HONDURAS

The Republic of Honduras is a unitary country with a presidential government system. The president of the Republic is elected directly for four years. The judiciary is formed by the Supreme Court of Justice, the courts of appeal and the courts. Legislative power is vested in the National Congress (unicameral) with 128 deputies elected by universal suffrage.

The country has a subnational level of government composed of 298 municipalities. The 1982 Constitution sets the boundaries and defines relations between the executive, legislative and judicial branches of government, including the municipal governments as part of the executive branch. The Constitution recognises municipalities as autonomous institutions governed by municipal councils (corporaciones), headed by a mayor and a number of councillors (regidores) according to the population size, who are also elected every four years. The last local elections were held in November 2021, coinciding with the general elections.

Effective decentralisation started in the 1990s as part of the State Reform and Modernisation Programme with the aim of ensuring political and administrative modernisation, as well as administrative and political decentralisation. The Municipalities Act, passed in 1990 (Decree No. 134-90), continues to be the municipal reference framework, although it has been revised several times (most recently by Decree No. 89-2015) and still needs to be made operational. According to this Act, municipalities have the capacity to make their own management decisions, raise their own funds and decide on their own budget and local development plans (Art. 12 and 13), although they cannot create taxes.

The decentralisation framework was complemented by the Pact on Decentralisation and Local Development (2005), overseen by the Human Rights, Justice, Governance and Decentralisation Secretary (SDHJGD, or Secretaría de Derechos Humanos, Justicia, Gobernación y Descentralización), in charge of implementing national decentralisation policies. In 2012, the National Policy for Decentralisation and Local Development was approved to promote fiscal and political decentralisation by ensuring sustainable transfers from the central government to municipalities. This policy was followed by the Law on Decentralisation (adopted in 2016, published in the Gazette in October 2021) to give municipalities greater autonomy in the management of local public services and budget execution. The law does not define a timeline for its implementation, which will be a concerted and gradual process under the new government and will require impact analyses and the monitoring of the transfer of the corresponding competences and financial powers. In practice, local governments in Honduras still lack the capacity and resources to take on these tasks and manage them effectively.

The Ministry of Governance, Justice and Decentralisation (SGJD, or Secretaría de Gobernación, Justicia y Descentralización) governs the interior of the Republic, pursuing good governance, access to justice and decentralisation, and contributing to local development and citizen participation. The Association of Municipalities of Honduras (AMHON, or Asociación de Municipios de Honduras), a civil association of municipalities formed in 1962, is responsible for the surveillance, respect and development of autonomy, municipal democracy and strengthening of local government. It seeks to encourage decentralisation and modernisation of public management as well as to promote draft bills to Congress, for the benefit of the common interests of municipalities.

TERRITORIAL ORGANISATION
MUNICIPAL LEVEL	INTERMEDIATE LEVEL	REGIONAL LEVEL	TOTAL NUMBER OF SNGs (2020)
298 municipalities (municipalidades)
Average municipal size: 33 237 inhabitants
298			298

OVERALL DESCRIPTION: The territory is divided into 18 departments, each with a governor appointed by the president of the Republic; departmental governments have no assigned functions or fiscal resources of their own. Their activities form part of the central government budget. Municipalities are the only decentralised level of government, while the central government is represented at the regional level by the departments.

MUNICIPAL LEVEL: The 298 municipalities include the Central District, composed of two cities, Tegucigalpa and Comayagüela, (Decree No. 53 of Article 179 of the Constitution) which constitute the capital of the Republic. The number of municipal councillors in each municipality varies between four and ten, depending on its population. The municipal council is the highest authority of the municipality as well as its deliberative body, and is presided over by the mayor, who is also the legal representative. The councillors making up the municipal council are elected by direct universal suffrage. The municipal councils are assisted by municipal advisors and councillors, who participate in different tasks within the municipality.

