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HONDURASPublic Expenditure Review
Towards Restoring Fiscal Consolidation
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Report No: ACS6720 [82662-HN] Republic of HondurasPublic Expenditures for Decentralized Governance in Honduras. Towards Restoring Fiscal ConsolidationAugust 2013. LCSPS. LATIN AMERICA AND CARIBBEAN
This volume is a product of the staff of the International Bank for Reconstruction and Development/ The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries.
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HONDURASPublic Expenditure Review
Towards Restoring Fiscal Consolidation
August, 2013
Poverty Reduction and Economic ManagementCentral America DepartmentLatin America and the Caribbean Region
ACCESO Programa de Acceso a Servicios de Salud con Equidad
y Administración Descentralizada
(Program of Access to Health Services with Equity and
Decentralized Management)
AIEPI Atención Integral de Enfermedades Prevalentes en la
Infancia (Integrated Management of Childhood Illness)
AIN-C Atención Integral a la Niñez en la Comunidad
(Community-Based Integrated Child Care Program)
APREMAT Aprendamos Matemáticas (Let’s Learn Math)
BANHPROVI Banco Hondureño para la Producción y la Vivienda
(Honduran Bank for Production and Housing)
BCH Banco Central de Honduras
(Central Bank of Honduras)
BCIE Banco Centroamericano de Integración Económica
(Central American Bank for Economic Integration)
CAINES Centros de Atención Integral a la Niñez
(Integrated Child Care Centers)
CCEPREB Centro Comunitario de Educación Pre-Básica
(Community-Based Center for Pre-Primary Education)
CCERP Consejo Consultivo de la Estrategia para la Reducción
de la Pobreza (Consultative Council for the Poverty
Reduction Strategy)
CEB Centro de Educación Básica
(Center for Basic Education)
CNPV Censo Nacional de Población y Vivienda
(National Population and Housing Census)
CONATEL Comisión Nacional de Telecomunicaciones
(National Telecommunications Commission)
DGVU Dirección General de Vivienda y Urbanismo
(Housing and Urban Development Directorate)
EDUCATODOS Programa de Educación Básica y Capacitación Técnica
(Basic Education and Vocational Training Program)
EFA Programa de Educación para Todos (Education for All)
EIB Educación Intercultural Bilingüe
(Intercultural Bilingual Education)
ENCOVI Encuesta de Condiciones de Vida
(Living Standards Measurement Survey)
ENEE Empresa Nacional de Energía Eléctrica
(State-Owned Electric Power Company)
ENESF Encuesta Nacional de Epidemiología y Salud Familiar
(National Epidemiology and Family Health Survey)
EPHPM Encuesta Permanente de Hogares de Propósitos
Múltiples (Household Survey)
ERSAPS Ente Regulador de los Servicios de Agua
Potable y Saneamiento (Potable Water
and Sanitation Regulatory Agency)
FDI Foreign Direct Investment
FHIS Fondo Hondureño de Inversión Social
(Honduran Social Investment Fund)
FIDAS Fondo Innovador para el Desarrollo y la
Asistencia Social (Innovation Fund for
Development and Social Assistance)
Abbreviations and Acronyms
Republic of Honduras Fiscal Year January 1 – December 31
Currency Equivalents (as of June 21, 2013) Currency Unit = Lempira (Lps)
1 US Dollar = 20.28 Lps 1 Lempira = US 0.049
Weights and Measurements Metric System
FONAPROVI Fondo Nacional para la Producción y la Vivienda
(National Fund for Production and Housing)
HIPC Heavily Indebted Poor Countries Initiative
HIV/AIDS Human Immunodeficiency Virus/Acquired Immune
Deficiency Syndrome
HOGASA Hogares Gestores de Atención en Salud
(Health Services Management Homes)
HONDUTEL Empresa Hondureña de Telecomunicaciones
(HonduranTelecommunications Enterprise)
IAIP Instituto de Acceso a la Información Pública
(Institute for Access to Public Information)
IFPRI International Food Policy Research Institute
INE Instituto Nacional de Estadísticas
(National Statistics Institute)
INFOP Instituto Nacional de Formación
Profesional (National Vocational Training Institute)
INJUPEMP Instituto Nacional de Jubilaciones y Pensiones de
Empleados y Funcionarios del Poder Ejecutivo
(Public Employees Pension Fund)
INPREMA Instituto Nacional de Previsión del Magisterio
(Teacher Pension Fund)
IPM Instituto de Prension Militar
LPG Liquified Petroleum Gas
MDG Millennium Development Goals
MDRI Multilateral Debt Relief Initiative
MOF Minstry of Finance
MOH Ministry of Health
NBI Necesidades Básicas Insatisfechas
(Unsatisfied Basic Needs)
PAPIN Programa de Apoyo a los Pueblos Indígenas y Negras
(Program to Support Indigenous and Black Peoples)
PEFA Public Expenditure and Financial Accountability
PER Public Expenditure Review
PES Programa de Escuela Saludable
(Healthy School Program)
PRAEMHO Programa de Alfabetización y Educación de Adultos
(Adult Literacy Program)
PRAF Programa de Asignación Familiar
(Family Allowances Program)
PRIESS Programa de Reorganización Institutional y Extensión
de los Servicios de Salud
(Institutional Reorganization and Extension of Health
Services Program)
PRIMHUR Programa de Mejoramiento Habitacional Urbano
(Urban Housing Improving Program)
PROEIMCA Programa de Educación Intercultural Multilingüe
de Centro América (Central American Intercultural
Multilingual Education Program)
PROHECO Programa Hondureño de Educación Comunitaria
(Honduras Community Education Program)
PRS Poverty Reduction Strategy
PVMR Programa de Vivienda Minima Rural
(Rural Minimum Housing Program)
SANAA Servicio Nacional de Acueductos y Alcantarillados
(Water and Sanitation Company)
SAP Suplidoras de Abastecimiento Popular
(Popular Shops)
SIERP Sistema de Información para la Estrategia para la
Estrategia para la Reducción a la Pobreza
(Povertyt Reduction Strategy Information System)
SOE State-owned Enterprises
SOPTRAVI Secretaría de Obras Públicas, Transporte y Vivienda
(Ministry of Public Works and Housing)
SS Secretaría de Salud
UNAT Unidad de Apoyo Técnico de la Secretaría del
Despacho Presidencial
(Technical Unit of the Ministry of the Presidency)
Acknowledgments
This report was prepared by a team led by Laura Zoratto (LCSPS) and Luc Razafimandimby (LCSPE) from February
to September 2013, as co-task-managers, under the overall supervision and guidance of Oscar Calvo-González
(Lead Economist and Sector Leader, LCSPR). The core team included, in alphabetical order, Calvin Zebaze Djiofack
(LCSPE), Denis Medvedev (SASEP), Gustavo Ezequiel Miranda (LCCHN), Karina Ramírez (LCSPS), Natalyia Biletska
(PRMPS), Nuria Tolsa Caballero (LCSPE), Ramón Arias (LCSPS), and Rong Qian (LCSPE). The main contributors of
Chapter 2 are Lorena Viñuela (LCSPS) and David Carias (consultant).
Authors of the background papers used as inputs for this report are as follows: for Water & Sanitation, David Mi-
chaud (ESCUW), Antonio Rodríguez Serrano (TWILC), and Yoonhee Kim (LCSDU); for Health, Christine Lao Peña
(LCSHH); and for Education, Juan Diego Alonso (LCSHE), Rocío Calidonio (LCSHE), and Martha Hernández (consul-
tant). These sector-specific papers are published separately.
The peer reviewers for this report are Jasmin Chakeri (OPSPQ), Enrique Blanco Armas (AFTP1), and Jonas Frank
(PRMPS).
This report was co-financed by The Swiss Agency for Development and Cooperation (COSUDE).
Contents
Executive Summary 11
I. Fiscal Context and Public Expenditure Trends 14A. Composition of Expenditures 16B. Managing the Deterioration of the Fiscal Stance 22C. The Immediate Causes of Weak Public Financial Management 23D. The Deeper Causes of Weak Public Financial Management 29
II. Fiscal Decentralization: Building Credible Reforms 32A. Intergovernmental Framework and Local Conditions 33 i. Heterogeneity in Size and Capacity 34 ii. Municipal Responsibilities Focused on Local Services 35 iii. Features and Evolution of the Transfer System 36 iv. Recurrent Attempts at Deepening Decentralization 39B. Municipal Finance in Numbers 39 i. Transfer Shortfalls: A Source of Allocative Distortions 40 ii. Municipal Revenue: Untapped Sources and Bright Spots 41 iii. Municipal Expenditure: Giving Precedence to Recurrent Expenditure 43 iv. Municipal Borrowing: Covering Transfer Delays 44 v. Local Public Investment: Increasing but Falling Short of Targets 46C. Impact in Service Delivery: The Case of Water and Sanitation 49D. Policy Recommendations 53E. Appendix 54
References 58
Annex 59
Tables, Boxes, Figures, and Maps
Table I 1: Operations of the Budgetary Central Government (% of GDP) 15Table I 2: Debt Composition for Honduras (% of GDP) 15Table I 3: Budgetary Central Government Expenditure Structure 20Table I 4: Upward Adjustment of Aggregate Budget Ceilings 25Table I 5: Current and Capital Expenditures—Approved and Modified Budget 26Table I 6: Additional and Modified Budget by Functional Classification (% of Total) 26Table I 7: Budget Execution by Functional Classification (%) 28Table I 8: SIAFI Coverage 28Table II 1: Average Population and Human Development Index per Category of Municipality, 2010 34Table II 2: Functional and Expenditure Assignment across Levels of Government in Honduras 35Table II 3: Expenditure Assignment across Levels of Government in Central America 36Table II 4: Reforms to Allocation Formula (Law of Municipalities’ Article 91) 37Table II 5: Tax Revenue and Transfer Shares of Municipal Revenue by Categories of Municipalities (%), 2002–2010 44Table II 6: Borrowing per Capita and Debt Service Share of Municipal Expenditure, 2002–2010 47Table II 7: Service Providers—Types and Population Served 50Table II 8: Selected Characteristics of Distinct Service Providers 51Table II 9: Comparison of Decentralized and SS Facilities based on Facility Characteristics and User Feedback 53Table II 10: Correlation Coefficients 54Table II 11: Multivariate Regression Analysis of Vertical Transfer Received (Fixed Effects) 55Table II 12: Multivariate Regression Analysis of Municipal Expenditure (Fixed Effects) 55
Box 1: The National Security Tax—Implementation Challenges and Its Effects on Municipalities 40Box 2: Deconcentrated Service Delivery Models and Community-driven Development Interventions 52
Figure I 1: Fiscal Deficits in Selected Central American Countries (% of GDP), 2012 14Figure I 2: Central Government Deficit (% of GDP), 1990–2010 16Figure I 3: Central Government Revenue and Expenditures (% of GDP), 2002–2012 16Figure I 4: Budgetary Central Government Tax Revenue in Selected Central American Countries (% of GDP, 2008–2012 Average) 17Figure I 5: Central Government Tax Revenue (% of GDP), 2002–2012 17Figure I 6: Composition of Consolidated Central Government Expenditures (% of GDP) 18Figure I 7: Composition of Consolidated Central Government Expenditures (% of Total Expenditures) 18Figure I 8: Consolidated Central Government Expenditures in Honduras and Countries with High GDP per Capita Growth (% of GDP and % of Total Expenditures) 19Figure I 9: Composition of Consolidated Central Government Expenditures on Infrastructure and Public Order and Safety (% of GDP) 19Figure I 10: Gross Public Fixed Capital Formation (% of GDP), 2000–2011 21Figure I 11: Composition of Budgetary Central Government Capital Transfers (% of GDP), 2009–2012 21Figure I 12: Central Government Capital Expenditures (% of GDP) 21Figure I 13: Central Government Capital Expenditures (% of Total) 21Figure I 14: Gross Fixed Capital Formation (% of GDP) 21Figure I 15: Gross Public Fixed Capital Formation (% of GDP) 21Figure I 16: Budgetary Central Government Salary Expenditure by Sector 22Figure I 17: Total Central Government Payment Arrears 22Figure I 18: Composition of Central Government Payment Arrears, 2009 and 2011 23Figure I 19: Aggregate and Composition Expenditure Outturn 24Figure I 20: Total Budget at Different Stages of the Budget Cycle (Millions of Lempiras) 25Figure I 21: Total Budget Execution (%) 35
Figure I 22: Budget Execution by Economic Classification (%) 27Figure I 23: Arrears and Actual Payments (% of Modified Budget) 29Figure I 24: Results of the Citizens’ Perception Survey 30Figure II 1: Aliquot per Municipality per Capita, 2009. 38Figure II 2: Total Transfers per Capita by Population Range, 2009 38Figure II 3: Transfers per Capita and Population, 2010 39Figure II 4: Transfers and Human Development Index, 2010 39Figure II 5: Planned Transfer as Share of Central Revenue (%), 2002–2038 41Figure II 6: Actual Transfer as Share of Central Revenue (%), 2002–2011 41Figure II 7: Budgeted Transfers versus Actuals, 2009–2012 42Figure II 8: Transfer Outturn (%), 2010 42Figure II 9: Municipal Revenue as Share of Total Government Revenue and GDP (%), 2000–2010 42Figure II 10: Local Revenue as Share of Total Government Revenue (%), 2003–2010 42Figure II 11: Municipal Revenue Total and Detailed Composition, 2002–2010 42Figure II 12: Municipal Revenue Total and General Composition, 2003–2009 42Figure II 13: Tax Revenue per Capita and Population, 2010 43Figure II 14: Tax Revenue per Capita and Transfer Share of Municipal Revenue, 2010 43Figure II 15: Municipal Expenditure as a Share of Total Government Expenditure and GDP (%), 2002–2011 45Figure II 16: Local Expenditure Total and as a Share of Total Government Expenditure (%), 2002–2010 45Figure II 17: Municipal Expenditure per Capita and Population, 2010 45Figure II 18: Municipal Expenditure per Capita and Transfer Amount per Capita, 2010 45Figure II 19: Municipal Expenditure Total and Composition, 2003–2010 45Figure II 20: Municipal Expenditure Total and Composition, 2003–2010 45Figure II 21: Recurrent Expenditure as a Share of Expenditure and Transfers as a Share of Municipal Revenue, 2010 46Figure II 22: Recurrent Expenditure per Capita and Transfer Amount per Capita, 2010 46Figure II 23: Borrowing as Share of Municipal Current Revenue (%), 2010 47Figure II 24: Debt Service as Share of Municipal Expenditure (%) , 2010 47Figure II 25: Access to Improved Water and Sanitation Facilities (% of Total Population), 1990–2010 48Figure II 26: Public Gross Fixed Capital Formation as a Share of GDP (%), 2000–2010 48Figure II 27: Municipal Net Public Fixed Capital Formation and Transfer Assets, 2002–2010 48Figure II 28: Municipal Net Public Fixed Capital Formation as a Share of Total (%), 2002–2010 48Figure II 29: Expenditure in Capital Assets as a Share of Municipal Expenditure and Transfer as a Share of Municipal Revenue, 2010 49Figure II 30: Expenditure in Capital Assets as a Share of Municipal Expenditure and Population, 2010 49Figure II 31: Expenditure in Capital Assets per Capita and Infrastructure Gap, 2010 49Figure II 32: Expenditure in Capital Assets per Capita and Population Density, 2010 49Figure II 33: Employees per 1,000 Connections Based on Type of Service Provider 51Figure II 34: Service Provider Performance by Management Model 51Figure II 35: Number of Municipalities by Population Range, 2010 54Figure II 36: Subnational Expenditure Share of Total Public Expenditure (%) in Developing Countries, 2010 56Figure II 37: Subnational Revenue Share of Total Public Revenue (%) in Developing Countries, 2010 56
Map 1: Transfer Amount per Capita (Lempiras), 2010 57
Map 2: Recurrent Expenditure per Capita (Lempiras), 2010 57
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Executive Summary
iscal consolidation remains the central chal-lenge facing Honduras, mainly due to increas-ing current expenditures. The fiscal deficit of the central government has been worsening since 2008, increasing from 2.4 percent of GDP
in 2008 to 6 percent in 2012. The 2012 figure marked the worst performance in the region that year. The widening fiscal deficit has been driven by a significant increase in current expenditures. For instance, in 2012, interest pay-ments increased by 37.5 percent, current transfers in-creased by 17.5 percent, and wages and salaries increased by 8.3 percent. In 2013, despite an announced govern-ment effort aimed at reducing the fiscal deficit to 4.5 per-cent of GDP, a mid-year assessment released in July 2013 points to a deficit of 6 percent once again.
Increases in interest payments are driven by new domestic debt. Between 2002 and 2008, interest pay-ments declined from 1.6 to 0.6 percent of GDP, with interest payments on external debt falling from 1.4 to 0.3 percent of GDP. This reduction was the direct result of debt alleviation through the Heavily Indebted Poor Countries and Multilateral Debt Relief Initiatives. By 2012, however, interest payments rose sharply to 1.9 percent of GDP. The jump was driven by a drastic in-crease in interest payments for domestic debt, which represented 1.4 percent of GDP in 2012 (or 78 percent of total interest payments). The domestic debt of the central government grew from 2.8 percent of GDP in 2007 to an estimated 15.2 percent in 2012. The new debt is expensive due both to its short-term nature and the lack of depth in the domestic bond market, with its interest rates averaging 9 percent and at times exceed-ing 15 percent. A substantial portion of the debt ac-cumulation resulted from public sector liabilities added in the 2006–2009 period (equivalent to 4.7 percent of GDP), which included the state’s pension contributions
(1.8 percent of GDP), pending payments for goods and services (1.7 percent of GDP), and transfers to munici-palities (0.8 percent of GDP).
The wage bill remains one of the highest in Latin America at 11.9 percent of GDP. The most significant impact on the wage bill stems from growing salary expen-ditures in the education and health sectors. On average, these two sectors accounted for around 70 percent of the central government wage bill during the 2008–2012 period, with education accounting for the majority (52 percent). In the education sector, roughly 93 percent of the expenditures are allocated to the sector’s wage bill, including teaching and non-teaching staff. In contrast, central government investment declined to a decade-low of 1.4 percent of GDP.
These increased current expenditures, which add rigid-ity to the budget, have occurred at the expense of in-vestments. Current expenditures from the central govern-ment increased from 17.5 percent of GDP in 2008 to 18.1 percent in 2012 due to the increase in interest payments, transfers, and expenditures in goods and services. But a decrease in capital spending by the budgetary central gov-ernment was accompanied by a particularly sharp reduc-tion in capital investment, from 2.8 percent of GDP in 2009 to 1.4 percent in 2012 in order to provide for larger capital transfers to other levels of government. The capital trans-fers resulting from decreased capital investment were not always used for capital formation, but rather to finance cur-rent expenditures. Compared with the second half of the 1990s and the beginning of the 2000s, capital expenditures of the central government have decreased from an average of 30 percent of the total expenditures to just 20 percent in 2012. Moreover, gross capital formation of the public sec-tor declined to a decade low of 3.3–4.0 percent of GDP in 2010–2011, compared to 5–6 percent of GDP in 2003–2004.
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The efficiency of spending remains a key constraint. Growth in general public services (executive and legis-lative bodies, financial and fiscal affairs, external affairs, and other general public services) was the main determi-nant of rising central government expenditures. They in-creased from 8.0 percent of GDP to 12.6 percent between 2009 and 2012. Spending on social sectors declined from 12.0 percent of GDP to 10.7 percent in the same period. Education still comprised the main share of total expen-ditures, although the total funds allocated to this sector fell from 8.5 percent of GDP in 2009 to about 6.8 percent in 2011. The reduction in education expenditures has not translated into allocative efficiency gains, as most of the funds have been absorbed by increased general public services spending. Overall, limited improvements, espe-cially in health and education outcomes despite high allo-cations to these sectors, suggest the need to improve the efficiency and quality of expenditures. Increased public expenditures have not delivered in terms of growth and improved public services, and whether the country is ready for decentralization remains an open question.
