export bias of the trade regime; (b) increases in public savings to levels consistent with planned public investment and available external financing; and (c) increases in private savings and greater efficiency of financial intermediation through liberalization of interest rate policies and institutional measures. 7. The first phase of the three-year program consisted of an action plan for 1988 aimed at stabilizing the economy. Its main goals for 1988 were to: (a) increase public sector savings to 2 percent of GDP (vs. 0.3 percent in 1987); (b) reduce the overall fiscal deficit by 2 percentage points of GDP, compared with 1987 performance; (c) reduce the deficit in the balance of payments and increase transparency in the foreign exchange market by permitting a greater proportion of transactions to take place at market-determined rates; (d) sterilize the excess money supply to avoid its inflationary impact; and (e) begin a process of liberalization of interest rates by elimination of distortions among rediscounted credit lines. 8. While the complete list of measures in the 1988 action plan were being worked out, the Government took a number of actions in early 1988 to reduce the fiscal and balance of payments deficits and control credit expansion. These included: (a) a freeze on all public sector salaries and the number of public sector jobs at the levels established as of February 15, 1988; (b) a freeze on all current expenditures for goods and services at their 1987 level; (c) reduction of Central Government transfers to autonomous institutions and submission of a proposal to Con- gress of legislation to reduce the participation of port city governments in port revenues; (d) extension of eligibility for authorization to trade foreign exchange at market prices from 11 to 28 non-traditional export products; (e) reduction of excess liquidity through re-establishment of a 100% reserve requirement on deposits held in commercial banks until the foreign exchange, for which the deposits were made, was available; and (f) elimination of payment in cash by the Central Bank for all converted external debt for which purchase was approved by the Govern- ment after February 15, 1988. 9. Based on these prior actions, management recommended to the Board that US$20 million of the uncommitted funds under the Third Industrial Credit Project (Ln. 2703-HO) be reallocated to support the first phase of the Government's macroeconomic adjustment program. On April 12, 1988, the Board of Directors accepted the recommendation and approved an amendment reallocating US$20 million of the loan to a new category for financing general imports. On the basis of this action, Honduras was able, through a bridge loan from a US commercial bank and the use of some of its own foreign exchange reserves, to reduce arrears to less than 60 days so that the Bank could resume disbursements. 10. Bank missions visited Honduras in April, June, and August, 1988 to continue prepara- tion and finalization of the 1988/89 action plan. The draft letter of development policy, outlining the government's economic stabilization and structural adjustment program to be supported by the SAL, was received on August 15, 1988. The stabilization/adjustment program agreed between the Government and the Bank in August 1988 was to provide US$100 million of financing under the SAL (US$50 million) and associated co-financing from Japan's Overseas Economic Cooperation Fund (US$50 million) during the period September 1988 - March 1989. The elimination of arrears to the Bank, IMF and OECF was predicated on the availability of  - 4 - disbursements under this financial package. Payment delays reappeared shortly after negotiations were completed in August, and a second bridge loan of US$25 million from Banco de Mexico in early September reduced arrears to the Bank by US$15 million and to the IMF by US$10 million. After the reduction of arrears, the SAL was approved by the Board on September 15, 1988. The Bank decided to go ahead without an IMF Stand-by, because it viewed the SAL as support for the first phase of a stabilization program to be followed by a formal Stand-by in early 1989 when arrears with the IMF would have been eliminated. Although the IMF couldn't proceed with a Stand-by because of Honduras' arrears to it, the Bank had worked closely with the IMF during project preparation and had agreed all major stabilization measures in the SAL with the IMF. C. PROGRAM OBJECTIVES AND DESCRIPTION 11. The essential aim of the Government's program was to stabilize the economy while laying the basis for addressing major macroeconomic constraints affecting long-term recovery and growth. In addition, by supporting productive employment it would enhance living conditions of the majority of the population. This would take place through reform of the public sector and public investment program, improved balance of payments management, credit and monetary policies and financial sector reform. 12. The SAL supported the first stage of the three-year adjustment program, consisting of an action plan for 1988-89. Specific measures included: (i) increasing public sector savings from an estimated 0.6% of GDP in 1987 to 1.1% in 1988 and 2.5% in 1989; (ii) reducing the 1989 fiscal deficit by at least 1.8 percentage points of GDP on a cash basis with respect to its 1988 level; (iii) improving tax administration; (iv) strengthening public enterprise management to improve their economic efficiency and control their budgets and operating programs; (v) continuing the process of divestiture of publicly held firms; (vi) achieving financial solvency for ENEE (the electric power company); (vii) reorienting the public investment program to support the goals of economic adjustment; (viii) increasing non-traditional exports; (ix) reducing non- essential imports; (x) improving the transparency of the foreign exchange market; (xi) eliminating the anti-export biases of the trade system; (xii) reducing inflationary pressure; (xiii) slowing down the growth of the monetary base; (xiii) avoiding the inflationary impact of external debt conversion; (xiv) unifying interest rates on Central Bank credit lines; and (xv) strengthening the financial condition of commercial banks. D. PROGRAM DESIGN AND ORGANIZATION 13. The SAL had two principal objectives. It was designed as a first step in support of a longer-term structural adjustment program for Honduras. It was also a key component of a program for clearing Honduras' arrears to the other multilateral agencies so that lending programs of these agencies could be resumed to support further stabilization measures and structural reforms. These were expected to include an IMF Stand-by Arrangement, an IDB pro- gram and planned structural and sectoral Bank loans to strengthen public enterprises and to support trade, agricultural and financial sector reforms. The financing plan for the SAL, assumed rescheduling of about US$235 million of publicly guaranteed debt, US$50 million from USAID, a US$25 million bridge loan, and US$50 million from Japan (OECF). The financing  - 5 - plan provided for full payment of arrears to the Bank prior to Board presentation (September, 1988) and for payment of about two thirds of the arrears to the IMF (about US$10 million) prior to Board presentation, with the remainder to be paid in October. 14. The loan was prepared relatively quickly by Bank staff with the cooperation of IMF staff who reviewed the macroeconomic stabilization program. However, it appears that the RMF had some reservations about the adequacy of the stabilization measures and the Government's commitment to their implementation. The IMF believed, as was reflected in their subsequent discussions with the Govemment in 1989 on a Stand-by, that further action was needed on the exchange rate and to increase fiscal revenues. As discussed earlier, the Bank believed that when the arrears to the IMF (and others) were cleared, the resources available for second tranche from the Bank and the OECF would help increase the likelihood of compliance with SAL conditionality, assure the IMF of the Govemment's commitment to the stabilization and structural adjustment program, and make it possible for the IMF to obtain agreement on additional fiscal and exchange rate measures to support a Stand-by Agreement. 15. The scope of the conditionality under the SAL was relatively modest. The Bank was aware that the measures under the first stage of the reforms would not be sufficient to ensure sustainability over the longer term, but believed that they would be deepened under future adjustment operations. As mentioned above, the SAL was to be considered as the first in a series of adjustment operations that would support structural and sectoral adjustment over time. 16. The adjustment program had been reviewed by the appraisal mission in August 1988 with the Government, opposition leaders, the private sector and high-level advisors of the Chief of Staff of the Armed Forces, all of whom reportedly indicated their support for the program. However, during SAL preparation and appraisal, the political situation in Honduras was becoming increasingly delicate. The Government was nearing its last year in office and a number of cabinet ministers were expected to resign by the end of 1988 to prepare their campaigns for the elections in November 1989. Achieving political consensus for implementing important economic measures during the 1989 election year, as was required for second tranche release, was expected to be difficult. 