Law on Fiscal Responsibility

PURPOSE.- The purpose of this Law is to establish guidelines for improved management of public finances, ensuring consistency over time of budgetary policy and guaranteeing fiscal consolidation, debt sustainability and poverty reduction with responsibility, prudence and fiscal transparency. FISCAL RESPONSIBILITY: These are the policies and commitments of discipline and fiscal adjustment that aim to prevent discretionary execution of expenditure and indebtedness to achieve macroeconomic stability, security of the Financial System, an increase in private investment and consequently to improve the social conditions of the poorest in a responsible manner.

SCOPE OF APPLICATION.- This Law shall be applied to the Non-Financial Public Sector (NFPS). CHAPTER II FISCAL RESPONSIBILITY RULES

MULTI-YEAR FISCAL PERFORMANCE RULES.- The General Budget of Revenue and Expenditure of the Republic, Budgetary Provisions and all other budget annexes, budgetary modifications and budget execution of the Public Sector, shall be subject to the following rules: 1) MACROFISCAL RULES FOR THE NON-FINANCIAL PUBLIC SECTOR (NFPS).

• a)

  For purposes of this Law, an annual ceiling is established for the deficit of the global balance of the Non-Financial Public Sector (NFPS), equal to one percent (1.0%) of the Gross Domestic Product (GDP), which shall be applied gradually as follows: - Shall not be greater than one point six percent (1.6%) in the year 2016; - Shall not be greater than one point five percent (1.5%) in the year 2017; - Shall not be greater than one point two percent (1.2%) in the year 2018; and, - Shall not be greater than one percent (1%) for the year 2019 onwards. For the determination of compliance with this rule, the Gross Domestic Product (GDP) published in the Medium-Term Macro Fiscal Framework shall be used;

• b)

  The annual increase in nominal current expenditure of the Central Administration cannot be greater than the average annual growth of the real Gross Domestic Product (GDP) of the last ten (10) years plus the projection of average inflation for the following year. For the determination of compliance with this rule, the inflation projection contained in the Medium-Term Macro Fiscal Framework shall be used; and,

• c)

  The new floating debt at the close of the fiscal year, as of the approval of this Law, shall not in any case exceed zero point five percent (0.5%) of the Gross Domestic Product (GDP) in nominal terms. 2) RULES ON TAX EXEMPTIONS In order to maintain the financial balance of the General Budget of Revenue and Expenditure of the Republic, all draft laws that seek a grant or expansion of tax incentives or benefits resulting in tax cuts, in which the Opinion Committee of the National Congress must request from the State Secretary in the Office of Finance (SEFIN) the Technical Opinion that contains the estimate of the budgetary and financial impact, for the time it remains effective and remit it to it within a maximum period of thirty (30) business days.

EXCEPTION RULES.- This Law shall have the following exception rules:

• 1)

  By national emergency declared, by natural catastrophe that could seriously affect the national economy (defined as damage equal to or greater than the equivalent of one percent (1.0%) of annual Gross Domestic Product (GDP) and upon prior request of the Executive Branch, the National Congress shall suspend, for a maximum period of two (2) years, the application of any of the rules stated in Article 3 of this Law; for such purpose, the Executive Branch shall establish in its exception request the following: a) The numerical limits of fiscal deficit and maximum current expenditure to be applied in the said period in relation to those established in the macrofiscal rules stated in numeral 1) of paragraph a) and b) of Article 3 of this Law. These limits shall be authorized by the National Congress of the Republic in the law that for such purpose must be issued; and, b) The actions conducive to compliance with the macrofiscal rule stated in numeral 1) of paragraph a) of Article 3 of this Law.

