The External Debt Problem in Central America: Honduras, Nicaragua, and the HIPC Initiative

Abstract

This paper reviews the foreign debt burden in Central America with special emphasis on Honduras and Nicaragua, which have a large debt overhang. Several indicators suggest that this foreign debt seriously impedes economic growth in both nations. Honduras and Nicaragua, the poorest countries of Central America, have lagged behind the rest of the region in growth, resulting in an increase in regional income inequality during the 1990s. Analysis suggests that Honduras and Nicaragua require alleviation of their foreign debt as a prerequisite to sustained growth. This paper also evaluates the prospects of these countries to qualify for the new initiative aimed at reducing the debt burden of the highly indebted poor countries (the so-called HIPC Initiative). It concludes that Honduras and Nicaragua have favorable prospects of qualifying for the HIPC Initiative. In general, both countries meet the eligibility criteria. Honduras and Nicaragua face a higher foreign debt burden than three countries that have already qualified for HIPC treatment. The main obstacle, however, is demonstrating successful macroeconomic performance under the supervision of the IMF. The paper ends with a discussion of the strategy that these countries should follow in order to achieve maximum debt relief.