Honduras is one of the poorest and least developed countries in Latin America. The economy has been based mostly on agriculture, and over a third of the labor force in 2001 were still involved in this sector. However, agriculture's contribution to the overall GDP fell from 27% in 1998 to 18% in 2000 mainly due to the damage done to export crops by Hurricane Mitch in October 1998. About 16% of the land is arable, located mostly along the coastal plains. Coffee and bananas account for 65% of total Honduran export revenues. The vast majority of banana holdings are controlled by two US companies, United Brands and Standard Fruit, and most other profitable agricultural enterprises are owned by a small number of private citizens. With its economy enormously dependent on banana production, the country is vulnerable to weather and world market price variations. Honduras also has extensive forest, marine and mineral resources, although widespread slash-and-burn agricultural methods continue to destroy forests. Hondurans, however, are becoming more concerned about protecting their environmental patrimony, in part because of the benefits of ecotourism.
In 1995, the Honduran economy rebounded from the severe recession experienced in 1994. Real GDP growth in 1995 was3.6%. It was led by a solid expansion in agricultural production spurred by soaring world coffee prices, excellent basic grains harvests, and a resurrected banana industry as well as a growing maquila (Free Trade Zone of assembly plants) sector that employed 65,000 people by year's end. Honduras also received abundant rainfall which replenished the nation's dams and enabled the country to generate adequate hydroelectric energy, thus avoiding the drought-related power cuts which adversely affected economic performance in 1994. In 1996, Honduran GDP grew about 3.5%. However, inflation for 1996 reached 24.9%, well above the government's target of 16%. End of period inflation declined to 12.8% in 1997.
The economy, however, has still not recovered from the devastation left by Hurricane Mitch in late 1998, a Category Five Hurricane, rated the worst in 200 years, with winds reaching 200-mph and dumping unprecedented amounts of rain in their wake. The dead were officially counted at almost 6,000, but the total number buried in the mud slides will likely never be known. Hurricane Mitch destroyed 20% to 80% of the 1998 coffee and banana crops, and caused an estimated $3 billion in damages, equal to half of the annual GDP. End of period inflation rose to 15.9%. In 1999 the Paris Club creditor countries extended a three-year moratorian on debt repayments by Honduras and wrote-off about two-thirds of the its $1.7 billion external debt contingent on the implementation of austerity, liberalization and privatization program under the IMF's Poverty Reduction and Growth Facility (PRGF). In February 1999, a man-made disaster, a fire at the El Cajón hydroelectric plant, shut down 60% of the country's elecricity until May. In all, GDP in 1999 fell 1.9% as the fall in production and export revenues was off-set by increases in construction under the National Reconstruction and Transformation Plan presented by the government in May. Inflation was held to 10.9%, but the country's trade deficit, which had amounted to 10.7% of GDP in 1997, more than doubled as a proportion of GDP, to 23.8% in 1999.
In 2000, GDP growth rose to 5% as the reconstruction program continued, although the trade deficit remained high—21.1% of GDP. Inflation dipped slightly to 10.1% and Honduras qualified for debt forgiveness and restructuring under the Highly Indebted Poor Countries (HIPC) initiative which included adhering to a program of civil service reform that meant large lay-offs in the public sector. Honduras joined Guatemala and El Slavador in a free trade agreement with Mexico, but ended up placing trade sanctions on Nicaragua over border and fishing rights disputes. In 2001, though reconstruction continued, Honduras was hit by a serious drought that helped reduce GDP growth to 3.5%. The trade defict increased slightly as a percent of the GDP to 23% as exports were further depressed by a declining external demand. Inflation fell to 10%. In 2002, GDP grew about 1.4% and inflation fell to 7.7%, although the IMF withheld further disbursement of debt relief under the HIPC because the targets under the PRGF program had not been sufficiently met. The trade deficit remained extraordinately high, amounting to about 25% of GDP.