• 2)

  In case the economy is going through an economic recession, defined as the fall in real Gross Domestic Product (GDP) for two (2) consecutive quarters and upon prior joint report of the Central Bank of Honduras (BCH) and the State Secretary in the Office of Finance (SEFIN), compliance with the provisions of the macrofiscal rule stated in Article 3 numeral 1) paragraph a) shall not be mandatory for the corresponding year, provided that in no case shall the deficit exceed two point five percent (2.5%) of the Gross Domestic Product (GDP). This exception may remain in effect for a maximum period of two (2) consecutive years, while there is conclusive evidence that real Gross Domestic Product (GDP) remains below the level prior to the real Gross Domestic Product (GDP) that motivated the exception; and,

• 3)

  In the cases established in the exception rules contained in this Article 4 numeral 1) paragraphs a) and b) preceding, the fiscal deficit of the following years shall be reduced annually by at least zero point five percent (0.5%) of the Gross Domestic Product (GDP) until reaching the limit established in the macrofiscal rule stated in Article 3 numeral 1) paragraph a) of this Law. CHAPTER III FISCAL TRANSPARENCY

MEDIUM-TERM MACRO FISCAL FRAMEWORK (MMFF).- The Medium-Term Macro Fiscal Framework is a dynamic management tool that guides strategic decision-making in fiscal policy. This shall include multi-year fiscal projections of revenue, expenditure and financing, which express indicative global ceilings of such variables; this tool shall be kept updated annually, with a fiscal projection of four (4) years and shall comprise, at a minimum:

• 1)

  The statement of principles of fiscal policy, subscribed by the State Secretary in the Office of Finance (SEFIN), in which the guidelines of economic policy and the objectives of medium-term fiscal policy shall be presented, including policy measures and estimates of results of the Central Administration, Local Governments, other General Government entities, Public Enterprises and the Non-Financial Public Sector. Estimates of financing of the Non-Financial Public Sector (NFPS) and its components during the period of validity of the Framework shall also be presented;

• 2)

  The goals of fiscal policy to be achieved within the following four (4) years, which shall comply with the provisions of Articles 2, 3, 5, 7 and 11 of this Law; and, 3) The provisions for the next four (4) consecutive or subsequent years, corresponding to:

  • a)

    The principal macroeconomic variables, among which the following must be included: nominal Gross Domestic Product (GDP), real growth of Gross Domestic Product (GDP), average and end-of-period inflation, exports and imports of goods, provided by the Central Bank of Honduras (BCH);

  • b)

    The projections of revenue and fiscal expenditure of the Non-Financial Public Sector (NFPS). The expenditure report shall include an economic classification of expenditure;

  • c)

    The medium-term public investment plan, with its respective amounts and financing sources;

  • d)

    A quantification of tax expenditures for the four (4) years under analysis and its projection of income from expiration;

  • e)

    The level of public indebtedness derived from the budget in the medium-term period considered, including any guarantee of entities of the Non-Financial Public Sector (NFPS) and a projection of the payment profile of short and long-term debt;

  • f)

    The indicators that evaluate the sustainability of public debt in the medium and long term;

  • g)

    Evaluation of compliance with the goals of the previous year; and,

  • h)

    Annex of Fiscal Risks: evaluation of contingent liabilities and other risks for the year and their respective mitigation plans.

There is created the Inter-institutional Committee composed of the State Secretary in the Office of Finance (SEFIN), State Secretary in the Office of General Government Coordination (SCGG) and the Central Bank of Honduras (BCH), for the elaboration and implementation of the Medium-Term Macro Fiscal Framework.

APPROVAL AND PUBLICATION OF THE MEDIUM-TERM MACRO FISCAL FRAMEWORK.- The State Secretary in the Office of Finance (SEFIN), shall remit to the Central Bank of Honduras (BCH), no later than April 15 of each year, the draft Medium-Term Macro Fiscal Framework, so that it may issue, within the following ten (10) calendar days, technical opinion on such Framework and its compatibility with the provisions of balance of payments and net international reserves and with its monetary policy. For such purpose, the Central Bank of Honduras (BCH) shall remit the indicators of the close of the previous year no later than February 15 of each year to the State Secretary in the Office of Finance (SEFIN).

