to their low coverage. Public debt in- creased steeply from 43.5 percent in 2019 HONDURAS Key conditions and to 55.8 percent in 2021, mainly composed of multilateral financing, given the coun- challenges try’s high-risk premium. A high food in- security rate (34.8 percent) and low Table 1 2022 Honduras is one of the poorest and most school attendance persisted in 2021, limit- Population, million 10.4 unequal countries in Latin America and ing human capital accumulation. GDP, current US$ billion 30.7 the Caribbean. In 2019, one in two people GDP per capita, current US$ 2942.6 lived in poverty (US$6.85 per day, 2017 a 12.7 International poverty rate ($2.15) PPP), concentrated in rural areas. Lower middle-income poverty rate ($3.65) a 26.4 Annual real GDP growth averaged 3.1 per- Recent developments a 49.5 cent from 2010-2019, driven by remittance- Upper middle-income poverty rate ($6.85) Gini index a 48.2 fueled private consumption. The country Despite global headwinds and impacts School enrollment, primary (% gross) b 96.5 benefited from prudent macroeconomic from hurricane Julia (1.2 percent of 2021 b 71.5 management anchored in the Fiscal Re- GDP), annual real GDP is estimated to Life expectancy at birth, years sponsibility Law (FRL), a crawling peg have expanded by 4 percent in 2022, dri- Total GHG emissions (mtCO2e) 29.3 with ample foreign reserves, and a sound ven by private consumption and private Source: WDI, Macro Poverty Outlook, and official data. financial sector. However, Honduras lacks investment. On the supply side, the a/ Most recent value (2019), 2017 PPPs. b/ WDI for School enrollment (2012); Life expectancy productive capacity, and its exports have growth was driven by maquila and ser- (2020). been insufficient to boost incomes and vices; the contribution of labor-intensive growth, particularly in rural areas. Exports agriculture remained subdued due to cli- are highly concentrated in agricultural mate shock impacts. commodities and low-value manufactured Strong domestic demand, pandemic-relat- Honduras's economy expanded robustly goods, destined for the U.S. Several factors ed global supply-chain disruptions, and a undermine competitiveness, including commodity price spike following Russia’s in 2022, supported by remittance-fueled high exposure to external shocks and nat- invasion of Ukraine caused high inflation. private consumption and private invest- ural hazards, low levels of climate-related Average inflation accelerated to 9.1 percent ment. GDP growth is expected to moder- resilience, elevated crime, and institutional in 2022 – the highest since 2008 and nearly ate in the near term amid a tempering of and business environment challenges. double the upper bound of the Central The impacts of the pandemic and hurri- Bank’s (BCH) target band (4 ± 1 percent). global demand and persistent inflationary canes Eta and Iota in 2020 exacerbated Yet, the BCH maintained the key policy rate pressures. Poverty and inequality are ex- existing economic and social challenges. at 3 percent in the context of shallow capital pected to continue their downward trend, Real GDP contracted by 9 percent y-o-y, markets weakening monetary transmis- albeit at a slower pace. Progress is limited and poverty (US$6.85 line) increased by sion, while speeding up liquidity absorp- by high inflation and slow labor market 8.2 pp to 57.7 percent in 2020. The coun- tion through open market operations. try's countercyclical response cushioned Higher prices and unemployment threaten recovery with employment remaining be- food security and poverty reduction. Un- the impacts of these multiple shocks; low pre-pandemic levels. however, social assistance programs had employment (8.9 percent in 2022) was still a relatively small mitigating impact due above its pre-pandemic level (5.7 percent), FIGURE 1 Honduras / Real GDP growth, inflation, current FIGURE 2 Honduras / Actual and projected poverty rates account balance (CAB), and NFPS fiscal balance and real GDP per capita Percent Poverty rate (%) Real GDP per capita (constant LCU) 15 70 30000 12 60 25000 9 6 50 20000 3 40 0 15000 30 -3 10000 20 -6 -9 10 5000 -12 0 0 2010 2012 2014 2016 2018 2020 2022 2024f 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 CAB (% of GDP) Fiscal Balance (% of GDP) International poverty rate Lower middle-income pov. rate Inflation Real GDP growth Upper middle-income pov. rate Real GDP pc Sources: Central Bank of Honduras and World Bank staff estimates. Source: World Bank. Notes: see Table 2. MPO 1 Apr 23 particularly for women as the unemploy- financing. Foreign reserves stood at 28 and inequality reduction in the medium ment gender gap widened from 3.9 per- percent of GDP by end-2022, covering 6 term. Poverty (US$6.85 line) is expect- cent in 2019 to 6.7 percent in 2022. Poverty months of non-maquila imports and sup- ed to decrease slightly to 51.9 percent in (US$6.85 line) is estimated