2009 Index of Economic Freedom

Quick Facts

Population:

• 7.0 million

GDP (PPP):

• $24.7 billion
• 6.3% growth
• 5.4% 5-year compound annual growth
• $3543 per capita

Unemployment:

• 27.8%

Inflation (CPI):

• 6.9%

FDI Inflow:

• $385.0 million

Honduras's 2009 economic freedom score is 58.7, making its economy the 91st freest in the 2009 Index. Its overall score is 0.2 point lower than last year, partially reflecting lower labor freedom. Honduras is ranked 20th out of 29 countries in the South and Central America/Caribbean region, and its overall score is slightly lower than the world average.

Honduras receives high scores for trade freedom, fiscal freedom, government size, and financial freedom. Personal and corporate income tax rates are fairly low, and the overall tax burden is moderate. Financial freedom is enhanced by the developing banking sector, which has been instituting stronger rules and more transparent oversight.

Poverty and inequality persist, and efforts to restructure the public sector need to be revitalized. Honduras's overall economic freedom suffers most from the lack of institutional capacity to protect property rights and a lack of will to tackle corruption in many aspects of economic activity. Public administration is inefficient and widely perceived as corrupt. The rule of law is undermined by weak basic security.

Background Back to the top

Honduras is one of Central America’s poorest countries; two-thirds of its people live below the poverty line, and unemployment is about 28 percent. The economy has diversified beyond traditional exports of coffee and bananas to include shrimp, melons, tourism, and maquila textiles, but more than one-third of the labor force works in agriculture. The government hopes that the Central America–Dominican Republic–United States Free Trade Agreement will expand trade and investment. President Jose Manuel “Mel” Zelaya Rosales, elected in 2005, is working to increase government transparency but seems focused more on eliminating economic inequality than on promoting growth. The government has met targeted macroeconomic objectives and is shedding debt under World Bank and International Monetary Fund initiatives. In addition to poverty, ongoing problems include drug trafficking, violent crime, and the proliferation of youth gangs.

Business Freedom 64.4 Back to the top

The overall freedom to conduct a business remains limited by Honduras's regulatory environment. Starting a business takes about the half the world average of 38 days. However, the entry cost of launching a business is high, and closing a business is relatively costly.

Trade Freedom 78.0 Back to the top

Honduras's weighted average tariff rate was 6 percent in 2005. Some differential import taxes, price bands for some products, import restrictions, limitations on market access in the services sector, non-transparent government procurement procedures, restrictive standards and labeling requirements, customs corruption, and subsidies add to the cost of trade. Ten points were deducted from Honduras's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 85.1 Back to the top

Honduras has moderate tax rates. Both the top income tax rate and the top corporate tax rate are 25 percent. Other taxes include a value-added tax (VAT) and a capital gains tax. In the most recent year, overall tax revenue as a percentage of GDP was 15.6 percent.

Government Size 79.7 Back to the top

Total government expenditures, including consumption and transfer payments, are low. In the most recent year, government spending equaled 26.0 percent of GDP. Privatization of state-owned enterprises has been stagnant since 2000. The government holds monopolies in many sectors including electricity, railways, and telecommunications.

Monetary Freedom73.5 Back to the top

Inflation is relatively high, averaging 6.8 percent between 2005 and 2007. The government regulates the prices of petroleum products, steel, pharmaceuticals, and services from state-owned utilities and can impose price controls on other goods and services as desired. Ten points were deducted from Honduras's monetary freedom score to adjust for measures that distort domestic prices.

Investment Freedom50.0 Back to the top

Foreign investment is generally accorded the same rights as domestic investment. Government authorization must be obtained to invest in tourism, hotels, and banking services. For all investments, at least 90 percent of a company’s labor force must be Honduran, and at least 85 percent of the payroll must be paid to Hondurans. Corruption, inadequate infrastructure, and the lack of judicial security hurt the investment environment. Residents and non-residents may hold foreign exchange accounts. Payments and transfers are not restricted, and few capital transactions require approval. There is no foreign ownership of land within 40 kilometers of international borders and shorelines, although Honduran law now permits foreign individuals to purchase properties in designated “tourism zones.”

Financial Freedom60.0 Back to the top

Honduras’s financial system has undergone consolidation through mergers and closures since the 1998–2001 banking crisis. Total assets in the financial system in 2007 equaled about 115 percent of GDP. Eighteen private commercial banks and two state-owned banks exercise significant influence in the banking sector. Domestic credit provided by banks is about 40 percent of GDP. Honduras has few legal and regulatory barriers to entry in the banking sector, but most foreign banks’ participation has been at a regional level rather than a national level. Three foreign-bank representative offices operate in Honduras, and they have a small client base. In recent years, the government has passed four banking reform laws aimed at strengthening the nation’s financial system. Capital markets are not fully developed, and the stock exchange (the Central American Stock Exchange) remains small with fewer than 10 private companies registered.

Property Rights30.0 Back to the top

Protection of property is weak. The lack of judicial security, a deteriorating security environment, and endemic corruption make it difficult to resolve business disputes. Expropriation of property is possible, and compensation, when awarded, is in 20-year government bonds. Foreigners seeking to buy real estate should be especially cautious in light of confusing laws and problems with land titles.

Freedom From Corruption25.0 Back to the top

Corruption is perceived as pervasive. Honduras ranks 131st out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Decades of cronyism, nepotism, secrecy, and prevarication have removed the stigma that once attached to corruption, making its eradication all the more difficult.

Labor Freedom40.9 Back to the top

Honduras's burdensome labor regulations impede employment and productivity growth. The non-salary cost of employing a worker can be low, but dismissing a redundant employee is costly. Regulations on the number of work hours are not flexible.