267 municipalities (90%) have a population of less than 50 000 inhabitants, while the 14 largest municipalities were home to 45% of the national population in 2020. In addition, the Municipalities Act of 1990 provides for the subdivision of municipalities for administrative purposes into cities, villages and hamlets, and the subdivision of cities into districts and neighbourhoods (Art. 17).

In 2013, following an initiative by the president, a law on ZEDEs (Special Development and Employment Zones) was put into effect. ZEDEs are extensions outside national, departmental or municipal jurisdiction, subject to a "special regime" of fiscal, judicial and security policy, with the aim of attracting investors. In open council meetings, many municipalities opposed or declared their territories free of ZEDEs, so it has not been possible to consolidate the zones in question in any part of the country. In April 2022, parliament repealed the ZEDEs.

STATE TERRITORIAL ADMINISTRATION: The departments are managed in a deconcentrated manner and administered by a governor who is appointed by the executive and assisted by a general council. The governor represents the executive branch at departmental level and is responsible for ensuring compliance of municipal policies with national ones. The Land Management Law (Decree no. 180-2003) assigns the departments a specific role in land development, coordination with local players, evaluation and monitoring. It also allows the possibility of creating departmental and democratic governments, based on popular consultation, with specific competencies and responsibilities, complementary to those of the national and municipal levels. To date, no such consultation has taken place.

HORIZONTAL COOPERATION: Inter-municipal cooperation (mancomunidad) is covered by Chapter II (Art. 16 b) of the Municipalities Act as a way for two or more municipalities, whether adjacent or not and which form part of a common urban area, to have the possibility to work together. This cooperation or association is defined as a local territorial entity, auxiliary and subordinate to the member municipalities, subject to public law and exclusively managing and executing those programmes, projects and services of priority interest, which enable its members to jointly address problems that cannot be tackled individually. Municipalities with a positive vote of two-thirds of the municipal council members may form associations with each other or with other national or foreign entities to better fulfil their duties and attributions. The associations are dissolved in the same way as they are created, by agreement between the parties involved. The Association of Municipalities of Honduras (AHMON) identifies a total of 46 inter-municipal associations across the country as of June 2022.

There are many community groups organised at municipal level that provide services in rural areas, such as water boards and parents' associations dealing with administrative or educational issues.

The Decentralisation Act (2021) has not yet been regulated and requires analyses of legal and institutional frameworks, economic issues, technical and fiscal assistance, among others. Although changes and transfers of powers to municipalities are envisaged, they have not yet been implemented. The Municipalities Act (1990) states that municipalities must ensure "the wellbeing of their inhabitants, promote their integral development and the preservation of the environment" (Art. 14).

As of 2020, the Ministry of Governance, Justice and Development (SGJD) divides municipalities into four categories according to their capacity to fulfil their assigned responsibilities: A (developed), B (developing), C (growing) and D (slow growth). This categorisation is calculated using the two-dimensional municipal development index, comprising 2 main indicators: the municipal index that includes territorial aspects of coverage such as access to water, energy, communications and the human development index; and the municipality index that includes financial and budgetary elements, income per inhabitant, saving efforts and investment achievements. In 2020, according to the municipal index, 43 municipalities are ‘developed’ (14.4%), 40 ‘developing’ (13.4%) and the rest (72.1%) are ‘growing’ (173 in category C) or in ‘slow growth’ (42 in category D). Compared to the 2014 SGJD assessment, in which 111 municipalities were in category C and 125 in category D, there has been a significant shift of municipalities from category D to C in 2020. However, the number of municipalities in categories A and B remained relatively stable between 2014 and 2020.

The Municipalities Act also establishes that local governments must fulfil their responsibilities for the provision of services directly or through agreements with national or autonomous institutions, or through contracts with public or private entities. Additionally, local authorities must promote community participation in local affairs.

