Haiti: Staff Report for the 2005 Article IV Consultation and Review of the Program Supported by Emergency Post–Conflict Assistance
Author:
International Monetary Fund
Search for other papers by International Monetary Fund in
Current site
Google Scholar Close
Publication Date:
17 Jun 2005
eISBN:
9781451817614
Language:
English
Keywords:
ISCR; CR; government; BRH; policy; BRH official; fund TA; central bank; debt service; real GDP; economic recovery; broad money
Download PDF (566.6 KB)

This paper focuses on the 2005 Article IV Consultation and Review of the Program Supported by Emergency Post-Conflict Assistance for Haiti. Economic and social conditions in Haiti deteriorated significantly during the early 2000, as the continued political stalemate undermined external financial support and private investment, and structural reforms came to a halt. This resulted in economic stagnation, high inflation, and widespread unemployment. The political turmoil in early 2004 and the devastating floods in May and September compounded these difficulties and led to a contraction of real GDP by 3¾ percent in 2003/04.

Abstract

This paper focuses on the 2005 Article IV Consultation and Review of the Program Supported by Emergency Post-Conflict Assistance for Haiti. Economic and social conditions in Haiti deteriorated significantly during the early 2000, as the continued political stalemate undermined external financial support and private investment, and structural reforms came to a halt. This resulted in economic stagnation, high inflation, and widespread unemployment. The political turmoil in early 2004 and the devastating floods in May and September compounded these difficulties and led to a contraction of real GDP by 3¾ percent in 2003/04.

I. Introduction

A. The Setting

1. Economic and political conditions in Haiti have been very difficult in recent years. The political deadlock following the disputed 2000 parliamentary elections undermined private sector confidence and dampened investment, and led to a sharp cutback in donor assistance. As a result, economic conditions in Haiti deteriorated significantly, with negative GDP growth, high inflation, and large fiscal and external deficits. The political polarization intensified, leading to street demonstrations and increasing violence that culminated in an armed conflict in early 2004, and President Aristide’ s resignation in February 2004 (Box 1).

2. A transition government was formed in early 2004 to lead Haiti to national elections, which are now scheduled for October-November 2005. A United Nations stabilization mission (MINUSTAH) has been deployed to help restore security and help prepare elections, but there have been recurrent episodes of escalation in violence.1 Over the past year, financial stability has been restored but economic conditions remain difficult and business confidence is low.

3. The economic consequences of the political turmoil in early 2004 and the devastating floods in May and September have been severe. The property damage and the interruption to economic activity resulting from the armed conflict are estimated to have totaled 5½ percent of GDP. The floods also caused the loss of thousands of lives, extensive damage to housing, and destroyed crops in Haiti’ s most productive agricultural areas.

4. Social conditions in Haiti are the most difficult in the Western Hemisphere. An estimated 76 percent of the population lives below the poverty line (on less than US$2 a day) and 55 percent in extreme poverty (on less than US$1 a day). Haiti’ s income distribution is highly skewed, with the poorest 20 percent of the population accounting for 1.5 percent of incomes and the wealthiest 20 percent for 68 percent. The United Nations ranks Haiti 153rd on its Human Development Index (out of 177 countries), and the country is unlikely to achieve the Millennium Development Goals by 2015.2

Haiti: Political Developments

1990 – Jean-Bertrand Aristide, a popular priest, is elected president.

1991 – President Aristide is overthrown in a military coup seven months after taking office. The United Nations approves sanctions.

1994 – Aristide is reinstalled in office with the help of a U.S.-led military intervention.

1995 – Aristide disbands the army. Aristide supporters win parliamentary elections. Since the constitution precludes the president from serving two consecutive terms, Aristide is succeeded by a close ally, René Préval.

1997–99 – Following a period of political deadlock, Préval dissolves parliament and rules by decree.

2000–01 – Aristide is reelected president, but the international community criticizes irregularities in parliamentary elections.

2002-03 – Dissatisfaction with the government grows amid deteriorating economic conditions and opposition becomes increasingly vocal.

January–February 2004 – Street demonstrations intensify and as a result of an armed rebellion, President Aristide resigns on February 29 and leaves the country.

March 2004 – As envisaged by the constitution, the chief of the Supreme Court, Boniface Alexandre, succeeds as president. A transition government, led by Gérard Latortue, is formed to lead the country to elections. A multinational interim force arrives.

June 2004 – U.N. stabilization force (MINUSTAH) arrives to replace the multinational interim force, and reaches full strength in December 2004.

October 2004 – Violence escalates on the anniversary of the coup that first overthrew Aristide in 1991.

January 2005 – The Electoral Council announces the schedule for national elections.

October 2005 – Municipal elections scheduled.

November 2005 – Parliamentary and presidential elections scheduled.

February 2006 – A newly-elected president and government to start their terms.

5. At the July 2004 conference, donors pledged US$1.1 billion of new financing for the period July 2004–September 2006.3 This assistance is intended to help strengthen political and economic governance, promote economic recovery and job creation, improve access to basic services, reestablish security, and promote national dialogue ahead of 2005 elections. Through end-March 2005, disbursements of budgetary assistance to Haiti are estimated at US$163.5 million. Project disbursements, however, have been slow reflecting weak government capacity to prepare and implement projects, security concerns, as well as procedural delays on the part of donors.

B. Policy Advice and Performance

6. The Fund has been actively engaged with Haiti in recent years and a track record of policy implementation is being established. The Fund’ s policy advice has focused on macroeconomic stabilization, improvement in fiscal transparency and accountability, and the need to clear external arrears and develop a medium-term strategy that could be supported by a PRGF arrangement. This approach—endorsed by the Executive Board at the conclusion of the 2002 Article IV consultation—guided two Staff-Monitored Programs (SMP) during 2003-04 and an EPCA-supported program approved on January 10, 2005 (Box 2).

C. Recent Economic Developments

7. The EPCA program is broadly on track, but the economic recovery has been weaker than expected (Text Table 1). According to the data provided by the authorities, all end-December and end-March targets were observed (Table 1). Many structural measures were implemented as envisaged, although key measures such as the census of public sector employment and domestic arrears have been delayed (Table 13). Financial stability has been maintained, but the weakness in exports and fiscal revenue, stagnant credit to the private sector, as well as slower-than-anticipated project disbursements by donors suggest that the recovery has fallen short.4

Text Table 1.

Haiti: Performance under the EPCA

article image

Excludes commercial banks’ foreign currency deposits with the BRH. Projected end-September 2005 stock reflects the authorities’ downward revision of the end-September 2004 stock.

Table 1.

Haiti: Indicative Targets, September 2004-March 2005 1/

article image
Sources: Ministry of Finance, Central Bank of Haiti, and Fund staff estimates.

Refer to technical memorandum for definitions of indicative targets.

Stock at end-September has been updated with revised information provided by authorities.

In December 2004, Haiti received additional cash budgetary support of US$12.7 million from Canada, which triggers the adjustor in section II.B of the TMU. Accordingly, the targets on BRH financing of the government and of the public sector and on BRH net domestic assets are adjusted downward by US$6.7 million, and the floor on the NIR is adjusted upward by the same amount.