The lack of efficiency in service delivery is most nota-ble in education. Central government spending on edu-cation, health, and infrastructure is consistent with the levels achieved in countries that experienced sustained periods of high GDP per capita growth, but the quality and efficiency of service delivery continues to lag behind. Although Honduras’ performance indicators in health and water and sanitation are comparable to similar Central American countries, performance in other infrastructure sub-sectors is variable and significantly behind its peers in education. Despite recent decreases, Honduras’ pub-lic spending on education as a share of GDP remains the highest among Central American countries, and it is one of the highest in the world. Analysis undertaken for the education sector reveals the significance of the efficiency losses due to teacher absenteeism, “ghost teaching”, and lack of instruction delivery within the allotted teaching time. On average, correct answers in math do not surpass 40 percent, and improvement over the last thirteen years was virtually nonexistent. Spanish test scores were slight-ly higher, but still around the 40 percent mark. In light of the new mandate for 12 years of compulsory education, spending in this sector is likely to increase even further.
Across all sectors, public financial management prac-tices undermine efficient allocation of resources and aggregate fiscal discipline. The primary constraint comes from nonbinding expenditure ceilings set by the Ministry of Finance which are routinely breached by sec-tor spending agencies. In addition, the absence of ex-an-te commitment controls leads to a generation of expendi-ture commitments without allocated budgetary funding.
As a result of budget modifications, cash rationing has be-come a constant and the level and composition of actual resource allocations often significantly deviate from the approved budget.
In order to set credible expenditure ceilings and maintain commitment control, the Ministry of Fi-nance requires a favorable authorizing environment underpinned by a strong political will. Although the adoption of laws and the implementation of informa-tion systems are all welcome developments, they alone cannot address the central weaknesses, as they can eas-ily be circumvented and adapted to traditional informal practices. The Integrated Financial Management System (SIAFI), for example, is bypassed at the commitment con-trol stage and used only at the payment stage. Until re-cently, the system of programing and allocation of com-mitment quotas established in the Budget Law in practice consisted simply of quarterly planning and allocation of cash for payments broken down by month. To date, the Ministry of Finance has been unable to exercise control over commitments, and unrecorded commitments still exist; as a result, in-year budget modifications across sec-tors and at the aggregate level are significant and budget ceilings are not enforced.
Growing fiscal deficits and weak public financial management practices have constrained the ability of the central government to implement and finance the decentralization process. In 2010, the government pledged to increase the share of central revenue trans-ferred to local governments from 5 to 20 percent by 2017 and to 40 percent by 2038. However, the central govern-ment has complied with the mandated revenue transfer percentage only three times in more than two decades of decentralization.
Current decentralization targets would pose signifi-cant fiscal challenges to the central government. The plans for deepening fiscal decentralization are not in-formed by an evaluation of the comparative advantage of municipalities in delivering social and infrastructure services. For sectors in which there are clear scale econo-mies and spillovers, devolution to the municipalities is not advisable. Moreover, the gains expected from de-centralization in terms of greater accountability as well as increased production and allocative efficiency are not likely to be realized in a context of weak institutional ca-pacity. The assignment of resources has to be consistent with the distribution of responsibilities (“funding follows function”). The current policy discussion has focused solely on the distribution of financial resources without attention to what functions could be realistically carried out by the municipalities.
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Improving transfer predictability is an important prerequisite for promoting effective local manage-ment of resources. Improving the predictability of transfers is more important than increasing their vol-ume. Before embarking on new decentralization ef-forts, special attention should be given to increasing the capacity of municipalities to operate within the existing framework and manage the current transfer levels. Transfer shortfalls and delays distort allocation decisions. Municipalities typically determine the shares of recurrent and capital spending on the basis of bud-geted transfers and forecasted own-source revenue. They tend to front-load recurrent expenditure and de-lay capital investments until they receive transfers from the central government. Consequently, shortfalls in transfers are often translated into cuts to capital spend-ing. It is common for municipalities with little resources of their own to resort to costly short-term commercial loans to finance the operation of basic services when there are transfer delays.
One unintended consequence of deepening decen-tralization efforts is an increase in expenditures at the local level based on expected transfers from the central government. The reform could lead to an unin-tended increase in local recurrent expenditure and higher levels of debt because municipalities use budgeted trans-fers to determine how much they can spend on personnel and to back short-term loans.
High levels of indebtedness are a source of concern for a number of municipalities. In 2010, approximately 28 municipalities took new loans in excess of the 20 per-cent revenue ceiling, whereas 20 allocated more than one-fifth of their expenditures to debt servicing. While information about cumulative levels of municipal debt was not available, current trends suggest that the levels are high for some municipalities. At least 25 municipali-ties have far exceeded their repayment capacity and ex-hibit dangerous levels of debt (Vargas, 2011).
An examination of expenditure composition sug-gests that most municipalities are not complying with the legal earmarks established for transfers. They are required to invest 54 to 69 percent of trans-fers they receive from the central government and can only spend 15 to 30 percent in administrative costs, depending on the size of the municipality. There is an inverse relationship between the ratio of recurrent expenditure to total municipal expenditure and the level of transfer dependence. The data also suggest that municipalities are choosing to use the majority of their own resources to finance personnel and other re-current expenses.
Municipalities are responsible for a sizable part of public investment and additions to public fixed capi-tal, but many constraints for effective capital spend-ing remain. Public investment at the subnational level is constrained by: (i) the low levels of management ca-pacity in most municipalities; (ii) limited coordination in investment projects across levels of government and among neighboring municipalities; (iii) unpredictability and lateness of transfers; and (iv) limited access to credit. To ensure a higher quality of decentralized capital spend-ing, sound public finance and investment management systems, coupled with adequate monitoring by and coor-dination with the central government, are required.
The current transfer system only partially accommo-dates for the heterogeneity in size, population, and economic development of municipalities. Half of the transfer pool is allocated in equal shares to all munici-palities, and the rest according to population and poverty shares. The result is that per capita transfers are many-fold higher in municipalities with small populations than in ur-ban centers. Most small municipalities have few sources of revenue besides transfers, but some are rich and able to mobilize sizable resources. Presently, the distortions are not significantly pernicious because the overall volume of transfers to the lowest tier is not large. Channeling more resources through that system, however, would magnify distortions, as the fixed transfer per municipality would be several times larger.
Devolving responsibilities to the municipalities is un-likely to improve service delivery. The large majority of municipalities lack the capacity and scale (with an aver-age size of 27,000 inhabitants) to efficiently finance and manage complex services. In the education sector, for in-stance, decentralization of responsibilities alone may not be sufficient and would not guarantee the active partici-pation of schools and civil society to ensure the efficiency in the sector and improve learning. Initial evidence sug-gests that “teaming” local communities and municipali-ties can lead to the improvement of education delivery. Honduras could take advantage of this and the PROHECO (Programa Hondureño de Educación Comunitaria) experi-ence to improve educational outcomes.
The deterioration of the fiscal deficit is not a result of fiscal decentralization. However, further decentral-ization efforts could pose significant fiscal challenges to the central government, as illustrated by the fact that the central government has complied with the mandated revenue transfer percentage only twice in the last decade (and, as noted earlier, only three times in more than two decades of decentralization). Moreover, adding transfers tends to be difficult and politically costly to revert.
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Fiscal Context and Public Expenditure Trends
Fiscal consolidation is the main challenge facing Hon-duras today. The fiscal deficit of the budgetary central government has been worsening since 2008, going from 2.4 percent of GDP in 2008 to 6 percent in 2012. The latter figure marked the worst performance in the region that year. The widening fiscal deficit has been driven by a sig-nificant increase in current expenditures. For instance, in 2012, interest payments increased by 37.5 percent, cur-rent transfers by 17.5 percent, and wages and salaries by 8.3 percent. In 2013, despite an announced government effort aimed at reducing the fiscal deficit to 4.5 percent of GDP, a mid-year assessment released in July 2013 points to a deficit of 6 percent of GDP once again. Operations of the budgetary central government in 2008–2012 are shown in Table I-1.
1 SECMCA data covers the central government based on SNA (budgetary central government, excluding social security institu-tions).
The increase in public debt, in particular domestic debt, has raised pressure on public finances. Public debt increased from 22.9 percent of GDP in 2008 to 34.8 percent in 2012. This boost is mainly accounted for by an
Source: Secretaría Ejecutiva del Consejo Monetario Centroamericano (SECMCA).1
Figure I.1: Fiscal Balance in Selected Central American Countries (% of GDP), 2012
-6
-5
-4
-3
-2
-1
0
1
NicaraguaGuatemalaCosta RicaEl SalvadorHonduras
-6.0 -1.7 -4.5 -2.40.5
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increase in domestic debt, from 6.1 percent of GDP in 2008 to 14.9 percent in 2012. External debt also increased over the same period (2008–2012) although at a slower pace, from 16.8 percent of GDP in 2008 to 19.9 percent in 2012. The debt structure has increased the government’s expo-sure to refinancing risk given the declining average matu-rity (3.7 years) and high interest rate of domestic financing.
The performance of government finances has been volatile over the past decade, with episodes of fiscal slippages followed by fiscal consolidation. This trend has indeed prevailed in recent years, with a large fiscal def-icit coinciding with presidential and parliamentary elec-tion years. While corrective actions have successfully lim-ited the accumulation of deficits from one administration
to the next in the past, they have not yielded a long-term reduction in fiscal deficits over the last decade. In 2010, the authorities embarked on an ambitious fiscal consoli-dation program which, by end-2011, succeeded in con-taining the combined public sector deficit to 2.8 percent of GDP. However, on the eve of the presidential election, fiscal slippages in 2012 returned the deficit to 4.5 percent of GDP (6 percent of GDP for the budgetary central gov-ernment). This stop-and-go policy stance has produced rapidly increasing debt ratios. This section analyzes pat-terns in revenues and expenditures in the absence of solid fiscal consolidation, especially in the post-crisis period.
Improved tax collection levels on par with the region-al average have not translated into budgetary central
Table I.1 : Operations of the Budgetary Central Government (% of GDP)
2008 2009 2010 2011 2012
Total Revenues and Grants 19.8 17.1 16.9 17.0 16.8
Current Revenue 17.7 15.2 15.5 15.9 15.9
Tax Revenue 16.0 14.2 14.4 14.8 14.6
Capital Revenue 0.0 0.0 0.0 0.0 0.1
Grants 2.1 1.8 1.4 1.1 0.9
Total Expenditures 22.2 23.1 21.5 21.6 22.8
Current Expenditures 17.5 18.6 17.9 17.0 18.1
Consumption 12.0 13.8 13.1 12.0 12.4
Salaries 9.3 10.9 10.7 9.6 9.7
Goods and Services 2.6 3.0 2.5 2.4 2.7
Interest 0.6 0.7 1.0 1.4 1.8
Transfers 4.9 4.1 3.8 3.6 3.9
Capital Expenditures 4.9 5.1 3.7 4.6 4.5
Investment 2.4 2.8 1.7 1.7 1.4
Transfers 2.5 2.4 2.1 3.0 3.1
Net Lending −0.1 −0.7 −0.1 0.0 0.1
Overall Balance −2.4 −6.0 −4.7 −4.6 −6.0Source: International Monetary Fund (IMF).
Table I.2 : Debt Composition for Honduras (% of GDP)
2008 2009 2010 2011 2012 2013
Domestic 6.1 7.7 11.8 13.9 14.9 16.2
External 16.8 16.9 17.9 18.2 19.9 25.5
Total 22.9 24.6 29.7 32.1 34.8 41.7Source: SEFIN/IMF. Data for 2013 is up to December.
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government deficit reductions. With an average tax revenue of 14.8 percent of GDP in the 2008–2012 period, Honduras ranked well above Guatemala (10.8), El Salva-dor (13.6), Costa Rica (13.7), Nicaragua (14.1), and Panama (11.5). The budgetary central government’s tax revenue tended to follow the economic cycle, increasing from 13.3 percent of GDP in 2002 to a peak of 16.4 percent in 2007, then falling to 14.2 percent during the 2009 economic contraction and increasing again to 14.8 percent in 2011. However, this relatively strong revenue performance has not yet resulted in a permanent decline in budgetary central government deficits, owing largely to increasing expenditures.
The budgetary central government’s tax revenue ac-counts for the bulk of public sector revenue. Over the last decade, public sector revenue in Honduras has aver-aged around 30 percent of GDP. The central government has collected over half of this amount, while the remain-der comes from public enterprise2 revenue and public sector workers’ pension fund3 contributions. Within the budgetary central government, more than 90 percent of revenues come from tax collection, primarily sales taxes (35 percent of total revenues; approximately 6 percent of GDP), income taxes (26 percent of total revenues; 4.5
2 The electric utility, Empresa Nacional de Energía Eléctrica (ENEE), the port agency, Empresa Nacional Portuaria (ENP), and the water and sewerage utility, Servicio Autónomo Nacional de Acueductos y Alcantarillados (SANAA).3 The main funds include the teachers’ pension fund, Instituto Nacional de Previsión del Magisterio (INPREMA), the military person-nel pension fund, Instituto de Previsión Militar (IPM), and the pension fund for general government workers, Instituto Nacional de Jubila-ciones y Pensiones de Empleados y Funcionarios del Poder Ejecutivo (INJUPEMP).
percent of GDP), fuel taxes (12 percent of total revenues; 2 percent of GDP), and import tariffs (6 percent of total revenues; 1 percent of GDP).
Fiscal efforts have not been consistent enough to pro-duce lasting results. Tax reforms have mainly served to address fiscal imbalances created by pre-electoral spend-ing rather than to reduce long-term fiscal vulnerabilities. Attempts to improve fiscal performance have not pro-duced the expected results due to their “ad-hoc” nature and a weak tax administration system. In addition, high turnover in the management structure of the Revenue Di-rectorate—the Dirección Ejecutiva de Ingresos (DEI)—has led to a weakening of the institutions involved in tax re-form. For instance, DEI changed directors three times in the last three years, and a commission appointed in 2012 to manage the institution and strengthen revenue genera-tion was dissolved in early 2013. During its short mandate, the commission developed a proposal to improve tax col-lection, reform the tax code, draft bills related to income and sales tax laws, and institute other relevant measures. If continued, the fiscal efforts introduced in recent years could generate a greater payoff. The challenge is to ensure a continued consensus among all stakeholders that these reforms are necessary and sustainable, and should thus re-main in effect during subsequent governments.
A. Composition of Expenditures
Budgetary central government spending, which ac-counts for about 60 percent of general government expenditures, is the main determinant of govern-
Source: SEFIN.Note: SEFIN data covers the budgetary central government. Shadowed years represent election years; the Y axis represents negative values. SECMA data covers the central government based on SNA (excluding social security institutions).
Figure I.2: Central Government Deficit (% of GDP), 1990–2010
1990
1995
2000
2005
2010
12
10
8
6
4
2
0
Source: SECMCA.
Figure I.3: Central Government Revenue and Expenditures (% of GDP), 2002–2012 / axis broken
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
262422201816141210
Revenues Expenditures
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ment spending trends. In 2010, budgetary central government spending and consolidated central govern-ment spending reached 21.5 and 34.1 percent of GDP respectively, while general government spending was estimated at 36 percent of GDP. Average spending by the budgetary central government also accounted for the bulk of the increase in total spending, rising from an average of 20.4 percent of GDP in the 2002–2006 period to 22.3 percent in 2007–2012. During the short-lived fis-cal consolidation periods, the budgetary central govern-ment expenditures were the key leading factor. Budget-ary central government spending decreased from 23.1 percent of GDP in 2009 to 21.6 percent in 2011, which was followed by an increase in 2012 to an estimated 22.8 percent of GDP.
The increase in consolidated central government ex-penditures has been mainly driven by growth in gen-eral public services. As Figure I6 and Figure I7 show, the proportion of general public services (executive and legislative bodies, financial and fiscal affairs, external af-fairs, and other general public services), both in percent of GDP and in percent of total spending, has risen from 8.0 to 12.6 percent and from 24.5 to 35.7 percent, respec-tively, between 2009 and 2012. More than one-third of the total consolidated central government expenditures went to social sectors. Education absorbed the main share, followed by health. However, the education share has declined over the same period due to a wage freeze discussed further in this chapter, and the share of social security and welfare spending has slightly increased. This suggests that the reduction in education expenditures has not translated into allocative efficiency gains, as most
of the funds have been absorbed by increased spending on public administration institutions at the national gov-ernment level.
Consolidated central government spending on sec-tors supporting economic growth is on par or above the levels and budget shares in countries that expe-rienced sustained periods of high GDP per capita growth.4 As noted in the background papers on sectoral public expenditures, there are limited improvements in the health and water sectors, but increased public expen-ditures have yet to yield verifiable improvements, particu-larly in education. This points to the lack of efficiency in sectors that are important for economic growth (World Bank, 2008). In addition, another source of inefficiency is likely to be associated with the size of general public ser-vices in Honduras, which is significantly larger—both in percentage of GDP and total spending—than in countries that have registered sustained high growth rates.
Consolidated central government expenditures on infrastructure and public order and safety have ex-perienced drastic cuts in the recent years. Spending on safety, namely police and fire protection, has declined more rapidly than public order spending, which is fo-cused primarily on judicial institutions. Infrastructure expenditures, which comprised about one-quarter of the
4 The data used is from Biletska and Rajaram (2007), which exam-ines public expenditure patterns in countries that experienced GDP per capita growth rates of 4 percent or above for a sustained peri-od of time and which was not interrupted by a prolonged growth plunge. In figures I-8, I-12, and I-13, the chosen years for these coun-tries correspond to periods of such levels of sustained economic growth.
Source: SECMCA and IMF.
Figure I.4: Budgetary Central Government Tax Revenue in Selected Central American Countries (% of GDP), 2008–2012 Average
0
5
10
15
20
PanamaNicaraguaGuatemalaCosta RicaEl SalvadorHonduras
Source: SECMCA.
Figure I.5: Central Government Tax Revenue (% of GDP), 2002–2012 / axis broken
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
17
16
15
14
13
12
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overall budget and between 8.4–8.9 percent of GDP, were drastically cut in 2012, to 21.2 percent of total govern-ment expenditure and 7.5 percent of GDP. Furthermore, patterns in the composition of infrastructure spending reveal that these cuts have been even more significant since subsidies for SOEs—which constitute the bulk of government expenditures in this sector—were subject to a smaller reduction, and thus their share of total in-frastructure spending has actually increased, from 77 to 83 percent. With the exception of 2011, the main share of subsidies to public enterprises have been for current spending, of which energy subsidies to consumers have constituted about 90 percent in 2009–2011 and 58 per-cent in 2012.
The central government has increased its current ex-penditures and capital transfers at the expense of capital investment. The current expenditures of the budgetary central government increased from 17.5 per-cent of GDP in 2008 to 18.1 percent in 2012 due to ris-ing interest payments, transfers, and payments for goods and services. At the same time, a government decrease in capital spending was accompanied by a particularly sharp reduction in capital investment—from 2.8 percent of GDP in 2009 to 1.4 percent in 2012—to provide for larger capi-tal transfers to other levels of government. These trans-fers, which increased from 2.1 percent of GDP in 2010 to 3.1 percent in 2012 (from 11.1 percent to 13.8 percent of total expenditures), were not always applied toward capi-tal investment, but rather were often used to finance cur-rent expenditures. One example is the Bono 10 Mil pro-gram involving cash transfers to 350,000 poor families in Honduras on the condition that they send their children
to regular health check-ups and to primary school. This program is classified under capital transfers of the bud-getary central government.