Main responsibility sectors and sub-sectors
SECTORS AND SUB-SECTORS	Municipal level
1. General public services (administration)	Internal administration
2. Public order and safety	Regulation of urban and interurban traffic; fire-fighting services
3. Economic affairs / transports	Development and maintenance of urban and local roads, pavements and beaches, urban transportation.Development, management and maintenance of local electric distribution systems (in cooperation with the national corporation).Development and regulation of commercial and industrial activity. Promotion of tourism.
4. Environment protection	Waste and sewage management and street cleaning. Protection of the environment, ecology and reforestation.
5. Housing and community amenities	Municipal development plans and coordination with national development plans.Urban development, planning and regulations, land use. Drinking water supply, street lighting.
6. Health	Public health and wellbeing of the population. Control of public markets and slaughterhouses.
7. Culture & Recreation	Control and regulation of public entertainment, including restaurants, bars, nightclubs, sale of alcohol.Culture and leisure, education and sports. Protection of heritage and local traditions.
8. Education	Development of tourist, cultural, leisure and sports activities.
9. Social Welfare	Development of policies to support children, young people, the elderly and those with disabilities.

Scope of fiscal data: Municipalities

SNA 2008

Availability of fiscal data: Medium

Quality/reliability of fiscal data: Medium

GENERAL INTRODUCTION: The Constitution, the Municipalities Act and the Law on Decentralisation, amongst other legislation, establish the subnational fiscal framework and main financial mechanisms for local governments. Article 91 of the Municipalities Act (Decree No. 143-2009) indicates that from 2014 onwards, the State will annually transfer, through the Office of Finance of the State Secretariat (SEFIN), 11% of all current revenues of the national budget, monthly and in advance, directly to municipalities' accounts. However, for 2020, the Ministry of Finance reported total transfers of USD 206.6 million, representing 42% of the allocation established in the law, which should be USD 492.6 million.

Fiscal decentralisation shows slow progress: the indicators confirm that the relative weight of municipalities' own resources in relation to GDP increased by 1.5% on average from 2002 to 2018 before accelerating in the 2 years after that. In 2002, municipalities' own revenues represented 1.12% of nominal GDP, a rate that reached 1.56% in 2018 and then 2.9% in 2020.

Since 2014, Honduras has been implementing the Integrated Municipal Administration System (SAMI), based on the budget classifiers of the IMF's Public Finance Statistics Manual 2014 version (MEF).

Subnational government expenditure by economic classification
2020	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total expenditure	141	2.6%	7.6%	100%
Inc. current expenditure	50	0.9%	4.0%	35.7%
Compensation of employees	45	0.8%	4.6%	32.1%
Intermediate consumption	2	0.04%	2.5%	1.5%
Social expenditure	-	-	-	-
Subsidies and current transfers	3	0.1%	2.2%	2.0%
Financial charges	-	-	-	-
Others	0.3	0.01%	-	0.2%
Incl. capital expenditure	91	1.7%	15.2%	64.3%
Capital transfers	30	0.6%	-	21.0%
Direct investment (or GFCF)	61	1.1%	-	43.2%

EXPENDITURE: Local governments’ share in public expenditure and GDP has decreased over the last decade (from 13.6% of total public expenditure and 3.7% of GDP in 2005 to 7.6% and 2.6% in 2020, respectively). Current expenditure represents approximately 35.7% of the local governments’ budget while almost two-thirds is capital expenditure (64.3%).

Most municipalities (categories C and D) depend on central government transfers to meet all their obligations. The fact that the transfers are used for the current expenditure of the municipalities and not to finance capital expenditures weakens the fulfilment of public service objectives.

DIRECT INVESTMENT: In 2015, the Commission for the Promotion of Public-Private Alliances (COALIANZA, or Comisión para la Promoción de la Alianza Público-Privada) was established as an alternative to complement the financial resources allocated to municipalities for project implementation. Within these alliances, local investments were mainly allocated to hydraulic infrastructures (drinking water and irrigation), markets and terminals. COALIANZA was abolished and liquidated by the current government (Executive Decree No. PCM-064-2019) for various reasons, including inadequate management. The Higher Council for Public-Private Alliances or "Consejo Superior APP" was created in turn (Art. 7). This Council focused on structuring airport concession projects, its major achievement being the construction and operation of Palmerola Airport, the international airport of Honduras. The Higher Council operated until December 2021, when, like other programmes, it was cancelled after the change of government.