17. The success of the SAL depended not only upon the Government's ability to implement the adjustment measures, but also upon precise and timely implementation of the financing plan. Although efforts were made by Bank staff during preparation and appraisal to put together a larger financial package, these efforts were not successful, as bilateral donors were unwilling to go beyond the US$125 million already pledged (para. 13). In particular, the amount of bridge financing was apparently limited and difficult to arrange because of Honduras' arrears and the assurances that the providers of bridge financing required. In the circumstances, the Bank considered that the financing plan, including the bridge financing, was tight but adequate, provided that everyone fulfilled their financing obligations on schedule. 18. A key component of the financing plan was the US$50 million cofinancing for the SAL from the Japan OECF. However, at the time the SAL was presented to the Board, the cofinancing agreement with Japan had not yet been finalized. Moreover, approval of the OECF loan was contingent upon elimination of Honduras' arrears to the OECF. In fact, elimination  - 6 - of OECF arrears did not take place according to the originally agreed timetable, due to competing efforts to clear IMF arrears. In the SAL, the Bank, after consultation with the IMF, made an exception to the usual understanding that neither the Bank nor the IMF would present new financing for a country to its Board if the country had arrears with the other. The financing plan for the SAL, while providing for full payment of arrears to the Bank prior to Board presentation, provided only for a reduction in arrears to the IMF prior to that date, with full elimination of arrears expected during the following month. A number of Directors raised objections with Bank management about this, with the result that payments to the IMF were accelerated (but not fully paid before Board presentation). This was made possible in part by deferring payment to the OECF. This delayed initiation of the approval process for Japan's cofinancing of the SAL. 19. Disbursement of the first tranche of the OECF loan would have enabled Honduras to remain current with the Bank. In its absence, arrears accumulated and the Bank suspended disbursements to Honduras on December 18, 1988. Without the Japanese cofinancing the Gov- ernment could not maintain the macroeconomic framework, arrears mounted further, and the multilateral agencies hardened their conditionality by requiring that further multilateral support to Honduras should be made only after clearance of-arrears and approval of an IMF Stand-by. Political support for further economic measures disappeared in 1989 and further stabilization/adjustment measures could not be taken until 1990 after the new Government had been installed. The failure to assure a sound financing plan for the SAL disrupted adjustment program implementation for a lengthy period. E. PROGRAM IMPLEMENTATION 20. Conditions of Board presentation (Annex I) consisted of: measures to reduce the fiscal deficit in the second half of 1988 and the preparation of a draft budget to reduce the consolidated public sector deficit further in 1989; establishment of committees to define a program of administrative reforms for public sector enterprises and to reform ENEE (the electric power company); expanded use of negotiable foreign exchange certificates to increase the share of exports and imports using foreign exchange traded at the free exchange rate; submission to Congress of legislation to eliminate import duty exemptions and surcharges to increase fiscal revenues and reduce effective protection; agreement on a monetary program for the balance of 1988; increases in interest rates on Central Bank credit lines and the proportion of public debt instruments contracted at market interest rates; and the selection of consultants to strengthen the Bank Superintendency and improve the supervision of financial institutions. 21. As mentioned in para. 19, when the OECF cofinancing was not approved, arrears to the Bank accumulated and the Bank suspended disbursement in December, 1988. The suspension of Bank disbursements led to further hesitation on the part of the Japanese authorities, and in spite of the Bank's efforts to explain that the suspension did not imply a breakdown in either the program or the dialogue between the Bank and Honduras, but was only the result of a temporary accumulation of arrears, the OECF made final approval of its cofinancing contingent on formalization of a Stand-by Agreement with the IMF. In March, at an IMF Board discussion of Honduras' arrears, all major shareholders declared that further multilateral support to Honduras should be made only after clearance of arrears and approval of an IMF Stand-by. The  - 7 - US Government also indicated that its support for any financial package for Honduras would require an IMF Stand-by. Without external funding, Honduras fell into non-accrual status with the Bank on April 1, 1989. 22. This experience under the SAL highlighted the need for a coordinated approach to stabil- ization, adjustment, and funding arrears clearance among the multilateral institutions supported by bilateral donors. In an effort to resolve the situation, the Bank proposed a dual strategy to the Govemment of Honduras consisting of: (i) a short term action program comprising a stabilization program with the IMF for 1989 and a solution to the arrears problem, and (ii) a medium-term adjustment program for the next three-four years that would provide the basis for external aid resource mobilization. The adjustment program would consist of a second SAL to reform the trade regime, increase the mobilization of financial resources, and improve the management of public expenditures and investment. Sector adjustment loans would also be prepared to address issues in public administration in general, and the problems relating to ENEE, in particular. Other sector adjustment loans could follow to improve export incentives in agriculture and manufacturing and to strengthen the financial sector. However, Honduras' serious economic problems and heavy external debt burden, further aggravated by military hostilities in the area, raised serious questions about the country's creditworthiness. Accordingly, the Bank belatedly recognized the need to raise new money for the proposed reform program primarily on concessional terms. 23. In May, 1989, Bank staff participated in an IMF mission to continue discussions of the key policy measures requested as prior actions for a Stand-by Agreement and to underline the importance of such an agreement to a viable financing package for 1989. However, two prior actions required by the IMF were politically highly controversial from the Government's point of view. The first prior action required raising the proportion of trade transactions at the parallel market rate. The President of the Central Bank opposed the agreement on the grounds that it amounted to a virtual devaluation. The second prior action required the valuation of imports at the parallel market rate for assessment of customs duties, in order to raise fiscal revenue and reduce the budget deficit. The out-going, minority Administration did not wish to take such strong action so close to the presidential and congressional elections, which were only six months away. Moreover, the broad political consensus which had emerged earlier behind the proposed adjustment measures -- including congressional leadership, ruling party and opposi- tion party candidates to the presidency, and the private sector -- began to dissolve when the ruling party candidate for the presidency withdrew his support following a similar earlier move by the opposition party candidate. Given this political context, no agreement could be reached with the IMF, and the preparation of a stabilization/adjustment program had to await the election of a new government in November 1989. 24. Second Tranche Release Conditions: Although the macroeconomic situation deteriorated and Honduras accumulated external arrears, many of the conditions for the SAL's second tranche release were met. Expenditure reductions were made in 1988 in the amount of L40 million and revenue increases surpassed the L25 million required. In October 1988, the Government submitted to Congress the 1989 public sector budget, and it was approved with the required reduction of the consolidated public sector by 1.8 percentage points of GDP compared with 1988. A program of reform for the decentralized institutions and a plan of action to rationalize  - 8 - ENEE's management, operations, and finances were prepared with Bank assistance as part of the preparation of a public enterprise reform loan. Although the Bank did not formally agree on a privatization program with CONADI (the National Industrial Development Corporation), the program was being implemented with financial and technical assistance from USAID, and the latter was satisfied with CONADI's performance in 1989 when seven enterprises were privatized compared with only one each in 1986 and 1987. A Bank mission reviewed the Government's 1989 - 1990 investment program in October 1988 and prepared a detailed report which was discussed with the Government. The program for 1989 was designed to hold public investment to 5 % of GDP as required under the SAL, although Bank staff estimated that, on the basis of a realistic estimate of inflation, it could reach 5.5% of GDP. 25. In October 1988, the list of imports for which foreign exchange was to be purchased at the free market rate was defined. In early 1989 an estimate reviewed by Bank staff indicated that it would amount to over 40% of total imports for 1989, as required. In October 1988, Congress approved legislation modifying import duty exemptions and surcharges along lines agreed with the Bank, although the changes produced somewhat less revenue than expected. 