A large portion of transfers go to the municipalities, all of which have expanded their budgets follow-ing the passage of Legislative Decree 143-2009. The Decree stipulates that the central government should transfer a portion of tax revenue to the municipalities, setting the mandated level at 7 percent in 2010, 8 per-cent in 2011, 9 percent in 2012, 10 percent in 2013, and 11 percent in 2014 and thereafter. Although it specifies that municipalities should dedicate 69 percent of these transfers to investment projects, in practice many allo-cate most of the transfers to cover operational expens-es. While it is perhaps less important whether it is the central government or the municipalities who carry out investment spending, evidence from the municipalities suggests that the transfer resources are often used for re-current spending. Therefore, the decline in capital invest-ment may, in fact, be larger than previously indicated.
The decline in capital investment by the budgetary central government would not be a matter of con-cern if the level of investment by the public sector remained stable. However, in recent years public sector gross fixed capital formation, including capital spending for the central and subnational governments, SOEs, and other non-financial public sector entities, has declined to a decade-low of 3.3–4.0 percent of GDP in 2010–2011, compared to 5–6 percent in 2003–2004. The question then arises on whether this decrease in capital invest-ment is well informed given the significant gaps in in-
Source: SEFIN. Data classi�ed according to the IMF GFS Manual (1986).
Figure I.6: Composition of Consolidated Central Government Expenditures (% of GDP)
Other Defense Public Order & Safety Agriculture EnvironmentInfrastructure Social Security & Welfare Health Education General Public Services
05
10152025303540
20122011201020092008
Source: SEFIN. Data classi�ed according to the IMF Government Finance Statistics(GFS) Manual (1986).
Figure I.7: Composition of Consolidated Central Government Expenditures (% of Total Expenditures)
201220112010200920080
102030405060708090
100
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frastructure access and the efficiency of resource use in some sectors analyzed in this report.
The twin challenge of declining investment levels and poor efficiency in public sector investment efforts is even more apparent when gross public fixed capital formation in Honduras is compared to other countries in Central America as well as countries outside the region that succeeded in achieving rapid economic growth. This comparison shows that the level of pub-lic sector investment in Honduras is only slightly higher than in Chile but significantly lower than in Korea, Malay-sia, and Thailand during periods of high GDP per capita growth rates. It also illustrates that, in the recent years, Honduras has significantly lagged behind Nicaragua, Pan-ama, and Paraguay in terms of levels of gross public fixed capital formation.
The public wage bill accounts for the bulk of the in-crease in total public expenditures over the past de-cade. Public sector wages in Honduras grew from an average of 12 percent of GDP in 2002–2008 to nearly 15 percent in 2009–2011, placing Honduras well above the regional average. The rapid growth in budgetary central government wages, which peaked at 10.9 percent of GDP in 2009, accounted for more than 70 percent of the overall increase in the public wage bill. Efforts by the govern-ment to contain salary expenditures by linking wage in-creases for public sector workers to inflation rather than the minimum wage in 2010 have proven effective.5 As a result of this initiative, between 2009 and 2012 salary
5 Tax and salary reforms were implemented through the Ley de Fortalecimiento de Ingresos, Equidad Social y Racionalización del Gasto Público, approved on March 28, 2010, and by Decree 224-2010, pub-lished on October 29, 2010.
Source: SEFIN; IMF GFS (1986) for Chile, Korea, Malaysia, and Thailand. Note: Data covers 2008–2012 for Honduras; 1984–1997 for Chile; 1970–2004 for Korea; 1976–1997 for Malaysia; and 1987–1996 for Thailand. Chosen years for these countries correspond to periods of sustained GDP per capita growth.
Figure I.8: Consolidated Central Government Expenditures in Honduras and Countries with High GDP per Capita Growth (% of GDP and % of Total Expenditures)
0
5
10
15
20
25
30
ThailandMalaysiaKoreaChileHonduras
General Public Services Education Health Infrastructure
0
2
4
6
8
10
ThailandMalaysiaKoreaChileHonduras
Source: SEFIN.
Figure I.9: Composition of Consolidated Central Government Expenditures (% of GDP)
Subsidies to SOEs Other Infrastructure Safety Public Order
0
0.5
1
1.5
2
201220112010200920080
2
4
6
8
10
20122011201020092008
on Infrastructure on Public Order & Safety
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spending for the entire public sector fell by 1.8 percent of GDP while the wage bill of the budgetary central govern-ment declined by nearly 1.2 percent (dropping below the 10 percent of GDP mark).
Growing salary expenditures in education and health, triggered mainly by salary increases, had the most sig-nificant impact on the wage bill. On average, these two sectors accounted for around 70 percent of the budgetary central government wage bill during the 2008–2012 pe-riod—education accounted for 52 percent, while health accounted for 18 percent. Since in 1980, employees in both the education and health sectors have benefitted from special employment regimes that allow their salaries to grow at a faster rate than the rest of the public sector. As a result, the increase in the education and health wage bill represents 70 percent of the total increase in salaries between 2008 and 2009, with the education sector alone accounting for 46 percent.
Interest payments have increased significantly over the last three years, mainly as a result of growing do-mestic debt. Between 2002 and 2008, interest payments declined from 1.6 to 0.6 percent of GDP, with interest pay-ments on external debt falling from 1.4 to 0.3 percent of GDP. This reduction was the direct result of debt allevia-tion through the HIPC and MDRI multilateral initiatives. By 2012, however, interest payments rose sharply, to 1.88 percent of GDP. The jump was driven by a drastic increase
in interest payments for domestic debt, which represent-ed 1.4 percent of GDP in 2012 (or 78 percent of total inter-est payments).
Overall, the domestic debt of the central government grew from 2.8 percent of GDP in 2007 to an estimated 15.2 percent in 2012. The government’s acquisition of a large amount of new domestic debt to finance current expenditures has led to a rise in financing costs. Yet a sub-stantial portion of the debt accumulation resulted from public sector liabilities added during the 2006–2009 peri-od (equivalent to 4.7 percent of GDP), which included the state’s pension contributions (1.8 percent of GDP), pend-ing payments for goods and services (1.7 percent of GDP), and transfers to municipalities (0.8 percent of GDP). The new debt is expensive, both because of its short-term na-ture and because of a lack of depth in the domestic bond market, where interest rates average more than 9 percent and at times exceed 15 percent.
Subsidy spending declined in recent years, from 1.6 percent of GDP in 2008 to 0.4 percent in 2012. De-creases in international fuel prices and tighter eligibil-ity requirements have contributed to declines in subsidy spending. Honduras has three main subsidy programs: fuel, electricity, and urban transport. It eliminated a fourth program—a taxi subsidy—in 2010. Fuel subsidies were introduced in 2007 to mitigate the adverse impact on consumers of a spike in international fuel prices. How-
Table I.3: Budgetary Central Government Expenditure Structure (2008 - 2012)
Description % of Total % of GDP
2008 2009 2010 2011 2012 2008 2009 2010 2011 2012
Total expenditures 100.0 100.0 100.0 100.0 100.0 22.4 23.1 21.5 21.6 22.8
Current expenditures 78.4 80.7 83.3 78.6 79.5 17.5 18.6 17.9 17.0 18.1
Consumption 53.5 60.0 61.0 55.7 54.3 12.0 13.8 13.1 12.0 12.4
Salaries 41.8 47.0 49.5 44.5 42.6 9.3 10.9 10.7 9.6 9.7
Goods and Services 11.7 12.9 11.5 11.2 11.6 2.6 3.0 2.5 2.4 2.7
Interest 2.7 3.2 4.5 6.3 7.9 0.6 0.7 1.0 1.4 1.8
Transfers 22.1 17.5 17.8 16.7 17.3 4.9 4.1 3.8 3.6 3.9
Capital Expenditures 21.9 22.2 17.4 21.4 19.9 4.9 5.1 3.7 4.6 4.5
Investment 10.8 12.0 7.7 7.7 6.2 2.4 2.8 1.7 1.7 1.4
Transfers 11.1 10.2 9.7 13.7 13.8 2.5 2.4 2.1 3.0 3.1
Net Lending −0.3 −2.9 −0.6 0.0 0.6 −0.1 −0.7 −0.1 0.0 0.1Source: SEFIN.
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Source: IMF World Economic Outlook (WEO).
Figure I.10: Gross Public Fixed Capital Formation (% of GDP), 2000–2011
0
1
2
3
4
5
6
7
201120102009200820072006200520042003200220012000
Figure I.11: Composition of Budgetary Central Government Capital Transfers (% of GDP), 2009–2012
3.5
3
2.5
2
1.5
1
0.5
0
Others Bono 10 Mil Decentralized and Deconcentrated InstitutionsPublic Enterprises Local Governments
2009 2010 2011 2012
4.56
2.9 2.9
6.4
3.8
20.6
13.2
17.7
21.1
24.4
* years for averages noted below. Source: SEFIN; IMF GFS (1986) for Chile, Korea, Malaysia, and Thailand. Note: Budgetary central government data covers 2008–2012 for Honduras; consolidated central government data cover 1984–1997 for Chile; 1970–2004 for Korea; 1976–1997 for Malaysia; and 1987–1996 for Thailand.
Figure I.12: Central Government Capital Expenditures (% of GDP)*
0
1
2
3
4
5
6
7
ThailandMalaysiaKoreaChileHonduras
Figure I.13: Central Government Capital Expenditures (% of Total)
0
5
10
15
20
25
30
ThailandMalaysiaKoreaChileHonduras
Figure I.14: Gross Fixed Capital Formation (% of GDP)
35
30
25
20
15
10
5
0
Gross public �xed capital formation Gross private �xed capital formationSource: IMF WEO. Note: Data covers 2008–2012 for Honduras; 1984–1997 for Chile; 1980–2004 for Korea; 1980–1997 for Malaysia; and 1987–1996 for Thailand.
ThailandMalaysiaKoreaChileHonduras
Source: IMF WEO.
Figure I.15: Gross Public Fixed Capital Formation (% of GDP)
0
2
4
6
8
10
12
14
2009-2011 2005-2008 2001-2004
ParaguayPanamaNicaraguaGuatemalaEl SalvadorHonduras
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ever, the subsidy costs quickly skyrocketed as fuel prices continued to increase, surpassing 1 percent of GDP in 2008. Authorities eliminated the fuel subsidy in 2009 and, in 2010, made it only applicable to liquefied petroleum gas (LPG) for household use. Urban transport subsidies for Tegucigalpa and Comayagüela are paid directly to service providers in exchange for charging a fixed fare of L3.5 to regular users and providing free transportation to seniors and the disabled. The cost of these subsidies has been limited to 0.1–0.2 percent of GDP.6 Finally, the gov-ernment gradually began reducing the coverage of elec-tricity subsidies in 2008 until their elimination in 2012.
B. Managing the Deterioration of the Fiscal Stance
The growing fiscal deficit in Honduras stems from in-efficient public financial management, pre-electoral spending increases, and pressures from sector inter-est groups. Corrective measures focusing on tax reform and fiscal consolidation in post-election years tend to ad-dress short-term fiscal imbalances rather than the reduc-tion of long-term fiscal vulnerabilities. The reversal of the 2010–2011 fiscal adjustment has brought about a signifi-cant deterioration in fiscal discipline. This situation raises concerns about the fiscal sustainability of current govern-ment spending.
Rising expenditures have increased the rigidity of the central government’s budget. The Ministry of Finance
6 The subsidy began as a daily amount of L1,075 to each operator; in March 2012, the amount was increased to L1,325.
(Secretaría de Finanzas or SEFIN) estimates the share of predetermined spending in the central government bud-get at around 85 percent, which exceeds (by more than 20 percentage points) the rigidity of the average budget in other Latin American countries with large entitlement programs (e.g. Brazil). The main drivers of such elevated expenditure levels are: rising interest payments on do-mestic debt, escalating salaries of public employees, par-ticularly in the education and health sectors, and trans-fers to municipalities following the 2009 Decentralization Law. In the absence of new financing sources, legally-mandated increases in both salaries and intergovernmen-tal transfers have become sticky expenditures that are politically difficult to reverse. These factors significantly constrain government efforts to improve expenditure pri-oritization, address societal needs, and still execute the budget effectively over the course of a fiscal year.
The bulk of payment arrears stems from rising ex-penditures that are driven by only a few categories of spending, which indicates that the government has been unable to pay for budgeted commitments. Ar-rears represented an average 2.8 percent of GDP over the 2008–2012 period. Although, at 2.5 percent of GDP, 2012 arrears were below the 2009 peak of 4.8 percent, they in-creased from the 2.1 percent level registered at the begin-ning of the period. Transfers to municipalities and other decentralized institutions, teacher and civil servant allow-ances, as well as social security contributions comprised 41.6 percent of total arrears in 2009, rising to 45.5 percent in 2011 (Figure I-18). Payment arrears for public debt and goods and services were also sizeable, but from 2009 to 2011 they showed declining shares of the total govern-
Figure I.16: Budgetary Central Government Salary Expenditure by Sector (Millions of Lempiras)
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
Ministry of Education Ministry of Health Rest
2008 2009 2010 2011 2012
Source: SEFIN.
0
2
4
6
8
10
12
14
20122011201020092008
Source: SEFIN.
Figure I.17: Total Central Government Payment Arrears
Arrears (percentage of GDP)Arrears (percentage of actual total expenditure)
2.1
4.8
2.81.7
2.5
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Source: SEFIN. Note: In 2009, the share of other payment arrears was comprised solely of arrears in capital investment spending.
Figure I.18: Composition of Central Government Payment Arrears, 2009 and 2011
Salaries & wages, incl. allowances & social security contributionsDebt serviceOther Transfers Goods & services
Salaries & wages, incl. allowances & social security contributionsDebt serviceOther Transfers Goods & services
2009 2011
ment payment arrears—from 21.2 percent to 7.9 percent and from 27.2 percent to 8.8 percent, respectively. How-ever, the expanding arrears category that gives reason for concern is capital spending. Although the disaggregated data on arrears for 2009 includes capital spending as a separate category, while the 2011 data does not, we can, however infer that the 2011 category “other arrears” in-cludes capital spending, which increased two-fold. Even if total arrears have been brought under control (Figure I17), the risk of a continued escalation looms large be-cause the main contributors to government arrears are the fastest growing categories of spending.
C. The Immediate Causes of Weak Public Financial Management
The significant deterioration of the fiscal stance in recent years, coupled with the low quality of public spending, warrant a closer look at government institu-tions and processes that influence public expenditure management.7 This section focuses on the institutional arrangements that impact aggregate fiscal discipline and budgetary spending efficiency. It is not intended to pro-vide a comprehensive review of public expenditure man-agement practices, but rather to highlight areas that need improvement and careful progress monitoring given their connection to sectoral performance.
7 Institutions are viewed as sets of rules, both formal and informal, roles, and information flows that pertain to planning, allocation, and spending of public resources.
When compared to the original approved budgets, re-cent total expenditure outturn figures suggest an in-creased deviation in the implementation of budgeted expenditures. In 2008, before the financial and econom-ic crisis, the government managed to release funds with little deviation from the original total budget by cutting expenditures across sectors. However, in recent years, revenue shortfalls and growing spending pressures have left it unable to achieve the same result. In 2011, both the composition of expenditure outturn and the aggre-gate expenditure outturn deteriorated again, resulting in lower PEFA scores of B and C+, respectively8 (Figure I-19). The changes in the composition of spending suggest that the central government is not delivering public services as originally planned (Honduras PEFA Assessment, 2012).
An array of dysfunctions in the public financial man-agement system contributes to the poor performance of budget execution. The system is hampered by unre-alistic budget planning, lack of commitment controls, and weak cash management. Budget implementation is af-fected by internal factors within SEFIN and line ministries as well as undue political interference from Congress, the Executive branch, and sector interests pushing for in-creased shares in the total budget.
The budget preparation process undermines the credi-bility of the annual budget. Budgets are routinely revised over the course of the year. The annual budget totals are con-
8 Guidance on the methodology for calculating aggregate expen-diture outturn and composition expenditure outturn is available on the PEFA website: http://www.pefa.org/en/content/methodologi-cal-guidance-and-practical-tools.
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tinuously increased during preparation and further revised upward during implementation (Figure I20). However, the budget actuals, which represent the government’s resource availability to fund expenditures at the budget execution stage, tend to be much smaller. Such poor resource predict-ability encourages ministries, agencies, and other partici-pants of the budget process to give insufficient weight to the budget formulation and treat it as a pro-forma exercise. The programming of salaries and operational expenditures tends to dominate the budget preparation of line ministries and agencies, while the budgeting of the programs that they implement is a residual of total allocated resources.
The central government continuously underestimates actual expenditures. Although SEFIN’s revenue-fore-casting capacity is quite robust, the central government continuously underestimates actual expenditures. To ac-commodate a lower spending level than required by exist-ing policy commitments, the proposed and subsequently approved budget often does not include certain catego-ries of spending mandated by law or policy decisions. For instance, the 2013 budget does not provide funds for the increased teacher wages approved in 2012 following na-tional strikes, which the Ministry of Education conserva-tively estimates at an additional L800 million. In another illustrative example, Congress received a proposed 2012 budget with an estimated fiscal deficit of 3.5 percent of GDP, while SEFIN presented a different macroeconomic framework with a projected fiscal deficit of 4.5 percent of GDP and a larger allocation for public investments.
Furthermore, the sector expenditure ceilings are not enforced. Honduras adopted a top-down budget model
to support aggregate fiscal discipline and introduced ceil-ings for line ministries to limit their claims on the com-mon resource pool. These spending limits aim to produce predictable resource envelopes to help line ministries plan and manage expenditures more effectively. The effi-cacy of such measures crucially depends on the credibility of expenditure and revenue totals as well as on the as-sumption that sector ceilings will not be revised except to accommodate unforeseen expenditures exceeding the amount of a contingency reserve. If total expenditures are continuously adjusted over the course of a year—first upward to accommodate new or increased spending and then downward to reconcile with actual resources—then sector ceilings will inevitably prove ineffective.
Ineffective expenditure ceilings undermine strate-gic prioritization of government spending and per-petuate budget incrementalism. The previous bud-get continues forward as the basis for the ensuing one, which then relies on incremental additions to spending programs derived from formalistic analysis of legal ex-penditure requirements. Meanwhile, spending priorities receive little consideration in relation to emerging eco-nomic and social needs. In the end, the back-and-forth process of budget proposals and revisions between SEFIN and line ministries becomes merely a perfunctory deter-mination of budget allocations before the budget is sub-mitted to Congress.
The budget process encounters considerable spend-ing pressures at both the approval and execution stages. These budget demands often undermine expen-diture ceilings of ministries and thus impact the compo-
Source: Honduras PEFA Assessment, 2012.
Figure I.19: Aggregate and Composition Expenditure Outturn
Aggregate Primary Expenditure Outturn (%) Composition of Expenditure Outturn (%)15
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sition of spending. The first upward adjustment occurs at the approval stage, when the Council of Ministers re-quests changes during budget formulation that Congress subsequently reviews and eventually approves. However, the main upward adjustments result from programming changes due to revised budget estimates, new projects, or shifting priorities at the budget implementation stage. A major source of rising expenditures are the various sector interests pushing for increases, either by influencing high-level policymakers or by exerting public pressure (e.g. teacher and police strikes). As shown in Table I-4, the total expenditure hikes ranged from 4.7 to 13.4 percent of the original proposed budget during the 2008–2012 period.
