Decree PCM-030-2020 in its article 24, amended twice and most recently on May 8 (PCM_041-2020), stipulates ±: “In accordance with the decisions of the Board of Directors of the Central Bank of Honduras (BCH) on the reduction of legal reserve requirements in domestic and foreign currencies, it is responsible for providing an effective real-time mechanism to allocate funds from the legal reserve to institutions of the national banking and financial system.” The lowering of interest rates from central bank credit windows for the financial system from 7 April 2020 is one of the additional measures taken by the authorities to mitigate the impact of Covid19. As for the key monetary policy rate, after a total reduction of 100 basis points in recent months, it remains at 4.50%, with a commitment to continue to closely monitor the evolution of inflation, reported the Central Bank of Honduras. Although the liquidity of the financial system has increased by nearly 30±000 million Lempiras this year, private banks are calling for the “liberalization” of legal reserve resources for monetary policy measures against Covid-19, according to the Central Bank of Honduras (BCH). Now, through document PCM-030-2020, the government has approved a further reduction in reserve requirements for BCH, both in Lempiras and foreign currency. In three months, among other measures, the BCH reduced the legal reserve for compulsory investments by five points (6,500 million lempiras). But the measure is not enough to reactivate the economy in the current pandemic situation. According to the BCH statement, the eligibility period for the calculation of mandatory investments of loans was from September 24, 2020 to December 29, 2021. The global economy contracted significantly in the first half of 2020 due to the intensification of the global Covid-19 health crisis. In line with the above, uncertainty persists in households and businesses around the world about the future behaviour of income and employment, which consequently affects consumption and private investment. As part of the current 2020-2021 monetary program, which established the obligation to continuously monitor the impact of Covid19 on economic activity and employment in order to take additional and timely measures to reduce the impact on the Honduran economy, the Board of Directors of the BCH approved a change in the structure of minimum reserves and investment requirements in order to pursue measures to maintain a sufficient flow of credit to the private sector, especially the micro, small and medium-sized enterprise sector, the Central Bank of Honduras (BCH) said.
The September 1, 2020 statement states that “. The BCH approved a reduction in the legal reserve in national currency by 3 percentage points (pp) from 12% to 9%. In order to create an incentive for the redirection of liquid resources to priority sectors, the Biosafety Clearing-House has set a requirement of 3% for mandatory investments in national currency to be recorded with the total value of new loans for priority sectors guaranteed by the MSME Guarantee Fund. `The eligibility period for the calculation of the mandatory investments of these loans shall be determined between 24 September 2020 and 29 December 2021. This requirement can also be calculated with accounting investments, which the BCH will manage for the benefit of each institution in the financial system,” the official document concludes. Learn more about the “System for Monitoring the Market and Economic Situation in Central American Countries” created by CentralAmericaData. Banks do not receive interest on this 12% reserve requirement, and central banks©use it primarily as collateral for savings and as a way to inject more money into the market in times of economic and financial crisis. Tegucigalpa – The Governor of the Central Bank of Honduras (BCH), Wilfredo Cerrato, said that the Board of Directors approved a reduction in the legal reserve of the national currency by three percentage points, from 12 to 9 www.bch.hn/download/boletines_prensa/2020/boletin_de_prensa_06_20.pdf In addition, the BCH assessed the current composition of the legal reserve and mandatory investments in national currency and decided to increase investments. mandatory in national currency by 2.0 percentage points, from 5.0% to 3.0% from 13 February 2020. This measure is part of the BCH`s monetary policy modernization to restructure direct instruments and strengthen the use of the MPR as the main instrument to signal the monetary policy stance.
This reduction in mandatory investment will free up about 2,100 million lempiras funds for the financial system, which would help stimulate lending to the private sector and stimulate economic activity. At its regular meeting on 4 February 2020, the Open Market Operations Commission of the Central Bank of Honduras (BCH) decided to reduce its key monetary policy rate (MPR) by 25 basis points from 5.50% to 5.25% as of 10 February 2020. This decision was taken internally and externally after analysis of the current economic environment and recent prospects. Currently, the legal reserve requirement is 12% (12 Lempiras out of 100 saved in a bank or financial institution) and 24% in foreign currency. The BCH decides what percentage will be reduced, and this amount must be allocated to new loans©or refinancing in productive activities affected by Covid-19. The $909 million increase in liquidity facilities for financial intermediation companies and the 0.5% reduction in the local currency legal reserve ratio are some of the measures taken by the central bank in response to the spread of Covid-19. With regard to the foreign exchange market, the central bank was authorized to offer dollar liquidity for $622.4 million, of which $400.0 million will be provided through repo for a period of up to 90 days and the remaining $222.4 million for the release of legal reserve funds in foreign currencies, the institution reported. This mechanism must be “directly linked to the applicant for new loans or the refinancing of existing loans©©, so that the allocation of funds released from the legal reserve is intended for the priority sectors in this implementing decree”.
For this year, the Central Bank of Honduras forecasts economic growth of between 3% and 3.5% and inflation between 4.5% and 6.5%. Excerpt from a statement by the Central Bank of Honduras: The Board of Directors of the Central Bank of Honduras (BCH) approved the Monetary Program (PM) 2015-2016, which defines the policy measures to be taken based on projections of the main macroeconomic variables based on the current national and international economic context. The measure was approved at the Agency`s last Board meeting, where it was noted that lending to the private sector decreased from May to August due to movement restrictions due to the COVID-19 pandemic. In this context, the Biosafety Clearing-House approved a reduction in the legal reserve in national currency by 3 percentage points from 12 per cent to 9 per cent. In addition, the requirement for mandatory investments in national currency has been set at 3%, to be included in the total value of new loans for priority sectors guaranteed by the MSME Guarantee Fund. He added that the total value of new loans for priority sectors guaranteed by the MSME Guarantee Fund will be recorded. Despite the fact that liquidity in the banking sector increased from L10 billion to L13 billion during the health crisis, loans to MSMEs fell short of expectations. While large companies are performing better in channelling funds for economic recovery.
Similarly, reducing the legal reserve will reduce the passive interest rate, or interest earned on public savings, in the financial system by almost one percentage point. (JB) He reiterated that the monthly index of economic activity (IMAE) indicates a decline of 10% due to the decline in manufacturing, commercial, private construction, hotel and restaurant and agriculture.