Monetary data is estimated from daily and weekly reports provided by the BRH as of March 25, 2005. Government revenue and expenditure figures reflects actual data through February and estimations for March.

Not targets.

8. However, progress has been made in containing inflation, and the exchange rate has stabilized. A significant tightening of financial policies in 2003 helped reduce inflation and stabilized the exchange rate (Figure 1). Inflation picked up again in early 2004, following renewed central bank financing of the budget and widespread supply constraints, and the gourde depreciated by 7 percent against the U.S. dollar during September 2003–February 2004. After budget discipline was restored in April 2004 and monetary financing of budget deficits was eliminated, inflation began to decline again and the gourde rebounded to the mid-2003 level (Text Figure 1). However, prices have been highly volatile on a month-to-month basis, as a result of supply disruptions caused by the September 2004 floods, and the pass-through of world prices of petroleum. Recent price developments are consistent with the program’ s objective of bringing inflation down to 12 percent (12-month rate) by September 2005.

Haiti: Fund Engagement in Haiti

At the 2002 Article IV consultation discussions, Executive Directors urged the authorities to re-establish a basis for growth and improved living standards and stressed the importance of embarking on a medium-term economic program, possibly in the context of a SMP that could establish a track-record of policy implementation and lead to a PRGF-supported program. This approach guided two SMPs that preceded an EPCA-supported program approved in January 2005.

SMP (April 2003–March 2004). A one-year SMP aimed at consolidating stabilization gains achieved since early 2003 and clearance of external arrears. The macroeconomic framework of the SMP was broadly maintained until December 2003, when the program went off-track, due to large expenditure overruns. The SMP provided a framework for the reengagement of the IDB, and in June 2003 Haiti cleared its arrears, thereby enabling the resumption of disbursements and development assistance.

SMP (April–September 2004). The new SMP, agreed in June 2004, sought to restore financial stability, provide a macroeconomic framework for donor assistance, and establish a track record of policy implementation that could build a basis for a possible future request for the use of Fund resources. Performance under the SMP was satisfactory; all quantitative targets were observed by wide margins and good progress was made on structural measures.

EPCA (October 2004–September 2005). The authorities requested a purchase under the Fund’s EPCA policy to help address the impact of the conflict in early 2004. The EPCA-supported macroeconomic program was agreed in late 2004, and on January 10, 2005, the Executive Board approved the purchase of SDR10.23 million (12.5 percent of quota). The quantitative targets were observed (Table 1) and most of the structural measures agreed for end-December were implemented as envisaged (Table 13). The authorities indicated their intention to request an additional purchase under the EPCA. The macroeconomic program underpinning the ECPA facilitated the reengagement of the World Bank with Haiti. In early January, 2005, Haiti cleared its arrears to the World Bank; the Bank’s Executive Board approved a fast-disbursing adjustment operation and an emergency recovery and disaster management project.

Text Figure 1.
Text Figure 1.

Haiti: Exchange Rate 1/

(1990=100)

Citation: IMF Staff Country Reports 2005, 206; 10.5089/9781451817614.002.A001

Source: Central Bank of Haiti; and Fund staff estimates.1/ An increase indicates an appreciation.
Figure 1.
Figure 1.

Haiti- Inflation and Monetary Developments 1/

Citation: IMF Staff Country Reports 2005, 206; 10.5089/9781451817614.002.A001

Sources: BRH, IHSI, and Fund staff estimates1/ Data for March 2005 are estimated based on BRH weekly reports. Data available through March 25, 2005.

9. With the decline in inflation and exchange rate stability, the BRH has relaxed monetary conditions in several steps. During August–October 2004, interest rates were reduced to 7.6 percent from 13.6 percent, and the stock of excess reserves of the banking system increased sharply reaching 25 percent of required reserves by March 2005.5 As a result, commercial bank prime lending rates declined somewhat, while average gourde deposit rates are now below dollar deposits rates. Nevertheless, private sector credit growth has remained stagnant, reflecting low business confidence and weak domestic demand (Figure 1).

10. Current expenditure was cut to protect the fiscal targets during October 2004– March 2005. Tax receipts were below target by around 0.2 percent of GDP, as a result of the security situation and strikes by customs officials. Also, donor-financed capital outlays fell below the programmed levels by 0.2 percent of GDP. The authorities responded by delaying planned wage increases (by the equivalent of 0.3 percent of GDP), while increasing capital expenditures financed by domestic resources. As a result, the overall fiscal deficit (excluding grants) was in line with the program.

11. The authorities are finalizing a supplementary budget for April–September 2005. In the face of growing pressures to implement budgetary outlays and slower-than-expected disbursement of donor assistance, the authorities are planning to re-orient expenditure to help stimulate economic activity. Also, the overall level of spending will be increased by about 0.4 percent of GDP to cover the needed additional outlays on elections, demobilization, and support to the electricity sector. The overall fiscal deficit is expected to reach 6.6 percent of GDP (or 1.5 percent of GDP including grants)—above the target assumed in the EPCA program—and there remains a financing gap of 0.4 percent of GDP. Unless additional donor support is identified, the gap would need to be covered by central bank financing.

12. Net international reserves (NIR) have stabilized at about US$65 million. With continued strong inflows of private remittances, the BRH has been able to maintain NIR above the program floor, while meeting foreign exchange needs of the government (Figure 3). Nevertheless, reserve adequacy indicators suggest that gross reserves are still low by international standards (Text Figure 2).

Text Figure 2.
Text Figure 2.

Haiti: Gross Reserves

Citation: IMF Staff Country Reports 2005, 206; 10.5089/9781451817614.002.A001

Figure 2.
Figure 2.

Haiti. Fiscal Developments 1/

(In percent of GDP; fiscal year ending September 30)

Citation: IMF Staff Country Reports 2005, 206; 10.5089/9781451817614.002.A001

Sources: Ministry of Finance, BRH, and Fund staff estimates.1/ Six-monthly data are annualized.
Figure 3.
Figure 3.

Haiti. External Developments

Citation: IMF Staff Country Reports 2005, 206; 10.5089/9781451817614.002.A001

Sources: BRH and Fund staff estimates

13. Haiti has cleared arrears to the World Bank (US$52 million) and obtained deferral of debt-service obligations from three bilateral creditors. On January 4, 2005, Haiti used US$46 million of its own reserves and a US$6.4 million grant from Canada to clear its external payments arrears to the World Bank. Following the Board approval on January 6, the World Bank disbursed US$46 million, enabling the replenishment of Haiti’ s international reserves. In parallel, France, Italy, and Spain granted Haiti forbearance on the stock of arrears and informed that a formal comprehensive treatment of its debt-service obligations would take place after a PRGF-supported program is in place.