Sizeable expenditures also originate from unrecorded commitments. Such commitments include purchase or-ders issued and contracts signed without verification of
resource availability over the course of a fiscal year. The budget incorporates unrecorded commitments as expen-ditures either later in the current year or, in the case of multi-year contracts, in subsequent years whenever the government receives invoices and associated payments materialize. Unrecorded commitments are difficult to quantify because such commitments are not reflected in accounting records. The analysis of approved and modi-fied expenditures by economic classification (Table I5) shows that, except in 2010, the highest increase for an approved budget occurred for capital spending, which is primarily due to increased disbursements of external loans in recent years.9 This analysis also suggests that a
9 Any supplier and / or contractor of the State at the time of re-ceipt of the purchase order must request a copy of a pre-credit com-mitment registered in the Integrated Financial Management System (SIAFI), to ensure that the contracting institution has the funds avail-
Table I.4: Upward Adjustment of Aggregate Budget Ceilings
Budget Adoption (Millions of Lempiras) Budget Adoption (% Change)
Years Original Ceilings (proposed budget by ministries/ spending agencies)
Approved by Council of Ministers
Approved by Congress
Modified Budget
Approved by Council of Ministers
Approved by Congress
Modified Budget
Change between Original Ceilings and Modified Budget
2008 101,634.6 111,374.6 111,161.3 119,509.4 9.6 - 0.2 7.5 17.6
2009 119,220.2 112,939.7 112,939.7 125,577.1 - 5.3 0.0 11.2 5.3
2010 117,255.4 121,990.2 121,990.2 127,732.5 4.0 0.0 4.7 8.9
2011 128,489.5 133,288.4 133,288.4 144,501.1 3.7 0.0 8.4 12.5
2012 136,449.1 144,744.5 145,022.0 164,461.1 6.1 0.2 13.4 20.5Source: SEFIN.
Figure I.20: Total Budget at Different Stages of the Budget Cycle (Millions of Lempiras)
180160140120100
80604020
0
Source: SEFIN.
20122011201020092008Prepared by Institutions Approved by Council of MinitriesApproved by Congress Modi�ed Accrued Expenses Actuals*
Source: SEFIN.
Figure I.21: Total Budget Execution (%)
Actuals to modi�ed budget Accrued expenses to modi�ed budget
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significant share of unrecorded commitments is likely to comprise capital investment. The growth of current ex-penditures contributed only marginally to higher levels of total spending.
The distribution of budget modifications among sec-tors based on functional classification shows that the general public services category has benefited the most from spending increases, followed by infrastruc-ture (primarily subsidies to SOEs) and education. Real-location of expenditures across budget heads varied sig-nificantly. In the 2012 budget, reallocations ranged from
able to honor the commitments made. Otherwise the government, through the Ministry of Finance, will not accept claims for payment of debts that do not have the respective budgetary support. Officials who violate this article shall be jointly liable financially to honor all the debts generated by not having appropriate credit reserves.
738–943 percent increases (for the Electoral Supreme Court and the Financial Services of the Central Adminis-tration, respectively) to 25 percent decreases (the Nation-al Program for Social Rehabilitation). However increases in education and infrastructure have been declining since 2010 and 2011, respectively. The drastically-reduced in-creases to educational spending are explained by a gov-ernment decision to freeze salary increases for teachers, which in earlier years crowded out capital expenditures. The pattern for overall social spending is uneven, as rela-tively low shares for health, social security, and welfare have increased.
Cash rationing due to resource constraints has led to further distortions in spending across sectors at the expense of capital investments. Actual spending by line ministries and agencies has significant deviations
Table I.5: Current and Capital Expenditures—Approved and Modified Budget
Current Expenditures Capital Expenditures
Approved (Millions of Lempiras)
Modified (Millions of Lempiras)
Change (%)
Approved (Millions of Lempiras)
Modified (Millions of Lempiras)
Change (%)
2008 95,263.00 100,030.70 5.0 15,902 19,480.10 22.5
2009 98,235.50 104,359.50 6.2 14,704 21,217.60 44.3
2010 107,280.70 110,098.80 2.6 14,709 17,633.70 19.9
2011 119,875.90 123,653.80 3.2 13,412 20,847.30 55.4
2012 128,475.80 140,114.40 9.1 16,546 24,346.60 47.1Source: SEFIN.
Table I.6: Additional and Modified Budget by Functional Classification (% of Total)
Additional Budget Modified Budget
2008 2009 2010 2011 2012 2008 2009 2010 2011 2012
General Public Services 29.8 38.0 19.3 21.9 63.8 30.0 28.8 26.5 30.2 32.9
Education 12.9 1.8 0.0 0.5 0.0 20.2 23.4 23.4 23.9 25.2
Health 3.7 6.0 1.2 6.9 5.0 6.4 7.8 7.9 7.2 7.0
Social Security & Welfare 2.1 0.3 7.3 10.8 6.2 5.1 5.0 5.6 5.4 6.9
Infrastructure 19.9 28.1 36.2 27.4 12.0 25.5 25.0 26.1 24.3 23.8
of which SOEs 12.6 0.7 1.6 9.5 4.0 19.4 17.1 19.5 18.5 19.4
Environment 6.8 0.8 19.5 6.2 0.3 1.1 0.6 1.4 1.2 0.8
Agriculture 10.8 1.1 5.1 7.9 2.9 2.2 1.9 2.1 2.2 1.9
Public Order & Safety 5.5 4.5 7.1 8.2 4.7 3.8 3.9 4.0 4.0 3.8
Defense 5.5 4.0 1.2 2.8 1.6 3.3 3.3 3.7 3.7 3.5
Other 3.0 1.5 3.1 2.4 3.4 3.9 2.8 2.4 3.4 2.4 Source: SEFIN.
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from the approved modified budget. Execution rates of government spending on a cash basis hovered around 70–82 percent for the 2008–2012 period, indicating the government’s real fiscal capacity set by SEFIN. The government’s approach to defining the budget execu-tion rate as the ratio of accrued expenses to the modi-fied budget, without considering the ratio of actual payments to modified budget, is misleading for future budget preparation. Such a definition assumes a greater fiscal capacity of the state and thus results in setting an over-optimistic total resource envelope in the following year. The budget execution rates for current expendi-tures have exceeded those of capital spending—72–83 percent and 61–78 percent, respectively. This suggests that cash rationing is one of the main factors that further compromises capital investments.10 Moreover, the dif-ference between execution rates on the accrual versus cash basis is larger for capital spending, which implies that it constitutes a larger share of payment arrears that are most likely to reflect unrecorded capital-investment commitments.
In recent years, the pattern of execution rates across sec-tors has skewed expenditure priorities in favor of core general public services and away from health, infrastruc-ture, and social security and welfare. Thus, domestically
10 A study examining constraints to budget execution in the in-frastructure sector in Indonesia (World Bank, 2012) finds that low execution rates for capital spending can also be caused by delays in budget preparation, appointment of project managers, and procure-ment. However, compared to Indonesia where capital expenditure execution rates were 80 percent and above in 2009–2011, there is significant room for improvement in capital spending execution rates in Honduras.
financed infrastructure and social spending (except edu-cation) are the areas that have faced cuts in fund releases, while the most protected sectors include general public services, environment, and agriculture. In fact, the edu-cation sector, which historically has received the highest share of the budget, had expenditure execution rates of nearly 90 percent until 2010.
The absence of mechanisms for commitment con-trol exacerbates cash rationing, adds rigidity to the budget, and poses a substantial fiscal risk. Although stipulated in the Organic Budget Law, no ex-ante control exists at the commitment stage and no mechanisms are provided to program and control expenditures before they are generated through scheduling and allocation of commitment quotas. A number of contracts without pre-assigned budget allotments have produced arrears payable in future fiscal years in violation of the Organic Law. In 2009, in-year expenditures that were not in-cluded in the appropriated budget reached 4.7 percent of GDP. This absence of commitment control also gives discretion to the Executive to add new projects and ex-penditures without allocating funding, which further ex-pands payment arrears. In 2008, 2.6 percent of the funds committed were not paid, while only 77.4 percent of the modified budget was paid (Figure I-23). Cash rationing often has adverse implications for capital spending be-cause delays in payments to service providers can slow or stall the work and lead to higher procurement costs and inefficient management.11
11 “Impunidad, el verdadero problema presupuestario en Hondu-ras,” FOSDEH, 2012.
Source: SEFIN.
Figure I.22: Budget Execution by Economic Classification (%)
Current Expenditure Actuals to Modi�ed Budget
Current Expenditure Accrued Exp. To Modi�ed Budget
Capital Expenditure Actuals to Modi�ed Budget
Capital ExpenditureAccrued Exp. To Modi�ed Budget
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The implementation of the Integrated Financial Man-agement System (SIAFI) remains incomplete. SIAFI is bypassed at the commitment control stage and used only at the payment stage when commitments, invoices, and payment obligations are recorded. Furthermore, the pro-curement information system is not linked to SIAFI, which makes it difficult to keep track of multi-year commitments under infrastructure investment contracts. There is no practice of preparing schedules of annual payments for multi-year contracts. Until recently, the system of pro-graming and allocation of commitment quotas established in the Budget Law, although referred as commitments, in practice consisted of quarterly planning and allocation of cash for payments, broken down by month. There is no programming or control at the moment of expendi-ture commitment, which, according to the provisions of Article 31 of the Budget Law, is the time of entering into a legal contract with third parties. In practice, the Cash Flow Committee—comprised of the National Treasury and
directors of the Public Credit, Budget, and Planning Unit (UPEG)—monitors cash flows and decides on the release of the quarterly allotment based only on availability of funding in a given quarter, which leads to cash rationing.
At present, only 63 percent of government institutions connect to SIAFI, while approximately 28 percent of total payments are made outside of the system. SIAFI, which covers all line ministries but not all public agencies, comprises the development and integration of modules on: (i) budget, (ii) accounting, (iii) treasury, (iv) human re-sources, (v) administration of goods, (vi) travel manage-ment, (vii) revolving funds (fondos rotatorios), and (viii) management of externally financed projects (unidades ejecutoras de proyectos con recursos externos or UEPEX). The initially-designed modules for travel management and revolving funds have never been implemented, while those for human resources, administration of goods, and UEPEX have only partially been implemented. This in-
Table I.7: Budget Execution by Functional Classification (%)
Actuals to Modified Budget Accrued Expenses to Modified Budget
2008 2009 2010 2011 2012 2008 2009 2010 2011 2012
General Public Services 70.2 59.7 71.9 74.0 84.0 72.1 74.2 75.6 79.0 90.4
Education 91.6 85.5 91.9 88.2 79.9 92.5 87.1 93.1 94.2 94.6
Health 85.3 82.9 89.8 92.4 74.2 93.8 95.4 94.5 96.1 92.9
Social Security & Welfare 88.6 28.2 36.9 73.1 66.7 88.7 30.0 41.7 74.7 69.9
Infrastructure 74.2 75.9 73.0 84.3 68.9 75.9 83.1 77.9 90.6 83.6
of which SOEs 71.6 78.0 73.3 85.5 70.0 72.8 82.3 77.7 91.7 83.2
Environment 61.8 57.2 90.2 85.8 88.5 95.8 73.6 91.9 87.5 91.1
Agriculture 73.8 71.1 72.2 79.5 87.8 75.8 75.9 74.5 85.4 93.2
Public Order & Safety 93.7 85.4 90.1 92.2 83.5 98.8 93.8 96.5 97.3 97.0
Defense 93.1 77.4 85.3 93.2 72.1 95.2 83.0 85.8 95.4 80.1
Other 35.6 31.5 89.8 75.6 79.0 41.1 36.6 90.6 76.1 80.9 Source: SEFIN.
Table I.8: SIAFI Coverage (Millions of Lempiras)
2008 2009 2010 2011 2012
Government total payments 92,529.2 88,328.2 99,137.1 118,687.8 127,260.9
Payments out of SIAFI made by centralized institutions 2,961.6 3,068.5 3,503.8 3,712.2 3,768.4
Payments out of SIAFI made by decentralized institutions 18,652.9 13,454.2 18,475.1 24,329.6 31,788.9
Total of payments out of SIAFI 21,614.5 16,522.7 21,978.9 28,041.8 35,557.3
% from total government payments out of SIAFI 23% 19% 22% 24% 28%Source: SEFIN.
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complete implementation of SIAFI has led to the creation of specific systems for the needs of all public entities, pro-ducing duplication and inconsistency in information gen-eration due to the lack of an integrated single system for all public entities.
A weak capacity to track expenditures and monitor performance undermines aggregate fiscal discipline. No detailed reporting or feedback exists on the perfor-mance of programs, projects, and policies that can inform line ministries in their budget decisions or help counter-act persistent interference from the Executive. Program performance reviews are minimal and audits are largely financial. These factors make scrutiny and implementa-tion of in-year modifications difficult to manage.
D. The Deeper Causes of Weak Public Financial Management
Dysfunctions at the budget formulation and imple-mentation stages, which have led to fiscal profligacy, are symptomatic of deeper institutional problems. The prevailing informality of institutional arrangements and practices, combined with a limited track record in implementing new policies, have undermined overall government fiscal performance. The people of Honduras have one of the lowest trust levels for the State in Latin America. Poor quality of public services and the ineffec-tive and inefficient use of public resources are damaging public confidence. Improving the quality of public ser-vices should gradually enhance citizen confidence in the trustworthiness of their government.
The absence of robust institutional mechanisms for maintaining fiscal discipline and achieving expendi-ture efficiency lies at the heart of public expenditure management concerns. SEFIN plays a pivotal role in fis-cal discipline that ranges from setting budgetary ceilings to controlling cash release during budget execution. The strengthening of SEFIN’s role was meant to ensure fiscal discipline. However, the recent hikes in expenditures, which were particularly pronounced in pre-election years and led to rising fiscal deficits, show the limits of such institutional aims. High-level political influences are also reducing SEFIN’s authorizing power because the main drivers of increased expenditures, such as growing domestic interest payments, transfers to municipalities, and salaries, originate outside of its control in Congress and the Executive. Honduras lacks formal institutional mechanisms backed by political will that ensure coher-ence in public expenditure management, such as effec-tive and formal commitment controls and assessment of the pertinence and affordability of various sector de-mands over the medium term. In addition, its mandate overlaps to a large extent with the newly established Ministry of Planning, which could undermine SEFIN ef-forts if the government does not clearly define their re-spective responsibilities and introduce effective coordi-nation mechanisms. Thus, despite its rather significant technical capacity to manage public finances—including staff skills, resources, and information technology—the recent expenditure hikes reveal its limited capability to facilitate aggregate fiscal discipline and allocative effi-ciency of public spending.
In the short to medium term, Honduras faces major challenges in implementing and sustaining fiscal con-solidation while at the same time undertaking equally important quality fiscal adjustments. The lack of al-locative spending efficiency can potentially translate into inefficient consolidation whenever political expedience determines sector spending cuts with little consideration for economic and social expenditure priorities. While tough policy choices to reduce budget rigidity are neces-sary, enhancing public financial management practices is fundamental in order to achieve a sustained quality fiscal adjustment.
Dysfunctions in budget planning and execution un-dermine aggregate fiscal discipline and efficient allo-cation of resources. The primary constraint arises from SEFIN’s nonbinding expenditure ceilings, which are rou-tinely breached. Sector ministries request significantly
Figure I.23: Arrears and Actual Payments (% of Modified Budget)
Actuals Accrued not paid Overestimation
2008 2009 2010 2011 2012
Source: SEFIN.
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higher expenditure envelopes over numerous negotia-tion rounds that extend into budget execution. As a re-sult of the many budget revisions, cash rationing has be-come endemic, while the level and composition of actual resource allocations frequently deviates significantly from the approved budget. To make expenditure limits cred-ible and enable effective cash management, SEFIN needs to base these ceilings on a realistic deficit target and then enforce them at both the budget preparation and imple-mentation stages.
The absence of de facto mechanisms for commitment control is exemplified by the discretion of the Execu-tive to add new projects and programs without allo-cated funding. Pressures from sector interest groups are
also leading to overspending at the sectoral level, grow-ing arrears, and widening fiscal deficits. The government recently adopted de jure laws to impose commitment control that have yet to become operational. Although the measures authorized SEFIN to refuse approval for in-year budget modifications made without a correspond-ing budget allocation, whether it actually manages to exercise this power will prove a determining factor in whether commitment control efforts succeed.
In order to enforce expenditure ceilings and commit-ment control effectively, SEFIN needs an authorizing environment backed by political will at the highest level. Without the strong and sustained support of politi-cal leadership, SEFIN efforts to enforce spending ceilings
Source: Latinobarómetro, 1996–2011. Perception of trust in government, rank 0–100%, being 100% more trust.
Source: Latinobarómetro, 1998–2011. Answer to question: In a scale of 1 to 10, how justi�able is it for you to evade taxes? Being 10 totally justi�able.
Source: Latinobarómetro, 2011. Citizens’ perception of e�ciency of the State, rank 0–10, being 10 very e�cient.
Source: Latinobarómetro, 2009–2011. Citizens’ satisfaction with public services (central and municipal), rank 0–11, being 11 very satis�ed.
Citizens’ Trust in the State Citizens’ Perception of Tax Evasion
E�ciency of the State Satisfaction with Public Services
Figure I.24: Results of the Citizens’ Perception Survey
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and commitment control will continue to lack credibility. Merely adopting laws and implementing information sys-tems is insufficient because both can be circumvented and adapted to traditional informal practices. Effective management requires coordination among the planning and the execution functions, a clear definition of roles, and a corresponding implementation capacity across entities. It also requires a transformation from incomplete and ad-hoc policymaking into a more thorough and detailed ap-proach, considering that policy activism with weak imple-mentation can generate unexpected outcomes.
The 2013 Budget Law addresses de jure some of the dysfunctions of the public financial management system, although its enforcement capacity is yet un-tested. Article 75 of the General Provisions includes a provision to prevent expenditure commitments without a prior verification of budget availability. The government plans to develop an application in SIAFI that requires each spending agency to make necessary budgetary modifica-tions prior to execution, schedule the dates of receipt of all goods and services (accrued expense), and arrange a cor-responding payment plan with suppliers and contractors. The agencies would send this information to the Treasury, which would in turn use it for its cash plans and releases. SEFIN plans to develop a new SIAFI module that requires spending agencies to develop an annual fiscal plan for all monthly expenses paid with national Treasury funds. Its goal is to develop an annual overview of cash payments, greater predictability of cash releases, and an accurate es-timate of payment arrears. SEFIN has also assigned staff (pre-interventores) to the Ministries of Education, Public Works, Health, and Transportation and Housing to exert formal control over expense-related documents. Over-sight and sanctions against violators will occur under the administrative procedure of the Superior Court of Audi-tors (TSC).
The enhanced monitoring of budget execution will help inform proposed changes in allocation. The Min-istry of Planning and External Cooperation (SEPLAN) will conduct monthly monitoring of public expenditures us-ing information related to physical progress and financial execution of investment at the national, regional, and municipal levels. This review will utilize data from SIAFI and from the Monitoring Platform of the Annual Operat-ing Plan and Budget of SEPLAN.
Political support is required to address the deeper in-stitutional issues that underlie poor public financial
management and overall performance, which in turn have led to lax fiscal behavior. The prevailing informal-ity of institutional arrangements and practices, as well as a weak track record for implementing reforms, are major obstacles to devising a more stable fiscal policy. The lack of stability and continuity of civil service in key areas of public financial management is another important con-tributing factor. As a medium- to longer-term priority, public financial management requires enhanced coordi-nation in managing public finances across central finance functions, sectors, and levels of government; effective capacity-building in the financial management of line ministries and agencies; and the assurances that SEFIN will maintain a leading role throughout the process.
While the fiscal situation that Honduras faces today is not a result of the decentralization process and cor-responding transfers to municipalities, a continued push toward decentralization could pose significant fiscal and political challenges. Growing fiscal deficits and weak public financial management practices con-strain the ability of the central government to implement and finance the decentralization process. The next chap-ter looks at the decentralization efforts in detail.
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Honduras has announced an ambitious process of fiscal devolution that aims to increase considerably the municipal share of total expenditure. The govern-ment pledged in 2010 to increase the share of central revenue transferred to local governments from 5 to 20 percent by 2017 and to 40 percent by 2038. Since the passing of the 1990 Law of Municipalities that initiated the decentralization process, the government has at-tempted numerous reforms seeking to reinforce the pro-cess. However, these reforms have only been partially implemented. A multitude of management, administra-tive capacity, and accountability problems remain both at the central and subnational level.12
12 César Vargas (2011) provides insights into the political econ-omy behind the decision to push for decentralization in Honduras. He suggests, for example, that during the 2009 crisis municipalities played an important role in supporting the new president, who in turn promised an increase of transfers from 5 to 11 percent by 2014. A political economy analysis of the decentralization process, how-ever, is beyond the scope of this report.