The Medium-Term Macro Fiscal Framework shall be approved by the President of the Republic in Council of Ministers, the last business day of April of each year and shall be published in its entirety, together with the Report of the Central Bank of Honduras (BCH) referred to in the preceding paragraph, within the following two (2) business days in the electronic media available to it and shall be remitted for its corresponding publication in the Official Gazette "La Gaceta".

The President of the Republic in Council of Ministers may, upon request of the State Secretary in the Office of Finance (SEFIN) and with the prior technical opinion of the Central Bank of Honduras (BCH), modify the Medium-Term Macro Fiscal Framework, in which case a supplementary document must be issued justifying the modifications to the Medium-Term Macro Fiscal Framework approved in the month of April. In this review, the Executive Branch cannot increase the limits on the deficit or non-financial expenditures referred to in Article 3 of this Law, except in the cases provided for in Article 4 of the said regulation. The modifications to the Medium-Term Macro Fiscal Framework shall be approved and published following the procedure established in the preceding Article.

The Executive Branch shall remit on the date ordered by the Constitution of the Republic no later than September 15 of each year to the National Congress, the Medium-Term Macro Fiscal Framework, together with the Draft Law of the Budget of Revenue and Expenditure of the Republic, which shall be consistent with said Framework.

MEDIUM-TERM MACRO FISCAL FRAMEWORK.- The State Secretary in the Office of Finance (SEFIN), shall publish each year the Medium-Term Macro Fiscal Framework. This shall include the macroeconomic projections, comprising all the assumptions on which they are based, covering four (4) years, the year for which the budget is being prepared and the following three (3) years.

CORRECTIVE MEASURES.- Once the General Budget of Revenue and Expenditure of the Republic is approved, the State Secretary in the Office of Finance (SEFIN), shall carry out the quarterly breakdown of revenue and expenditure corresponding to the total of public entities within the scope of the said Law.

DECLARATION ON COMPLIANCE WITH FISCAL RESPONSIBILITY.- Before June 30 of each year, the State Secretary in the Office of Finance (SEFIN), shall remit to the National Congress of the Republic and shall publish a Declaration on Compliance with Fiscal Responsibility of the previous fiscal year, in which shall evaluate the revenue, expenditure, fiscal result and its financing and other macroeconomic goals established in the Medium-Term Macro Fiscal Framework of the corresponding year. In case there are significant deviations between what was approved in the Medium-Term Macro Fiscal Framework and the results of the fiscal year, the differences and the corrective measures adopted must be justified.

Within sixty (60) calendar days following the end of each semester of the year, the State Secretary in the Office of Finance (SEFIN) shall publish a report on the degree of progress in relation to the goals provided for in the Medium-Term Macro Fiscal Framework, with emphasis on compliance with such goals and the rules established in Article 3 of this Law. In case that the comparison between the goals of the Medium-Term Macro Fiscal Framework and the semi-annual execution shows a deviation between what was programmed in the fiscal goals and what was executed, the report shall contain the corresponding explanations and the corrective measures to be adopted, with the prior approval of the Council of Ministers upon proposal of the Inter-institutional Committee created in Article 6 of this Law.

REGISTRATION IN THE REGISTRY OF EXEMPTED ENTITIES.- To enjoy the exemptions, exonerations and customs privileges, all legal entities must register annually in the Registry of Exempted Entities in the State Secretary in the Office of Finance (SEFIN). Once the Legal Entities are registered, the General Directorate of Control of Customs Privileges (DGCFA) shall keep the records and update them annually. The State Secretary in the Office of Finance (SEFIN) is authorized, in case of recurrence of non-registration for two (2) consecutive or alternate years in the said Registry, to proceed immediately to notify the institutions that administer the special regimes and the tax administration for the cancellation of the beneficiary's status. The institutions that administer the regimes shall be directly responsible for carrying out such cancellations, in which case, if after the expiration of fifteen (15) business days for the same, cancellation and notification to the beneficiary and to the State Secretary in the Office of Finance (SEFIN) shall not have been made, the public servant culpable of the omission shall be directly responsible, and shall be sanctioned in accordance with the current legal framework.