26. Some of the targets of the monetary program were also met. Consolidated credit to the public sector was held below target and total credit was exceeded only slightly. However, Ml (currency and demand deposits) and the monetary base increased much more than targeted due to a net purchase of foreign exchange beyond amounts expected, due principally to the failure of the financing plan for the adjustment program referred to above, and the Central Bank did not increase its rediscount rate to 10% p.a. on January 1, 1989, as required under the SAL (it was not increased to 10% until May 1990). Also, the study to strengthen the regulatory framework for financial institutions was delayed repeatedly until other sources of finance could be obtained (USAID ultimately financed the acquisition of computer equipment and systems for the Superintendency of Banks as well as a study on the need for reform of the banking laws and financial sector legislation in 1990). 27. Despite this progress in meeting second tranche conditions, disbursement of the tranche could not take place in view of the deterioration of the macroeconomic situation and the collapse of the external financing plan for the adjustment program. Accordingly, the Bank waited for the results of the 1989 election to reopen discussions on the scope and depth of a stabilization/adjustment program with the newly elected Administration. 28. In November 1989, the opposition party candidate was elected as President in a landslide victory which resulted in a controlling majority for his party in the Congress. His first actions were to assemble a highly skilled and reform-oriented economic team and initiate discussions with the multilateral institutions to normalize relations. At the request of the Government, Bank, IMF and IDB missions visited Honduras during February 1990, and agreement was reached on a program that could be supported by the three institutions. The first phase of that program was introduced in March 1990, with the announcement of a series of wide-ranging reforms. The Government's plan was to clear all of its outstanding arrears to the Bank, the IMF and the IDB (totalling US$245.7 million) by June 25, 1990; the Bank's share of this total was US$152.6 million. As part of the financial package for the program, the Government sought the support of the IMF under a Stand-by Arrangement to be presented to the IMF Board by late June 1990,  - 9 - and requested the Bank to resume its assistance beginning with the release of the second tranche of the SAL, to be followed shortly thereafter by approval of a second SAL. This would trigger US$50 million in cofinancing from Japan. The Government requested the Bank to waive the specified conditions for release of the second tranche of the SAL and substitute in their place actions taken since March 1990, which were considered to meet or go beyond the requirements of the original program. 29. The package of measures announced by the Government in March 1990 included changes to the exchange rate, actions to increase tax revenues and limit current expenditures, and steps to reduce effective protection. A new exchange rate regime was introduced that brought the average exchange rate to L4 per US dollar (compared with L2 per US$, in effect since 1928). Congress approved a tax package in March 1990 and the Government's budget in April 1990 that were designed to ensure an increase in tax revenues from 16% to 21% of GDP, control expenditures on wages and purchases of goods and services at 21 % of GDP, and reduce the public sector deficit for 1990 to 6.9% of GDP. The Government also committed itself in an IMF Stand-by program to maintain this reduction throughout the year and not resort to inflationary domestic financing in 1991. The Government also expressed its intention to continue to divest public enterprises as indicated in decrees 161/85 and 197/85, to reduce overstaffing and to initiate a program of tariff rationalization for the remaining public enterprises. Also in March 1990, the Government reduced import duties from a range of 90% - 1 % to 40% - 2% and eliminated all exemptions and surcharges (with the exception of a list of goods requiring bilateral negotiations). As part of the agreements reached with the IMF on a Stand-by program, the Government defined and started implementing the 1990 monetary program designed to limit the net increase of domestic banking system credit to the public sector to 0.5% of GDP. Finally, the Government agreed to complete the study to identify measures to strengthen the supervisory and regulatory powers of the Superintendency of Banks. 30. Bank management concurred with the Government that the above list of actions and com- mitments were of sufficient depth as to have complied with, and in some cases, exceeded the conditions for the release of the second tranche of the SAL. Moreover, the measures formed the basis for a comprehensive program of structural adjustment that would be supported by a second SAL operation, to complement the stabilization program supported by the IMF. Accor- dingly, Bank management recommended to the Board that the second tranche of the SAL be released upon clearance of arrears and the Board granted its authorization on June 11, 1990. In parallel, the Bank arranged a financing package through the Consultative Group for Honduras designed to clear arrears to the multilateral institutions. The final package consisted of: a US$49.7 million Japanese OECF cofinancing for the SAL; US$44 million from USAID's Economic Program; bridge loans from Mexico (US$25 million), Venezuela (US$40 million), and the United States (US$ 82.3 million); and US$6.8 million from Honduras. The financial transactions called for under the plan were successfully executed in late June, and on June 28, 1990 arrears to the Bank were cleared. The suspension of disbursements was lifted on June 29, 1990, and the second tranche of the SAL in the amount of US$25 million was released on July 5, 1990.  - 10 - F. MACROECONOMIC RESULTfS 31. The collapse of the SAL financing package and the delay in releasing the second tranche until a new economic program was undertaken by the new government in mid-1990 clearly had an impact on macroeconomic results during 1988-90. When the SAL was prepared, it was expected that the real effective exchange rate would increase by more than 20% between 1987 and 1990. The increase was significantly greater than this when the new exchange rate regime was introduced in March 1990 and the official rate was adjusted from L2 to L4 per US dollar. There was expected to be a progressive increase in imports traded at the free market rate and import duties were expected to be steadily reduced along with the increase in the real exchange rate. The expansion of imports traded at the free market rate and the reduction in import duties also had to await the reforms of the new Government in March 1990. Foreign transfers were expected to decline by 10% per year starting in 1989. Instead, the balance of payments deficit widened in 1989, and was financed by an increase in arrears. In 1990, with SAL II financing, an IMF program, debt rescheduling and a smaller balance of payments deficit, Honduras' debt situation was stabilized. 32. Tax revenues were forecast to increase by 0.5% of GDP in 1989. They actually fell slightly from 14.9% to 14.8% of GDP as expected measures to improve tax administration and collection were not implemented. Government current expenditures were reduced between 1987 and 1990 as forecast, although by only 1.3% of GDP rather than the 2.6% forecast. The reduction of expenditures was expected to occur primarily as a result of a rationalization of operations of the main public enterprises. The rationalization program was delayed in 1989 until the new Government assumed office in 1990. Public sector deficits (including foreign transfers as revenues) were expected to decline on a cash basis from 4.8% of GDP in 1987 to 2% of GDP in 1990. They actually declined from 4.8% to 1.8% of GDP in this period, but only because foreign financing increased from 1.1% of GDP in 1987 to 7.2% of GDP in 1990 due to the SAL, the IMF Stand-by and related cofinancing and debt rescheduling. 