Current decentralization aspirations would pose sig-nificant fiscal and political challenges. Growing fiscal deficits and weak public financial management practices constrain the ability of the central government to imple-ment and finance the decentralization process. The cen-tral government has complied with the mandated rev-enue transfer percentage only twice in the last decade (and only three times in the more than two decades of decentralization). Politically, mandated transfers tend to be difficult and costly to revert.
Improving transfer predictability is an important pre-requisite for promoting effective local management of resources. If the government announces a new increase in transfers but cannot effectively comply with them, the new decentralization policy can unrealistically elevate ex-pectations. The reform could then lead to an unintended increase in local recurrent expenditure and higher levels of debt because municipalities use budgeted transfers to determine how much they can spend on personnel and to back short-term loans.
Fiscal Decentralization: Building Credible Reforms
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The plans for deepening fiscal decentralization are not informed by an assessment of the comparative advantage of municipalities in delivering social and infrastructure services. For sectors in which there are clear scale economies and spillovers, devolution to the municipalities is not advisable. The present policy dis-cussion has focused solely on the distribution of finan-cial resources without considering what functions local governments can carry out effectively. The assignment of resources has to be consistent with the distribution of responsibilities (“funding follows function”).
Devolving more responsibilities to all municipalities is unlikely to help improve service delivery or increase capital formation. The large majority of municipalities lack the capacity and scale (with an average population size of 27,000) to efficiently finance and manage complex services. Furthermore, currently most municipalities do not comply with the central government’s investment tar-gets and spend most of the transfers on personnel and other recurrent expenditure. Further devolving expen-diture responsibilities can lead to a reduction in public capital expenditure because it is unlikely that municipali-ties will be able to effectively absorb and scale up invest-ments in the medium term. To ensure a higher quality of decentralized capital spending requires sound public investment management systems and adequate moni-toring by and coordination with the central government. Moreover, the gains expected from decentralization in terms of greater accountability as well as increased pro-duction and allocative efficiency are not likely to be real-ized in a context of weak institutional capacity.
The present transfer system only partially accommo-dates for the heterogeneity in size, population, and economic development of municipalities. Half of the transfer pool is allocated in equal shares to all munici-palities and the rest according to population and poverty shares. The result is that per capita transfers are many-fold higher in municipalities with small populations than in urban centers. Most small municipalities have few sources of revenue besides transfers, but some are rich and able to mobilize sizable resources. Presently, the distortions are not problematic because the overall vol-ume of transfers to the lowest tier is not large. Channel-ing more resources through that system, however, would magnify distortions, as the fixed transfer per municipality would be several times larger. Asymmetric approaches could help factor in the heterogeneity in the municipali-ties’ capacity and size.
This chapter looks at the decentralization13 process in Honduras from three complementary angles. First, it reviews the features and evolution of the intergovern-mental framework and previous attempts to strengthen the role of municipalities. Second, the chapter examines the effects of transfer unpredictability and shortfalls, and the institutional weaknesses of municipalities. Third, it presents selected sectoral outcomes and existing evi-dence from community-level interventions to illustrate the potential benefits and hurdles of localizing service provision.
A. Intergovernmental Framework and Local Conditions
The current intergovernmental fiscal framework cre-ates positive and negative incentives for municipali-ties. On the one hand, a considerable number of mu-nicipalities finance a sizable share of their expenditure through the collection of their own revenue and have, over time, increased their tax mobilization. While debt levels are high and unsustainable for 25 municipalities, the majority are demonstrating some level of fiscal re-sponsibility by not assuming new debt beyond the legal limit. On the other hand, most municipalities are not complying with the earmarks on transfers, in particular the share assigned to capital expenditure. In addition, due to the unpredictability and lateness of transfers, many municipalities regularly resort to short-term loans from private banks to finance their recurrent spending obligations. These loans, which generally imply high in-terest rates that can divert sizable resources from produc-tive spending, are backed with budgeted transfers from the central government.
13 The design of an intergovernmental framework involves a number of interrelated dimensions, including political, administra-tive, and fiscal. Political decentralization assigns decision-making authority to subnational governments that are directly elected by the residents of their jurisdiction (Manor, 2000). Fiscal decentraliza-tion requires that subnational governments be granted decision-making power over taxation and expenditure policies. Administra-tive decentralization guides subnational governments to assume authority over policies and public officials in their jurisdiction (Eaton and Schroeder, 2010). Different degrees of administrative authority result in different models of decentralization. Deconcentration gives subnational governments or regional units of line ministries the responsibility for implementing policies, but they have little discre-tion over their design or the allocation of resources. In a delegation model, subnational governments are granted partial responsibilities and authority, while the central government retains significant deci-sion-making power. With devolution, subnational governments are granted complete authority over functions and resources without any oversight from national officials.
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While the fiscal and administrative frameworks pres-ent problems, the implementation process poses the greatest challenge to municipal governance. Before embarking on new decentralization efforts, special at-tention should be given to increasing the municipalities’ capacity to operate within the existing framework and manage the current transfer levels. Improving transfer predictability is an important prerequisite for promot-ing effective local management of resources. Enhancing vertical and horizontal coordination in public investment management is another priority because different levels of government and the various entities involved jointly provide much of the infrastructure.
i. Heterogeneity in Size and Capacity
Honduras is a unitary country with two main levels of government, central and local. Territorially, the country is organized into 18 departments and divided into 298 municipalities. Departments operate with limited func-tions under governors directly appointed by the Presi-dent. The 1982 Constitution recognizes municipalities as autonomous political and administrative entities with their own treasuries and entitlement to revenue gener-ated in their jurisdiction. In practice, they could only ex-ercise their autonomy after the 1990 Law of Municipalities gave them fiscal resources along with several of their own sources of revenue.
While municipalities have political and administra-tive autonomy, horizontal and vertical accountability remains weak, especially in small municipalities. A direct vote elects a Mayor and a Council to govern; the number of Council members varies within a range of four to ten, depending on municipal size. Although the Coun-cil is expected to provide a balance of power and repre-sent a diversity of interests, in practice mayors wield con-siderable influence (USAID, 2004).
Municipalities vary considerably in size and popula-tion density. Over half of the population lives in the eight most-developed urban municipalities, while the rest lives in municipalities of 70,000 inhabitants or less (the average population is below 20,000 and the lowest is 1,100). Also, municipal surface areas vary considerably, from 17 to 8,063 sq. kilometers (the average municipal surface area is 376 sq. kilometers), while population densities vary from 2.5 to 800.6 inhabitants per sq. kilometer. Although the poverty headcount is high across all municipalities (66.2 percent of the population in 2011), the average poverty rate is higher in rural areas than in cities—71.6 versus 59.8 percent, respectively. All these factors impact both the municipal costs for providing services and infrastructure and the administrative requirements necessary for effec-tive service delivery.
The vast majority of municipalities lack the necessary capacity to effectively manage resources and have made limited progress since decentralization began. Municipalities exhibit wide disparities in development and institutional strength. The Secretariat of Interior and Population divides municipalities into four categories based on several indicators: the human development in-dex, the level of urbanization, institutional capacity, the resource base, and access to basic services such as tele-phone, piped water, and power. The categories include: A (High Capacity), B (Intermediate Capacity), C (Poor Ca-pacity), and D (Very Poor Capacity). In 2010, the govern-ment classified 8 percent of municipalities as developed, 11 percent as intermediate, and the remaining 81 percent were categorized as poor or very poor despite numerous initiatives for institution building at the local level.
Municipalities have varying capacities to mobilize their own resources and access external financing. Type A and B municipalities have a broader economic base and a better capacity for tax collection. Their sub-
Table II.1: Average Population and Human Development Index per Category of Municipality, 2010
Category Number HDI Income per Capita
Population Surface Area (sq. km)
Population Density
Average Minimum Maximum
A 23 0.72 4,307 174,582 14,651 1,126,533 733.9 272.4
B 32 0.68 2,981 32,545 2,772 112,909 555.8 114.5
C 107 0.65 2,360 15,720 1,352 78,797 408.6 72.7
D 136 0.60 1,729 9,611 1,163 31,538 247.6 70.9Source: SEFIN.
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stantially higher resource base provides them with great-er fiscal space to invest in social infrastructure, manage the unpredictability of transfers, and meet service needs and citizen demands. Conversely, Type C and D munici-palities lack the capacity to mobilize resources and re-main primarily dependent on vertical transfers.
ii. Municipal Responsibilities Focused on Local Services
The functions assigned to municipalities have re-mained limited to the few local services mentioned in the 1990 Law of Municipalities. The law assigns munici-palities certain functions related to solid waste manage-
ment, regulation of public spaces, local infrastructure, and other local services to the lowest tier of government. Mu-nicipalities are also expected to assume responsibilities related to municipal police and public lighting services. Since it came into effect, the law’s functional assignments have remained unchanged, even when Decree 143/2009 mandated that the share of central revenue transferred to municipalities be more than double by 2013. Table II2 provides a list of essential public services and the role of different levels of government in their delivery.
The central government is still responsible for the management and financing of the main social services
Table II.2: Functional and Expenditure Assignment across Levels of Government in Honduras
Functions National Local Observations
Security X Municipalities assume some expenses to support the Ministry of Security (creating the Munici-pal Police, providing infrastructure facilities, etc.).
Health X Municipalities assume some expenses for maintenance, guards, and the purchase of medicines and other items in support of the Ministry of Health.
Education X Municipalities assume some maintenance expenses for schools, guards, purchase of school sup-plies, temporary teachers, etc., in support of the Ministry of Education.
Social Programs X X Municipalities assume some responsibilities in caring for vulnerable groups as well as some expenses to support relevant institutions.
Housing and Urban Planning
X X Municipalities assume some expenses to support the Ministry of Public Works, Transportation, and Housing (SOPTRAVI) for housing and counterparts in housing programs (community land). Municipalities are assigned the responsibility of urban planning.
Solid Waste Collec-tion and Treatment
X Municipalities have the sole responsibility to provide all related services.
Roadways and Urban Streets
X X Municipalities are responsible for opening and maintaining the urban and secondary roadways.
Transport X The Ministry of Public Works, Transportation, and Housing (SOPTRAVI) has responsibility for op-erating permits and local route openings.
Potable Water X Municipalities participate in programs of investment in water and sanitation through central-ized and decentralized entities such as: Honduran Social Investment Fund (FHIS); National Rural Development Program (PRONADER); Ministry of Finance (SEFIN); National Autonomous Aque-duct and Sewer Service (SANAA), etc. Municipalities also offer technical assistance and regulate the sector.In Article No. 67, the Water Law (Decree 181/2009) states that the municipalities will issue wa-ter rights, permits, and licenses under established regulations for the following consumption: 1) household use; 2) industrial, artisanal, and micro and small enterprises; 3) artisanal and sports fishing; 4) local tourism; 5) irrigation systems up to 10 hectares in size; 6) agro-cattle whose isolated consumption does not exceed 0.06 liters per second; and 7) legally recognized water administration boards. Article 86 of this Law indicates that the water authority will establish the tariff framework and its review, and, depending on the case, by the municipalities after the calculations are assessed and reviewed by the respective regulating entities.
Electricity X X Municipalities manage the construction of new distribution networks and the promotion of ecological protection and reforestation. Municipalities are directed to use resources from the Poverty Reduction Strategy in part to bring power projects to their communities. Municipalities also participate in the control and promotion of commercial and industrial activities, with a high involvement in the policies for electrical energy generation and transmission.
Source: SEFIN.
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such as education and health. The central government still manages the provision of education services through deconcentrated structures. Municipalities are involved in early education and are responsible for the maintenance and rehabilitation of schools. Some degree of local par-ticipation now takes place through parent-teacher asso-ciations, but schools maintain direct links to the Ministry of Education rather than to municipalities. Health centers operate at the local level, but with lines of accountability to central agencies.14 The central government is currently considering a move towards a deconcentrated model of services in rural areas through a memorandum of under-standing between a service provider and the Ministry of Health. In the first round, this model would serve 52 mu-nicipalities in the C and D categories.
The distribution of responsibilities across levels of government in Honduras is very similar to that of other unitary countries in the region. Health and edu-cation remain central government functions, as in most countries of the region. The role of municipalities is large-ly focused on local services and small-scale infrastructure provision (Table II3).
14 The Ministry of Health has: seven national hospitals, six re-gional hospitals, and 16 area hospitals with a total of 4,000 beds; 57 maternal child clinics; 380 health centers with doctors and dentists; 1,017 rural health centers; and 4 emergency periphery clinics.
iii. Features and Evolution of the Transfer System
Reform processes to date have focused almost ex-clusively on the design of the transfer system, with less attention paid to the capacity of the municipali-ties to invest or to raise their own revenue. While the intergovernmental fiscal system of Honduras is simple and transparent, compliance problems critically ham-per effective local fiscal management. Delays, unpre-dictability, and shortfalls in transfers limit the ability of municipal governments to deliver services and make investments. This unreliability presents particularly se-rious problems for small municipalities that have little resources of their own.
The transfer system allocates a high share of resources on a per unit basis and by population. Municipalities benefit from having tax revenue that accrues to them directly, but large disparities exist in the economic base of these jurisdictions. The overall intergovernmental sys-tem does not fully factor in their ability to collect these resources. Although other countries give block grants to local governments for basic operating expenses, these transfers are either adjusted to the size of the municipal-ity or comprise smaller shares of the total resource pool. For example, Guatemala allocates part of its transfers as a fixed amount per municipality, but the share is consid-erably smaller and the formula gives greater weight to
Table II.3: Expenditure Assignment across Levels of Government in Central America
Social Services Transportation Other Services Utility Services
Hous
ing
Nutri
tion P
rogr
ams
Prim
ary a
nd Pr
esch
ool E
duca
tion
Seco
ndar
y Edu
catio
n
Unive
rsitie
s
Publ
ic He
alth
Hosp
itals
Socia
l Welf
are
Inte
rurb
an H
ighw
ays
Urba
n Hig
hway
s
Ports
and N
avig
able
Wat
erwa
ys
Airp
orts
Railr
oads
Urba
n Tra
nspo
rtatio
n
Oil a
nd ga
s Pip
eline
s
Publ
ic Or
der a
nd Sa
fety
Polic
e
Irrig
ation
Heat
ing
Fire P
rote
ction
Drin
king W
ater
and S
ewer
age
Was
te Co
llecti
on
Electr
ic Po
wer S
uppl
y
Telec
omm
unica
tions
Costa Rica C C C C C C C C C C C C C C C C C L C C
El Salvador C C C C C C C C C C C C C C C C C L C C
Guatemala C C C C C C C C L C C C C C C C,L L C C
Honduras C C C C C C C C C, L C C C C C L C, L L C C
Panama C C C C C,I C C C C C C C C C C I,L C CSource: World Bank, 2006; Law of Municipalities, 1990.Note: C = Central, I = Intermediary, and L = Local.
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a number of other equalizing indicators. Beyond Latin America, Ghana and Uganda have per unit subsidies, but they are much smaller in relative terms.
The current transfer system established by the 1990 Law of Municipalities has been amended twice. Ini-tially, the central government was obligated to trans-fer 5 percent of tax revenue to the municipalities (Table II4). Authorities computed the transfer amount using a formula that distributed 40 percent of resources equally and the remaining 60 percent in proportion to the num-ber of inhabitants in each municipality. The law limited the resources available for administrative or operational expenditures to 15 percent of the transfers and assigned the remaining funds to maintenance and additions to the social infrastructure.
The original 1990 formula introduced two sources of horizontal imbalance or disparities. A block grant that provided equal portions for all municipalities favored small municipalities disproportionally. The per capita transfers received by a very small municipality could be 1,000 times greater than that of an urban center. Yet to the
extent that size and poverty incidence are correlated, the transfer could also have an equalizing effect. Conversely, large municipalities benefit from the use of population size to distribute two-thirds of the resource pool and have the strongest economic and institutional capacity.
Municipalities also received revenue from local taxes. The main categories include: the Personal Income Tax, the Industry, Commerce, and Service Tax, and the Extraction and Exploitation of Livestock Resources Tax. In the case of personal income and sales taxes, municipalities collect these taxes directly but share the base with the central government. The size of the base for these main tax cate-gories highly correlates with population density, meaning that small municipalities must rely on the block transfer as their almost-exclusive source of revenue.
In 2005, a new allocation formula increased the block transfer to half the share of the resource pool and introduced poverty and fiscal effort as new criteria. Decree 200/2005 increased the unitary transfer to 50 per-cent of the shared resources, gave poverty a 20 percent weight, and assigned fiscal efficacy a 10 percent weight.
Table II.4: Reforms to Allocation Formula (Law of Municipalities’ Article 91)
1990 Law of Municipalities Decree 200/2005 Decree 143/2009
Amount 5 percent of central tax revenue 5 percent of central tax revenue 7 percent of central tax revenue and expenditure in 2010, 8 percent in 2011, 9 percent in 2012, 10 percent in 2013, and 11 percent in 2014
Allocation Formula
40 percent of transfers allocated in equal parts60 percent according to share of population
50 percent of transfers allocated in equal parts30 percent according to share of population10 percent according to share of population living under the poverty line10 percent according to level of fiscal efficacy
50 percent of transfers allocated in equal parts 20 percent according to share of population30 percent according to share of population living under the poverty line
Uses 10 percent earmarked for administra-tive expenditure5 percent earmarked for operation and maintenance of social infrastruc-ture (including salaries of teachers and nurses)In municipalities with budgets below L500,000, the two percentages above can be doubledThe remainder is allocated to public investment (85 percent)
10 percent earmarked for administrative expenditure15 percent earmarked for operation and maintenance of social infrastructure (including salaries of teachers and nurses)In municipalities with budgets below L500,000, the two percentages above can be doubledThe remainder is allocated to public investment (75 percent)
15 percent earmarked for administrative expenditure13 percent earmarked for operation and mainte-nance of social infrastructure (including salaries of teachers and nurses)In municipalities with budgets below L500,000, the two percentages above can be doubled1 percent earmarked for child and youth protec-tion programs and projects2 percent earmarked for social development and gender-based violence preventionThe remainder is allocated to public investment (69 percent)
Special Provisions
1 percent earmarked to audits of the TSC and for strengthening internal controls
1 percent earmarked to audits of the TSC and for strengthening internal controls
Source: Law of Municipalities and Vargas, 2011.
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By reducing the weight of the population share, the re-form aimed to correct some of the horizontal inequities from the previous formula. The revised Article 91 also ear-marked transfers to a number of specific uses but allowed municipalities with a budget smaller than L500,000 to double both the share of the administrative costs and the amount invested in the operation and maintenance of so-cial infrastructure (which includes the salaries of teachers and nurses). Over 85 percent of municipalities had met the revenue efficacy criteria by 2008, while the rest saw their transfers cut by 10 percentage points.
In 2009, the central government revised the formula again, reducing the weight of the share of population, increasing the weight of the share of poverty, and eliminating the reward for fiscal efficacy. It also intro-duced earmarks for child protection and gender-based vi-olence prevention programs. The new formula increased the equalization effect of the transfer by prioritizing the poverty share over population. However, by continuing to provide a fixed amount to each municipality regardless of wealth or size, it not only generated horizontal inequali-ties but even encouraged excessive spending among the small municipalities that do not require 15 to 30 percent in operating costs. By eliminating the fiscal efficacy crite-
ria, the transfer system no longer rewards municipalities’ efforts to raise their own revenue.