II. Near-Term Outlook and Risks

14. Significant downside risks to the near-term outlook derive from the political situation, and the lifting of quotas under the Agreement on Textiles and Clothing (ATC). On the political front, security concerns and lack of government’ s control over provinces may jeopardize prospects for fair and safe elections scheduled for late 2005. In addition, weak coordination of donor financing with the budget and likely delays in disbursement of donor assistance could further undermine private sector confidence and derail economic recovery. Finally, Haiti’ s textile assembly export sector faces increasing competition in U.S. markets now that ATC quotas have been abolished, and its survival is in question.6

15. Despite the increased risks to the near-term economic outlook, the staff agreed with the authorities to keep the 2004/05 macroeconomic framework unchanged. The staff cautioned, in particular, that the GDP growth objective of 2½ percent would be difficult to achieve, given signs in the first two quarters that the economic recovery had been delayed. The authorities argued, however, that growth in the second half of the year would pick up strongly in response to accelerated external disbursements and improved allocation of expenditures in the supplementary budget to key development sectors, and that this year’ s growth objectives could be achieved.7 Also, taking into account projected disbursements and the inflow of private remittances, the end-September NIR target of the BRH is expected to be met.

III. Policy Discussions

16. The authorities’ key objectives are to consolidate the macroeconomic stabilization and to jump-start the economy. Although the transition government is unable to commit to policies beyond 2005, it places a priority on ensuring that near-term economic policies provide a firm basis for medium-term growth, and on a reform agenda that will be formed after national elections in 2005. During the discussions, the staff stressed that sustained growth would require political stability, a substantial strengthening of social and economic infrastructure, as well as institutional capacity, supported by continued donor engagement and commitment to combating corruption (Box 3). Continued expansion of Haiti’ s national income will be essential to reduce poverty and help lessen dependency on foreign aid.

Haiti: GDP Growth, Medium-Term Projections, and Millennium Development Goals

GDP growth in Haiti has been on a declining trend during the past 20 years, but has fluctuated widely in response to political developments and external aid flows.

  • During the 1970s, real GDP growth averaged 4.6 percent, fueled by expansion in light manufacturing, the garment assembly industry, tourism, as well as public investment financed by foreign aid.

  • In the 1980s, growth turned negative, affected by a hurricane and drought, and a U.S. recession. The political instability after the fall of the Duvalier regime in 1986 led to further economic decline.

  • Following President Aristide’s election in 1991, growth recovered as macroeconomic conditions and relations with donors improved.

  • During 1992–94, real GDP declined by a cumulative 25 percent, reflecting the effects of the military coup, the international economic and political embargo, and the cutoff of foreign aid. Agriculture suffered from shortages of inputs, the assembly sector contracted, and tourism ceased.

  • After President Aristide’s return to Haiti in 1994, substantial economic assistance helped re-invigorate growth, and activity expanded in construction and manufacturing. However, growth weakened subsequently due to growing political instability, declining foreign aid, and poor agricultural performance.

  • During 2001–04, real GDP growth averaged -1.2 percent, as the political impasse undermined business confidence and non-humanitarian aid was suspended. Political tensions culminated in an armed conflict and change of government in February 2004, with damage estimated at 5½ percent of GDP.

Figure 1.
Figure 1.

Haiti: Actual and Trend GDP growth 1970-2003

Citation: IMF Staff Country Reports 2005, 206; 10.5089/9781451817614.002.A001

Sources: IFS and Fund staff estimates

Over the medium-term, real GDP growth is expected to exceed its recent trend on the assumption of increased foreign aid flows and political stability. Recent trend growth is estimated at 0.7 percent, reflecting the dampening effect of the recent drop in activity.1 With restored business confidence and the resumption of foreign assistance, GDP growth could revive more strongly to nearly 4 percent, a rate that is similar to that achieved during the 1970s. In the short term, large capital inflows are expected to boost growth mainly through construction. In the medium term, growth will be supported by public investment largely financed by foreign aid, private sector investment and productivity gains from structural reforms.

Haiti would need to double the average GDP growth rate currently projected at 4 percent per year to halve head-count poverty by 2015.2 Haiti is ranked 153 on the Human Development Index—76 percent of the population, and 88 percent of the rural population, lives below the poverty line (US$2 per day income per person).

Figure 2.
Figure 2.

Haiti: GDP growth and external aid, 1970-2003

Citation: IMF Staff Country Reports 2005, 206; 10.5089/9781451817614.002.A001

Sources: IFS and Fund staff estimates
1 Trend output growth was calculated using a Hodrick-Prescott filter. 1 Cutting headcount poverty in half between 2003 and 2015 would require annual growth of GDP per capita of 2.9 percent. See Human Development Report 2003, “Millennium Development Goals: A compact among nations to end human poverty.”

17. The authorities noted Haiti’s need for additional financing support from the Fund, including a second EPCA purchase. They stated that continued assistance from the Fund would also provide a macroeconomic framework that could extend beyond national elections when negotiations could begin with a newly-elected government on a program that could be supported by the PRGF. The staff noted that a positive track record of policy implementation under the EPCA program could provide a basis for a future request for Fund resources.

A. Fiscal Policy and Reforms

18. The authorities and staff agreed on the need for budget corrections to protect the fiscal objectives of the EPCA-supported program. The authorities were confident that targets for budgetary revenues in the second half of the fiscal year could be met by strengthening tax administration, including by intensifying customs inspections and reestablishing controls over imports from the Dominican Republic. The staff observed that the main risk to revenue projections was a deterioration in security conditions, which would affect both domestic incomes and tax administration. On the expenditure side, the staff stressed the importance of safeguarding key social expenditures, especially in light of their importance for political cohesion and stability. The authorities stated that in consultation with donors, a package of projects was being prepared focusing on infrastructure and the provision of basic social services, which will be incorporated in the supplementary budget and implemented before the end of this fiscal year. Additional donor financing is being sought to cover the remaining financing gap.

19. The mission raised questions regarding the large budgetary transfers in support of electricity. The authorities estimate that additional central government transfers to the Electricité d’ Haïti (EDH) totaling G400 million (0.3 percent of GDP) will be needed through end-September 2005 to ensure the supply of electricity in Port-au-Prince. The staff noted that the EDH’ s very difficult financial condition and lack of adequate internal expenditure control mechanisms represented a significant source of fiscal vulnerability and urged the authorities to establish an effective monitoring mechanism. The authorities agreed with the staff’ s proposal, reiterating their commitment to full accountability and transparency in public sector operations. They noted that such a mechanism will be set up by end-April, and that all new contracts for electricity production would be subject to open and competitive bidding procedures.

20. The staff stressed the need to bolster the budget execution process. Weaknesses in expenditure monitoring coupled with very conservative budget management had contributed to keeping spending well below the targets set under the last SMP and the EPCA program. The staff and authorities agreed that aid coordination and implementation of projects agreed under the Interim Coopeartion Framework needed to be accelerated as soon as possible to boost economic recovery, create employment, and expand provision of key social services.

21. The mission and the authorities agreed on the broad parameters that would govern the 2005/06 budget. The key macroeconomic assumptions for 2005/06 include real GDP growth of 3 percent, inflation of 10 percent, and an increase in NIR to US$114 million by end-September 2006. In order to increase key public services and, public investment, while eliminating BRH financing, domestic revenues and external financing would need to fully cover recurrent and capital expenditures. The overall deficit (excluding grants) of 7 percent of GDP would be fully covered by external concessional loans and grants.

