In a variety of reports and press releases issued by the International Monetary Fund since 2004, it has been noted that the Central Bank of Honduras (CBH) has announced its intention to introduce measures to improve the transparency of its monetary policy operations. The CBH particularly intended to do so by reporting to the public when developments occur and by making available its financial statements along with explanatory notes and external auditor findings. The 2005 IMF Article IV Consultations report disclosed that Honduras's primary monetary goal is price stability via a reduction of inflation. The CBH's principal policy instruments are open market operations and the judicious use of interest-rate increases to sterilize inflows of capital. The CBH website has recently introduced a new feature specifically devoted to the concept of transparency. Available only in Spanish, the site nonetheless offers access to the CBH mandate and mission, monetary policy, and texts of relevant legislation. The site shows that, in 2006, a new law was passed, entitled the Law of Transparency and Public Access to Information. While there are clearly ongoing developments regarding monetary policy transparency in Honduras, publicly available information does not address whether these measures will put the CBH into compliance with the IMF's Code of Monetary Policy Transparency.

General Overview

In 2006, the International Monetary Fund (IMF) issued a report titled "Honduras: Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Interim Assistance Under the Enhanced Initiative for Heavily Indebted Poor Countries." This report noted that the Central Bank of Honduras (CBH) would work with the IMF to implement several measures designed to enhance its monetary policy. According to the report, the CBH plans to "(1) make the use of indirect instruments of monetary management more effective; (2) improve interest rate signaling to the market; and (3) define the appropriate limit on open market operations denominated in dollars" (p. 76). The CBH also planned to improve its facility as lender-of-last-resort. According to the report, "while the government does not anticipate supporting insolvent banks, if, in an extreme case, such support were necessary to avert a systemic crisis, these funds will be provided by the government and offset by compensatory measures in the fiscal program" (p. 76). The CBH also specifically addressed monetary policy transparency, announcing its intent to inform the public as to monetary developments. Beginning with the 2003 CBH Annual Report, the central bank intended to include a full set of its financial statements, along with explanatory notes and the findings of the external auditor. The report noted that the CBH also announced its intent to "expand the scope of the Internal Audit Department's audit plan from 2004 on, to include audits of the process of reporting monetary data to the IMF and audits of controls over central bank investments" (p. 77). Legislation was pending to reform the Central Bank Law in order to facilitate some of these planned improvements (e.g., redefining the CBH's role as lender of last resort).

In its December 2005 overview of the Latin American economies, the Economic Commission for Latin America and the Caribbean (ECLAC) writes that, since May 2005, a new framework was employed for the implementation of monetary policy in Honduras. This framework was developed to facilitate clear communication of the CBH's position to agents. According to this new approach, the CBH's operational targets and instruments have both undergone changes. In the case of operational targets, the CBH no longer employs intermediate targets, and instead sets a short-term money-market interest rate. According to the ECLAC report, the CBH also distinguishes between short- and long-term liquidity management. The new framework also extends the monetary policy instruments available to the CBH.

In 2006, the IMF published the "First Review" of Honduras under the Poverty Reduction and Growth Facility and Request for Waiver of Performance Criteria, and Financing Assurances Review. According to this report, Honduras contemplates a number of reforms designed to modernize the operations of the CBH and facilitate the gradual implementation of monetary targeting, among other improvements. This will require a number of preliminary changes, including the replacement of government and central bank debt with securities and the development of daily and weekly liquidity-forecasting methodologies. The IMF suggested that these reforms must be accompanied by a program of capacity building. The CBH will also have to officially announce its new monetary regime to the broader Honduran banking system. Honduran authorities requested IMF assistance to develop the requisite infrastructure to enable the implementation of a new liquidity support mechanism. They also aimed to implement a plan to recapitalize the CBH to cover prior losses and cover future losses after the end of each year.

The 2006 report also noted that the IMF had sent a technical mission to Honduras in 2000 in order to review the CBH procedures for the compilation of monetary statistics and conducting analytical surveys. Both timeliness and data quality were found to be in need of improvement. In 2000, the IMF mission provided the CBH with standardized reporting forms for use in submitting data to the International Finance Statistics publication and to the IMF's Western Hemisphere Department. The new forms generally followed the Money and Financial Statistics Manual (MFSM) format. The 2006 report noted that Honduras adopted the new forms for reports filed from 1996 through 2001, but discontinued the practice beginning in 2002. The report noted that Honduran balance-of-payments data broadly conform to the Balance of Payments Manual, 4th edition (BPM4), adding that "considerable progress has been made... in preparation to adopt BPM5" (p. 47). Honduras does not compile data on its international investment position, and there are some discrepancies in the handling of data regarding the maquila sector and certain foreign currency transactions in the financial sector. Finally, the report noted that the response rates to most annual surveys are low and there is a substantial delay in obtaining the results.