The current transfer system favors small municipali-ties and those that have a lower level of economic and institutional development. When considered on a per capita basis, the fixed per unit transfer or aliquot (alícuota) increases geometrically as the size of the mu-nicipalities’ population decreases, as shown in Figure II1. The transfer amount per capita received in munici-palities of 3,000–5,000 inhabitants is eight times larger than that of a municipality with more than 300,000 people (Figure II2). The differences between large and small municipalities increase as population decreases, reaching an 18:1 ratio between the least and the most populated groups.
Transfers per capita are negatively associated with population and income, but there are wide disparities in the transfers received by localities of similar levels of human development. Figure II3 and Figure II4 illus-trate the variation. Equally, there is no clear relationship between transfers and revenue mobilization capacity or the overall level of municipal development, which corre-lates highly with income (Table II5).
Transfer Formula
Transfer = ( 0.50 * P ) + ( 0.20 * P ) + ( 0.30 * P ) 298 x/X Population x/X Population under the Poverty Line
P is the pool of funds to be allocated to all municipalities. x/X represents the share of each factor that is present in a given municipality.
Source: Vargas, 2011.
Figure II.1: Aliquot per Municipality per Capita, 2009
0 500 1000 1500 2000 2500Lempira
Popu
lation
rang
e
<1,500
1,501-3,000
3,001-5,000
5,001-10,000
10,001-50,000
50,001-300,000
>300,000
Lempira
Popu
lation
rang
e
Source: SINEMUN, 2012.
Figure II.2: Total Transfers per Capita by Population Range, 2009
0 1000 2000 3000 4000 5000
<1,500
1,501-3,000
3,001-5,000
5,001-10,000
10,001-50,000
50,001-300,000
>300,000
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Although transfers have some degree of conditional-ity, the central government lacks the capacity to effec-tively monitor the allocation of funds to ensure their proper use as prescribed by the Law of Municipalities. Without monitoring or enforcement mechanisms, the government cannot verify that municipalities are spend-ing resources in the intended manner. Municipalities thus have greater autonomy to use resources at their own dis-cretion given that the enforcement of rules is unlikely. In addition to the general administrative weakness of mu-nicipalities, the central government has limited capacity to monitor and promote coordination across levels.
iv. Recurrent Attempts at Deepening Decentralization
Along with changing the transfer formula, succes-sive governments have repeatedly attempted to strengthen the role of municipalities. Development partners have been important supporters of these efforts. Nonetheless, many of the pledges in support of decen-tralization have not translated into actions or results. Fur-thermore, a multitude of management, administrative ca-pacity, and accountability problems are still present both at the central and subnational level.
Most attempts to delegate additional responsibili-ties and resource management to municipalities have failed due to the resistance by central line agencies and the weak local capacity to absorb functions. One example is the 2001 Poverty Reduction Strategy (PRS) adopted as part of the debt forgiveness process, under which the government delegated major responsibilities for project and program implementation to the munici-
palities. The policy initiative was not successful because the decisions remained centralized and the municipalities were not given the necessary resources to implement the projects (Calix, 2012).
Efforts and programs designed to support local capac-ity-building have had limited success. The most recent is the Decentralization and Municipal Development Pro-gram (PRODDEL), which was established to support the implementation of the PRS by consolidating and deepen-ing the process of decentralization and local accountabili-ty. The program provided support to the central agencies working with municipalities to improve their capacity to deliver services and local financial management.
The inconsistent implementation of existing commit-ments due the limited fiscal space and shifting priorities of the central government remains a major obstacle to deepening the decentralization process. The 2011 es-tablishment of a national security tax (Box 1) provides an example of the perils involved in creating a law without a careful implementation design.
B. Municipal Finance in Numbers
The most relevant trends and fiscal indicators are pre-sented in this section. It is important to note that the analysis is limited due to lack of complete and reconciled data on subnational finances. Honduras has established a National Municipal Information System (SINEMUN) that is maintained by the Ministry of Interior and Population and integrates the account statements from all 298 mu-
Figure II.3: Transfers per Capita and Population, 2010
5000
4000
3000
2000
1000
0
Mercedes de Oriente Mercedes de Oriente
San MiguelitoSan Juan
Humuya Humuya
6 8 10Population (In) Index of Human Development
12 14
5000
4000
3000
2000
1000
050 60 70 80
Source: INE and SINEMUN, 2012. Source: INE and SINEMUN, 2012.
Figure II.4: Transfers and Human Development Index, 2010
Puerto Cortés
San Pedro SulaTegucigalpa
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nicipalities. However, there are discrepancies with the in-formation municipalities provide to the Superior Tribunal of Accounts (Tribunal Supremo de Cuentas) and the data on transfers that SEFIN compiles. The discrepancies are highlighted when relevant.
i. Transfer Shortfalls: A Source of Allocative Distortions
By 2013, mandated transfers in Honduras had dou-bled, relative to the beginning of the decade. Dur-ing the 2009 political crisis, the Executive issued Decree 200, which changed the transfer allocation formula and mandated their increase to 11 percent of central revenue by 2014. Subsequently, the 2010 Country Vision and the
Strategic Plan made decentralization a core goal, with the aim of giving municipalities 40 percent of the national revenue by 2038. Figure II5 illustrates the goals and inter-mediate milestones guiding the current efforts for greater fiscal devolution.
Compliance with transfer targets, however, has been partial and inconsistent. These goals contrast starkly with the actual transfers.15 During the first decade that the Law of Municipalities was in force (1990–2000), the central government transferred the full 5 percent man-
15 According to the Honduran Association of Municipalities (AM-HON), the government has a pending debt of L860 million with the lowest tier of government.
Box 1: The National Security Tax—Implementation Challenges and Its Effects on Municipalities
In Honduras, local governments have designed and implemented innovative, although often extra-legal, approaches to citizen protection. Due to the high social demand for improved security services, many municipalities assumed an expanded role in safety matters. Acting beyond their traditional jurisdic-tion and legal responsibilities, several mayors imposed municipal security taxes, which in some cases raised significant revenues for the municipalities. Some municipalities, such as Puerto Cortés, developed success-ful mechanisms to raise security taxes and manage them transparently through a trust fund monitored by local authorities, the private sector, and civil society organizations.
In response, the central government designed a unified national system for security tax collection. In July 2011, Congress passed the Ley de Seguridad Poblacional, which defined the security tax rate and its application. The central government prohibited the collection of the municipal security taxes starting in January 2012 and, in return, promised to redistribute the resources collected from the implementation of a new national security tax. For a temporary period of five years, the security tax would apply to financial transactions and specific sectors, including mobile phones, food and beverages, mining, and casinos. The Executive Revenue Directorate (Dirección Ejecutiva de Ingresos, DEI) within SEFIN would assume responsi-bility for its collection and transfer the revenue to a trust fund that a committee of representatives from the government, business sector, and civil society would administer.
The new revenue system for public security was implemented slowly. In January 2012, no regulation existed yet for the financial transactions tax. Derived from efforts to protect individuals and make firms bear the costs of the tax, the regulations were so complex that banks did not understand how to withhold the tax properly. With this uncertainty lasting well into mid-2012, revenues from the financial transactions tax slowed, while the central government failed to fill the gap caused by the municipalities’ loss of their own security tax revenue. Moreover, the new law required that the committee of representatives agree on the process for using the earmarked revenues. Although the Law established the committee, it has not yet reached an agreement on a common strategy. The revenues collected up until April 2013 (L1.3 billion) had not yet been utilized.
Several other municipalities that had previously collected security taxes, committed revenue, and begun implementing programs have since lost their capacity to respond to public security needs. In response to the slow implementation of the new system, some municipalities have created mechanisms for obtaining resources under a new tax rate called a “governability rate” or through the private sector.
Source: Authors’ summary of the National Security Tax Law.
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dated allocation to local governments only once, in 1992. Since 2002, transfers have slowly increased as a share of central government revenue, but they still fall below the target. Only in 2006 and 2008 did transfers meet the tar-get (Figure II6).
Transfers fall short of budgeted amounts with varying rates of execution among municipalities. On average, between 2008 and 2012 the ratio of actual transfers to the amount budgeted was 85 percent (Figure II7). Yet this av-erage masks variation across units. In 2010, while most municipalities received about 70 percent of the budgeted transfer, approximately one-sixth of municipalities re-ceived 50 percent or less (Figure II8).
Transfer shortfalls and delays distort allocation deci-sions. Municipalities typically determine the shares of recurrent and capital spending on the basis of budgeted transfers and what they forecast to be their own-source revenue. They tend to front-load recurrent expenditure and delay capital investments until they receive transfers from the central government. Consequently, shortfalls in transfers are often translated into cuts to capital spend-ing. When there are transfer delays, it is common for municipalities with few resources of their own to resort to costly short-term commercial loans to finance the op-eration of basic services. Improving transfer predictability is an important prerequisite for promoting effective local management of resources. Before embarking on new de-centralization efforts, special attention should be given to increasing the capacity of municipal governments to op-erate within the existing framework and manage current transfer levels.
ii. Municipal Revenue: Untapped Sources and Bright Spots
Municipal revenue as a share of government reve-nue declined from 2001 to 2009, although the trend reversed in 2010. On average, municipal revenue rep-resented less than 2 percent of GDP for the 2002–2010 period, about 2 percentage points below the ratio of mu-nicipal expenditure to GDP (Figure II9). The trend in the data reported by the IMF Government Finance Statistics (GFS) is similar despite differences in 2010 (Figure II10).
Municipal current revenue16 represented, on average, 58 percent of total municipal revenue for the 2002–2010 period. Despite the decrease in current revenue as a share of total revenues from 2005 to 2007, which plum-meted to 36 percent, it started to increase again in 2009. Current revenue takes a larger share of total revenues now than it did at the beginning of the period. Whereas in 2002 it accounted for 53 percent of the total, in 2010 it represented 58 percent.
Tax revenue as a share of municipal revenue appears to be declining. Municipalities do collect some local taxes,17 but, whereas in 2002 tax revenue represented
16 Current revenue comprises tax revenue and other non-tax revenue. Non-tax revenue refers to current revenue such as fines, surcharges, interest for late payments, and revenues recovered by administrative and judicial procedures. Capital revenue comprises loans, revenue from asset sales, transfers, subsidies, capital gains, and other capital income such as bonds, legacies, donations, and balance resources.17 Funding for municipalities comes from a variety of sources that include both tax and non-tax revenue. These include taxes that can-
Source: Vargas, 2011; Law of Municipalities; and Strategic Plan, 2010.
Figure II.5: Planned Transfer as Share of Central Revenue (%), 2002–2038
05
1015202530354045
2038
2022
2017
2014
2013
2012
2011
2010
2009
2008
Decree 143/2009
Country Vision
2007
2006
2005
2004
2003
2002
Decree 143/2009
Source: SEFIN, 2012.
Figure II.6: Actual Transfer as Share of Central Revenue (%), 2002–2011
05
1015202530354045
2011201020092008200720062005200420032002
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Source: SEFIN, 2013.
Figure II.7: Budgeted Transfers versus Actuals, 2009–2012
0
1000
2000
3000
4000
5000
201220112010200920080
20
40
60
80
100
Modi�ed Budget Actuals Actuals as % of Modi�ed Budget
milli
on Le
mpir
a
perce
ntag
e
Figure II.8: Transfer Outturn (%), 2010
100
80
60
40
200 50 100
Frequency150 200
Source: SEFIN, 2013.
Source: IMF GFS, 2013.
Figure II.10: Local Revenue as Share of Total Government Revenue (%), 2003–2010
16
14
12
10
8
6
4
2
020072006 2009 20102003 2004 2005 2008
Local Revenue as Share of Total Government Revenue
Source: SINEMUN, 2012.
Figure II.9: Municipal Revenue as Share of Total Government Revenue and GDP (%), 2000–2010
0
2
4
6
8
10
12
14
16
201020092008200720062005200420032002 20012000
Municipal revenue as share of GDPMunicipal revenue as share of total government revenue
Source: SINEMUN, 2013.
Figure II.11: Municipal Revenue Total and Detailed Composition (Millions of Lempiras), 2002–2010
0
1000
2000
3000
4000
5000
6000
201020092008200720062005200420032002Service Fees ICS Tax Property Tax Personal TaxPecuniary Tax Extraction Tax Transfers
Figure II.12: Municipal Revenue Total and General Composition (Millions of Lempiras), 2003–2009
6500
5500
4500
3500
2500
1500
500
-500
Taxes Other revenue Grants
2003 2004 2005 2007 200920082006
Source: IMF GFS, 2013.
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46 percent of total municipal revenue, in 2010 it only ac-counted for 29 percent. Although marked by fluctuations throughout the period, tax revenue has increased in ab-solute terms. The decrease in the share of tax revenue on total municipal revenue is therefore explained by a faster increase in other sources of revenue, especially transfers.
The composition of tax revenue remained relatively stable throughout the 2002–2010 period, despite some fluctuations in 2007 and 2009. The fee on ser-vices accounted for the largest share of municipal tax revenue, followed by the Tax on Industry, Commerce, and Services, contributing to total tax revenue an average of 43 and 30 percent, respectively, for the 2002–2010 period. While discrepancies exist between the data reported by SINEMUN and that of the IMF GFS, the figures show a simi-lar trend (see Figure II-11 and Figure II12).
A wide disparity in revenue collection performance still exists. In 2010, the 23 municipalities classified as category A collected 80 percent of all local revenue, while the remaining 20 percent was mobilized by the 275 municipalities in the other three categories. Their per capita tax revenue was also more than seven times that of stagnant or poor capacity municipalities. This trend is consistent with the main source of income from indus-tries that are likely to be concentrated in a small number of municipalities.
not be modified by municipalities (i.e. real estate tax, personal in-come tax, and business tax) as well as taxes for services and contribu-tions imposed at the discretion of the municipality. Non-tax revenue includes fines, surcharges, transfers from the central government, and others.
Although tax revenue per capita is positively associ-ated with population, some small municipalities are collecting substantial tax revenue, indicating that size it is not the only determining factor. The more depen-dent municipalities are on transfers, the smaller their own-source revenue per capita is. Size and income per capita are closely associated. Both economic development and size affect the revenue base and the level of transfer that a given municipality receives. Yet this relationship is not deterministic, and positive outliers exist. Some munici-palities such as José Santos Guardiola, La Unión, Las Ve-gas, Roatán, San Buena Ventura, Santa Ana, and Utila have high rates of tax revenue per capita, despite their small size and high transfer amount per capita.
The significance of tax revenue versus that of trans-fers varies significantly across different types of mu-nicipalities. Between 2002 and 2010, tax revenue aver-aged approximately half of the municipal revenue of the most developed group, while the share for municipalities with very poor capacity was below 10 percent. During the same period, the more developed municipalities only derived 16.4 percent of their revenue from transfers, while in the least developed municipalities transfers accounted for 73 percent of total revenues.
iii. Municipal Expenditure: Giving Precedence to Recurrent Expenditure
Since 2002, municipal expenditure has increased both in absolute and relative terms. Subnational ex-penditures have gone from L2.6 billion in 2002 to L11.2 billion in 2010 (as per data from SINEMUN illustrated in
Figure II.13: Tax Revenue per Capita and Population, 2010
4000
3000
2000
1000
06 8 10
Population (In) Transfer Share of Municipal Revenue12 14
4000
3000
2000
1000
00 40 6020 80 100
Source: INE and SINEMUN, 2012. Source: INE and SINEMUN, 2012.
Figure II.14: Tax Revenue per Capita and Transfer Share of Municipal Revenue, 2010
Santa Ana Santa AnaJosé Santos Guardiola
La UniónJosé Santos Guardiola
La UniónLas Vegas
Utila UtilaRoatán Roatán
San Buenaventura San Buenaventura
San Pedro SulaTegucigalpa
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Figure II19). The share of subnational expenditure also rose from 10 percent of total government expenditure in 2002 (equivalent to 2 percent of GDP) to 14 percent (or 3.4 percent of GDP) in 2011 (Figure II15). This average is com-parable to that of other unitary countries in the region (World Bank, 2012). As illustrated in Figure II-15, the share of municipal expenditure reached its highest level in 2007 and has since declined. In per capita terms, municipal ex-penditure has increased at a faster rate than central gov-ernment expenditure. However, discrepancies do exist between the data reported by SINEMUN (Figure II-15) and the data that SEFIN reports to the IMF GFS (Figure II16).
Expenditure per capita is inversely related to the pop-ulation but has a positive association with transfers. Small municipalities have higher spending per capita and higher transfer amounts per capita (Figure II17, Figure II18). This suggests that transfers may be driving expen-diture increases.
Recurrent expenditure accounts for approximately half of municipal expenditure, with personnel outlay as one of the main subcategories. In the 2002–2010 period, recurrent expenditure represented, on average, 45.6 percent of total municipal expenditure (Figure II-19). Wages accounted for an average 58 percent of recurrent expenditure and 28 percent of total municipal expendi-ture for the same period. In absolute terms, personnel expenditure increased from L720 million in 2002 to 3.3 billion in 2010.
Capital investment expenditure has shown a decreas-ing trend since 2003. Expenditure on capital assets has
gone from representing 41 percent of municipal expendi-ture in 2003 to 27 percent in 2010, although in absolute terms it increased by L1.2 billion. Conversely, the service of debt was 5 percentage points higher, going from 14 to 19.4 percent in 2010. Once again, there are discrepancies between the SINEMUN and IMF GFS data (Figure II-19 and Figure II20), but it is important to note that the latter does not include capital expenditure.
An examination of expenditure composition sug-gests that most municipalities are not complying with the earmarks established for transfers in Article 91. They are required to invest 54 to 69 percent of the transfers they receive from the central government and can only spend 15 to 30 percent in administrative costs, depending on the size of the municipality. There is an inverse relationship between the ratio of recurrent ex-penditure to total municipal expenditure and the level of transfer dependence (Figure II21). The data also sug-gest that municipalities are choosing to use the majority of their own resources to finance personnel and other recurrent expenses (Figure II22). Notably, larger munici-palities spend more per capita on recurrent expenditure than smaller ones.
iv. Municipal Borrowing: Covering Transfer Delays
The Law of Municipalities allows municipalities to se-cure public loans, carry out financial operations with national and foreign institutions, and issue bonds to finance investments. In each case, they must comply with the legal requirements and adhere to an established borrowing limit of 20 percent of the municipality’s annual
Table II.5: Tax Revenue and Transfer Shares of Municipal Revenue by Categories of Municipalities (%), 2002–2010
Category 2002 2003 2004 2005 2006 2007 2008 2009 2010
Tax Revenue Share of Municipal Revenue (%)
A 59.6 52.4 53.0 52.0 52.5 42.8 48.7 44.5 37.4
B 36.7 38.5 36.1 34.4 42.9 34.8 36.0 33.0 29.0
C 29.4 23.5 23.9 17.3 22.6 17.8 19.2 18.4 16.7
D 13.8 8.4 11.1 11.8 10.2 6.0 8.2 7.9 7.4
Transfer Share of Municipal Revenue (%)
A 17.6 12.2 15.3 16.0 14.9 18.7 21.9 18.3 12.8
B 46.0 33.9 34.1 41.1 27.3 31.2 35.7 37.2 26.9
C 60.0 57.1 58.5 69.0 55.0 55.4 60.6 58.3 50.2
D 73.8 69.9 72.0 79.0 73.5 69.2 78.3 71.7 69.7Source: SINEMUN, 2012.
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Source: IMF GFS, 2013.
Figure II.16: Local Expenditure Total and as a Share of Total Government Expenditure (%), 2002–2010
20
15
10
5
020072006 2009 20102003 2004 2005 2008
Local Expenditure as Share of Total Government Expenditure
Source: SINEMUN and SEFIN, 2012. Note: * Non-adjusted data.
Figure II.15: Municipal Expenditure as a Share of Total Government Expenditure and GDP (%), 2002–2011
20
15
10
5
02007*2006 2009* 2011*2010*2002 2003 2004 2005 2008*
Municipal Expenditure as Share of GNPMunicipal Expenditure as Share of Total Government Expenditure
Figure II.17: Municipal Expenditure per Capita and Population, 2010
6000
4000
2000
06 8 10
Population (In) Transfer per Capita12 14
6000
4000
2000
00 2000 30001000 4000 5000
Source: SINIMUM, 2012. Source: SINIMUM, 2012.