22. Aid coordination needs to be strengthened to ensure effective use of the pledged external assistance. The authorities noted that they are seeking donor support in preparation of projects that were agreed under the ICF and are to be included in the public investment program. The total amount of external assistance for the 2005/06 central government budget is projected at US$328 million, mostly from Canada, the European Union, the IDB, the United States, and the World Bank (Table 11). However, the team noted that it projected a budget financing gap of about US$20 million (0.4 percent of GDP) and that external cash budget support would not be sufficient to even cover Haiti’ s debt service obligations, and urged the authorities to work with donors to secure additional financing.

23. The authorities are planning to prepare the 2005/06 budget soon enough to allow proper planning, coordination with donors, and consultation with civil society. Accordingly, they committed to conveying indicative spending ceilings to ministries, as well as to transmitting project proposals for the public investment program, consistent with the priorities of the ICF and in time for Cabinet discussion in July. This would enable the budget’ s submission for public consultation prior to its final approval in September.8

24. The authorities are committed to improving budget management and expenditure control. They emphasized that a broad strategy for reform of public financial management is needed, especially in view of governance weaknesses and increased donor funding. The authorities identified the following priority areas: (i) the budget formulation process, to enable identification of strategic spending priorities; (ii) the expenditure approval process, to limit discretionary recourse by ministries to current accounts; (iii) the preparation and execution of the public investment program, which is presently handicapped by inadequate institutional capacity; and (iv) budget monitoring, which is constrained by the absence of reliable, timely monthly fiscal data. The authorities welcomed the envisaged technical assistance from the Fund which they saw as instrumental in developing a fiscal reform agenda for the medium term.9

B. Monetary and Financial Sector Policies

25. The staff underscored the importance of reducing inflation to single digit levels. The team noted that exchange rate stability—boosted by inflows of private remittances—and the elimination of monetary financing of the budget deficit had played a key role in helping reduce inflation over the past year. At the same time, weak economic activity had also reduced pressures on domestic prices. However, interest rates on gourde deposits were now below those on dollar deposits and were highly negative in real terms, and the staff cautioned that, especially given the large excess reserves in the banking system, there was a risk that pressures on the exchange rate could emerge. Therefore, a tightening of the monetary policy stance was needed, both to avoid destabilizing the exchange rate and to support the program’ s inflation objectives.

26. The BRH officials responded that the monetary stimulus introduced last year was still needed to support economic recovery. Moreover, they observed that BRH losses would have been exacerbated if the banking system’ s excess reserves (estimated at 7.1 percent of gourde broad money) had been sterilized. Nevertheless, the officials underscored their commitment to containing inflation and agreed to a gradual absorption of the liquidity overhang in the coming year.

27. The authorities are seeking to strengthen their monetary policy framework. The BRH targets inflation with broad money as the operational target, while also taking into account the need to avoid exchange rate instability while maintaining a market-determined floating regime. The authorities recognized the need to upgrade their capacity to forecast liquidity, which would require better coordination between monetary and central government financial operations, and have requested technical assistance from the Fund. Also, markets for financial instruments need to be modernized to provide clear signals about market conditions. In the near term, the BRH will reinstate a conventional auction for a predetermined amount of BRH bonds, in line with the recommendations of the recent IMF technical assistance mission (Box 4).

Haiti: Recommendations on the Central Bank’s Operations

  • Reinstate a conventional auction for BRH bonds, with bids accepted for the pre-announced amount.

  • Establish a formal targeting framework, with a macroeconomic forecast to link the bond auction to the targets on monetary policy.

  • Convert outstanding BRH credit to the government into bonds that would provide the central bank with income sufficient to conduct monetary operations.

  • Gradually reduce reserve requirements to internationally comparable levels (10 percent or less).

  • Review the BRH’ s regulations and guidelines relating to foreign currency exposure limits and the management of foreign currency risks.

28. The authorities and staff agreed that the present floating exchange rate regime is appropriate in Haiti’s circumstances.10 The authorities noted that the appreciation of the gourde over the past year reflected its recovery from a year before, and expressed the view that it did not have a significant impact on Haiti’ s competitiveness, as wage costs remain very low and export performance does not appear to have been affected.11 They suggested that political instability, weak infrastructure, and poor security conditions were more important factors weighing on competitiveness.12 Also, since mid-2004 both nominal and real exchange rates have depreciated somewhat (Text Figure 1).

29. The authorities agreed on the need to strengthen the BRH by addressing its losses and increasing its independence. The legal, operational, and financial autonomy of the central bank needs to be bolstered by modernizing its legal basis and properly defining its role and relations with the government. The staff noted, however, that there was an even more urgent need to address the operational losses of the BRH and to develop a plan to strengthen its financial position to enable it to conduct monetary operations effectively.13 The authorities agreed to introduce in the 2005/06 budget a plan to recapitalize the BRH. This latter step is to be supported by IMF technical assistance.

30. The authorities were confident that financial system vulnerabilities were modest. Official data indicate that the financial system remains stable, an assessment also supported by banking supervisors and commercial banks’ auditors. In particular, although nonperforming loans increased as a share of total loans from 7 percent in September to 8.3 percent in December 2004, the average risk-weighted capital adequacy ratio was 15.1 percent. The BRH continues to monitor the financial position of commercial banks, and it is working on a new banking law that would, inter alia, strengthen the supervisory role of the central bank. Also, the BRH has recently extended its supervision to credit cooperatives.

C. Structural Reforms and Governance

31. The authorities stressed the importance they attach to enhancing public sector governance and transparency. The staff agreed that considerable progress has been achieved in implementing structural reforms in the first half of the fiscal year (Table 13). The expenditure approval process has been streamlined and the discretionary use of ministerial current accounts has been sharply reduced. Also, the Anti-Corruption Unit became operational by end-2004, pre-audits of the state-owned telephone and electricity companies have been initiated, and requests for offers for audits of three other key public sector enterprises have been published. In the financial sector, the IMF safeguards assessment and the external audit of the BRH accounts have been largely completed.

32. The staff welcomed the authorities’ commitment to implement the remaining structural measures under the program. The staff recommended completing the census of employment in order to reduce the number of “ghost workers” and release resources for priority areas in the 2005/06 budget, and also implementing the survey of domestic arrears. The authorities agreed, and indicated that the census of employment in education and the survey of domestic payment arrears were to begin in May. Also, they confirmed that the information on the execution of the budget and the list of beneficiaries of a government-supported program to compensate private businesses for damages suffered from the early 2004 conflict would be published in line with their earlier commitment. The authorities will also continue to limit discretionary spending through current ministerial accounts to below 10 percent of budgetary credits for nonwage current spending.

D. Medium-Term Outlook and Debt Sustainability

33. The staff’s medium-term GDP growth projection takes into account the trend output growth and increased foreign aid inflows (Box 3 and Table 6). The projection assumes a continued inflow of external assistance of about 10 percent of GDP annually, to support extensive public investment program. Accordingly, growth would average 4 percent, the external current account deficit (excluding external grants) would stabilize at 7 percent of GDP by 2009, and gross international reserves would increase to the equivalent of three months of imports.

Table 2.