The law determines that about 69% of state transfers to municipalities must be earmarked for capital investments (although in practice, many municipalities allocate these transfers to operating expenditure). Most of the capital revenues of municipalities (62.3%) are transfers from the central government. In general, investments are concentrated in large urban areas.

In 2020, two-thirds of subnational capital expenditure was spent on direct investment and the remaining third to capital transfers.

The municipal pact for a better life created by AHMON and the presidency in 2014 aimed to enable municipalities to present investment projects in a consensual manner for approval by the National Congress. In practice, the projects are managed by central government and therefore have no financial impact on the municipalities. The " voucher for a better life", for example, works in the form of centrally administered conditional transfers to the poorest people throughout the country. The pact was repealed in 2022 and the programmes will be managed by a new institution called “Solidarity Network” (Red Solidaria).

ⓘ No detailed data available for this country

Due to the reporting structure of municipalities, there is a lack of accurate data on expenditure by economic function. The central government is responsible for the management and financing of the main social services, such as health and education. The Municipalities Act defines minimum percentages of central government grants that municipalities must respect, including allocations to programmes for children and young people (1%), support for women and the fight against gender-based violence (2%) and the development of social infrastructure projects (13%). Municipalities may use up to 15% of the grants for administrative expenses, except for municipalities whose own revenues are below HNL 50 000 (or USD PPP 45 830), which may devote up to 30% of their budget to cover these expenses.

Subnational government revenue by category
2020	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total revenue	156	2.9%	10.2%	100.0%
Tax revenue	70	1.3%	4.7%	44.7%
Grants and subsidies	62	1.1%	-	39.6%
Tariffs and fees	0.2	0.0%	-	0.1%
Income from assets	0.1	0.0%	-	0.1%
Other revenues	24	0.5%	-	15.5%

OVERALL DESCRIPTION: Following a gradual increase starting at 7% in 2010, since 2014, the State has annually transferred 11% of the tax revenue of the general budget of the Republic to the municipal accounts. The SGJD is the entity of the legislative branch responsible for coordination and oversight, as well as authorisation of transfers to municipalities.

In 2020, municipalities reported USD PPP 156 revenue per capita, equivalent to 2.9% of GDP. Within local revenue, the 2 largest items are tax revenue (44.7%) and donations and grants (39.6%). Other revenue makes up 15.5% of total resources and, finally, user charges and revenues from other assets each account for 0.1% of total revenues.

Within the revenues collected by municipalities in 2020, 42.1% refers to current revenues including income from the sale of goods and services (from tax revenues at 82.5% and non-tax at 17.5%). The remaining 57.9% of municipal revenues are referenced as capital revenues, which include loans obtained by municipalities, inheritances, bequests and government transfers. The latter account for 62.3% of capital revenues.

TAX REVENUE: The Municipalities Act establishes that municipalities cannot create or modify their taxes, although they can annually approve and decide on the rates and tariffs in the Local Taxation Plan (Plan de Arbitrios). Of the total revenue collected by Honduran municipalities in 2020, 44.7% corresponds to tax revenue.

Municipal taxes are made up of 5 taxes and various fees and charges for services and rights. In 2020, these were distributed as follows: 43% from fees and tariffs; 14% from immovable property taxes; 8% from neighbourhood taxes (these last 2 together make up what in other countries is called the property tax); 30% from taxes on industry, commerce, and services; 1% from taxes on the extraction of natural resources; and 4% from the telecommunications tax.

