IMF Standoff

Honduras was supposed to negotiate another stand-by arrangement with the International Monetary Fund at the end of May.

But the IMF keeps postponing the meeting.  First it was postponed to early June, and now it might happen in late June, more than a month late.

Or it might not happen at all.

A Stand-By Arrangement  (SBA) is the ability to borrow money from the IMF at rates that are slightly cheaper than through a private bank.  It allows the IMF to "quickly respond to a country's external financing needs":

When a country borrows from the IMF, it agrees to adjust its economic policies to overcome the problems that led it to seek funding in the first place. These commitments, including specific conditionality, are described in the member country’s letter of intent (which often includes memorandum of economic and financial policies).

Honduras negotiated its last SBA in October of 2010.  Under a combined Stand-By Arrangement and Stand-By Credit Facility, Honduras arranged to borrow up to $202 million. Its April, 2011 Letter of Intent details the financial targets that had to be met to continue its borrowing privileges.

The IMF and Honduras agreed that the country met those goals during much of 2011.  However, the last quarter of 2011 results fell outside the targets. Specifically, the government deficit increased beyond projections, and the central bank's monetary policy permitted a drawing down of the international reserves beyond the limits set in the agreement.

As of May 31, 2012, Honduras had not drawn on this line of credit. It has continued to pay down the loans taken out by previous administrations, but it again failed to meet the agreed upon targets this spring.

The IMF consequently wants changes in specific monetary policy that led to a higher drawing down of international reserves. But that's currently a sticking point in the negotiations.  Here's the problem:

In June, 2011, Honduras adopted a new exchange mechanism that let to a very slow, gradual devaluation of the Honduran lempira against the US dollar.  It's down about 0.5 lempiras to 19.44 lempiras to the dollar today.  That's about a $0.03 decline.

The new exchange mechanism resulted in a higher than normal demand for dollars, driving the central bank's reserves lower, and contributed to Honduras not meeting the IMF goals.

Any devaluation helps make exports from Honduras cheaper, but increases the price of imports, and Honduras is a net importer of goods.  This widens the trade imbalance.

In its most recent communications with Honduras, the IMF demanded that Honduras accelerate devaluation of the lempira as a condition for signing another SBA.  Lobo Sosa rejected this as disproportionately affecting the poor.  He told the press:

We will not permit an accelerated devaluation of the lempira.  What we are hoping is they will understand us, that they will understand that we cannot do that, and on the other themes we are disposed to do what we can to maintain the fiscal discipline of the government.

The problem is that Honduras promised the IMF in February, 2012, to devalue the lempira by about 5% (or about 0.9 lempiras) during 2012.  The current mechanism is too slow to achieve that goal, and now the Lobo Sosa government is reneging on the promise.

Honduras can't close the annual budget without cutting 2, 500 million lempiras ( $128.6 million dollars), almost exactly the amount of credit in the previous Stand-By Agreement.

More, the next budget contains a 6, 200 million lempira increase, making a total shortfall of 8, 700 million lempiras ($447.5 million dollars).  This money is to be used for the internal elections, transport subsidies, and for an electrical subsidy.

The previous SBA expired on March 31, 2012.

Honduras and the IMF have no date to begin negotiating a new agreement.