33. The money supply increased by 14.4% in 1989 rather than the 12% forecast. Domestic interest rates were not liberalized in 1988 and 1989 as expected and quasi-money savings declined slightly rather than increasing as a share of GDP as forecast. GDP growth was expected to average 3.3% a year between 1989 and 1992. Actual growth averaged 2.9% during this period, but fell to only 0.1 % in 1990 as new fiscal measures implemented that year restrained growth. Domestic inflation was expected to remain close to intemational levels as the stabilization measures took hold and a gradual, controlled devaluation was implemented. Low net capital inflows in 1988 and 1989 forced the Govemment to resort to more domestic debt financing than planned. Consequently, the Central Bank exceeded its public sector credit targets, although the overall credit targets under the SAL's monetary program were met. These developments, followed by the large exchange rate adjustment in 1990, resulted in a jump in domestic inflation to 23% in 1990 and 34% in 1991, before falling to 8.8% in 1992. Overall, macroeconomic targets were not met as the stabilization measures were disrupted at the end of 1988.  - 11 - G. SUSTAINABILITY 34. The reform program initiated with the support of the SAL was continued through three policy-based operations: SAL II (September 1990 in the amount of US$90 million), the SAC (January 1991 - SDR 14.3 million), and an Energy Sector Adjustment Credit (ESAC - October 1991 - SDR 37.95 million). An Agricultural Sector Adjustment Credit (AGSAC) for SDR 43.3 million has been negotiated, and significant elements have already been implemented. In August 1990, Honduras became eligible for IDA and in September 1991, became an IDA-only country, providing it access to urgently needed sources of highly concessional financing. SAL II was designed to improve incentives to stimulate private savings and investment in export oriented activities, increase public savings and efficiency of the public sector, improve the commercial banks' mobilization and allocation of resources, and improve the productivity of the private agricultural sector. The SAC supplemented SAL II financial resources as part of the general Bank effort to help countries hit by petroleum price increases in the wake of the Gulf war. Automatic petroleum price adjustment mechanisms were introduced into the SAL II program through the SAC. The ESAC was designed to establish a comprehensive energy policy and strategy and a sound regulatory framework, strengthen the efficiency, planning and financial soundness of ENEE, improve electricity pricing and resource allocation in the sector, promote petroleum exploration and production, liberalize petroleum product trade, and encourage greater private sector participation in the development of the energy sector. AGSAC is designed to improve land use by supporting modifications to the Agrarian Reform Law, lay the basis for a sustainable management of the country's rich forest resources, and help improve sector planning and coordination. It will also consolidate reforms in trade, agricultural pricing policy, grain marketing, and rural finance started in 1990 and supported by SAL II. 35. As the foregoing summary indicates, reforms have now gone well beyond the measures envisaged under the SAL. Implementation has been essentially in accordance with agreements reached under the respective programs, although in some cases somewhat slower than planned. Under SAL II, the exchange rate, trade and financial sector reform programs are completed or are well advanced, as are privatization programs and the strengthening of the finances of key public enterprises. These reforms are unlikely to be reversed, although the redirection of public spending to social programs could be weakened by fiscal problems. Honduras has had a continuous program with the IMF since mid-1990 and has substantially met the IMF targets although some have had to be renegotiated. H. IMPLEMENTATION AND MONITORING OF THE LOAN 36. Borrower Performanc: The Government established a technical team to work with the Bank in the preparation of the SAL consisting principally of representatives of the Central Bank, Ministry of Finance, and Ministry of Economy. Cooperation was good, particularly during program preparation and Bank staff worked closely with the Government's technical team in designing the goals of the adjustment program. The Government was initially opposed to clearing its arrears to the IMF until the IMF demonstrated its willingness to contribute to a solution to Honduras' financial emergency, but eventually agreement was reached to make a partial payment to the IMF prior to Board presentation of the SAL. This attitude may have been a major reason for concerns in the IMF about the Government's commitment to carrying out the  - 12 - adjustment program. Towards the end of 1988 and in 1989 when problems emerged, discussions were elevated to a higher level to include top ministry and central bank officials; subsequently the dialogue was further expanded to include the participation of representatives of the political parties. After the breakdown of the program in April-May 1989, few contacts took place between the out-going administration and the Bank. Following the November 1989 elections, discussions were initiated with representatives of the Government-elect in Washington, DC, and subsequently in Honduras. The team put in place by the new administration worked effectively to define a broad program of reforms, and to introduce it rapidly, to normalize relations with the international donor community. 37. Bank Perfor .nc: The Bank carried out a difficult dialogue with the Government to agree upon an adjustment program and with the international financial community to obtain its support for the program. It sent a number of missions to Honduras in late 1988 and early 1989, to review progress in meeting conditions for second tranche release and to participate in IMF missions. During this period, Bank staff prepared a detailed report on the Government's 1989-90 public investment program. The Bank chaired the Consultative Group for Honduras which arranged a financing plan to clear Honduras' arrears in mid-1990. In addition, some effort was given to advising the Government on Bank audit requirements and disbursement procedures. Additional work was done on the SAL to prepare the documentation for second tranche release based upon revised conditionality and this was largely combined with the work done in the preparation for SAL II. However, the Bank failed to help to assure a sound financial package for the SAL. And it is likely that a more ambitious adjustment program, particularly with greater action on the exchange rate and to increase fiscal revenues, would have gained greater support from the IMF and helped to ensure a fully adequate financial package for the SAL. 38. Disbursement and Procurement: Disbursement and procurement proceeded smoothly under the loan. There was no use of international competitive bidding under the SAL as procurement was below the ICB threshold. 39. Reporting and Auditing: There was little direct reporting by the Borrower and follow-up on compliance with tranche conditions was carried out by Bank staff during supervision missions. The audit report for the period ending December 31, 1988, covering the first tranche of the SAL was not accepted, as it did not give separate opinions on statements of expenditure, information on compliance with loan covenants, or adequate disclosure on audit procedures followed. Following receipt of Bank comments, a single audit report covering both tranches was submitted in 1991 which met Bank requirements. I. PROGRAM RESULTS 40. The main objectives of the SAL were to assist the Government of Honduras to eliminate arrears to the multilateral agencies, stabilize the economy, and initiate implementation of an adjustment program. Partly because of political weakness and the views of key Honduran officials, the Government was only prepared to agree to a modest program of measures, many of which were short term in nature with limited long term structural benefits. The Bank was inclined to accept this program, partly because of its large exposure in Honduras, and partly because it expected that structural reforms could be deepened under future operations for which  - 13 - the SAL would pave the way. The Bank made this loan without an IMF Stand-by because the IMF could not formally agree on a Stand-by with the Government until its arrears were cleared. However, the IMF worked closely with the Bank on the interim stabilization measures contained in the SAL and were in agreement with them. It was expected that additional stabilization measures would be required (further action on the exchange rate and to increase fiscal revenues) in 1989 and would be included by the EMF in a subsequent Stand-by Arrangement. The disrup- tion in the financing plan when discussions with the IMF broke down, made it impossible for the Government to maintain its macroeconomic framework and the momentum to carry out the measures under the SAL was lost. An already weak Government was unable in an election year to sustain the reforms and generate support for the additional measures required by the EMF as conditions of a Stand-by Arrangement (with the accumulation of arrears, corrective measures had to be even stronger than originally anticipated). Further reforms had to await the results of the election at the end of 1989 and the preparation by the new Government of a new reform program. The initial measures in this program exceeded the conditions for release of the second tranche of the SAL and were used to justify its disbursement on July 5, 1990. 