The property tax is payable in August of each year at a flat rate of HNL 3.50 per thousand for urban property and up to HNL 2.50 per thousand for rural property. In case of late payment, a surcharge of 2% per month is levied on the tax due. The personal or neighbourhood tax is levied on the annual income received by natural persons within a municipality, whether or not they have domicile or residence there; the tax is computed by applying the rate set in the Municipalities Act, amended Article 77. The tax period begins on 1 June and ends on 31 May of the following year.

GRANTS AND SUBSIDIES: The allocation of central government grants is based on criteria specified by the Municipalities Act, according to which 50% of the transfers are to be distributed equally among municipalities, 20% according to population and 30% according to the percentage of the population living below the poverty line (Art. 91). Although article 91 was revised in 2009 to increase the levelling effect of the transfer (focusing on the proportion of poverty among the population), this transfer still generates horizontal imbalances by providing a fixed amount to each municipality regardless of its wealth and size. This current system benefits small municipalities, which receive ten times more resources per inhabitant than more populous ones.

In 2020, donations and grants received by municipalities represented 39.6% of their total income. On average, each municipality received an amount of USD 693 000 in transfers, with the municipality of Puerto Cortes (Cortes) receiving the most resources with USD 11 790 000 and the municipality of Manto (Olacho) receiving the least resources with USD 250 000.

OTHER REVENUE: Non-tax revenue represents 15% of municipal revenues, and 18% of current revenues (tax revenue plus non-tax revenue). Local taxes relate to the provision of direct and indirect municipal services, rental of municipal assets or property, construction, penalties, fines and improvement taxes, which are contributions paid to municipalities by potential beneficiaries of municipal works until the municipality has partially or fully recovered its investment.

Capital revenues are those that increase the assets of the municipality, such as those from the contracting of loans, the sale of assets, the proceeds of the contribution for improvements, those generated from the placement of bonds, transfers, subsidies, inheritances, legacies, donations, credits and in general any other related income.

Due to the difficulty of covering local expenditure with what is transferred by the central government, municipalities use an account called treasury balance resources (including deficit or surplus), which results from the implementation of the previous year's budget. These other revenues, which represent 15.5% of subnational revenues, were 2.7 times higher in 2020 compared to 2019 and have been increasing steadily since 2002, with an average increase of 2.2 times the previous year's amount.

Subnational government fiscal rules and debt
2020	Dollars PPP / inh.	% GDP	% general government debt	% SNG debt	% SNG financial debt
Total outstanding debt	35	0.7%	3.3%	100.0%	-
Financial debt	35	0.7%	3.3%	100.0%	100.0%
Currency and deposits	27	-	-	77.3%	77.3%
Bonds / debt securities	-	-	-	-	-
Loans	8	-	-	22.7%	22.7%
Insurance pensions	-	-	-	-	-
Other accounts payable	-	-	-	-	-

FISCAL RULES: The mayor is responsible for formulating and preparing the programme budget every year before submitting the draft budget to the municipal council for approval. The approved budget must be submitted to the Ministry of the Interior and Justice. Local governments must prepare a balanced budget covering both current and capital expenditures.

DEBT: The Municipalities Act allows municipalities to enter into loans and other financial transactions with any national institution (Art. 87). Municipalities may issue bonds to finance works and services with the authorisation of the Ministry of Finance and Public Credit and with prior approval of the Board of Directors of the Central Bank of Honduras. When loans are granted by foreign entities, the procedures established in Law 41 on public credit must be followed. A special provision in the Public Credit Act (Decree No. 111-90) limits municipalities prior to taking out a loan. Borrowings and agreements entered into by municipalities and that require the endorsement of the State are subject to the approval of the National Congress. If the municipality contracts loans or issues bonds to finance works whose investment is not recoverable, it may not allocate more than 20% of its annual revenue to amortise the payment of these debts (Art. 191, Municipalities Act.)