Haiti: Selected Economic and Financial Indicators

Fiscal Year Ending September 30

article image
Sources: Ministry of Economy and Finance; Bank of the Republic of Haiti; and Fund staff estimates.

Based on the authorities’ revised nominal GDP for 2000, 2001, and 2002.

Excluding grants.

In relation to broad money (including foreign currency deposits) at the beginning of the period.

External current account balance excluding official capital grants.

Includes external public sector debt, outstanding Central Bank bonds, and credit from commercial banks to the NFPS.

Excludes commercial banks’ foreign currency deposits with the BRH.

Gross reserves excluding capital contributions to international organizations.

Table 3a:

Central Government Operations

(In millions of gourdes)

article image
Sources: Ministry of Finance and Economy; and Fund staff estimates

Includes statistical discrepancy.

To cover net operational losses of the central bank.

Includes expenditures reclassified from operations to transfers and subsidies in 2004/05.

Total external financing, including grants, was higher than programmed, primarily due to the disbursement of a US$12.7 million (G483 million) grant from Canada in late December.

Foreign-financed capital expenditures include the disbursement of a US$2.8 million grant from Canada for Haiti’s membership fee for the Caribbean Development Bank. Grants were higher than programmed due to the increase in the grant component of World Bank financing.

Table 3b.

Haiti: Central Government Operations

(In percent of GDP)

article image
Sources: Ministry of Finance and Economy; and Fund staff estimates

Includes statistical discrepancy.

To cover net operational losses of the central bank.

Includes expenditures reclassified from operations to transfers and subsidies in 2004/05.

Total external financing, including grants, was higher than programmed, primarily due to the disbursement of a US$12.7 million (G483 million) grant from Canada in late December.

Foreign-financed capital expenditures include the disbursement of a US$2.8 million grant from Canada for Haiti’s membership fee for the Caribbean Development Bank. Grants were higher than programmed due to the increase in the grant component of World Bank financing.

Program ratios differ slightly from those in Country Report No. 05/65 due to a minor revision in nominal GDP.

Table 4.

Haiti: Summary Accounts of the Banking System

Fiscal Year Ending September 30

article image
Sources: Bank of the Republic of Haiti; and Fund staff estimates.

Includes commercial banks’ foreign currency deposits. For program monitoring, they are excluded from net international reserves.

Excludes special accounts.

For all quarters, percentage change is calculated relative to the previous September.

Percentage change calculated on US dollar values.

Table 5.

Haiti: Balance of Payments

(In millions of U.S. dollars; unless otherwise indicated)

article image
Sources: Data provided by the central bank; and Fund staff estimates.

Based on remittances transferred through authorized “transfer houses” and central bank, estimates of such transfers channeled through other means.

Excludes commercial banks’ foreign currency deposits with the BRH.

Includes short-term capital and errors and omissions.

Includes commercial banks’ foreign currency deposits with the BRH.

Table 6.

Haiti: Medium-Term Scenario

article image
Sources: Haitian authorities; and Fund staff estimates.

Includes current revenue and transfers from the BRH.

Includes exceptional outlays.

Table 7:

Haiti Indicators of Fund Credit, 2004-2009

(Fiscal year ending September 30)

article image
Sources: IMF, Finance Department, and staff projections.

Includes the 12.5 percent of quota disbursement under the emergency post-conflict assistance.

Including SDR charges.

Before subsidization of GRA charges.

Table 8.

Haiti: Indicators of External Vulnerability

(Units as indicated)

article image
Sources: Central Bank of Haiti; and Fund staff estimates.

Goods and services.

Including grants.

Includes short-term capital, errors and omissions.

Table 9.

Haiti: Stock of Arrears and Projected Debt Service, 2000-05

(Fiscal year ending September 30, in millions of U.S. dollars)

article image
Sources: BRH; and staff projections

Excluding arrears reduction.

Table 10.

Haiti: External Financing Requirements and Sources, 2000–05

(In millions of U.S. dollars; unless otherwise indicated)

article image
Sources: Data provided by the central bank; and Fund staff estimates.
Table 11.

Haiti: External Assistance to the Government and Debt Service

(In millions of U.S. dollars)

article image
Sources: Data provided by donors, the central bank, and staff projections.

Includes only identified financing; excludes humanitarian assistance and election financing.

Table 12.

Haiti: Millennium Development Goals (Cont.)

article image
article image
Sources: World Bank; UN Statistics Division, and Fund staff estimates

Targets 12-15 and indicators 33-44 are excluded because they cannot be measured on a country specific basis. These are related to official development assistance, market access, and HIPC initiative.

Data for 2004 are the same as 2003 data.

Table 13.

Haiti: Status of Main Policy Actions Under the EPCA

article image
article image

34. To support increased provision of key social services and to underpin the strengthening of the public sector’s institutional capacity, government domestic revenues need to increase by 3 percentage points of GDP over the medium term. This would require reforms in the areas of tax policy and tax administration, and strengthened public sector governance and transparency. Strengthening essential public services would require selective wage increases to recruit and maintain quality staff in key security, education, and health sectors, and the wage bill as a share of GDP is projected to rise by 2009 to 5 percent of GDP, the levels observed in the mid-1990s. The authorities noted that improvements in tax administration, and its extension over the entire country, would likely bring large increases in government revenues. They agreed that the main risks to the medium-term outlook derive from potential delays in holding elections and achieving national reconciliation, which could undermine continued donor involvement and derail economic recovery.

35. The authorities believe that stronger growth is possible with renewed donor support, sound macroeconomic policies, and a stable business climate. They underscored the need to upgrade the country’ s infrastructure, noting that unreliable provision of electricity, inadequate road networks, and difficult security conditions were the main impediments to growth and investment. The staff agreed that higher GDP growth would be desirable—along the lines of the projections prepared for the 2002 Article IV consultation (Text Figure 3)—to boost incomes and employment and enable Haiti to converge toward the Millennium Development Goals. However, such performance would require a pace of structural reforms and of investment that in the staff’ s view could not be assumed under present conditions. Raising growth to high sustainable levels over the medium term would require achieving broad domestic consensus on the economic and social strategy and making substantial progress toward political stability and domestic security.

Text Figure 3.
Text Figure 3.

Haiti. Real GDP Growth

Citation: IMF Staff Country Reports 2005, 206; 10.5089/9781451817614.002.A001

36. The team cautioned that additional donor support of about US$50 million was needed to close the external financing gap projected for 2005/06. Total external financing is projected at US$454 million, of which US$328 million is for the 2005/06 budget and the rest corresponds to humanitarian assistance and funding of elections. The bulk of this external financing is expected in the form of grants, but the existing commitments in support of the elections appear to fall short of the projected cost. The staff encouraged the authorities to seek additional financial support to help meet Haiti’ s foreign exchange needs and the external reserves objectives.

37. The authorities shared the staff’s concerns about Haiti’s debt sustainability.14 Based on end-2004 data, the debt-export ratio (in net present value (NPV) terms) of 187 percent suggests that Haiti’ s debt may be unsustainable. The team noted that although on more favorable assumptions (higher export growth or concessionality of pledged assistance), the debt situation appeared less worrisome, the fiscal capacity to carry the present level of debt was weak, which illustrated the importance of ensuring that donor assistance was provided only on highly concessional terms and of establishing growth-oriented policies. The staffs of the IMF and World Bank will undertake a formal assessment of Haiti’ s HIPC eligibility, and expect to present its results in a joint paper to their respective Boards later this year.

