Lost in the 2024 election shuffle, Honduras is walking an economic tightrope. Faced with an unprecedented currency crisis, the country’s response may shape the economic future of Central America for better or worse, with real consequences for the United States that cannot be overlooked.
The Honduran currency, the lempira, is weakening dramatically despite the government’s efforts to maintain its value artificially. This Sisyphean task has come at a considerable cost in recent months, with the Honduran government burning through more than $2 billion in foreign currency reserves as a way of buoying the lempira against the U.S. dollar.
While the IMF’s involvement is well-intentioned and designed to stabilize government finances, the inflationary risk associated with Washington, D.C.’s involvement is all too real. If hundreds of millions of dollars suddenly flood the Honduran economy, working people in the country should expect extreme inflationary pressure. As the late economist Milton Friedman once observed, “Inflation is one form of taxation that can be imposed without legislation.”
Case in point: The United States. During the COVID-19 pandemic, the Federal Reserve printed trillions of dollars to stabilize the situation, and Americans are still dealing with sky-high inflation today. In Honduras' neighbor, Guatemala, inflation reached almost 10 percent in 2022.
There is no free lunch, and Honduras’ policymakers must understand the unintended consequences of accepting IMF financial assistance. The urgency of their fiscal situation is underscored by a looming debt repayment schedule. With numerous bonds maturing, debt service is projected to exceed $4 billion annually between 2022 and 2026—a staggering 23 percent of the country’s annual government budget. This financial pressure cooker forces policymakers to make difficult choices between maintaining currency stability and meeting debt obligations.
In the months ahead, Honduras’ ability to balance competing priorities will be crucial. The government’s artificial propping up of the lempira may provide short-term stability, but at the cost of depleting reserves and potentially triggering longer-term economic pitfalls.
If the economic crisis worsens, U.S. onlookers should brace for spillover effects. After all, nearly 30 percent of Hondurans are in need of humanitarian aid, and growing numbers are forced to move and seek refuge outside the country’s borders. Honduras is a transit country for people traveling to the U.S., with thousands of migrants entering Honduras’ borders every day and hundreds of thousands per year. A worsening economy could very well lead to a massive uptick of Hondurans themselves seeking refuge elsewhere, most notably the U.S.
The population of Honduras may be under 10 million, but the small Central American nation has an outsized impact on regional economic prospects and the region’s very own relationship with the United States. The decisions made in the coming months won’t just determine the fate of Hondurans for years to come, but they will also affect Honduras’ neighbors that are deeply interconnected in a volatile global economy.
Will Honduras stick the landing, or is an economic catastrophe on the horizon? Only time will tell. But, for policymakers, investors, and economists around the world, it will be essential viewing.
Olav A. Dirkmaat, PhD is a professor of economics at Universidad Francisco Marroquin (UFM) and Daniel Fernandez, PhD is Director of UFM Market Trends.