In 2006 the Law of Transparency and Public Access to Information was passed addressing overall transparency in the public sector. The CBH website discloses a relatively new addition to its services, specifically dedicated to the concept of transparency. The CBH website, available in Spanish only, through its transparency portal "Transparencia Banco Central de Honduras", provides access,to transparency-related legislation, a statement of the CBH's mandate and mission, and documents relating to its past and current monetary policy activities. As of May 2008, the IMF's Special Data Dissemination Standard (SDDS) website does not list Honduras as a subscriber. However, Honduras does participate in the IMF's less stringent General Data Dissemination System (GDDS).

The IMF's 2006 Article IV Consultation with Honduras was concluded on February 21, 2007, although it remains unavailable for public dissemination. On March 8, 2007, however, the IMF released a Public Information Notice (PIN) that summarized the findings of the larger Consultation report. According to the PIN, the macroeconomic context for CBH activities includes falling inflation and rapidly growing credit. This prompted a reduction in open market bill interest rates in early 2006, followed by rate stabilization through the remainder of that year. The CBH also reduced its liquidity requirements on U.S. dollar deposits in the bank by six percentage points. According to the PIN, "the central bank is strengthening monetary operations and plans an upgrade of the payment system infrastructure." The PIN named the easing of monetary policy as one element contributing to increased policy challenges facing Honduras, occurring as it does in conjunction with weakened fiscal policy and strong economic expansion. Although inflation has been reduced to "historically low levels," further monetary tightening seemed prudent to the IMF staff. The IMF also mentioned the potential for economic distortion arising from administratively applied inflation-fighting measures such as price controls. The PIN reported that "directors commended the authorities for their efforts to improve monetary policy operations and modernize the payments system. [The IMF] encouraged [the authorities] to recapitalize the central bank with marketable securities that carry market interest rates, to secure its financial integrity." Other actions by the Honduran authorities that earned IMF approval were their intent to gradually eliminate obligatory foreign exchange surrender requirements and transition to a more flexible exchange rate regime.

A June 25, 2007 IMF press release disclosed the activities of a joint IMF/CBH initiative dedicated to "the adoption of international best practices, with the objective of improving the quality of monetary and financial statistics and making them comparable with those from other countries in the region." The press release added that this initiative would be followed by a regional report that would include recommendations for the CBH and other Central American central banks. In an April 2008 press release, the IMF reported that current Honduran monetary policy "is aimed at containing inflation in single-digits, bringing bank credit growth to more sustainable levels, and ensuring the build-up of international reserves to maintain coverage relative to 2007." To this end, monetary policy has tightened and authorities are prepared to continue in this direction if circumstances require it. To maintain external competitiveness, as well as to safeguard against the effects of external economic shocks, the CBH has begun a more active approach to the use of exchange rate policy. According to the IMF press release, Honduras has instituted "a set of fiscal, monetary, and prudential policy measures [that] aims at addressing the emerging macroeconomic imbalances and placing the energy sector on a sustainable footing."

The Principles

Clarity of roles, responsibilities and objectives of central banks.

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There is no publicly available information that directly addresses Honduras's compliance with this principle. The IMF's 2005 Article IV consultations with Honduras disclosed that the CBH's primary monetary policy goal is to maintain price stability through inflation reduction. The principal policy tool to achieve this goal was identified as open market operations, with the application of interest rate increases as the need arose to "sterilize" inflows of capital. In 2002, an IMF Report on the Observance of Standards and Codes (ROSC) dealing with fiscal transparency mentioned that the CBH was endowed by law with both functional and operating autonomy with regard to its conduct of monetary and exchange policy. Reforms to the Central Bank Law enacted in 1996 strengthened that autonomy and provided for functional modernization of the CBH. According to the 2002 report, "since the bank no longer serves as a development bank, its relations with the Public Treasury are more strictly delineated" (p. 7). According to the report, the CBH board members are presidential appointees and serve four-year terms. By law, they can only be removed from the board if found guilty of wrongdoing by the Honduran Supreme Court. The 2002 ROSC added that the CBH engages in quasi-fiscal activities, carried out in its roles as the economic advisor and financial and fiscal agent for the government. For these services, it receives no compensation. The report further stated that the CBH "maintains the current accounts of all government agencies, on which it pays no interest" (p. 7).