38. The BRH stressed the importance of further accumulation of international reserves for strengthening Haiti’s external position. In this context, the BRH welcomed the staff’ s analysis and discussion of the applicability of alternative benchmarks for establishing medium-term reserve accumulation targets. The BRH recognized that according to commonly used benchmarks the present level of international reserves was too low. Officials stressed, however, that determining the appropriate level of reserves in Haiti would require consideration of qualitative factors such as the floating exchange regime, the high share of imports directly linked to private remittances and to the assembly export sector, and low debt-service obligations. Nevertheless, they noted that reserve coverage of about three months of imports could be a useful interim operational target that could provide sufficient protection against external vulnerabilities.

E. Other Issues

39. The authorities welcomed technical assistance from the Fund. In March 2005, a technical assistance mission from Fund’ s Monetary and Financial Systems Department identified the technical assistance priorities of the BRH and advised the authorities on the appropriate instruments to upgrade the central bank monetary operations framework. A parallel mission from the Finance Department completed an on-site safeguards assessment of the BRH. Two technical assistance missions from the Fiscal Affairs Department are envisaged to recommend measures on revenue administration and tax policy, and public expenditure management. This expenditure management technical assistance mission has reviewed steps to strengthen the budget formulation process and the use of a new budget nomenclature. A technical assistance mission from the Statistics Department will recommend measures to strengthen the quality and timeliness of monetary data reported to the Fund.

40. The staff underscored the urgency to improving the government’s capacity to produce quality and timely fiscal and monetary data. While the periodicity and coverage of economic statistics made available to the Fund are broadly adequate, problems exist with regard to their timeliness, which does not meet the standards stipulated in the Technical Memorandum of Understanding under the EPCA-supported program. The most severe problems exist with regard to data on Haiti’ s international reserves, which largely reflect the excessive decentralization of accounting and financial reporting at the BRH. The staff welcomed the authorities’ commitment to strengthen data reporting and reliability, especially for data required for the monitoring of performance under the program.

IV. Staff Appraisal

41. The political transition initiated last year and the renewed donor support have created conditions for restoring growth and dealing with Haiti’s acute social problems. Over the past year, the transition government has restored financial stability, and good progress was made on the structural front. The EPCA program is broadly on track, the gourde has stabilized, inflation is on the decline, net international reserves have increased, and many structural measures were implemented as envisaged despite a difficult political and security environment. The international community pledged large resources at the July 2004 conference in Washington, and the Fund approved financial assistance in support of the EPCA program.

42. The challenge ahead will be to raise growth over the medium term. As a first step, it would be important to fully implement the social and economic agenda agreed with donors, restore security, and establish conditions for fair and safe elections. Prerequisites for raising growth on a sustainable basis would include achieving broad domestic consensus on the economic and social strategy, prudent macroeconomic policies, and continued commitment to good governance. In that context, an important task of a new government to be formed in early 2006 would be to develop a medium-term development and poverty reduction strategy that could be supported by the international community.

43. In the near term, however, the weaker-than-expected economic recovery will require policy adjustments and additional donor support. The authorities are finalizing a supplementary budget for April–September 2005 that seeks to deal with revenue shortfalls and delays in project disbursements. Welcome steps have also been taken to strengthen tax administration to prevent further revenue shortfalls and protect priority outlays, including in areas where implementation of donor funded projects was slower than anticipated. Given the political and economic importance of sustaining electricity supply, the supplementary budget also provides additional resources needed to cover higher fuel costs and weaker hydro production. Additional outlays will also be needed to strengthen security and the government’ s control over provinces, which are essential for ensuring successful elections. The authorities have appropriately appealed to the international community to accelerate disbursement of pledged assistance, including for the additional financing needs of the budget, while the recourse to central bank financing should be minimized.

44. The transition government’s recognition of the importance of broad consultations with civil society and political parties on the 2005/06 budget is welcome. Early initiation of this process will help align donor support with government priorities and the needs of all stakeholders, and will be especially important in view of the political transition that is envisaged to occur in the first half of next year. The staff welcomes the authorities’ commitment to ensure that in the 2005/06 budget total government expenditure will be fully covered by domestic revenues and external donor financing, and there will not be any recourse to domestic financing.

45. Monetary conditions need to be tightened to consolidate progress in reducing inflation and protect the program’s external objectives. The liquidity in the banking system appears excessive and needs to be absorbed and interest rates raised to positive levels in real terms. The authorities are committed to re-establishing price-based auctions for BRH bonds and to introducing in the 2005/06 budget a plan to strengthen the financial position of the central bank. The staff encourages publication of the interim audit of the BRH and welcomes the completion of the IMF safeguards assessment mission.

46. The floating exchange rate regime has been appropriate in Haiti’s circumstances. The authorities’ interventions in the foreign exchange market have been implemented judiciously, without disturbing market conditions while allowing an increase in international reserves to more comfortable levels. The staff supports the BRH’ s objective of increasing its net international reserves over the medium term.

47. The authorities are encouraged to build on the progress that has been achieved on the structural front. It will be important to carry forward the momentum for reforms, and in particular to complete the census of employment in the public sector, the survey of domestic arrears of the government, and to publish the list of beneficiaries of a government-supported program to compensate private businesses for damages suffered from the early 2004 conflict. The staff also encourages the authorities to strengthen the budget execution process, and welcomes the authorities’ commitment to ensure that government transfers to the electricity sector are used as envisaged, and that all contracts on electricity production adhere to open and competitive bidding procedures.

48. The staff supports the authorities’ efforts to enhance aid coordination and mobilize additional donor financing. It will be important to ensure that additional financial support that may be required for the supplementary budget be provided and external budget financing pledged for this year be fully disbursed, which will play a key role in reinvigorating the economy and restoring private sector confidence. For 2005/06, resources need to be identified to ensure full financing of the budget and elections. New financing needs to be provided on highly concessional terms to minimize Haiti’ s external debt burden, which could become a source of vulnerability. The staff welcomes the regularization of arrears to the World Bank and the agreement by some bilateral donors to defer debt-service payments and the treatment of arrears until a PRGF-supported program is in place.

49. There is an urgent need to improve data reporting to the Fund for program monitoring and surveillance. Serious problems continue with the delivery of timely fiscal and monetary data consistent with the standards agreed for program monitoring. These problems can be remedied by implementing the recommendations of the IMF safeguards assessment mission and technical assistance from the Fund.

50. It is recommended that the next Article IV Consultation with Haiti be held on the standard 12-month cycle.

ANNEX I Haiti—Fund Relations

As of March 31, 2005

I. Membership status: Joined September 8, 1953; Article VIII.

II. General resources account

article image

III. SDR department:

article image

IV. Outstanding purchases and loans:

article image

V. Financial arrangements:

article image

VI. Projected obligations to the Fund: (SDR million; based on existing use of resources and present holdings of SDRs):

article image

VII. Exchange arrangements:

Managed floating with no predetermined path for the exchange rate. The change from a fixed to managed floating regime took place in January 1990. Haiti’s exchange system is free of restrictions on the making of payments and transfers for current international transactions. Since September 1991 all transactions have taken place at the free (interbank) market rate.