41. The program of measures in the SAL was inadequate in a number of respects. The conditions of Board presentation were weak leaving the more important actions as conditions of second tranche release. The actions to expand the share of foreign exchange transactions at the free market rate were modest in the light of the efforts on the fiscal and monetary side. For example, the Government would have had a much better chance of meeting the monetary and fiscal targets if it had adopted, at the earliest stage in its program, a much more aggressive program to improve tax collection. Income and property taxes only represented about one-fourth of tax revenues, less than 5% of GDP. Collection rates were estimated to be less than 30%. An aggressive, well-focussed program could have generated significant additional tax revenues to support the adjustment process. One could also argue that the required adjustment in interest rates -- affecting only the interest rate on central bank rediscounts -- was inadequate, as such lines involved a relatively small share of total credit. It would have been better to have attempted to obtain greater flexibility in other interest rates, considering that increased savings and strengthening the financial condition of commercial banks were important objectives of the SAL. Of course, the most serious weakness of the program was the inadequacy of the financing plan for the SAL. Had the OECF funds been provided on schedule, the Govemment's adjustment program might have been sustained at least through the early part of 1989, increasing the probability that the Government would have carried out important actions to meet the second tranche release conditions. 42. Despite the failure of the SAL program to stabilize the economy and to avoid the accumulation of new external arrears, the work done by Bank staff to assist the Government in the preparation of its three year adjustment program, and the implementation of the initial measures under the program, established the basis for the program developed by the new Government in 1990. Without the SAL the Government would not have understood as well as it did the need for the measures embodied in SAL II, which were more ambitious than the first SAL measures, nor would it have been able so quickly to convince the Congress and the public to take them. One of the major reasons for the restructuring of Ln. 2703-HO and the approval of the SAL was Bank concern that Honduras' arrears not reach unmanageable levels. Had it not been for the impact of these operations on limiting arrears and for the availability of SAL second  - 14 - tranche and Japanese OECF cofinancing funds, it would have been much more difficult to put together a plan to clear Honduras' arrears in 1990. J. LESSONS LEARNED 43. There are three main lessons that emerge from the Bank's experience with the SAL. EiWi, the Bank should not have gone ahead without a fully satisfactory set of stabilization measures. The strategy of starting with an easy program and hoping to follow it up with additional measures, expected under an IMF Stand-by, was unlikely to work in an environment where the Government's commitment to stronger reforms was likely to diminish rather than increase as the election, scheduled for the end of 1989, approached. Secondly, the Bank should have required that more of the measures related to the structural reforms be taken as conditions of Board presentation rather than as conditions of second tranche. As in the case of the stabilization measures, the Government's capacity for implementing the structural measures was likely to wane as the political impact of the measures gained importance as the elections neared. Earlier and more forceful efforts to improve tax administration and to reorient the public investment program would also have supported the goals of the economic stabilization. Third, the Bank should not have gone ahead with the SAL without an adequate, well defined and agreed financing plan which would have eliminated the external arrears to all major multilateral and bilateral agencies, including the IMF and the OECF, prior to Board presentation. 44. Of course these lessons are related. A more ambitious set of stabilization and structural reform measures would likely have attracted greater support from the international financial community and facilitated the arranging of a sound financing plan for the SAL. A sound financing plan would have allowed the elimination of arrears to the IMF prior to Board presen- tation, paving the way for a Stand-by soon thereafter, based upon a solid stabilization program under implementation. The Bank now requires that an IMF program be in place in support of any adjustment operation. This reflects an understanding that the support of each institution is required to assure the successful implementation of related stabilization and structural adjustment measures. The Bank also now insists that the more difficult measures in adjustment operations be taken up-front to assure that they are implemented. 45. A possible fourth lesson to be learned from the SAL is that perhaps the Bank should not have gone ahead with a borrower of doubtful creditworthiness for Bank lending. Honduras' serious economic problems and heavy external debt burden, further aggravated by military hostilities in the area, raised questions in the Bank in 1989 about the country's creditworthiness. The importance of providing resources to a country as poor and indebted as Honduras became clear during the implementation of the SAL. However, per capita incomes in Honduras were distorted by an overvalued exchange rate and Honduras did not become eligible for IDA until late 1990. Even then, IDA funds were provided only on a limited basis, and SAL II was approved on IBRD terms. Perhaps a new approach should be developed to improve the methodology for determining eligibility for IDA which takes into account to a greater extent the problems of countries with severely overvalued exchange rates.  - 15- PART H. PROGRAM REVIEW FROM THE BORROWER'S PERSPECTIVE A. BACKGROUND 46. Real Sector. In 1987, GDP increased 6.0 percent, higher than the 0.7 percent GDP growth reached in 1986. Compared to the previous year, this dynamism was mainly the result of a production increase in the agricultural, construction, trade, and service sectors. The main sources of growth were from production increases in coffee, bananas, seafood, basic grains and other products. As a percentage of GDP, gross domestic investment reached 13.3 percent, maintaining the same level of the previous year. 47. Prc. According to the consumer price index, average inflation was 2.5 percent, lower than the 4.4 percent registered in 1986. Lower inflation was a result of an adequate supply of basic grains, a stable exchange rate, and the use of price control policy. 48. External Sector. The balance of payments deficit worsened from 3.0 percent of GDP in 1986 to 4.0 percent in 1987. This situation resulted mainly from an increase in oil international prices, which forced Honduras to devote more foreign exchange to oil imports. In addition, international coffee prices declined in 1987. The volume of exports of basic products decreased by about 9.3 percent in 1987. The exchange rate policy contributed to this decline, as overvaluation of the exchange rate increased, making Honduran exports less competitive. Imports in 1987 registered a decline of 1 percent in relation to 1986. In 1986-87, considerable disbursements were made to service external debt interest payments. However, the economy did not obtain sufficient external resources from the international financial institutions (IMF, World Bank, IDB), and there was uncertainty with regard to AID disbursements. 49. Public Finances. The fiscal policy implemented by the Government in 1987 resulted in a deficit of 10.8 percent with respect to GDP, slightly higher than the 10 percent observed the previous year. This was mainly the result of the reduction in current revenues caused by the decline in Honduras's main international export prices (coffee, etc.). With regard to GDP, Government's revenues were 28.1 percent, higher than the 26.5 percent of the previous year. It should be highlighted in this context that income taxes increased by 19.1 percent. As for current expenditures of the consolidated public sector, a restrictive policy was maintained in order to keep investment levels consistent with the economic program. 50. Financial and Monetary Policy. In 1987 the objective of monetary policy was to reduce inflation by controlling the financing of the fiscal deficit. The active interest rate was 17 percent, maintaining a real competitive rate at the international level. Total credit grew by 8.6 percent from its 1986 level of 9.7 percent. This was due mainly to an increase in financing to the private sector. 51. By mid-1988, the economic situation prompted the Government to seek solutions to the macroeconomic imbalances through the implementation of various actions leading to the 1. This is a translation of the Spanish original, which is attached as Annex II.  - 16- negotiation and subsequent approval of a Structural Adjustment Program with the World Bank. The main objective of this Program was to apply corrective measures in the external, fiscal and monetary areas, as well as to clear arrears with international creditors/to pay overdue international obligations. To this end, it was necessary to accomplish various objectives and goals in certain specific economic variables, to consolidate stability, and to liberalize the economy, gradually promoting exports as a key variable in the economic development of the country. B. LOAN NO. 2990-HO: SAL I 52. After a series of reviews and adjustments to the conditionalities contained in the program, the Loan Agreement No. 2990-HO (Decree No. 134-88) was approved by the country authorities on October 29, 1988 for US$50.0 million to be disbursed in two tranches. The principal objective was the application of additional economic measures through a Program in which the actions, objectives and policies were designed to achieve the structural adjustment of the Honduran economy. Loan conditionalities were mainly directed towards the reorganization and adjustment of the country's finances, through the reduction of the fiscal deficit, containment of import growth, and reallocation of internal resources and foreign exchange to facilitate, in part, external debt service. Proceeds of US$25.0 million from loan effectiveness and from the United States' support fund were partly devoted to reduce the pressure on servicing the debt with multilateral organizations, even though arrears continued to be accumulated with commercial banks and on imports. 53. Following the signing of the Loan Agreement and the declaration of loan effectiveness (end of 1988), the actions leading to the release of the second tranche were interrupted due to reasons beyond Government's domain. The use of funds became subject to prior agreements with the International Monetary Fund (IMF). Once problems were solved, Honduras was able to reach an IMF Stand-by Arrangement, and obtain fresh money from the Japanese Government. Because 1989 was a year of political transition, the Government in power handed over to the next administration the final stage of program implementation. Therefore, the loan closing date was postponed from December 31, 1989 to July 5, 1990. It is important to highlight that, even though the presiding Government had to face an adverse situation, it carried out all the necessary actions to comply with SAL I conditionalities. C. MACROECONOMIC RESULTS 54. Broadly speaking, during 1988 economic performance was characterized by policies aimed at reducing the fiscal deficit, maintaining the lempira exchange rate, achieving price stability, and clearing external debt arrears. Since these policies were linked to an objective of sustained economic growth, they were inconsistent with World Bank conditionalities, and made it impossible to fulfill the planned targets. For example, in 1988 GDP experienced an increase of 4.6 percent, lower than the 6.0 percent attained in 1987. Also, prices increased by 4.5 percent, two points higher than the increase recorded the previous year. The fiscal deficit increased, rather than decreased, by about 100.0 million lempiras, compared to the level reached in 1987, and exports reached 7.7 percent against an increase of 6.2 percent in imports.  - 17 - 55. In 1989, the Honduran economy endured the fiscal deficit problems mentioned above, a scarcity of foreign exchange and the heavy accumulation of arrears payments abroad. Therefore, during 1989 actions were taken to reduce public expenditures and improve the balance of payments, and a credit policy was directed towards maintaining a monetary growth consistent with the real growth rate of production. However, efforts to correct these imbalances failed, as evidenced by 1989 production figures showing that, in real terms, production grew by 4.3 percent, lower than the 4.6 percent of the previous year, and that the domestic price level reached 9.8 percent due to price increases for most items. The extemal sector experienced continuous imbalances in 1989, as it had since 1988. In effect, even though a self-financing mechanism was introduced for non-essential imports (as planned since 1988), total imports in 1989 registered a 3.0 percent growth rate, higher than the 2.0 percent growth in exports. 56. On the fiscal side, the Government continued to introduce various proposed measures in order to improve its finances. Thus, a slight increase in tax revenues was attained through the elimination of exemptions and the use of tax surcharges approved by Congressional Decree No. 109-88. As part of the Administrative Reform Program, the Ministry of Finance started to put into practice some administrative measures to improve tax collection procedures. On the other hand, it was not possible to accomplish the goal of reducing by 40 million lempiras the total expenditures of the public sector. By the end of 1989, total expenditures amounted to 4,712 million lempiras, higher than the 4,324 million lempiras of the previous year. The increase in revenues was not enough to offset such a rise, consequently, the public sector deficit was not reduced as envisioned. Instead, it increased by more than 100 million lempiras, from 610 million in 1988 to 761 million in 1989, resulting in a deficit/GDP ratio of 8.3 percent. Central Government current expenditures, as a percentage of GDP, were 20.2 percent, higher than the 17.6 percent planned. This was due to larger expenditures on wages and salaries, goods and services, and interest payments on domestic and external debt. 57. Implementation of the 1989-91 public sector investment program began in 1989 with an investment goal equivalent to 5.0 percent of GDP. It is important to highlight that external consultants collaborated in the formulation of this program. The projects developed, however, were too ambitious to carry out, given the economic situation of the country. Special importance was given to the action plan to rationalize the Electric Power Company (ENEE), mainly because of the amount of the debt involved in the construction of the Hydroelectric Dam Francisco Morazan (approved towards the end of January 1991 by Decree No. 5-A-91). Priority was also given to the privatization of the companies held by the National Industrial Development Corporation (CONADI), so that the Government could recover the resources that it had invested in prior years. D. CONCLUSION 58. Analysis of program execution for Loan No. 2990-HO shows that the strategy used responded to conditions that the Government had indicated for that period. Even though the initial steps were taken in July 1988, the conditionalities to be fulfilled during July-December 1988 were not very demanding, and a very demanding program of stabilization was left for 1989. The measures required for stabilization were difficult to implement at this stage, since this was a year of political transition, and therefore, had to be postponed to the first semester of 1990.  - 18 - PART m. STATISTICAL INFORMATION RELATED BANK LOANS AND/OR CREDITS Loan/Credit Title Purpo Year of Approval Satu 1. Second Structural To improve incentives to 1990 In implementation. Adjustment Loan stimulate private savings and (Ln. 3257-HO). investments in export activities, increase public savings and efficiency in the public sector, improve resource mobilization and allocation, and improve productivity of the private agricultural sector. 2. Structural Adjust- To supplement SAL II, and to 1991 Implementation ment Credit help Honduras cope with petro- completed. (Cr. 2208-HO). leum price increases during Gulf War. 3. Energy Sector To establish a comprehensive 1991 In implementation. Adjustment Credit energy policy/strategy and a (Cr. 2306-HO). sound 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. PROGRAM TIMETABLE Date Planned Actual Date Initiating Memorandum July 1988 July 1988 Appraisal August 1988 August 1988 Letter of Development Policy August 1988 August 1988 Negotiations August 1988 August 1988 Board Approval September 1988 September 15, 1988 Loan Agreement October 1988 September 28, 1988 Effectiveness November 1988 November 23, 1988 Loan Closing December 1989 July 5, 1990  - 19 - CUMULATIVE LOAN DISBURSEMENTS Amount (US$ million) FY89 FY91 Appraisal Estimate 50.0 Actual 25.0 25.0 Actual as % of Estimate 50.0 100.0 Date of Final Disbursement 7/5/90 MISSION DATA No. of No. of Staff Month/Year Weeks Persons Weeks Preparation February 1988 2 5 10.0 Preparation April/May 1988 3 8 24.0 Preappraisal 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 III March 1989 1 1 1.0 Supervision IV April 1989 1 2 2.0 Supervision V October 1989 2 2 4.0 Program Completion February 1993 1 1 1.0 STAFF INPUTS (Staff Weeks) GRAND FY88 FY89 FY90 FY91 FY93 TOTAL LENP 28.9 8.5 37.4 LENA 4.2 13.4 17.6 LENN 6.9 6.9 SPN 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   ACTIONS TAKEN BEFORE CONDITIONS FOR ACTIONS TAKEN FOR GOALS ACTIONS TO BE CARRIED OUT SAL BOARD PRESENTATION SAL SECOND TRANCHE SAL SECOND TRANCHE' 1. Public Sector - Increase public sector savings - Carry out actions to raiw public - Definition of program for reduction of - Achievement of target of reduc- - Expenditure reductions in the from an estimated 0.6% of GDP savings by L65 million during the the fiscal deficit by L65 million on a tion of consolidated public sector amount of [.40 were made in 1987 to 1. I% in 1988 and second half of 1988. cash basis during July-December deficit by L65 million on a cash and revenue increases sur- 2.5% in 1989 (public sector 1988, including an expenditure basis during July-December 1988. passed the L25 million defined as Central Govcrnment, reduction program to yield L40-50 required. public enterprises, autonomous million and a