Honduras is a lower middle-income country with a huge wealth gap and a past of military rule and corruption.

Natural disasters have piled their effects on top of malnutrition, poor housing and infant diseases. In 1998 Hurricane Mitch devastated the country, leaving 5,000 dead, most of the crops destroyed and damage estimated in the billions that set back development by decades.

Drug trafficking and crime are fueled by poverty and rising unemployment. Youth gangs, known as “maras” have plagued Honduran society to the point of becoming a major security issue.

In 2005, Manuel Zelaya won the presidential elections by the smallest margin ever in Honduran electoral history.

Zelaya's campaign theme was "citizen power," proposing to double the number of police officers and to jail murderers and rapists for life.

He also vowed to increase transparency and combat drug trafficking, while maintaining macroeconomic stability.

The Zelaya administration has made poverty reduction its top priority, endorsing the Poverty Reduction Strategy Paper.

The four pillars identified by the President for his administrative mandate (Jan 2006- Jan 2010) are: Equitable economic growth for employment generation. Good governance through state modernization and civic participation. Environmental protection and risk management. Development of human capital.

President Zelaya was ousted from office on June 28 after an attempt to change the Constitution that would have allowed the possibility of his reelection, to which Congress and the Judiciary were strongly opposed. The United States and the Organization of American States (OAS) who have condemned the coup d’état, have been working vigorously to resolve the crisis and return Zelaya to power, but mediation attempts by President Oscar Arias of Costa Rica have so far failed. As a result of this situation the World Bank has paused its lending to the government of Honduras.

The country has a diversified economy, based on international trading of agricultural commodities and manufactures, which makes it the most open economy in Central America.

The US recession is having a substantial negative impact on the Honduran economy. Remittances, exports from maquilas (assembly factories) and FDI - the key links between the two economies - are contracting. Real GDP growth is projected to fall to around 2% in 2009.

Dire poverty was aggravated by Hurricane Mitch in 1998. After this massive loss of life and assets, Honduras embarked on a very ambitious Poverty Reduction Strategy (PRS) in consultation with civil society and donors, agreeing to a set of actions aimed at reducing the incidence of extreme poverty by half by 2015.

The Country Assistance Strategy (CAS) (pdf) supported the PRS by contributing to the restoration of macro-economic stability, improvement of the business climate, better performance of the financial sector, and a sound framework for public sector financial management.

Growth in Honduras is largely attributable to the continued growth in remittances and strong export performance, particularly by the maquila sector and by the CAFTA effect on private investment.

These achievements allowed Honduras to reach the HIPC (Heavily Indebted Poor Country) Completion Point in April 2005 and to maintain the benefit from the MDRI (Multilateral Debt Relief Initiative) in 2007.

Over 59% of Hondurans remain below the poverty line and 36.2% below the extreme poverty line.

Increased public spending has shown the following results over the past decade: Vaccination programs reached virtually the entire population. Maternal mortality fell from 182 per 100,000 live births to 108 per 100,000, a 38 percent reduction. Chronic malnutrition in children aged 1-5 fell from 33 percent in 2001 to less than 24.7% in 2006. Primary school attendance rose from 85 percent in 2002 to 89.4% in 2005.

Challenges

Honduras remains vulnerable to external shocks. The agricultural sector has lost about one third of its purchasing power in the past two decades, largely due to the decline in prices for export crops, particularly bananas and coffee.

Honduras is susceptible to hurricanes and droughts. Measures to mitigate the impact of these shocks are primarily geared to strengthening households’ capacity to adapt, extending market-based risk management mechanisms, and developing effective safety nets.

Although Honduras’ trends on most indicators have been favorable for the past decade, the prospects for meeting the targets laid out in the Millennium Development Goals (MDG) are uncertain. Current trends fall short in four areas: reducing extreme poverty by half, reducing under five malnutrition by half, and reducing under five and infant mortality by two-thirds.

Further progress in achieving the MDGs in Honduras will require improved quality of PRSP spending and acceleration in economic growth of at least 5 to 6%. Macro-economic stability, as well as improvements in governance and in the quality of and access to economic and social services, are critical for sustained growth.

Bank studies have highlighted the importance of improvements in the quality of education (see Poverty Assessment and Development Policy Review). They also argue that progress will need to be made in increasing rural productivity and diversifying the sources of rural incomes, since most of the country's poor live in rural areas and are dependent on agriculture for their livelihood.

See: Drivers of Sustainable Rural Growth and Poverty Reduction in Central America (pdf)
DR-CAFTA: Challenges and Opportunities for Central America
Honduras Development Indicators

The Bank is financing 18 active projects. The projects are designed to: remove long-standing structural barriers to growth, by modernizing the public sector and improving the performance of economic and social services; improve rural productivity and generate employment; strengthen human development by improving educational opportunities and health care; and improve the protection of the environment.

These include:

Health System Reform Project
Aims to extend and improve health care coverage, especially to the low-income population. It has supported the development of a decentralized mechanism for the delivery of maternal-child health care involving local stakeholders in the management of clinics.

Education, Quality, Governance and Institutional Strengthening.
Finances education with significant progress at community schools that involve parents in school management, jointly with teachers. The Bank has also supported the harmonization of external assistance in the education sector through the Education for All initiative.

Nutrition and Social Protection Project
Helps to finance the expansion of the community-based integrated child support program as well as creating opportunities for youth at risk.

"Barrio Ciudad", Rural Infrastructure, and "Nuestras Raices"
These are executed by the Fondo Hondureño de Seguridad Social (FHIS), and aim to strengthen capacity for the development and management of investments at the municipal and community levels.

Natural Disaster Mitigation Project,
Designed to put the disaster-response system on a firm footing. The project has supported the development and implementation of risk mitigation plans in the 60 highest-risk municipalities as well as strengthening the national disaster early-warning and response system.

Honduras Road Reconstruction and Improvement II
Aimed at improving the quality of road network and of road management in support of the government's growth and competitiveness goals.

Power Sector Efficiency Enhancement Project (PROMEF)
Newly approved at the beginning of 2009 by the Board of Directors to improve National Electric Power Company (ENEE) operational and financial performance, thus contributing to the sustainability of the power sector in Honduras.

The World Bank has achieved considerable impacts in the development of the urban and rural populations of Honduras. Some include:

Regional Development in the Copan Valley Project: To achieve sustainable tourism development based on the cultural and natural patrimony of the Copan Valley through: (a)creation of an archaeological tourism circuit integrating five archaeological parks/sites; (b)ecologically sustainable management in the parks/sites; (c)capacity building for employment associated with park/site development; (d) strategic planning for tourism development; (e)access to training and technical assistance for products and services provided by locally-owned enterprises; and (f) institutional strengthening for cultural management capacity.

Poverty Reduction Support Technical Assistance (PRSTAC): This project, which just closed, assisted the Government of Honduras in improving its institutional capacity in the areas of participatory planning and monitoring, public expenditure management, accountability, public administration and public service delivery thereby facilitating the implementation of the country's Poverty Reduction Strategy.

For more details visit: Results: Projects in Action

María Amalia San Martín
Public Information Center and External Affairs
Tel: 504-239-4551/52/53/54/60
Fax: 504-239-4555
email: msanmartin@worldbank.org