REGISTRATION DEADLINE FOR THE EXONERATED REGISTER.- Legal entities must register in the Register of Exonerated Persons administered by the State Secretariat in the Office of Finance (SEFIN), no later than ninety (90) days from the publication of the Regulations of this Law in the Official Gazette "La Gaceta". The failure to submit the registration application within the aforementioned period shall be considered as the first non-compliance indicated in the previous Article.

NON-SIMULTANEITY OF TAX BENEFITS.- In accordance with the provisions of Decree No. 113-2011 dated June 24, Two Thousand Eleven, containing the Law on Efficiency in Public Revenue and Expenditure, any legal entity cannot enjoy more than one tax benefit protected under a Special Law containing provisions of a tax nature. Legal entities that were enjoying more than one tax benefit prior to the effective date of this Law must choose the tax benefit they wish to enjoy from said date, proceeding immediately to register in the corresponding exemption register. The State Secretariat in the Office of Finance (SEFIN), once the aforementioned registration has been completed, must proceed to notify the institutions that house, administer, and verify the operations of the beneficiaries and the tax authority.

TAX EXEMPTIONS AND EXONERATIONS.- The State Secretariat in the Office of Finance (SEFIN), as of fiscal year 2017, must annually begin with the publication of exemptions and exonerations on its web portal, corresponding to the previous fiscal year. Said publication must contain, at a minimum, the following information:

• 1)

  Special Regime and/or Economic Sector;

• 2)

  Authorizing Law;

• 3)

  Tax Exonerated (type and amount);

• 4)

  Number of Beneficiaries;

• 5)

  Jobs Created (direct and indirect);

• 6)

  Projects;

• 7)

  Amount of Capital Investment; and, 8) Exports (in cases where applicable).

SYSTEMATIZATION.- The State Secretariat in the Office of Finance (SEFIN), head of the Single Window, created by Executive Decree PCM-052-2013 dated November 5, 2013, is instructed to implement a system based on Information Technologies so that through these, it executes the online systematization of procedures for the authorization of exemptions, exonerations, and customs franchises. Said platform must be linked with the Tax Authority for shared use and exchange of information in real time; likewise, the mandatory incorporation must include the State Secretariats in the Offices of: Economic Development, Agriculture and Livestock, Energy, Natural Resources, Environment and Mines, and Social Development and Inclusion, the Honduran Tourism Institute, the Free Tourism Zone of the Bay Islands, the Property Institute, National Company of Electric Energy, and any other State entity that is linked to or related to the corresponding authorization.

SWORN DECLARATION OF FISCAL SACRIFICE.- The Tax Authority is instructed to enable, within the peremptory period of ten (10) business days, the Declaration of Fiscal Sacrifice contained in Article 34 of Decree No. 113-2011 dated June 24, Two Thousand Eleven and published on July 8, Two Thousand Eleven of the Law on Efficiency in Public Revenue and Expenditure. The beneficiaries described in Article 17 of this Law have the formal obligation to submit said declaration by May 30 of each year starting in 2017.

INTERPRETATION CRITERIA.- Every legal provision, present and future, relating to the organization, functioning, administration, and execution of resources or other matters referred to any entity of the Non-Financial Public Sector (SPNF) must conform to this Law, understanding that everything approved beyond what is regulated herein shall be understood to be subordinate to it.

PROHIBITIONS.- The following are expressly prohibited: 1) The creation of expenses that are not included in the General Budget or are not subject to the general rules of budget execution; and, 2) The approval of any legal or administrative norm that interferes with the correct execution of the Medium-Term Macro Fiscal Framework and, in particular, with the fiscal rules indicated in Article 3 of this Law. Credits cannot be negotiated with institutions, markets, or formal financial institutions that place as collateral patrimonial guarantees, alienations, or conditions, among other rights and fiscal decisions, such as national reserves and natural resources.

