The follow up of the IMF in the country´s economic program

The Honduran Government, with the aim of establishing the conditions for a solid and sustainable growth has implemented key reforms designing an economic program focused on decreasing the macroeconomic imbalances and strengthening the public sector finances. The Stand-By Arrangement (SBA) and Stand-By Credit Facility (SCF) that has been approved by the International Monetary Fund (IMF) Executive Board in October 2010 and has been entered with the Honduran Central Bank are supporting it.

As part of the implementation of the aforesaid Agreements, an IMF mission has met in Honduras with the Presidency, Ministry of Finance, Central Bank Governor and other senior government officials on February 2012.

The mission is focused on the follow up of the actions engaged by Honduras in such Agreements. They have assessed recent economic developments; the performance of monetary and fiscal policies; and the progress in structural reforms provided under the government's economic program for 2011. The mission (IMF) also expressed that they noted achievements in economic growth and control of inflation and acknowledged significant progress in the structural reform agenda during 2011 and early 2012, in particular in public sector pension funds, taxation and education.

Though the mission has confirmed that the target deficit of the combined public sector has been achieved, they highlighted that the deficit of the central government has been higher than expected. Furthermore, the mission emphasized that the monetary targets under the program (net international reserves and central bank domestic assets) have not been met.

As well, the mission has updated the macroeconomic projections for 2012 and recommended to strengthen the economic policy framework accordingly. In particular, the mission has recommended continuing improving liquidity control mechanisms and the operational framework for monetary policy; continue the process of fiscal consolidation by keeping expenditures under control; improving budget management; and to implement ongoing structural reforms.

In comparison to last year statistics and those predicted for 2012 a GDP growth between 3.4% and 3.8% is expected as well as a decrease of the inflation rate. However, the public sector deficit may be higher than last year reaching 3.5% of GDP.

More commitment is mandatory in order to reach a higher GDP, less inflation rates and less public deficit.

A combination of an increment of foreign investment; road and port infrastructure; stability and legal certainty; security; increment in remittances; increase in exports, approval of laws focused on the attraction of investment; more support to the agricultural sector; international technical - financial cooperation and more access to a better education; health, food and employment to reduce poverty, among others, are crucial to ensure the country´s economic growth and development.

The recent economic growth in the country

Honduras, well known for agricultural, manufacturing and mining, is also well known for its maritime resources. In the south (Pacific coast) you find the boost of shrimp industry and the Atlantic coast, which boast African palm plantations and related industries.

Along with the Caribbean coast locations, there are also many touristic sites to visit such as the Mayan Ruins in Copan and the Lenca Path in Gracias, Lempira and coffee plantations.

The country has seen the expansion of free zones, which are tax exempted for the operations of several industries, such as garment manufacturing, wire harnesses, call centers which are very competitive and attract foreign investment.

The country has also improved its infrastructure projects in the Port of Cortés, the Corredor Logístico and Tecnológico and in Renewable Energy Projects. The projects have been awarded through international bids, which involve a private operator providing works and technical services to the Honduran Government for several years as convened in each contract.

Legal framework in place

As mentioned in the previous edition, Honduras has taken a step forward by creating a new legal framework to attract local and foreign investment, materialized through the following laws:

  • In respect to tax reforms the Law for the Strengthening of the Income and Fiscal Equity (2010) has reformed taxes on income and sales to seek reduction of the deficit (a new Law on Rationalization of Tax Exemption and Public Waste Control is currently being reviewed by the National Congress);
  • The Public Private Partnership Law (2010) enabling public-private participation in the implementation, development and administration of public works and services;
  • The Secured Transactions Law (2011), which has created the Register of Secured Interests, ensuring that different assets may be pledged as collateral for loans;
  • The National Hourly Employment Law (2011) establishes special working shift arrangements with limited time for work or services;
  • The Law for the Promotion and Protection of Investment (2011) provides different tax incentives; provides full guarantees to property rights in the country and enables arbitration for the solution of conflicts;
  • The Law for the Simplification of The Investment Procedures in Public Infrastructure (2011) which simplifies and expedites the necessary procedures in all levels concerning the public sector authorities;
  • The Law of Safety Population (2011) which indicates the financial transactions subject to taxation in order to reduce criminality and strengthen judicial organisms.

Foreign account tax compliance:

In March 2010 the Congress of the United States of America approved the Foreign Account Tax Compliance Act (FATCA), which will be in force in Honduras on January 1st 2013.

The law was created on the presumption that some American contributors were not reporting their revenues to the IRS. It aims to control and ensure the correct release of information of the American contributors, which have foreign assets.

All financial and non financial entities that have American investments from individuals or legal entities must subscribe an Agreement with the Treasury of the United States and engage with some procedures that will allow the Internal Revenue Service (IRS) to obtain information of the assets of those American clients.

If financial entities do not subscribe an agreement any payment coming from the United States of America and which is received by a financial entity as an income, interest or dividend will be subject to a withholding tax of 30% (foreign currency purchase and remittances are excluded).

Therefore any entity that makes a payment which source comes from United States of America must consider if it is subject to FATCA.

Payments subject to FATCA are those which may be subject of any kind of withholding such as: payment of interest (including portfolio interests); dividends; rents; royalties; wages; license rights and other annual or periodical income which may be fixed or variable; income and benefits which source of payment is United States of America.

In order to comply with this new law every financial and non-financial institution in Honduras must adopt technological, human resources and information request proceedings and policies about those investments and accounts from American contributors.

There is no doubt that the creation (and execution) of FATCA implies important challenges.

Every financial and non-financial institution must consider the cost they will assume in order to comply with the law provisions and not be subject to the 30% of the withholding tax.

The FACTCA law implies that every financial and non entity must comply with an Agreement subscribed with United States of America and it allows the cross information to know if an American contributor that has operations in a foreign country like Honduras or other, is evading taxes.

Conclusion

Honduras is a country of opportunities as long as it can make certain that doing business in the country can be done under clear rules and that its inhabitants can access to a better education.-

This article has been published by financial newspaper Moneda on edition February 14th may 2012.-

It has also been published by IFLR Guide 2012-2013.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.