revenue increase institutions, and municipalities). program to yield L25 million. - Reduce the 1989 fiscal deficit by - Define fiscal measures that would - Preparation of a draft budget for the - Approval by Congress of 1989 - Approved at least 1.8 percentage points of permit reduction of the consolidated Central Government for 1989 con- Central Government budget. GDP on a cash basis with public sector deficit by 0.7 percent- sisert with goals of reduction of respect to its 1988 level, age points of GDP on a cash basis consolidated public sector deficit by at - Approval by Executive Brnch of - Approved. in 1988, compared with its 1987 least 1.8 percentage points of GDP. 1989 budget for autonomous level, and by at least 1 .8 percentage Budget to be designed to achieve institutions. - points of GDP in 1989, compared reduction of Central Government - The reduction in the consoli- with 1988. current expenditures (excluding - Both budgets together to achieve dated public sector was not increases in interest payments) to reduction of consolidated public achieved. The 1989 deficit 17.6% of GDP in 1989, compared to sector deficit by 1.8 percentage increased by 0.6% of GDP, 18.3% in 1987. points of GDP, compared with compared with the 1988 1988 level, level. nImprove tax administration - Prepare during 1988 an administra- - Agreement on an administrative - Not achieved. tive reform program to: reform program to improve tax collection in 1989. (a) improve collection of taxes assessed at customs. (b) improve administration of income and sales tax collections. D-  ACTIONS TAKEN BEFORE CONDITIONS FOR ACTIONS TAKEN FOR GOALS ACT[ONS TO BE CARRIED OUT SAL BOARD PRESENTATION SAL SECOND TRANCHE SAL SECOND TRANCHE' 1. Public Sector (Contd) - Strengthen public enterprises - Dcfine and carry out a program of - Establishment of the Committee to be - Preparation of a program of - The program of reforms was managenent to improve their administrative reforms for public responsible for defining the program reforns for decentralized prepared but ordy patily economic efficiency and control sector enterprises, of administrative reform for public institutions to be initiated in 1989. implemented. their budgets and operating ector enterprises. programs. - Continue procesa of divestiture - Implementation of Privatization - Agrmement on an action plan with - Satisfactory progres was of publicly held firm.s program. monthly targets for 1989 for registered in carrying out the execution of CONADI's program dcfined in Dccretos privatization program defined in 16 1/85 and 197/85 during Deeretos Nos. 161/85 and 197/85. 1989. - Achieve financial aolvency for - Prepare an action plan to include - Esblishment of a Committee to be - Preparmtion of a plan of action to - Prepared with Bank ENEE. current expenditure reduction, responsible for defining a program of rationalize expenditures, invest- assistance. seuing of tariffs based on long-run institutional, operational and policy ment and management, and to re- marginal cost, and restructuring of reform for this enterprise. structure ENEE's financial debt the enterprise's debt. during 1989. - Reorient the public investment - Reorient the public sector invest- - Agreement with Bank on public - Investment program prepared program to support the goals of ment program for 1988, limiting investment program for 1989 that with Bank assistance - but economic adjustment. investment expenditures to 5 % of would limit total investmfnt target exceeded. GDP, excluding those projects expcnditure to no more than 5 % financed entirely with foreign of GDP. grants. - Review high-coat projects (Choluteca irrigation, Tegucigalpa airport, Tegucigalpa water supply).  ACTIONS TAKEN BEFORE CONDITIONS FOR ACTIONS TAKEN FOR GOALS ACTIONS TO BE CARRIED OUT SAL BOARD PRESENTATION SAL SECOND TRANCHE SAL SECOND TRANCHE' 11. Balance of Payments - Increase non-traditional exports. Expand coverage of CETRA - Increas coverage of CETRA to 40% mechanism to include more export of foreign exchange eamings from all products. export products, except coffee and timber, which will receive 15%. Bananas and minerals, which will continue to be covered by current apecific regimes, will not be eligible for CETRA benefits. - Reduction of non-essential - Expand the list of products to be Definition of list of imports to be - Verification that list of imports - Achieved. impons. imported through the free market, purchased at the free market exchange covering 40% of imports in 1987 rate. List designed to secure that have been channeled to the free 40% of the value of annual imports market (CETRA). will be purchased using foreign exchange procured at the free exchange rate (CEIRA). - Improve the transparency in the - Control and registration in the - Verification of implementation of - Carried out. foreign exchange market. Central Bank of the CETRAS the control and registation issued by the commercial banks. system. - Elinination of the anti-export - Reduction in effective protection - Submiission to Congress of legislation - Congressional approal of the - Approved. biases of the trade system. level, to eliminate import duty exemptions legislation. and sureharges while increasing fiscal revenues.  ACTIONS TAKEN BEFORE CONDMONS FOR ACTIONS TAKEN FOR GOALS ACTIONS TO BE CARRIED OUT SAL BOARD PRESENTATION SAL SECOND TRANCHE SAL SECOND TRANCHE' 111. Monetary Prosram - Cut down inflationary pressu. - Sterilize excess monetary base by - Agreement on a Monetary Program - Compliance with targets for - Not achieved although reinstating reserve requirements on with wonthly targets for September/ September-December 1988 and consolidated credit to the imports and carrying out open October 1988. agrmement on a Monetary public sctor was held below market operations. Program with monthly targets for target and total credit January-December 1989. exceeded only slightly. However, the money supply and the monetary base increased much more than targeted. - Slow down the growth of the - New Public debt should bc - Change the characteristics of the monetary base, contracted at market rates. Public Debt, so a larger proportion of the debt is contracted at market rates, outside the Central Bank. 4 - Avoid inflationary impact of - Money creation for the program of external debt conversion, extcrnal debt conversion must be within the agreed targets for monetary expanaion. IV. Financial Sector - Unify interest rates on Central - Develop and implement - Agree on methodology and increae - Start implementing the - Not done until May 1990. Bank credit lines. methodology to adjust intcrest rates the Central Bank rediscount rate to methodology and increase the on main credit lincs from Central 9% (except for operations involving Central Bank rediscount rate to Bank, trust funds and BANADESA basic grains). 10% on January 1, 1989 (except in order to climinate subsidies and for basic grains). improve market signals.  ACTIONS TAKEN BEFORE CONDITIONS FOR ACTIONS TAKEN FOR GOALS ACTIONS TO BE CARRIED OUT SAL BOARD PRESENTATION SAL SECOND TRANCHE SAL SECOND TRANCHE' IV. Financial Sector (Cont'd) - Strengthen the financial - Go ahead with the Technical - Selection of consultants to carry out - Agree on Action Program for - Not carried out. Financed condition of conmmercial banks. Assistance to the Superintendency technical assistance, implementation of the subsequently from other of Banks as agreed under IBRD Ln. recommendations of consultants. sources. 2703, with the following objectives: (a) improve supervision and control procedures; (b) improve information system; (c) providc for training of Superintendency of Banks' personnel; (d) mnake recommendations on needed change in the banking law regarding regulations on capital requirements, ceilings on credit granted to related parties, information that must be published, and strengthening and better defining the roles and authority of the Superintendency of Banks and its interaction with the country's financial institutions. 1. This list includes only actions specified in the Loan Agreement, not the additional measuras implemented by the new government in March 1990.   - 27 - Annex II Page 1 of 10 BANCO CENTRAL DE HONDURAS Depto. de Estudion Econ6micos Diviai6n de AnAlisis y Polftica Econ6mica Secci6n de Convenios y PolIftic Comercial COKENTARIOS SOIRE LA EJECUCION DEL PRESTAMO No. 2990-HO-(SAL I) SUSCRITO RN 1988 ENTRE LA REPUBLICA DE HONDURAS Y IL EACO KUNDIAL AhTECIDENTES Sector Real En 1987 el Producto Interno Bruto (FIB), creci6 un (6.0%) que es superior al (0.7%) alcanzado en 1986. Este dinamismo en relaci6n al afto anterior, se origin6 principalmente en un aumento en la producci6n de los sectores agropecuarios, construcci6n, comercio, servicios entre otros. Con respecto a la Inversl6n interna Bruta como % del PIB alcanz6 un nivel de 13.3%, manteniendo el mismo nivel del ago anterior. Los efectos positivos que muestran los indicadores de la producci6n, se originan en el crecimiento de la producci6n de cafg, banano, mariscos, granos b&sicos y otros productos. Precios La inflaci6n medida a trav6s del IPC, se situ6 en 2.5% inferior al 4.4Z de 1986 originado en un adecuado abastecimiento de granos b&sicos, tipo de camblo estable y polftica de control de precios adecuada. Sector Externo La Balanza de pagos, refleJ6 en la cuenta corriente y como porcentajea del FIB, un deterioro al pasar au deficic de 3.0% en 1986, a 4.0% en 1987, como consecuencia en primer lugar del ineremento en el precio  _nnex II -8-_ag 2 of 10 internacional del petrrleo, que oblig6 a nuestro pa!s a deatinar mAi divioas para la importad.6n de eats producto astrat6gico. En contrasts con lo anterior, el precio an el mereado internacional del caf6 disminuy6, lo que provoc6 un deterioro en low t(rminoa de intercambio. Las exportaciones de los principales productos disminuyeron en 1987 on aproximadamene 9.3%, en relaci6n al ato 1986, en este comportamiento incidi6 la polctica del tipo de cambio real, ya qua se tonfa una moneda sobreapreciada, tal como lo demuestra el ITCER que registr6 un nivel de 114.22 inferior al observado al alto precedente, provocando una manor competitividad de nuestras exportaciones. Por el lado de las importaciones, se observ6 en 1987 una diaminucl6n de 1% con relacion a 1986 pero como porcentaje del PIB, 4stas se mantuvieron en proporciones do 18.7% y 20.0Z, respectivamente. Paralelo a lo anterior, se efectuaron considerables desembolsos para el pago de intereses sobre deuda externa, sin embargo, la economda no cont6 con recursos externos suficientes, de parte de las in8tituciones financieras internacionales (PMI, BM, BID), aef como por la incertidumbre respecto a los desembolsos de la Agencia Internacional para el Desarrollo AID. Finanzas PGblicas Con la polftica f iscal ejecutada por el Gobierno en 1987, se alcanz6 un deficit con respecto al PIB de 10.8% levemente superior al observado el aflo anterior que fue de 10%. Este resultado fue originado especfficamnente por el impacto, que en las finanzas publicas gener6 la disminuci6n de los precios internacionales de nuestras exportaciones (Caf6 etc.), a traves de una reduccion en los ingresos corrientes. E1 ingreso del Gobierno general se ubic6 en 28.1% con respecto al PIB, on relaci6n con el 26.5% del aHo anterior, donde destaca el aumento de 19.1%  - 29 - Annex II Page 3 of 10 del impuesto sobre la rents. En relacion a low Gastos Corrientes del sector pu'blico consolidado, se mantuvo una polItica restrictiva orientada a mantener niveles de invermi6n acordes con el programa econ6mico. Poltica Monetaria y Financiera En 1987, la polftica monstaria tuvo como objetivo la reduccl6n de la inflacifn, mediante el control del financiamiento del dificit fiscal. La tasa de interis activa fue de 17Z, manteni4ndose una tasa real competltiva a nivel internacional En lo que respects a los activos pars el crtdito total, se observ6 un crecimiento de 18.3%, superior an 8.6 puntos porcentuales al nivel registrado en 1986 que fue de 9.72, que se explica bUsicamenta por e1 incremento del financiamiento al sector privado en tErminos reales de 15.1% al relacionarlo con el a?[o 1986 qm,* fue de 8.2%. La situaci6n antes descrita indujo al Gobierno, a resolver lou desequilibrios macroecon6micos a mediados de 1988, mediante la implementaci6n de una aerie de gestiones encaminadas a la negociacifn y posterior aprobaci6n de un Programa de Ajuste Estructural con el Banco Mundial, cuyo objetivo primordial signific6 la apllcaci6n de modidas correctivas en el orden externo, fiscal y monetario, asS como cunplir con obligaciones internacionales vencidas. Lo anterior, a travis del logro de una serie de objetivos y metas en algunas variables econ6micas especfficas, consolidaci6n de la estabilidad, liberalizaci6n do la econom.fa en formas gradual en donde el fomento de las erportaciones fuera una variable clave en el desarrollo econ6mico del pafs. EL PRESTAMO No. 2990-HO: SAL I DespuEs de una aerie de reviuiones y ajustes a las condiciones a cumplir por Honduraa con el Banco Mundial, se aprueba el 29 de octubre de 1988 el  - 50 - Annex II Page 4 of 10 Convenio de Prhtamo No. 2990-HO (Decreto No. 134-88), por un monto de US$ 50.0 millones a desembolsarse en dos tramos; el objetivo principal, lo constitiy6 la aplicaci6n de medidas adicionales de orden econ&nico a travis de un Programa cuyas acciones objetivos y polfticas fueran diseffados para lograr el ajuste estructural de la economfa hondureffa. De acuerdo a la estructura del pristamo, se observa que las condiciones allf establecidas se dirigen principalmente a la reorganizaci6n y ajuste de las finanzas del pafa, mediante In reduccil6 del deficit fiscal, contenci6n de importaciones a.! como la ressignacit6n de recursos internos y de divisas para subsanar en parte el servicio de la deuda externa. Al obtenerse el primer desembolso de US$ 25.0 millones am! como desembolsos de los foodo6 de apoyo del Gobier-ao de Los Eatados Unidos, iStos se destinaron en parte para reducir la presift de pagos con organiamos multliaterales adn cuando se siguid acumulando atrasos con la banca comercial y por importaciones. Posterior a la firma del Convenio (finales de 1988) y de haber obtenido *I primer desembolso, las geetiones para realizar el eegundo desembolso fueron interrumpidas por causas ajenas al Gobierno, y la aubsiguiente utillizacion de datos, estuvo condicionada acuerdos provios con el Fondo Monerarlo Internacional (FMI). Una vez solventadas las dificultades se logr6 obtener recursos de este organismo, a travis de un prestamo stand-by, asa como ingresos frescos del Gobierno del Japon. Debido a que 1989 era un afto de transici6f pol!tica, el Gobierno de turno traslad6 al siguiente, la etapa final de ejecuci6n del pr6stamo raz6n por la cual, 1l fecha de cierre que fuera planificada para diclembre 31 de 1989, se traslad6 a Julio 5 de 1990. Es importante seftalar, quo aGn cuando me tuvo que enfrentar situaciones adversas, el Gobierno de turno, realiz6 todas las acciones que fueran necesarias para dar cumplimiento con la condicionalidad establecida en el SAL I.  - 31 - Annex Il Page 5 of 10 RESULTADOS KACROECONOMICOS En tgrminos general*. y en forma muy resumida se puede decir que durante 1988, el Comportamiento Econ& ico se caracteriz6 por polfticas orientadas a la reducci6n del d6ficit fiscal, mantener el tipo de cambio del leupira, aaf como la estabilidad de los precios y cumplir a su vez con los atrasos pendientes por servicio de deuda externa, ligado todo lo anterior, a un objetivo de crecimiento econ6mico y crecimiento soatenido que entr6 en contradicci6n con las condicionalidades de ese Organismo, lmposibilitando el cumplimiento de las meta* propuestas. AiX, 1988 observC un crecimiento del Producto Interno Bruto de 4.6Z inferior al 6.0% registrado en 1987, con un crecimiento de precios de 4.5%, superior en dos puntos al crecimiento alcanzado an el a&o anterior. El ddficit fiscal por mu parte, en vez de disminuir, aument6 airededor de L 100.0 mifllones sobre el nivel alcan.-ado en 1987, y ls8 exportaciones alcanzaron una tasa de 7.7% contra un crecimiento de 6.22 en el nivel importado. Para 1989, la economfa Hondurefta arrastr6 los problemas de d6ficit fiacal anteriores, eocasez de divisas y la fuerte acumulaci6n de pagos atrasados al exterior, por lo que ese aflo se tomaron nuevamente medidas encaminadas a reducir el gasto pablico y mejorar nuestra balanza de pagos, asi como una polftica crediticia dirigida a mantener un crecimiento monetarlo consistente con la tass de crecimiento real de la producci6n. Sin embargo, lo esfuerzos por corregir estos desequilibrios no logran su objetivo, las mimas cifras lo evidencian al mostrar la producci6n un crecimiento en terminos reales de 4.3Z inferior al 4.6% del afto anterior, y un nivel de precios internos de 9.8Z origlnado por incrementos en la mayorfa de los rubros qua lo componen.  32 - Annex II Page 6 of 10 En la parts fiscal, el Gobierno continu6 introduciendo varias da las medidas propuestas con el fin de mejorar sus finanzas, aof logra darse un lave mejoramiento an loe in8resoa tributarios madiante la sliminaci6n de uxenciones y de algunas sobretacas a travSs de 14 aprobaci6n an e1 Congreso Nacional del Decreto No.109-88. Be comenz6 a poner en prActica algunas de las medidas de tipo administra- tivo de parts del ministerio de Hacienda, cowo parre del Programa de Reforma Administrativo, orientado a mejorar los procedimiento de recaudaci6n de recursos. Por otra parte, no fue posible cumplir con las metas de reduccci6n de los RA*L W Lotalea del sector pdblico fijadas en L 40.0 millones. Efectivament. al final del age se tuvo una ejocucifn total de L 4,712 milloneg superior a lou L 4,324 milloniw dwl atu utLwrlue, delbido eu parte a que el crecimiento de los ingresos no fue suficlente para contrarreRrar dihn c.rec.imiento. El deficit del sector pdblico potr st parti, vim lgrr redutiraea como se pensaba y aumonrd en mis de L 1O0.0 millaue. at pauar de L 610.0 iullt.Tiw eii lA88 E 1. 7i9.8 u 1I r,,u*n Ufl 19BO, UrwujaLIiu uu. hluLulLidu ddtfioc/pIR do 8.3%. Los gestos corriente d1e1 CGnhterrnno Centrnl, nn alcanzaron al nivel de 17.6X dul PIB eULablelidu, al uILU -La .tL 20.2 fiwL ,L Al'ti9A An MAYAr7-Pt erogAc1nnAA pnr ramularArnInnaR, compra de bimnos y wervicion, pugo de intereses de deuda externa como interna. Xl programa du Invurml6n puc ul wui te pyblieo, logr6 realizarce abarcando el periodo 1989-1991, con una mera de Inversl6n de 5Z del P1S. Ea importante sefalmlr, qte para ^%z fnrrnllArfhin RA cOnt6 con la  - 3.3 - Annex II Page 7 of 10 colaboraci6n de varigo consultores externui quo fueron desarrollando programas demasiado ambiciosos, dif!ciles de llevar a cabo por la sltuaci6n scon6micas del paSs en *se entonces. Gran significado requiri6 el plan de accidn para la rJlonalitaie