Tuesday, December 6, 2011

Honduras.Fiscal Emergency Recovery Development Policy Credit Program

One of the Honduran administration’s top objectives is to foster high economic growth. Putting the economy on a rapid and sustainable growth path will not be easy, but it is feasible. Action will be required on five fronts. First and foremost, a more conducive macroeconomic framework is necessary; in particular, redressing the large imbalances in Central Government finances and unresolved structural weaknesses in public pension funds and public sector enterprises. Second, an integrated citizen security strategy is necessary to tackle the increasing levels of crime and violence that are undermining the country’s growth potential and investment climate. Third, investments in infrastructures are needed to promote the country’s regional development. Fourth, poor governance negatively affects return rates of investment opportunities in Honduras. Finally, low levels of human capital are an important growth constraint. This operation will focus on addressing the first two areas; the rest are being supported by other Bank operations and activities.

2. The Government launched fiscal consolidation efforts in 2010 and has begun tackling the remaining risks to macroeconomic stability and unresolved structural weaknesses in public pension funds and public sector enterprises. To this end, the Government has already introduced measures to close the actuarial deficits of the main public pension institutes—Instituto Nacional de Previsión del Magisterio (INPREMA), which serves the private sector and public sector teachers, and Instituto Nacional de Jubilación y Pensiones de los Empleados Públicos (INJUPEMP), which covers Central Government civil servants.
Similarly, the Government has introduced measures to contain the wage bill and is implementing a strategy to strengthen tax administration.

3. President Lobo’s administration has begun to make significant efforts to fight crime and violence and promote citizen security; however, these efforts will require substantial implementation support in order to be sustained and to have a robust development impact over time. The Government has approved the National Citizen Security and Co-existence Policy 2011-2022, which provides a comprehensive and long-term approach to this challenge, with crime prevention as one of its main pillars. In addition, the Government has mandated the Security, Defense, and Governance Cabinet (Gabinete de Seguridad, Defensa y Gobernabilidad) to provide the intra-governmental coordination which is required to implement the policy. Moreover, Congress has approved legal reforms to secure new resources to finance activities to foster security, including those addressed in the citizen security policy framework.

4. This document describes a proposed First Programmatic Reducing Vulnerabilities For Growth Development Policy Credit (DPC) in the amount of SDR 55.1 million for the Republic of Honduras. The programmatic series, which includes one subsequent loan, is designed to assist the Government in strengthening fiscal management and in implementing an integrated citizen security policy. Specifically, the operation supports four areas that are central to the reform program: (i) tax administration, focused on improving taxpayer compliance; (ii) civil service reform, focused on the rationalization of the public
wage bill by delinking teachers’ salary adjustments from those reflected in the private sector’s minimum wage; (iii) pension reform, designed to lessen contingent fiscal vulnerabilities by reducing the public pension institutions’ actuarial deficits, and (iv) citizen security reform, focused on strengthening institutional coordination mechanisms and programs needed for an integrated violence prevention strategy . The reforms supported by this operation are expected to have a positive impact on poverty and inequality (see section VI).

5. The proposed operation is envisaged in the new Country Partnership Strategy covering the period FY2012-2014 (to be presented jointly with this operation to the Board of Executive Directors) and is closely aligned with other Bank operations. For example, the Improving Public Sector Performance Technical Assistance Loan (P110050, currently under preparation and expected to accompany this operation) provides support to strengthen public sector human resource management. In addition, a Japan Social Development Fund (JSDF) for Employment Generation in Poor Urban Neighborhoods will complement this operation.

World Bank. Document Date:  2011/11/03.Document Type:  Program Document.Report Number:55656.Volume No: 1 of 1