TRANSPARENCY IN PUBLIC FINANCE INFORMATION.- The State Secretariat in the Office of Finance (SEFIN) must publish quarterly, through electronic means, information on revenues, expenses, and financing of the Central Administration, General Government, and Non-Financial Public Sector (SPNF), forty-five (45) days after the end of each month. The Central Bank of Honduras (BCH) must provide the State Secretariat in the Office of Finance (SEFIN) with the information required for compliance with this Article no later than twenty (20) days after the end of each month. Institutions of the Non-Financial Public Sector (SPNF) have the obligation to attend calls for public hearings for the fulfillment of the performance of this Law when called upon by the Budget Commission or any body within the National Congress. CHAPTER IV TRANSITORY AND FINAL PROVISIONS

For the purposes of incorporating the information of the Municipalities in the fiscal balance of the Non-Financial Public Sector (SPNF), this must be done gradually until completing one hundred percent (100%) in the year 2019 as follows: For Municipalities Category A and B in the year 2018 and for Municipalities Categories C and D in the year 2019 using the system defined by the State Secretariat in the Office of Finance (SEFIN) for the management of public finances of the municipalities.

The State Secretariat in the Office of Finance (SEFIN), through the Fiscal Contingencies Unit (UCF), must be in charge of identifying, assessing, and evaluating fiscal risks in the period of three (3) years, after which it must publish a report on said risks including the mitigation plans for the same.

All those trusts financed with public resources created until the enactment of this Law and new ones must be managed within the General Budget of Revenue and Expenditure of the Republic without the purpose of said trusts being affected.

The State Secretariat in the Office of Finance (SEFIN) must be responsible for monitoring compliance with this Law.

The State Secretariat in the Office of Finance (SEFIN) must issue the regulatory provisions necessary for the application of this Law, within a period not to exceed ninety (90) calendar days, which must contain the definitions to be used for the application of this Law.

This Decree shall enter into effect as of the day of its publication in the Official Gazette "La Gaceta". Given in the City of Tegucigalpa, municipality of the Central District, in the Hall of Sessions of the National Congress, on the seventh day of the month of April in two thousand sixteen. ANTONIO CÉSAR RIVERA CALLEJAS PRESIDENT JOSÉ TOMÁS ZAMBRANO MOLINA SECRETARY SARA ISMELA MEDINA GALO SECRETARY To the Executive Branch For Execution: Execute. Tegucigalpa, M.D.C., April 28, 2016. JUAN ORLANDO HERNÁNDEZ ALVARADO PRESIDENT OF THE REPUBLIC THE STATE SECRETARY IN THE OFFICE OF FINANCE Executive Branch EXECUTIVE DECREE NUMBER PCM-020-2016 THE PRESIDENT OF THE REPUBLIC IN COUNCIL OF STATE SECRETARIES, WHEREAS: In accordance with Article 245 numeral 2 of the Constitution of the Republic, it corresponds to the President of the Republic to direct the general policy of the State and represent it. WHEREAS: It is an attribution of the President of the Republic, as established in Article 245 of the Constitution of the Republic, to administer public finances, dictate extraordinary measures in economic and financial matters when required by the national interest, direct the economic and financial policy of the State, create and maintain public services, and take the necessary measures for their proper functioning. WHEREAS: In accordance with Article 11 of the General Law of Public Administration, the President of the Republic is responsible for the supreme direction and coordination of the centralized and decentralized public administration, being able, in the exercise of his functions, to act through the Council of Ministers. WHEREAS: The Law for the Establishment of a Vision for the Country and the adoption of a Plan of the Nation for Honduras recognizes and expressly establishes the need to strengthen institutions of the Public Sector, making investments in Technology, the creation of Information Systems, and the training of qualified Human Resources. WHEREAS: The National University of Agriculture (UNA) is a Higher Education institution of [page omitted]