Figure II.18: Municipal Expenditure per Capita and Transfer Amount per Capita, 2010
Mercedes de Oriente
Mercedes de Oriente
Humuya Humuya
San Miguelito San Miguelito
San Buenaventura
Fraternidad
Cabañas
Puerto Cortés Puerto Cortés
Amapala AmapalaYauyupe
FraternidadTauyupe
San BuenaventuraCabañas San Juan
Source: IMF GFS, 2012.
Figure II.20: Municipal Expenditure Total and Composition, 2003–2009 (%)
100
80
60
40
20
0
10
020072006 20092003 2004 2005 2008
Source: SINEMUN, 2012.
Figure II.19: Municipal Expenditure Total and Composition, 2002–2010 (%)
100
80
60
40
20
0
Billio
ns Le
mpir
a
Billio
ns Le
mpir
a
12
10
8
6
4
2
02007*2006 2009* 2010*2002 2003 2004 2005 2008*
Recurrent Expenditure InterestCapital Goods Capital Transfers Personnel Expenditure
Total Expenditure Compensation of employees Use of goods and servicesInterest Other Expense
Expense
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ordinary revenue. Municipalities cannot acquire external debt without SEFIN authorization and they must not ex-ceed the administration period.
The law grants municipalities broad financial auton-omy, including the right to secure loans, but only a few have the capacity to access credit and financing. The practices of subsidized money, donations, and debt payments from the central government have hampered efforts to develop a system of municipal financing. Mu-nicipalities often obtain short-term loans from domestic commercial banks guaranteed with budgeted transfers from the central government. The financing cost of such loans results in inefficient spending focused on recurrent expenditure and short-term needs rather than on medi-um- to long-term capital investments.
Between 2002 and 2010, borrowing increased in ab-solute terms for all categories of municipalities, but decreased as a share of municipal revenue and ex-penditure. In per capita terms, both borrowing and debt service have increased for all categories of municipalities (Table II6). Borrowing represented 14 percent of munici-pal revenue in 2002, compared with 8 percent in 2010. Service of debt has decreased as a share of municipal ex-penditure and appears to have stabilized at 5 percent.
Municipal borrowing is concentrated on municipali-ties with a greater capacity for savings. In 2010, the debt service represented on average 8 percent of total municipal revenue. The municipalities in Category A (less than 8 percent) accounted for 81 percent of new loans and their debt service was on average 17 percent of total
revenue and 48 of own-source revenue. The limited expe-riences in issuing bonds have not been successful due to poor design and implementation. For example, the mu-nicipality of San Pedro Sula recorded the first municipal bond issue in 1997, but, as a consequence of a series of evaluation and implementation errors, the security led to a financial imbalance for the municipality (USAID, 2004). Table II6: Borrowing per Capita and Debt Service Share of Municipal Expenditure, 2002–2010
High levels of indebtedness are a source of concern for a number of municipalities. In 2010, approximately 28 municipalities took new loans in excess of the 20 percent of revenue ceiling (Figure II14) whereas 20 spent more than one-fifth of their expenditure on debt service (Figure II23). While information about cumulative levels of mu-nicipal debt was not available, indications suggest that the levels are high for some municipalities. At least 25 municipalities have far exceeded their repayment capac-ity and exhibit dangerous levels of debt (Vargas, 2011).
v. Local Public Investment: Increasing but Falling Short of Targets
Municipalities are responsible for a sizable part of public investment and additions to public fixed capi-tal, but many constraints for effective capital spend-ing remain. Public investment at the subnational level is constrained by: (i) the low levels of management capacity in most municipalities; (ii) limited coordination in invest-ment projects across levels of governments and among neighboring municipalities; (iii) unpredictability and late-ness of transfers; and (iv) limited access to credit.
Figure II.21: Recurrent Expenditure as a Share of Expenditure and Transfers as a Share of Municipal Revenue, 2010
100
80
60
40
20
00 20 40
Transfer Share of Municipal Revenue
Earmark
Transfer per Capita60 80 100
6000
4000
2000
00 2000 30001000 4000 5000
Source: SINEMUN, 2012. Source: SINEMUN, 2012.
Figure II.22: Recurrent Expenditure per Capita and Transfer Amount per Capita, 2010
FraternidadCabañas
San MiguelitoMercedes de Oriente
Humuya
Tauyupe
Puerto Cortés
AmapalaSan Juan
San Buenaventura
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Fiscal constraints and volatile economic conditions have negatively affected the overall public investment level. Capital spending and public fixed capital forma-tion as a share of GDP have been relatively low and vari-able from year to year. The average share of fixed capital formation was 4.5 percent of GDP during the 2000–2010 period (Figure II25), a level considerably lower than that of 1990s. This level is below the regional average for the same period of time—5.7 percent—and that of develop-ing and lower middle income (LMI) countries.
The rate of public capital formation remains insuf-ficient to cover the current infrastructure gap. While some infrastructure services such as access to water and sanitation have slowly improved, the overall quality of in-frastructure remains low relative to the regional average
(Figure II26).18 Compared to other Latin American coun-tries as well as LMI countries, Honduras ranks at the bot-tom in terms of the Logistics Performance Index (LPI) for Infrastructure, which measures the quality of trade- and transport-related infrastructure.19
Against this backdrop, municipal fixed capital forma-tion has been steadily increasing, and it represents a growing share of total public capital formation. Be-tween 2003 and 2009, municipal capital formation qua-drupled (Figure II27). During the same period, additions to fixed capital by municipalities went from representing 17 percent of total public additions to 30 percent (Figure II28). However, those additions are likely to be heavily con-
18 WEF, 2012.19 World Development Indicators, 2012.
Table II.6: Borrowing per Capita and Debt Service Share of Municipal Expenditure, 2002–2010
Category 2002 2003 2004 2005 2006 2007 2008 2009 2010
New Borrowing per Capita
A 114.8 197.8 164.6 181.1 191.8 195.2 142.2 212.2 225.2
B 25.5 50.0 35.8 50.7 32.6 49.2 102.7 165.4 162.8
C 24.9 41.1 39.2 13.4 72.7 93.9 75.4 12.9 54.3
D 41.9 35.1 61.2 6.1 36.9 59.6 68.5 45.8 45.4
Debt Service per Capita as Share of Municipal Expenditure
A 16.6 14.1 14.0 15.6 16.5 10.5 10.5 10.5 17.2
B 8.9 7.9 10.8 7.9 6.1 5.7 5.7 5.7 9.3
C 4.9 7.7 8.8 7.5 5.7 6.6 6.6 6.6 4.8
D 10.1 9.7 11.7 10.4 4.5 3.7 3.7 3.7 4.1Source: Authors’ calculations based on data from SINEMUN and SEFIN.
Figure II.23: Borrowing as Share of Municipal Current Revenue (%), 2010
200
150
100
50
00 8 10
Population (In)
Legal Limit
Population (In)12 14
80
60
40
20
00 8 1210 14
Source: SINEMUN and INE, 2012. Source: SINEMUN and INE, 2012.
Figure II.24: Debt Service as Share of Municipal Expenditure (%) , 2010
La Trinidad
San JorgeMorolica El Triunfo
San Lorenzo
San Lorenzo
Puerto Cortés
Puerto CortésCholuteca
San Pedro Sula
NacaomeTela
Jesus de Otoro
MorolicaTomalá
Ocotepeque
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centrated in large urban centers. The horizontal distribu-tion of fixed public capital formation cannot be examined through the available data. Furthermore, it is not possible to determine if the additions to public fixed capital at the municipal level are the result of local investments or rather assets produced by central agencies or development part-ners and then transferred to local governments.
The transfer system has been designed with the aim of encouraging public investment and prioritizing maintenance of capital assets and social infrastruc-ture at the local level. Decentralizing public investment responsibilities was expected to increase its allocative and production efficiency. By placing decision-making at the government level with the most direct contact with citizens, municipalities could obtain and better leverage more accurate information about local needs. However,
outcomes are contingent on the overall level of institu-tional capacity and the degree of accountability. Without these factors, decentralization can instead shift resourc-es from needed infrastructure investments to recurrent spending, as it appears to be happening in Honduras.
On average, small municipalities invest higher shares in capital assets than large municipalities with greater resources of their own, but a large number of mu-nicipalities do not meet the investment targets. The greater the ratio of transfer to municipal revenue is, the larger the share of expenditure in capital assets (Figure II29). Municipality size seems to be inversely associated with expenditure in capital assets (Figure II30). These pat-terns suggest that larger municipalities are using their own resources to finance social and recurrent spending. They may be also be benefitting from economies of scale.
Source: World Development Indicators, 2012.
Figure II.26: Access to Improved Water and Sanitation Facilities (% of Total Population), 1990–2010
90
80
70
60
502000 2005 20101990 1995
Improved water source (% of population with access)Improved sanitation facilities (% of population with access)LAC Honduras LMI
Source: IMF WEO, 2013.
Figure II.25: Public Gross Fixed Capital Formation as a Share of GDP (%), 2000–2010
109876543210
20072006 2009 2010200220012000 2003 2004 2005 2008
Source: IMF GFS, 2013.
Figure II.28: Municipal Net Public Fixed Capital Formation as a Share of Total (%), 2002–2010
40
35
30
25
20
152006 2008 20102002 2004
Net Fixed Capital Formation Total Expenditure
Source: IMF GFS, 2013.
Figure II.27: Municipal Net Public Fixed Capital Formationand Transfer Assets (Millions of Lempiras), 2002–20106000
5000
4000
3000
2000
1000
020072006 20092003 2004 2005 2008
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Small municipalities appear to be complying more closely with the earmarks established by the Law of Municipali-ties, though not uniformly.
Expenditure in capital assets is positively associated with the infrastructure gaps, which suggests some responsiveness to needs, although with considerable variation across localities. Municipalities that have a lower percentage of households with access to improved sanitation or running water are generally investing a greater amount of resources than those that are better endowed (Figure II31). This could be linked to municipali-ties having better information about local needs and tar-get resources accordingly. One outlier is the municipality of Utila, which invests a significantly higher amount per capita than other municipalities exhibiting similar levels of infrastructure needs.
As population density increases, expenditure in capi-tal assets per capita decreases, highlighting cost dif-ferences across municipalities. Economies of scale favor large urban localities (Figure II32). Currently, the transfer formula compensates indirectly for differences in size but does not fully consider population density or cost differences. However, the transfer formula may be encouraging the few small and wealthier municipalities to overinvest, as it appears to be the case in Utila.
C. Impact in Service Delivery: The Case of Water and Sanitation
Due to a lack of concise data at the municipal level, decentralization results were analyzed only for the water and sanitation sector. In the health and educa-
Figure II.29: Expenditure in Capital Assets as a Share of Municipal Expenditure and Transfer Amount as a Share of Municipal Revenue, 2010
80
60
40
20
00 20 40
Transfer as Share of Municipal Revenue
Earmark
Population (In)
40 60 100
80
60
40
20
06 8 1210 14
Source: SINEMUN and SEFIN, 2012. Source: SINEMUN and SEFIN, 2012.
Figure II.30: Expenditure in Capital Assets as a Share of Municipal Expenditure and Population, 2010
Figure II.31: Expenditure in Capital Assets per Capita and Infrastructure Gap, 2010
4000
3000
2000
1000
010 20 30
Percentage of Household without Access to Improved Sanitation (2001 Census) Population Density40 50
4000
3000
2000
1000
00 200 600 800400 1000
Source: SINEMUN, 2012. Source: SINEMUN, 2012.
Figure II.32: Expenditure in Capital Assets per Capita and Population Density, 2010
Fraternidad Fraternidad
San Juan San Juan
Mercedes de Oriente Mercedes de OrienteUtila Utila
AmapalaYauyupe YauyupeSan Juan Guarita San Juan Guarita
La Libertad La Libertad AmapalaSan Miguelito San Miguelito
Humuya Humuya
CabañasSan Buenaventura San Buenaventura
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tion sectors, community-driven models present better results than centralized service delivery (Box 2). However, community-driven projects and decentralized municipal service delivery are distinct models and should not be used interchangeably.
The methods for delivering water and sanitation ser-vices differ considerably among municipalities. In ru-ral areas, water boards mainly facilitate service provision. In urban areas, the municipality or dedicated autonomous municipal providers deliver these services. The national water and sewerage utility (SANAA) is also an important service provider that serves over 1.5 million people in the capital city of Tegucigalpa.
The more autonomous service providers are more ef-ficient. Operating efficiency differs considerably among different management models. Figure 33 shows the im-
20 Currently serving 13 cities and 2 rural communities (based on “Ac-ueductos Operados por SANAA—propuesta tentativa de entrega”).21 As registered by ERSAPS. The actual number is likely to be higher.22 Even within this category, there are several different models, ranging from a decentralized unit within municipal administration with budget and managerial autonomy, to a commercial company with (partial) municipal ownership.23 Estimated.24 CONASA, 2011.
portant trends of employees per 1,000 connections by different management model. While SANAA has more than 6 employees per 1,000 connections, the concession-ary water utilities and water boards have just above 2 em-ployees for the same number. The Ordinary Least Squares (OLS) analysis confirms that the trend is statistically sig-nificant within the sample.
The independent service providers show better per-formance in financial and operational efficiency. Tariff effectiveness measured by the ratio of average tariff over average cost is significantly higher among water boards and municipal companies at 2.62 and 1.38, respectively, compared to 1.23 and 1.21 by SANAA and the municipality, respectively. Service providers further removed from political decision-making (and the corresponding possibility of receiving operating subsidies) appear to have more liberty and less political pressure to keep tariffs below cost recovery level (Ta-ble II8). Community-based water boards fare better in service continuity than SANAA and other management models. SANAA has the highest rate of water metering of all the management models, but it is not statistically significant. Municipal direct service and water boards have very low disinfection rate compared to SANAA and
Table II.7: Service Providers—Types and Population Served
Service provider type Description # of service providers
Population served (thousands)
% of total population served
SANAA National water and sewerage utility (where service has not yet been decentralized)
1 20 1,550 20%
Municipality (directly) A municipal department that provides services directly, usually in municipalities with smaller urban populations
4,7 21 490 6%
Autonomous municipal provider 22
Public utility with independent governance structure and budget predominantly in mid-size cities
12 510 7%
Private concession A private firm providing service within a specific geographical area under government agreement, with the sole example exist-ing in San Pedro Sula
1 720 9%
Patronatos and urban water boards
A local development committee or community- based organiza-tion operating in urban areas, sometimes with bulk water from another provider, for example SANAA; prevalent in many cities
300–50,0 23
450 6%
Urban dwellers without organized water services
No service from organized service provider (self-provision) N/A 200 3%
Rural water boards A community-based organization operating in rural areas as the quasi-exclusive model in rural areas
5,000 24 2,900 38%
Rural dwellers without organized water services
No service from organized service provider (self-provision) N/A 770 10%
Source: Authors’ calculations.
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municipal companies, perhaps due to the low level of professionalization of services in these two models.
The overall performance of autonomous service pro-viders such as municipal companies or water boards is better than SANAA or direct municipal service provi-sion. A performance index, based on indicators covering financial, operational, and service quality aspects, divides service providers into low, medium, and good perfor-mance utilities. The results summarized in Figure II34 sug-gest that municipal companies and water boards perform better than SANAA and municipalities.
The results suggest that decentralization and commu-nity-based models have had some positive impacts on sector performance. Most of the autonomous munici-pal companies, which were created more recently when the decentralization process began, perform better than SANAA. Community-based water boards appear to work quite well, providing a small portion of the clientele with decent quality of service while operating within their available financial resources.
However, decentralization alone is unlikely to solve all the problems in the sector. Whether it is decentralized to autonomous service providers or local government, the decentralization process of the sector should couple appropriate management models and capacity-building with autonomy and incentive structures in order to reap the potential benefits of sector reform.
Evidence from the health and education sectors simi-larly point to beneficial impacts on performance from the more direct engagement of clients in the imple-mentation of programs. A number of implementation examples involving deconcentrated service delivery models and community-driven development interven-tions show sizable gains compared to purely centralized models (Box 2). These examples could inform reforms at the local level and create linkages between community-level interventions and municipal governments.
25 The models are ranked by increasing level of autonomy from political influence.
Table II.8: Selected Characteristics of Distinct Service Providers
Service provider Tariff effectiveness Water treated (%) Metering level Continuity Index
SANAA 1.23 0.63 11% 1.4
Municipality 1.21 0.05 2% 1.8
Municipal Company 1.38 0.87 10% 1.6
Water Board 2.62 0.07 N/A 2.5Source: Authors’ calculations based on 2010 ERSAPS data.
Source: Authors’ calculations based on 2010 ERSAPS data.
Figure II.34: Service Provider Performance by Management Model25
100
80
60
40
20
0
Num
ber /
% of
mod
els ob
serv
ed
Source: Authors’ calculations based on 2010 ERSAPS data.
Figure II.33: Employees per 1,000 Connections Based on Type of Service Provider
7
6
5
4
3
2
1
0MunicipalCompany
Increased Autonomy
PrivateConcessionaire
SANAA Municipality Water Board
MunicipalCompany
PrivateConcessionaire
SANAA Municipality Water Board
Poor Medium Good
7 18
4
32
116
1
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Box 2: Deconcentrated Service Delivery Models and Community-driven Development Interventions
Communities have assumed service delivery through particular projects in a number of sectors such as education, transportation, and rural development. Many are financed by the Honduran Social In-vestment Fund (FHIS), a unit of the Presidency of the Republic that funnels investment towards municipal projects.
In the education sector, community-based schools present better results than traditional schools. The Honduran Program for Community Schools (PROHECO) is a model in which the responsibility for regu-lating and financing basic education and schooling as well as coverage in rural areas of the country remains centralized under the Secretariat of Education. However, the functions related with the contracting and administrative supervision of personnel are decentralized and transferred to the association of parents who act in a legal capacity. PROHECO was originally financed by the World Bank and today is integrated under the Secretariat of Education.
PROHECO schools show evidence of greater efficiency compared to traditional schools and they have a greater impact on student achievement. Evidence shows that these schools: (i) have lower drop-out rates and grade failure instances; (ii) earn better test scores in Spanish, Mathematics, and Science; (iii) are open more frequently; (iv) have teachers that work more hours even though their salaries are lower than traditional schools; (v) use existing capacity more effectively; and (vi) have better school infrastructure and more resources than traditional schools. In addition, the government successfully devolved some of its functions to school councils. Each school council (called Asociación Educativa Comunitaria or AECOS) is responsible for hiring and firing teachers, managing funds, monitoring teacher performance and absentee-ism, and construction and maintenance of schools. PROHECO increased its coverage significantly over the last 13 years. It started with 648 teachers serving 16,501 students in 506 schools. In 2012, the program had 6,468 teachers serving 144,249 students in 3,100 schools.
In the health sector, community-driven models improved service, but the system remains very cen-tralized. Decentralized primary health care (PHC) has increased its coverage and shows evidence of provid-ing better quality services than the Ministry of Health (Secretaría de Salud or SS) facilities. The innovative health coverage extension strategy was introduced in 2005 to implement community-based models in ar-eas that meet a set of socio-economic criteria, including a designated poverty level, access to health and education services, and certain health indicators. This program provides a basic package of health services oriented toward prevention, health promotion, and basic curative care with special attention to young chil-dren and reproductive-age women. By 2012, this service delivery model had increased to 28 management entities overseeing 269 facilities in 13 departments, which covered at least 850,000 people or 10.3 percent of the Honduran population. Evidence exists that these models provide better quality services than the SS facilities (Table 6). Users are also more likely to return to a decentralized facility. In terms of results, reduced incidences of maternal death have been reported in areas where a decentralized facility operates, such as the one managed by a consortium of municipalities of Copán Ruinas, Santa Rita, and Cabañas.