In 2006, the IMF issued a report titled "Honduras: Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Interim Assistance Under the Enhanced Initiative for Heavily Indebted Poor Countries." This report noted that the CBH has specifically addressed monetary policy transparency, announcing its intent to inform the public as to monetary developments. Beginning in the 2003 CBH Annual Report, the central bank intended to include a full set of its financial statements, along with explanatory notes and the findings of the external auditor. The CBH also announced its intent to "expand the scope of the Internal Audit Department's audit plan from 2004 on, to include audits of the process of reporting monetary data to the IMF and audits of controls over central bank investments" (p. 77). The issues raised in the report were supposedly addressed in the amendments to the Central Bank Law in August 2004.

Open process for formulating and reporting monetary policy decisions.

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There is no publicly available information that directly addresses Honduras's compliance with this principle. In 2006, the IMF issued a report titled "Honduras: Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Interim Assistance Under the Enhanced Initiative for Heavily Indebted Poor Countries." This report noted that the CBH has specifically addressed monetary policy transparency, announcing its intent to inform the public as to monetary developments. Beginning in the 2003 CBH Annual Report, the central bank intended to include a full set of its financial statements, along with explanatory notes and the findings of the external auditor. The CBH also announced its intent to "expand the scope of the Internal Audit Department's audit plan from 2004 on, to include audits of the process of reporting monetary data to the IMF and audits of controls over central bank investments" (p. 77). Legislation was pending to reform the Central Bank Law in order to facilitate some of these planned improvements, such as redefining the CBH's role as lender of last resort.

The CBH website discloses a relatively new addition to its services, specifically dedicated to the concept of transparency. The website is available in Spanish only, but provides access to transparency-related legislation, the CBH's mandate and mission, and documents relating to its past and current monetary policy activities. The website discloses that in 2006 a new law was passed addressing CBH transparency: the Law of Transparency and Public Access to Information. As of May 2008, the IMF's SDDS website does not list Honduras as a subscriber. However, Honduras does participate in the IMF's less stringent GDDS.

Public availability of information on monetary policy.

II

There is no publicly available information that directly addresses Honduras's compliance with this principle. In 2006, the IMF issued a report titled "Honduras: Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Interim Assistance Under the Enhanced Initiative for Heavily Indebted Poor Countries." This report noted that the CBH has specifically addressed monetary policy transparency, announcing its intent to inform the public as to monetary developments. Beginning in the 2003 CBH Annual Report, the central bank intended to include a full set of its financial statements, along with explanatory notes and the findings of the external auditor. The CBH also announced its intent to "expand the scope of the Internal Audit Department's audit plan from 2004 on, to include audits of the process of reporting monetary data to the IMF and audits of controls over central bank investments" (p. 77). Legislation was pending to reform the Central Bank Law in order to facilitate some of these planned improvements, such as redefining the CBH's role as lender of last resort.

The CBH website discloses a relatively new addition to its services, specifically dedicated to the concept of transparency. The website is available in Spanish only, but provides access to transparency-related legislation, the CBH's mandate and mission, and documents relating to its past and current monetary policy activities. The website discloses that in 2006 a new law was passed addressing CBH transparency: the Law of Transparency and Public Access to Information. As of May 2008, the IMF's SDDS website does not list Honduras as a subscriber. However, Honduras does participate in the IMF's less stringent GDDS.

Accountability and assurances of integrity by the central bank.

II

There is no publicly available information that directly addresses Honduras's compliance with this issue. In 2006, the IMF issued a report titled "Honduras: Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Interim Assistance Under the Enhanced Initiative for Heavily Indebted Poor Countries." This report noted that the CBH has specifically addressed monetary policy transparency, announcing its intent to inform the public as to monetary developments. Beginning in the 2003 CBH Annual Report, the central bank intended to include a full set of its financial statements, along with explanatory notes and the findings of the external auditor. The CBH also announced its intent to "expand the scope of the Internal Audit Department's audit plan from 2004 on, to include audits of the process of reporting monetary data to the IMF and audits of controls over central bank investments" (p. 77). Legislation was pending to reform the Central Bank Law in order to facilitate some of these planned improvements, such as redefining the CBH's role as lender of last resort. As of May 2008, the IMF's SDDS website does not list Honduras as a subscriber. However, Honduras does participate in the IMF's less stringent GDDS.