OBJECTIVE AND GOAL
The exchange rate policy objective, like the monetary policy objective, is to safeguard the internal and external value of the currency; consequently, to maintain export competitiveness, especially with regard to the country’s main trading partners, trying to reduce the current account deficit to sustainable levels in the medium term (6% of GDP).
To this end, the Central Bank of Honduras (CBH) has adopted as goal, within the framework of the 2008-09 Monetary Program, to increase Net International Reserves at least US$250.0 millions to reach US$2,726.0 millions, compared to the December 2007 balance. This increase on reserves will allow the imports coverage level to be similar to last year’s, at 4.0 months of imports, excluding maquila.
STRATEGY
The Monetary Program 2008-09 plans to continue exchange rate policy instrumentation through the Public Auction for Foreign Currency Allocation (SAPDI in Spanish) and to modernize, so that in the short run the CBH may have an Electronic System for Foreign Currency Negotiation.
The CBH will maintain the current exchange rate regime, using exchange rate policy more actively to accumulate an adequate level of reserves. This will allow the CBH to adequately manage the impact on the exchange rate of the growing risks of foreign shocks, especially those related to the increase in fuel and food prices.
The Honduran Government Program has been endorsed by the International Monetary Fund through the subscription of a Stand By Agreement to support the 2008 economic program, which contemplates resources for SDR38.8 millions (US$63.5 millions). This financial access has a precautionary character tending to enforce external stability. In the same agreement, indicative goals are established for the net international reserve levels, which will be monitored quarterly.
Other actions considered for the attainment of the reserve goal, are related to acquiring external credit (only under concessional conditions) as well as obtaining concessional credit from the Petrocaribe Agreement in the amount of US$350.0 millions for the years 2008 and 2009.
Likewise, to diversify investments and to obtain greater foreign currency earnings, the CBH foresees a more efficient management of the international reserves investments, through the subscription to the Reserves Advisory and Management Program (RAMP) agreed with the World Bank under the principles of security, liquidity and profitability.
On the other hand, considering the regional environment and to support the nation’s productive areas, the CBH’s Directory has authorized the banking system to gradually reduce the foreign currency reserve requirement in 10%, from 24% to 14% starting on March through November 2008, for those institutions that, according to the monthly records of the National Banking and Insurance Commission, direct their foreign currency loan portfolios to activities other than consumption and trade in a proportion equal to or greater than 70%.
PARAMETERS AND OPERATING MECHANISM
The CBH will maintain the current exchange rate band of +/- 7% with respect to an established base price, defining more specific parameters to ration the current exchange rate scheme, with regard to the prices offered for the purchase of foreign currency by the exchange rate agents, whose offered prices may not be greater than three fourths of the zero point one per cent (0.075%) of the Reference Exchange Rate average resulting from the verified auctions of the previous seven days.
At the same time, the CBH will carefully observe and revise, if necessary, the foreign currency holding limits assigned to the exchange rate agents so that they can satisfy their clients’ foreign currency requirements in a timely and efficient manner.
Additionally, to measure the currency’s external competitiveness level, the Monetary Authority will follow the evolution of the Lempira’s Effective Real Exchange Rate with respect to the United States dollar, indicator that takes the inflation rate into account as well as the inflation rate of Honduras’ main trading partners, including the evolution of those trading partners’ exchange rates with respect to the United States Dollar.