VIII. Article IV Consultation

The last Article IV consultation was concluded by the Executive Board on January 24, 2003. Haiti is on the standard 12-month cycle.

IX. Technical assistance: A long-term macroeconomic advisor worked in the president’ s office from May 1999 to February 2001.

Technical assistance missions since 1997:

article image
article image

X. Resident representative: Mr. Mounir Rached has been the Fund’s Resident Representative since October 2002

ANNEX II Haiti—Relations with the World Bank Group

(Prepared by World Bank Staff)

Following the change of government in March 2004, the World Bank stepped up its engagement in Haiti as part of a broader Government/multi-donors partnership to respond to Haiti’ s social, economic and institutional needs. In that context, a joint government-donors needs assessment carried out in May provided the basis for the Transitional Government’ s two year Interim Cooperation Framework (ICF). The ICF was presented at an international donors conference on July 19–20, 2004 at World Bank Headquarters, where donor countries and international organizations pledged US$1.08 billion in fresh resources to support the implementation of the ICF. The Bank pledged to support the ICF with up to US$150 million in IDA grants and credits complemented with US$3.5 million in small grants from the Post-Conflict Fund and US$6.4 million in small grants from the trust for Low Income Countries Under Stress (LICUS).

The Bank and the Haitian authorities have since prepared a Transitional Support Strategy (TSS) to program the Bank’ s support to Haiti for the period July 2004-June 2006. The TSS was reviewed by the Bank’ s Board on January 6, 2004. On the same day, the Board approved a fast-disbursing Economic Governance Reform Operation (EGRO) for US$61 million and an emergency recovery and disaster management project for US$12 million. The approval of the IDA assistance followed the clearance of Haiti’ s arrears to the World Bank on January 4, 2005. The Bank is also preparing a technical assistance project (US$2 million) to strengthen institutional capacity for the design and implementation of policies and help improve the institutional environment for increased donor financing in the future. During the second year of the implementation of the TSS, the Bank would provide up to an additional US$75 million in IDA assistance contingent on progress in the first year of the program. This additional assistance may help create economic and social opportunities in rural areas and small towns, including through community-driven development projects and a multi-sectoral investment program. In an effort to reduce Haiti’ s debt burden, the Bank made maximum use of the grant provision under IDA 13 to convert into grants 51 percent of its fiscal year 2004/05 financing to Haiti. Under IDA 14, there will be room to convert into grants a similar and possibly a larger share of the Bank’ s fiscal year 2005/06 financing to Haiti.

The Bank’ s policy dialogue, financial and technical assistance span several thematic areas including: civil society monitoring of governance policy performance, strategic communication for development, donor coordination, public enterprise audit and management, rural development, budgetary management and financial control, public sector procurement, anti-corruption, management of road maintenance fund, school feeding and public-private partnership in education, solid waste management, disaster management and early warning systems, rural safe water provision and management, and energy.

Since July 2004, the Bank’ s disbursements to Haiti have amounted to about US$50 million, of which nearly US$47 million in budget support on account of the EGRO.

The IFC’ s priorities in Haiti include strengthening domestic financial institutions and job creation. The IFC currently has two investments in Haiti: (i) a US$400,000 equity investment in Micro Credit National; and (ii) a US$20 million investment in Grupo M – a Dominican textile company with an important investment in Haiti to finance the start-up of an industrial park/free trade zone located just across the border in Ouanaminthe, Haiti.

The most recent World Bank Country Assistance Strategy for Haiti was reviewed by the Bank’ s Board in 1996.

ANNEX III: Haiti—Relations with the IDB

(Prepared by IDB Staff)

The IDB’ s portfolio of 10 projects under its ongoing transition strategy of re-engagement (2003–04), totaling US$400 million, is presently in full implementation, supporting Haiti’ s reconstruction agenda. Since reactivation of its lending in July 2003, the IDB has disbursed over US$80 million of this amount through end-2004, leaving an available balance of US$320 million. These interventions, combining investment and policy-based loans, are complemented with a strong program of nonreimbursable technical assistance and nonfinancial products to underpin program and policy preparation and implementation and increase country knowledge.

In July 2004, the IDB pledged US$263 million in additional financing to support implementation of the Interim Cooperation Framework (ICF). To operationalize this pledge in full, the IDB’ s Board of Executive Directors approved a new Transition Strategy (2005–06) on March 9, 2005, covering over 11 operations, totaling US$270 million, to continue financing Haiti’ s transition agenda as well as longer-term actions. This strategy strengthens efforts to stabilize the economy, deepen governance reforms, alleviate pressing social needs, lay the foundation for pro-poor growth, strengthen natural disaster prevention and environmental management, and lead to an elected government in 2006.

The IDB’ s growing involvement in Haiti thus supports longer-term economic governance reforms, particularly in the critical areas of fiscal management and tax reform and administration, and associated institutional development, in close coordination with the IMF and the World Bank. In parallel, the IDB provides financing for high impact investments to rehabilitate critical infrastructure, increase productivity, and increase provision of basic services to vulnerable groups and communities on a national level. As an overarching objective, IDB program execution builds on an implementation support and institution-building strategy based on a flexible approach. This approach includes special measures to strengthen local capacities to facilitate execution and speed up disbursements, and is also pursued through high-level special implementation and monitoring review missions.

The Bank supports all pillars of Haiti’s short and medium term reconstruction agenda: (a) political governance and national dialogue with technical assistance to create rule-based mechanisms for alternative dispute resolution, and for dealing with gender issues; (b) economic governance and institutional development through fiscal and financial sector reform loans, and capacity building for public administration reform; (c) economic recovery through rebuilding infrastructure (roads, ports, airports) and private sector development; further assistance to agriculture intensification with a rural economy development program; and loans to reduce the impact of natural disasters and for watershed management; and (d) access to basic services through a vocational training program to increase opportunities for low income youth and meet private sector skill demands; improve living standards and income generation in urban areas of the capital and main cities and towns of the interior, through an urban rehabilitation loan.

ANNEX IV Haiti—Statistical Issues

Real sector: The Haitian Institute of Statistics (HIS) is publishing a harmonized CPI on a monthly basis, as recommended and facilitated by Fund technical assistance. The institute has made progress in implementing recommendations made by several Fund technical assistance mission to improve the quality of real sector statistics, and it has published national accounts for the period 1986/87 to 2003/2004 based on the interim base year 1986/87. The institute also publishes data on economic activity of the real sector on a quarterly basis, including indices of industrial production, energy, construction, and domestic and external trade. The March 2000 technical assistance STA mission had recommended that the HIS establish a new base year for national accounts and a revised CPI. The HIS will soon publish a new CPI which has been rebased to a more recent period (August 2004) using the weights of the 2000 household survey. The HIS carries out household budgetary surveys on a periodic basis; in the past, these have been complemented by studies on issues such as housing, education and employment. A further study on transport is underway. The Institute is currently engaged in the preparatory work for the fourth population and habitat census. Further technical assistance may be needed to address the outstanding deficiencies that continue to hinder the quality of real sector statistics.