to remain above porting exchange rate stability. Despite 2023, and 51.3 percent by 2024. Growth pre-crisis levels, at 52.4 percent in 2022. unfavorable terms of trade, the current is projected to rise modestly by 2025, fu- While remittances, representing 28.1 per- account deficit is expected to narrow to eled by remittances, investment, and ex- cent of GDP and about 30 percent of 3.3 percent of GDP in 2022 (from 4.3 per- port demand. household income for the bottom 40 per- cent in 2021) on the back of strong re- The 2023 budget foresees a significant in- cent of households receiving remittances, mittances, mainly financed by multilater- crease in spending as the execution of on- grew by 20 percent in 2022, they did not al debt and foreign direct investment. going and new investment projects accel- compensate for deteriorated labor market erate, which could weaken public finances outcomes and inflationary pressures from and increase Honduras’s financing needs. the war in Ukraine. A wider NFPS deficit relative to 2022 is The government announced an expansion- Outlook projected over the medium term, bound by ary budget, including sizable reconstruc- the FRL’s escape clause ceilings: 4.4 per- tion and investment spending, an increase Real GDP growth is projected to decel- cent in 2023, 3.9 percent in 2024, and 3.4 in energy and fuel subsidies, and financial erate to 3.5 percent in 2023, given lower percent in 2025. The government plans a assistance to the agriculture sector. In early growth among trading partners and per- gradual fiscal adjustment to return to the 2022, it authorized new borrowing for up sistent inflationary pressures. Weaker ex- FRL target of 1 percent of NFPS deficit; to US$2 bn in 2022-23, withdrew US$335 m port demand coupled with elevated im- however, the timeline is uncertain. The ad- in IMF Special Drawing Rights, and incor- port prices are likely to widen the current justment is planned to be supported by porated US$1 billion (3.3 percent of GDP) account deficit in 2023; robust import de- revenue mobilization measures, improv- in monetary financing into the 2022-2023 mand will maintain the current account ing the efficiency of public spending, and budget, setting out a non-financial public deficit over the medium term. Gradual budget reallocations. However, challeng- sector (NFPS) deficit of 4.9 percent of GDP disinflation is projected over the medium ing legislative position of the ruling party in 2022. However, a small deficit of 0.24 term as global inflation subsidies; how- could affect the progress on fiscal, social, percent of GDP was registered due to slow ever, inflationary pressures could per- and structural reforms. Along with budget budget execution coupled with strong cor- sist if the policy rate is maintained, and execution issues, this could depress private porate income tax performance. the government implements its spending investment, weaken growth, and cause a The external position remained strong, plan. Slower growth and persistent infla- deterioration in the labor market and liv- supported by remittances and external tion will likely curb progress in poverty ing standards of the population. TABLE 2 Honduras / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2020 2021 2022e 2023f 2024f 2025f Real GDP growth, at constant market prices -9.0 12.5 4.0 3.5 3.6 3.7 Private Consumption -6.2 15.1 5.0 3.2 3.7 3.9 Government Consumption 2.9 8.5 1.7 0.5 0.1 0.4 Gross Fixed Capital Investment -23.8 33.3 2.8 6.9 4.1 4.0 Exports, Goods and Services -20.8 21.5 5.0 4.2 5.1 5.2 Imports, Goods and Services -18.5 33.0 5.2 3.9 4.1 4.3 Real GDP growth, at constant factor prices -9.0 12.5 4.0 3.5 3.6 3.7 Agriculture -6.3 0.4 1.7 2.1 2.2 2.3 Industry -14.3 20.1 5.3 4.8 4.9 5.0 Services -7.2 12.5 3.9 3.3 3.4 3.5 Inflation (Consumer Price Index) 3.5 4.5 9.1 7.1 4.6 4.2 Current Account Balance (% of GDP) 2.9 -4.3 -3.3 -3.8 -4.1 -4.0 Net Foreign Direct Investment Inflow (% of GDP) 1.6 1.2 1.0 1.2 1.4 1.4 a Fiscal Balance (% of GDP) -5.5 -3.7 -0.2 -3.4 -3.0 -2.2 Revenues (% of GDP) 28.2 30.0 30.5 30.0 30.6 31.1 a Debt (% of GDP) 54.1 55.8 51.0 51.7 52.1 50.6 a Primary Balance (% of GDP) -4.3 -2.8 0.8 -2.7 -2.3 -1.6 b,c International poverty rate ($2.15 in 2017 PPP) 19.5 14.5 13.3 12.9 13.0 12.7 b,c Lower middle-income poverty rate ($3.65 in 2017 PPP) 34.7 29.6 28.2 27.3 26.9 26.3 b,c Upper middle-income poverty rate ($6.85 in 2017 PPP) 57.7 53.3 52.4 51.9 51.3 50.7 GHG emissions growth (mtCO2e) -5.1 8.1 1.6 0.2 1.4 1.7 Energy related GHG emissions (% of total) 33.8 36.3 36.3 35.5 35.4 35.5 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. Notes: e = estimate, f = forecast. a/ Fiscal data refers to non-financial public sector. b/ Calculations based on SEDLAC harmonization, using 2019-EPHPM. Actual data: 2019. Nowcast: 2020-2022. Forecasts are from 2023 to 2025. c/ Projections using microsimulation methodology. MPO 2 Apr 23