Deconcentrated facilities not only performed better than SS facilities, they also had lower unit costs. A 2009 study found that, in general, total unit costs in decentralized facilities for 11 types of services (in-cluding family planning, prenatal care, pneumonia and acute respiratory infection treatment, and births) were lower than total unit costs in centralized/SS facilities. However, some variations exist depending on the type of service: (i) SS facilities tend to spend more on personnel even though they have fewer staff than decentralized units, partly because they pay higher salaries—doctors and auxiliary nurses working in SS facilities earn 25 percent and 19 percent more, respectively, than those in decentralized facilities; (ii) decen-tralized facilities pay 40 percent more for their basic medicine stocks than centralized ones because they purchase medicines at the local level to facilitate timely delivery without the benefits of bulk purchases and lower unit costs.
However, the health administrative system is not harmonized. The 2010 public expenditure survey (PETS) noted that institutional and financial arrangements vary depending on the particular governance and management model of each facility. This situation contributes to diversity in reporting arrangements with lines of authority not always clear to facility managers. For instance, some public ambulatory facilities managers, including managers of rural health centers (CESARs) and maternal-infant clinics (CMIs), report to SS central offices, while most facilities report to SS departmental offices and some to municipal offices. The PETS also underscored that weak data recording prevented the accurate tracking of resource flows. No mechanism exists to systematically record and consolidate all sources of funding according to health facility.
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D. Policy Recommendations
The essential preconditions for meaningful devo-lution include increased capacity at the municipal-ity level and stronger public financial management practices at the central level. Although decentraliza-tion plays an important role in the public agenda, the central government should avoid accelerating its imple-mentation until it recovers control of its own finances and improves the flow of transfers, which is often ir-regular or delayed. This unpredictability has had a det-rimental impact on municipalities. Under the current circumstances, deepening decentralization could raise expectations that cannot be met and lead to unintend-ed consequences such as increased local borrowing.
The following policy issues and recommendations are offered for consideration by the central govern-ment:
Focus on implementation: Intergovernmental and subnational governance reform should focus on imple-menting existing rules and strengthening and stream-lining existing institutions, rather than on passing a new legal framework and additional rules. New reforms should not only be informed by evidence, but also un-derpinned by sound assumptions about fiscal space and expected gains in terms of service delivery and ac-countability.
Asymmetrical decentralization: Subnational govern-ments are heterogeneous in resources and capacity and may best be served by an asymmetric approach to de-centralization. Heterogeneity across municipalities in revenue base, income per capita, spending challenges, and administrative capacity are central issues that should
be reflected in process design. Only a small set of munici-palities (approximately 23) have substantive administra-tive capacity to assume greater responsibilities.
Vertical Balance: Potential accountability gains could result from reducing dependence on transfers and pro-viding local governments with additional opportunities to generate own-source revenue, especially in the richer and more densely populated municipalities. Two major untapped potential revenue sources are the property tax and motor vehicle taxes. In highly urbanized municipali-ties, particularly the A and some B categories, increased taxes have the potential to both raise local budget re-sources and improve resource allocation in the economy.
Subnational Revenue Effort: The government might consider re-introducing an incentive for revenue mobi-lization. Between 2002 and 2009, the collection of local taxes increased substantially when the transfer formula rewarded municipalities for their revenue mobilization efforts. Additional incentives should come with capacity-building support, investments in improved cadasters, and other tools to better assess the revenue potential of mu-nicipalities. Using an asymmetric approach, additional taxes could also be devolved to more developed subna-tional entities.
Equalization formula: An equalization formula seeks to eliminate the gap between revenue and the cost of pro-viding a minimum level of services and local revenue. The current formula considers poverty rates to assess needs and uses population to assess the revenue base. However, half of the resource pool is allocated on a per-municipality basis, which introduces disparities given the large heterogeneity of local governments. A more refined formula should consider not only the level of tax effort
Table II.9
Characteristic Decentralized/Alternative Facility SS Facility
Adherence to Protocols:* Pneumonia Treatment Diarrhea Treatment
% of Facilities81.569.4
% of Facilities69.537.8
Functioning Medical Equipment** 83 55
Clean Bathrooms** 50 0
Users Received Needed Medicines** 91.6% of Users Surveyed 68.1% of Users Surveyed
Users Waited Less than 1 hour** 50% of Users Surveyed 39% of Users Surveyed Source: * SS, MEASURE Evaluation/PRODIM Consultores (2009); **García Prado and Peña (2010).
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but more accurately the economic potential and needs of various municipalities. While limitations still exist on the availability of data, enough information is currently col-lected on income per capita, human development, and regional GDP that could complement the existing mea-sures included in the formula.
Public Service Delivery: A rethinking of the expen-diture assignments and the public service delivery re-gime is necessary if the commitment to expenditure decentralization is to deepen. The structural fixes needed to reach this goal include removal of con-straints on local decision-making, greater clarity in ex-penditure assignments, and containment of fiscal dis-parities to acceptable levels. However, these reforms are conditional on strengthening the capacity of sub-national governments to upgrade the quality of their service delivery.
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Table II.10: Correlation Coefficients
Population Surface area (sq. km)
Population under the Poverty Line
Transfer Amount per Capita
Expenditure per Capita
Recurrent Expenditure per Capita
Surface area (sq. km) 0.18*** 1.00
Population under the Poverty Line
0.66*** 0.20*** 1.00
Transfer Amount per Capita
-0.02 -0.01 0.17*** 1.00
Expenditure per Capita -0.01 -0.03 0.00 0.01 1.00
Recurrent Expenditure per Capita
0.09*** 0.13*** 0.03 -0.04 0.04*** 1.00
Expenditure in Capital Assets per Capita
-0.22*** -0.15*** -0.14*** 0.05* -0.04 -0.80***
*** Significant at the 0.01 level (2-tailed) ** Significant at the 0.05 level (2-tailed) * Significant at the 0.10 level (2-tailed)
Source: SINEMUN and INE, 2012.
Figure II.35: Number of Municipalities by Population Range, 2010
Number of municipalities
Popu
lation
rang
e
0 30 60 90 120 150
<1500
1,501-3,000
3001-5000
5,001-10,000
10,001-50,000
50,001-300,000
>300,000
E. Appendix
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Table II.11: Multivariate Regression Analysis of Vertical Transfer Received (Fixed Effects)
Dependent Variable Vertical Transfer Received
Constant 3,608,753.0 (359,451.4)***
Population 26.0 (5.9)***
Population under the Line of Poverty 104.8 (9.2)
Population Density (per sq. km) -8458.1 (2540.1)***
N 1549
N Groups 184
R-sq 0.44
F= 3.51
Prob>F= 0*** Significant at the 0.01 level (2-tailed) ** Significant at the 0.05 level (2-tailed) * Significant at the 0.10 level (2-tailed)
Table II.12: Multivariate Regression Analysis of Municipal Expenditure (Fixed Effects)
Dependent Variable Total Expenditure (Lempiras) Recurrent Expenditure (Lempiras) Expenditure
Constant -14,800,000 (4,011,222)
-5,945,732 (2,280,779)***
Vertical Transfer Received -1.1 (0.3)***
-1.0 (0.2)***
Tax Revenue -0.3 (0.1)***
-0.2 (0.0)***
Population 1,104.3 (64.4)***
540.6 (36.6)***
Population under the Line of Poverty 459.1 (100.3)***
284.7 (57.0)***
Population Density (per sq. km) 80,438.9 (26,766.2)***
34,975.2 (15,219.2)**
N 1549 1549
N Groups 184 284
R-sq 0.73 0.69
F= 3.45 2.86
Prob>F= 0 0Source: Authors’ calculations based on 2010 ERSAPS data.
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Source: World Bank Decentralization Indicators, 2012, based on GFS data.
Figure II.36: Subnational Expenditure Share of Total Public Expenditures (%) in Developing Countries, 2010
50%45%40%35%30%25%20%15%10%
5%0%
Afgh
anist
anJa
maic
aLe
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iland
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and T
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Source: World Bank Decentralization Indicators, 2012, based on GFS data.
Figure II.37: Subnational Revenue Share of Total Public Revenue (%) in Developing Countries, 2010
50%45%40%35%30%25%20%15%10%
5%0%
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Map 1: Transfer Amount per Capita (Lempiras), 2010
Map 2: Recurrent Expenditure per Capita (Lempiras), 2010
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Dickson, Eric. 2006. Management Models of Water and Sanitation: Approaches to Decentralization in Honduras. Urban Poverty and Environment Report series 4. Interna-tional Development Research Centre, Ottawa.
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Annex
Country´s Percentile Rank (0-100)
Figure A.1: Comparison with regional average (Latin America and Caribbean - lower bar)
Voice and Accountability
Political Stability / Absence of Violence
Government E�ectiveness
Regulatory Quality
Rule of Law
Control of Corruption
50 1000 25 75
Country´s Percentile Rank (0-100)
Source: Kaufmann D., A. Kraay, and M. Mastruzzi (2010), The Worldwide Governance Indicators: Methodology and Analytical Issues.Note: The Worldwide Governance Indicators (WGI) are a research dataset summarizing the views on the quality of governance provided by a large number of enterprise, citizen and expert survey respondents in industrial and developing countries. These data are gathered from a number of survey institutes, think tanks, no-governmental organizations, international organizations, and private sector �rms. The WGI do not re�ect the o�cial views of the World Bank, its Executive Directors, or the countries they represent. The WGI are not use by the World Bank Group to allocate resources.
Figure A.2: Comparison with income category average (Lower middle income - lower bar)
Voice and Accountability
Political Stability / Absence of Violence
Government E�ectiveness
Regulatory Quality
Rule of Law
Control of Corruption
50 1000 25 75
Key Development Indicators Honduras LatinAmerica& Carib.
Lowermiddleincome
(2011)
Population, mid-year (millions) 7,8 589 2.533
Surface area (thousand sq. km) 112 20.394 20.842
Population growth (%) 2,0 1,1 1,6
Urban population (% of total population) 52 79 39
GNI (Atlas method, US$ billions) 15,4 5.050 4.488
GNI per capita (Atlas method, US$) 1.980 8.574 1.772
GNI per capita (PPP, international $) 3.820 11.582 3.837
GDP growth (%) 3,6 4,7 5,5
GDP per capita growth (%) 1,6 3,6 3,9
(most recent estimate, 2005–2011)
Poverty headcount ratio at $1.25 a day (PPP, %) 18 6 30,2
Poverty headcount ratio at $2.00 a day (PPP, %) 30 12 59,5
Life expectancy at birth (years) 73 74 66
Infant mortality (per 1,000 live births) 18 16 46
Child malnutrition (% of children under 5) 9 3 24
Adult literacy, male (% of ages 15 and older) 85 92 80
Adult literacy, female (% of ages 15 and older) 85 91 62
Gross primary enrollment, male (% of age group) 114 118 106
Gross primary enrollment, female (% of age group) 114 114 102
Access to an improved water source (% of population) 87 94 87
Access to improved sanitation facilities (% of population) 77 79 47
Net Aid Flows 1980 1990 2000 2011
(US$ millions)
Net ODA and official aid 102 448 448 574
Top 3 donors (in 2010):
United States 19 215 110 103
Spain 0 6 35 69
European Union Institutions 5 10 18 58
Aid (% of GNI) 4,2 16,0 6,4 3,9
Aid per capita (US$) 28 92 72 76
Note: Figures in italics are for years other than those specified. .. indicates data are not available. Development Economics, Development Data Group (DECDG).
Honduras at a glance
75-79
60-64
45-49
30-34
15-19
0-48 86 64 42 2
percent of total population
0
60
50
40
30
20
10
08 1990 20111995 2000
Honduras Latin America & the Caribbean
8
6
4
2
0
-2
-4
-695 05
GDP GDP per capita
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Long-Term Economic Trends 1980 1990 2000 2011
Consumer prices (annual % change) .. 23,3 11,0 2,9
GDP implicit deflator (annual % change) 13,2 21,2 30,8 9,3
Exchange rate (annual average, local per US$) 2,0 4,1 15,0 18,9
Terms of trade index (2000 = 100) .. 129 100 85
1980–90
1990–2000
2000–11
(average annual growth %)
Population, mid-year (millions) 3,6 4,9 6,2 7,8 3,0 2,4 2,0
GDP (US$ millions) 2.566 3.049 7.106 17.427 2,7 3,2 4,4
(% of GDP)
Agriculture 23,7 22,4 15,9 14,5 2,7 2,2 3,1
Industry 24,3 26,4 32,5 27,3 3,3 3,6 3,4
Manufacturing 15,0 16,3 22,7 19,2 3,7 4,0 3,8
Services 52,0 51,2 51,7 58,1 2,5 3,8 5,6
Household final consumption expenditure 69,4 66,8 70,8 77,7 2,6 3,0 4,3
General gov't final consumption expenditure 12,7 12,9 13,4 16,5 3,3 2,0 5,6
Gross capital formation 24,8 23,0 28,3 27,0 3,0 7,8 3,0
Exports of goods and services 37,2 37,2 54,0 47,6 1,1 1,6 3,7
Imports of goods and services 44,1 39,9 66,4 68,8 1,2 3,8 3,4
Gross savings .. .. 21,2 17,9Note: Figures in italics are for years other than those specified. .. indicates data are not available. Development Economics, Development Data Group (DECDG).
Balance of Payments and Trade 2000 2011
(US$ millions)
Total merchandise exports (fob) 1.297 3.897
Total merchandise imports (cif ) 2.863 8.658
Net trade in goods and services -831 -3.606
Current account balance -508 -1.503
as a % of GDP -7,2 -8,6
Personal transfers and
compensation of employees (receipts) 484 2.811
Reserves, including gold 1.319 2.821
Voice and accountability
Political stability
Regulatory quality
Rule of law
Control of corruption
0 25 10050 75
Country´s percentile rank (0-100)higher values imply better ratings
20112000
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Central Government Finance
(% of GDP)
Current revenue (including grants) 15,1 23,2
Tax revenue 13,8 16,2
Current expenditure 14,8 21,0
Overall surplus/deficit -5,2 -2,8
Highest marginal tax rate (%)
Individual .. ..
Corporate 25 30
External Debt and Resource Flows
(US$ millions)
Total debt outstanding and disbursed 5.478 4.642
Total debt service 397 1.008
Debt relief (HIPC, MDRI) 814 1.884
Total debt (% of GDP) 77,1 26,6
Total debt service (% of exports) 9,9 12,2
Foreign direct investment (net inflows) 382 1.043
Portfolio equity (net inflows) 0 0
Private Sector Development 2000 2011
Time required to start a business (days) – 14
Cost to start a business (% of GNI per capita) – 46,7
Time required to register property (days) – 23
Ranked as a major constraint to business 2000 2011
(% of managers surveyed who agreed)
Corruption .. ..
Access to/cost of financing .. ..
Stock market capitalization (% of GDP) 8,8 ..
Bank capital to asset ratio (%) 8,8 11,0
Technology and Infrastructure 2000 2011
Paved roads (% of total) 20,4 ..
Fixed line and mobile phone
subscribers (per 100 people) 7 112
High technology exports
(% of manufactured exports) 0,4 1,3
Environment
Agricultural land (% of land area) 26 29
Forest area (% of land area) 57,1 45,3
Terrestrial protected areas (% of land area) 18,2 18,2
Freshwater resources per capita (cu. meters) 14.810 12.371
Freshwater withdrawal (% of internal re-sources)
1,2 1,2
CO2 emissions per capita (mt) 0,81 1,0
GDP per unit of energy use
(2005 PPP $ per kg of oil equivalent) 6,0 5,9
Energy use per capita (kg of oil equivalent) 481 601
World Bank Group portfolio 2000 2011
(US$ millions)
IBRD
Total debt outstanding and disbursed 151 0
Disbursements 0 0
Principal repayments 27 0
Interest payments 15 0
IDA
Total debt outstanding and disbursed 838 732
Disbursements 38 135
Total debt service 8 7
IFC (fiscal year)
Total disbursed and outstanding portfolio 42 192
of which IFC own account 27 192
Disbursements for IFC own account 9 0
Portfolio sales, prepayments and
repayments for IFC own account 26 19
MIGA
Gross exposure 16 6
New guarantees 0 0
Short-term, 268
Private, 1.061
Bilateral, 766Othermultilateral, 1.600
IMF, 215
IDA, 732IBRD, 0
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Millennium Development Goals Honduras
With selected targets to achieve between 1990 and 2015 (estimate closest to date shown, +/- 2 years)
Goal 1: halve the rates for extreme poverty and malnutrition 1990 1995 2000 2011
Poverty headcount ratio at $1.25 a day (PPP, % of population) 46,9 20,6 18,0 17,9
Poverty headcount ratio at national poverty line (% of population) 74,8 65,8 70,0 66,2
Share of income or consumption to the poorest qunitile (%) 2,8 3,1 2,7 2,0
Prevalence of malnutrition (% of children under 5) 15,8 19,2 12,5 8,6
Goal 2: ensure that children are able to complete primary schooling
Primary school enrollment (net, %) 89 90 89 97
Primary completion rate (% of relevant age group) 65 71 .. 101
Secondary school enrollment (gross, %) 33 33 .. 74
Youth literacy rate (% of people ages 15-24) .. .. 89 95
Goal 3: eliminate gender disparity in education and empower women
Ratio of girls to boys in primary and secondary education (%) 104 .. .. 107
Women employed in the nonagricultural sector (% of nonagricultural employment) 41 43 42 42
Proportion of seats held by women in national parliament (%) 10 .. 9 20
Goal 4: reduce under-5 mortality by two-thirds
Under-5 mortality rate (per 1,000) 55 44 35 21
Infant mortality rate (per 1,000 live births) 43 36 29 18
Measles immunization (proportion of one-year olds immunized, %) 90 89 98 99
Goal 5: reduce maternal mortality by three-fourths
Maternal mortality ratio (modeled estimate, per 100,000 live births) 220 180 160 100
Births attended by skilled health staff (% of total) 47 55 56 67
Contraceptive prevalence (% of women ages 15-49) 47 50 62 65
Goal 6: halt and begin to reverse the spread of HIV/AIDS and other major diseases
Prevalence of HIV (% of population ages 15-49) .. .. .. ..
Incidence of tuberculosis (per 100,000 people) 125 125 116 43
Tuberculosis case detection rate (%, all forms) 60 71 89 96
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Millennium Development Goals Honduras
With selected targets to achieve between 1990 and 2015 (estimate closest to date shown, +/- 2 years)
Goal 7: halve the proportion of people without sustainable access to basic needs
Access to an improved water source (% of population) 76 79 82 87
Access to improved sanitation facilities (% of population) 50 57 64 77
Forest area (% of total land area) 72,7 .. 57,1 45,3
Terrestrial protected areas (% of land area) 13,6 15,0 18,2 18,2
CO2 emissions (metric tons per capita) 0,5 0,7 0,8 1,0
GDP per unit of energy use (constant 2005 PPP $ per kg of oil equivalent) 5,5 5,5 6,0 5,9
Goal 8: develop a global partnership for development
Telephone mainlines (per 100 people) 1,8 2,9 4,8 7,9
Mobile phone subscribers (per 100 people) 0,0 0,0 2,5 104,0
Internet users (per 100 people) 0,0 0,0 1,2 15,9
Households with a computer (%) .. .. 3,7 12,9
Note: Figures in italics are for years other than those specified. .. indicates data are not available. – indicates observation is not applicable. Development Economics, Development Data Group (DECDG).
125
100
75
50
25
02000 2005 2010
Primary net enrollment ratioRatio of girls to boys in primary & secondary education
100
75
50
25
01990 20111995 2000
Honduras Latin America & the Caribbean
160140120100
80604020
02000 20102005
Fixed + mobile subscribers Internet users
Hon
dura
s Pu
blic
Exp
hend
iture
Rev
iew
200
8-20
12
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