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Latin America Investment News on Viva Tropical

Honduran Central Bank Dangerously Under Funded

Article Summary:

Too much government spending and low, to little tax collection is causing a cycle of debt and overspending by the Honduran Government. The result is a dangerously underfunded Central Bank. With $ 526 million in capital needed to continue its operations, the Inter Monetary Fund has demanded the Honduran Government capitalize the bank as soon as possible. Government official say the Central Bank has operating losses to be covered, but remains within international standards.

Photo Credit: El Financiero

Original Article Text From From El Financiero via Google Translate :

Central Bank Undercapitalized

The accounts of the Central Bank of Honduras (BCH), regulator of monetary policy, shows the red and performs a process of capitalization. Maria Elena Mondragon, president of the BCH, says it takes about $ 526 million to capitalize the institution and the auction of government securities held was very successful with over 70% of the proceeds.

The official acknowledged that there are operating losses to be covered, “but we are within international standards”, he added, and they have the credibility to put these resources.

However, the IMF itself (IMF) demanded that the Central Bank as soon as possible capitalized as part of the agreement “Stand By” effective with the Honduran government.

Recent data indicate that the finance required to September is about $ 285 million just to capitalize. But there is a cumulative process that had losses in 2003, 2004, 2005 and 2006 that together, plus the consolidation of assets, totaling $ 590 million.

For Raf Flores, executive director of the Social Forum of External Debt of Honduras (FOSDEH), control of liquidity and operating costs have been increasing in recent years and they recently upped the policy rate from 5 to 5.5%. “To some extent, this is double-edged sword, because if the central bank sharply raises monetary policy rate at the end is setting a floor for interest rates and banking system, on the other hand, excess spending by the Government, which ultimately affects the operations of the Central Bank, “says Flores.

Millionaire Spending
And is that the Central Government has not covered the Central Bank the financial costs of the bonds at the time of maturity, but that cost has assumed the Central Bank. “To this is added that the Central Government has a discipline in itself, because it is growing its level of spending and not getting the necessary resources through tax revenues to cover that spending growth,” says Flores.

$ 590 Million requiring the Central Bank of Honduras for losses accumulated in recent years. The government faces two problems then, a high fiscal deficit that forces external and internal debt, and a Central Bank with losses.

The forecast closing Central Bank operating loss this year, is $ 57 million in losses for 2012 are about budgeting losses to $ 92.3 million.

The sacrifice will be in public investment, explains Flores. “Both the national and public investment has fallen because the current expenditure commitment has increased and is limiting the possibilities for investment and increasing domestic debt to cover that expense. It is at the expense of foreign borrowing for public works and goes in a circle a little dangerous to enter a process of debt that ultimately has an impact on the operations of the Central Bank. ”

What’s next?
Undoubtedly, Flores estimates will have to continue this process of borrowing or the Central Government will have to find other mechanisms to capitalize on the Central Bank as the Government provide additional services that are now done in the private banking system.

But private banks opposed this and that “we manage resources and give credit facilities to the Government,” said Roque Rivera, president of the Honduran Association of Banking and Insurance (AHIBA).

Private banking has funded more than $ 105 million to municipalities in Honduras with the support of the Government and recently approved $ 31 million (over three banks) to finance road infrastructure damaged by recent rains.

But Raf Flores of FOSDEH, notes that “has to be weighed such questions, because the importance of having an entity which regulates monetary policy is certainly needed, if it enters a process of disinvestment can lead to very complicated situations.”

International Monetary Fund recently conducted a study recommended greater independence of central banks in Central America, a way that seems not to follow the Central Bank of Honduras.

Operating Loss
Maria Elena Mondragon, president of BCH, said that “the cost of monetary policy comes from various sides. One is to absorb liquidity from the market and have to pay BCH performance by bank bills to absorb this liquidity, but then have an accumulation of reserves in the country is not free, the BCH purchase these reserves. ”

Have reserves of over $ 2,400 million in the country has a cost, and that is paid by the BCH. The income comes from investment returns, or yields generated by those reserves invested abroad, he said.

Link to Original Article:

From El Financiero

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