According to the SGJD, the performance of loans reported by the 298 municipalities during the period 2015-2020, represented, on average, 12% of total municipal revenue, confirming a downward trend in the financing of municipal management. In 2015, municipal debt represented 13% within the structure of municipal revenues, while this increased to 22% by 2019 and then decreased by 6% by 2020. In 2020, debt servicing at the municipal level is equivalent to 0.7% of GDP and 3.3% of the public debt of the Honduran public administration. Of the loans granted to the municipal sector by the financial system in 2020, 80.06% is concentrated in the municipalities of the Central District (52.09%) and San Pedro Sula (27.09%). The aggregate municipal debt of 292 municipalities represents only 8.19% of total municipal loans. Within this municipal debt, 77.3% corresponds to currency and deposits, and the remaining 22.7% to loans.

TERRITORIAL MANAGEMENT OF THE CRISIS: According to the UN Humanitarian Response Plan for the COVID-19 pandemic of May 2020, Honduras was already experiencing the largest humanitarian emergency crisis in its history before the pandemic. The crisis revealed the low response capacity of the National Health System and especially of the Integrated Health Networks, characterised by an insufficient number of health workers, a deficient and inadequate distribution of these in primary health care, a low percentage of medicines and supplies in health facilities, and the low availability of tools and equipment for timely diagnosis and treatment.

The country's health system is divided into three territorial levels: first, rural health centres (CESAR), health centres with a doctor and dentist (CESAMO), mother and child clinics (CMI) and peripheral emergency clinics (CLIPER); second, departmental and regional hospitals; third, national hospitals. The entire health system is managed by central government and the municipalities provide some support within the framework of municipal management, although their role is not defined by law. The health system comprises a public and a private sector. While the private sector serves 10% of the population according to the Honduras Medical Review in 2020, the public sector is composed of the Ministry of Health (SESAL) serving 60% of the population and the Honduran Social Security Institute (IHSS), which is in charge of workers' and employers' contributions and insures 12% of the population. It is estimated that 18% of Hondurans have no access to health services.

Due to the precariousness of the centrally managed health system, municipalities take action on a case-by-case basis and according to their own resources. The centralised management model of the health sector has forced municipalities to use their own resources to provide support measures, e.g., to set up triage centres (primary care and basic medical assessment) from which patients with major illnesses are referred to hospitals in the health network.

SUBNATIONAL EMERGENCY MEASURES TO COPE WITH THE CRISIS: While no direct tax relief measures were applied, administrative measures and special tax regimes were used to generate additional resources to alleviate the fall in public revenues. Decree No. 79-2020, signed on 27 June 2020, authorised municipalities to grant a tax amnesty until 31 December 2020. Taxpayers were allowed to settle their municipal tax liabilities without interest, fines or surcharges for non-payment. It is assumed that the measure was not extended to 2021.

The Honduran authorities approved a spending package of about 0.6% of GDP for the purchase of medical supplies, temporary medical facilities, hiring of additional health personnel, as well as to provide food for 800 000 families. In addition, the Economic Rescue Act was approved, which deferred the payment of taxes and social benefits to the second half of 2020 in support of SMEs; a 10% income tax rebate for companies that maintain pre-crisis employment levels; and unemployment benefits for legally recognised workers of about 0.3% of GDP.

IMPACTS OF THE CRISIS ON SUBNATIONAL GOVERNMENT FINANCE: According to the changes in intergovernmental transfers in Honduras between 2019 and 2020, municipalities obtained an increase of less than 5%. The increase or decrease in local spending varied depending on each municipality's own management.

In 2020, the municipal pact for a better life was still in force, establishing a system of conditional transfers without consideration of fiscal effort so that municipal governments had the financial resources to attend to the humanitarian and health emergency. Of the 35% of the funds transferred by the State to the municipalities through the SGJD, between 5 and 20% should be allocated to COVID-19's emergency response.

ECONOMIC AND SOCIAL STIMULUS PLANS: The Honduran authorities approved a law to increase health infrastructure spending (1.6% of GDP), as well as a budget extension that will allow the government to acquire additional debt equivalent to 10% of GDP. All economic and social stimulus plans are taken at the central level, complemented by actions taken by municipalities according to their resources.