IMF Sees Progress in Honduras, but Inflation and Energy Losses Threaten Hard-Won Stability

Honduras is approaching the completion of its International Monetary Fund-supported economic reform program, with the IMF acknowledging progress in maintaining fiscal discipline, strengthening external reserves and preserving economic growth. However, the IMF's latest assessment also exposes a difficult economic balance: rising living costs, persistent electricity-sector financial weaknesses and recurring external shocks continue to threaten the durability of the country's macroeconomic gains.

The IMF announced a staff-level agreement with Honduran authorities on the sixth and final reviews of the Extended Fund Facility (EFF) and Extended Credit Facility (ECF) arrangements following discussions in Tegucigalpa from October 20 to November 2, 2026. Subject to Executive Board approval expected in late December, Honduras would gain access to approximately US$120 million.

The agreement signals broadly favorable program performance, but it does not signify the resolution of Honduras' economic vulnerabilities. The Fund's assessment suggests that the country's next challenge will be sustaining stability beyond the financing arrangements while addressing structural weaknesses that continue to constrain fiscal flexibility, investment conditions and resilience to economic disruptions.

Strong economic buffers face growing pressure from inflation and external shocks

Honduras has maintained economic momentum despite disruptions associated with international energy markets and climate conditions. According to the IMF, the economy expanded by 3.7% during the first half of 2026, although full-year growth is projected to moderate to 3.4% amid an increasingly challenging external environment.

The IMF identified higher energy prices associated with the Middle East conflict and a severe El Niño-related drought among the shocks confronting the economy. These developments expose a persistent vulnerability: domestic economic stability can be disrupted by circumstances beyond the immediate reach of national fiscal and monetary authorities.

Inflation presents an equally significant challenge. The IMF reported that headline inflation reached 6.3% in September as food and energy prices increased, while core inflation remained contained at 3.5%. The difference indicates that volatile essential costs have contributed substantially to the recent acceleration in consumer prices.

For households, particularly those requiring social assistance, rising food and energy expenditure places additional pressure on already essential consumption. The resulting policy challenge is to protect vulnerable groups without allowing temporary relief measures to become permanent fiscal obligations that weaken public finances.

Honduras' external position also presents contrasting signals. According to the Fund, the current account registered a surplus equivalent to 4.1% of GDP during the first half of 2026, but is projected to move into a deficit of 2.2% of GDP for the full year.

International reserves have nevertheless provided an important stabilizing buffer. The IMF reported that net international reserves reached approximately US$11.5 billion in October, supported by robust remittances and favorable export prices. Their accumulation offers protection against external pressures, although changing international conditions could complicate efforts to preserve these buffers.

The coexistence of strong reserves, moderating growth and elevated headline inflation illustrates the limits of assessing economic stability through individual indicators. Honduras' ability to maintain progress will depend on containing price pressures while safeguarding external balances and sustaining confidence in its economic policies.

Electricity sector weaknesses threaten to undermine fiscal discipline

The IMF considers Honduras' non-financial public sector deficit target of 1% of GDP for 2026 and 2027 appropriate, citing prudent revenue assumptions, realistic expenditure plans and a credible financing strategy. Maintaining this benchmark, however, requires confronting financial pressures that extend beyond routine budget management.

The electricity sector remains a major source of fiscal vulnerability. The Fund emphasized that reducing the financial burden of state-owned electricity company ENEE is essential to containing fiscal risks and protecting resources for priority government expenditure.

ENEE's elevated electricity losses, arrears and governance weaknesses create continuing challenges for public finances. Their persistence highlights a broader tension between achieving fiscal targets and addressing inefficiencies that can repeatedly generate financial obligations for the public sector.

The IMF welcomed the recent approval of the Energy Justice Law and a more targeted approach to subsidies, identifying both as steps toward improving sectoral sustainability. However, it stressed that effective implementation, reduced electricity losses, stronger governance and greater competition remain necessary.

Subsidy policy creates another difficult balancing act. While measures addressing higher energy and fuel prices have helped cushion vulnerable households, the Fund recommended that assistance remain temporary, carefully targeted and consistent with incentives to conserve energy.

Fiscal sustainability therefore depends partly on whether Honduras can deliver social protection without allowing energy-related commitments to crowd out other spending priorities. The issue extends beyond electricity tariffs to the government's capacity to finance essential services and maintain expenditure discipline during recurring shocks.

The IMF also highlighted reforms aimed at strengthening financial transparency and revenue mobilization. Progress in liquidating trust funds, implementing the Organic Budget Law, improving Treasury Single Account operations and tightening expenditure controls through SIAFI forms part of this institutional agenda.

Additional priorities include improving procurement and public investment management, strengthening ONCAE and modernizing tax and customs administration. The Fund identified electronic invoicing, stronger arrears recovery, risk-based audits and scrutiny of tax incentives as measures capable of supporting more effective revenue collection.

These reforms collectively point toward a fiscal strategy focused not only on restricting deficits but also on improving how public resources are collected, controlled and allocated. Their effectiveness will ultimately depend on implementation rather than the formal adoption of new administrative mechanisms.

Post-program stability will depend on monetary credibility and institutional reform

Beyond fiscal management, the IMF has emphasized monetary and exchange rate reforms as essential to preserving economic stability. The Fund noted that policy adjustments have improved foreign exchange market functioning and supported reserve accumulation, while the September increase in the policy interest rate demonstrated the authorities' commitment to price and external stability.

Honduras intends to move gradually toward a more market-based foreign exchange allocation mechanism and establish the foundations for inflation targeting. According to the IMF, these measures could strengthen monetary policy effectiveness and help anchor inflation expectations while allowing exchange rates to reflect market conditions more closely.

Such changes require institutional readiness and careful sequencing. Greater market responsiveness may improve monetary transmission, but its effectiveness will depend on credible policy implementation, particularly when global uncertainty and domestic price pressures remain elevated.

Governance reforms constitute another important dimension of the economic agenda. The IMF identified progress under the National Transparency and Anti-Corruption Strategy, alongside stronger judicial effectiveness, legal certainty and the rule of law, as priorities for improving investor confidence and supporting long-term growth.

The Fund also emphasized operationalizing the beneficial ownership registry and implementing anti-money laundering and counter-terrorist financing reforms ahead of the 2027 Financial Action Task Force evaluation. These measures are intended to strengthen safeguards against corruption and illicit financial flows.

Although the IMF considers the principal objectives of Honduras' financing arrangements largely achieved, it continues to identify elevated risks from global uncertainty and climate-related vulnerabilities. The assessment suggests that maintaining economic stability will require sustained institutional reform alongside prudent fiscal and monetary policies.

The expected December Executive Board decision will determine whether the final reviews are completed and additional financing becomes accessible.