Government finance: Haiti reports monthly and annual GFS data on a regular basis for publication in IFS. However, no GFS data have been published in the GFS Yearbook for the past 15 years. This is a disappointing given that the 1995 multisector mission recommended the establishment of a system of compilation and reporting of GFS data to the Fund. Progress is slow due to the lack of human and financial resources. Data provided in 2001 via the Central Bank of Haiti were not published in the 2001 GFSY owing to insufficient detail and consistency problems. Further work is required to extend coverage and breakdowns, to improve the link between the nonfinancial and the financial transactions as well as the outstanding debt, and to compile a functional breakdown of expenditure. These improvements require additional human and financial resources. The reporting of budgetary expenditures, especially on the ministerial discretionary accounts should be improved to increase transparency. There is a need to improve the timeliness of publication of accounts of public enterprises, as well as of the accounts of the nonfinancial public sector.

Monetary accounts: Continuous work on monetary statistics has helped to improve the sectorization and classification of accounts in the analytical balance sheets of the Bank of the Republic of Haiti (BRH) and commercial banks. Efforts have been undertaken to strengthen reporting requirements for commercial banks so as to strengthen bank supervision, enforce reporting according to Basel Core Principles, and step up the fight against illicit transactions. This has at times affected the timeliness of compilation and reporting of money and banking statistics.

Balance of payments: Progress has been made towards improving the reliability of balance of payments data. The implementation of several technical assistance mission recommendations has contributed to an improvement in the balance of payment data. Notwithstanding the progress, there is scope for improvement, most notably in the methodology for compiling trade data, collecting trade and services data and making more systematic use of existing sources, (such as customs, port and airport agencies, airlines, and oil companies).

Haiti: Table of Common Indicators Required for Surveillance

As of April 29, 2005

article image

Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Daily (D); Weekly (W); Monthly (M); Quarterly (Q); Annually (A); Irregular (I); Not Available (NA).

ANNEX V Haiti—Debt Sustainability Analysis

This note presents a debt sustainability analysis (DSA) prepared using the framework for low-income countries approved in early 2004 (Debt Sustainability in Low-Income Countries—Proposals for an Operational Framework and Policy Implications) (www.imf.org). This DSA will be updated jointly with World Bank staff based on a new framework considered by the Boards of the Fund and the Bank in April 2005 (Operational Framework for Debt Sustainability Assessments in Low-Income Countries—Further Considerations) (www.imf.org). The macroeconomic scenario underlying this DSA is the baseline scenario described in Section III.D of this Staff Report. The analysis is based on estimated end-2004 debt data and takes into account the pledges of financial assistance at the July19-20, 2004 donors’ conference, updated in the context of the 2005 Article IV consultation discussions. A joint World Bank-IMF formal preliminary assessment of Haiti’ s HIPC eligibility is planned for later in 2005 and will be based on loan-by-loan reconciled data.

1. The results of the debt sustainability analysis presented in this paper suggest that Haiti’ s debt burden is high and could become a source of vulnerability. Under the baseline scenario, Haiti’ s debt-burden indicators will remain high over the medium term. In particular:

  • At end-2004, the NPV of external debt-to-exports ratio was well above levels considered to be sustainable.1 This result is robust to whether current year exports or the three-year average is used as a denominator. However, other key debt ratios—NPV of debt-to-GDP and debt service-to-exports—were at levels generally considered to be sustainable.

  • The NPV of external debt-to-export ratio is expected to only gradually decline during 2005–23. Although exports are projected to grow faster than the economy as a whole, the ratio of NPV of debt-to-exports remains above 150 percent for the next five years and above 100 percent until 2020. The other key ratios—NPV of debt-toGDP and debt service-to-exports—are projected to decline gradually to half their present levels over the next 20 years.

  • The debt sustainability analysis of the total public debt yields similar results.2 As domestic debt as a share of GDP is very small, and the NPV of total public debt-toGDP ratio declines closely in line with the NPV of the external debt-to-GDP ratio. The NPV of total public debt-to-revenue ratio declines from about 200 percent in 2004, and remains above 150 percent until 2011, largely reflecting low revenue mobilization in Haiti. The debt service-to-revenue ratio declines from about 14 percent in 2004 to below 5 percent in 2015, reflecting in part the targeted increase in the revenue mobilization.

2. Haiti’s external debt and debt-service indicators are very sensitive to changes in the economic environment. Indeed, plausible external shocks have a significant impact on the debt ratios (Box 1, and Figures 1 and 2). The results of the alternative scenarios used to assess Haiti’ s vulnerability to shocks are as follows:

Figure 1.
Figure 1.

Haiti: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2004-2023

(In percent)

Citation: IMF Staff Country Reports 2005, 206; 10.5089/9781451817614.002.A001

Source: Fund staff projections and simulations.1/ The discount rates are projected to increase as in WEO.2/ Assuming about half of current borrowing will be provided as grants.
Figure 2.
Figure 2.

Haiti. Indicators of Public and Publicly-Guaranteed External Debt Under Alternative Scenarios, 2004-23

(In percent)

Citation: IMF Staff Country Reports 2005, 206; 10.5089/9781451817614.002.A001

Source: Staff projections and simulations.
Figure 3.
Figure 3.

Haiti: Indicators of Total Public Debt Under Alternative Scenarios, 2004-2023 1/

(In percent)

Citation: IMF Staff Country Reports 2005, 206; 10.5089/9781451817614.002.A001

Source: Fund staff projections and simulations.1/ Most extreme stress test yields highest ratio in 2013. This test uses the baseline real GDP growth rate minus one standard deviation in 2005 and 2006.2/ Reserves exclude grants.

  • A worst-case scenario is generated as a combination of (one-half standard deviation) shocks to export growth, the GDP deflator, and private and official transfers.3 Under such an “extreme stress test,” the NPV of debt-to-exports ratio would double relative to the baseline and remain above 150 percent for the entire projection period. Also, the other key debt ratios—NPV of debt-to-GDP and debt service-to-exports—would increase above the conventional sustainability thresholds for several years.

  • If key macroeconomic variables were to remain at their historical (1995–2003) averages, the decline in the debt ratios would be slower than in the baseline scenario. The historical scenario attempts to replicate past macroeconomic performance under the previous cycle of external assistance to Haiti, and is less favorable than the baseline scenario.

  • An increase in international interest rates would reduce calculated NPV of Haiti’s debt. Under an alternative “variable discount rates” scenario, it is assumed that discount rates applied to estimate the NPV of future debt service would follow the WEO projected increase in U.S. dollar interest rates. This would result in Haiti’ s debt levels in NPV terms falling below 150 percent of exports of goods and services in 2005.

  • An increase in the grant element of all future assistance would lower debt burden indicators. For example, if half of the currently assumed concessional borrowing were provided in the form of grants, Haiti’ s debt burden would decline to sustainable levels about five years faster than envisaged under the baseline scenario.

  • Two alternative scenarios for total public debt also indicate continued vulnerability. The historical scenario, assuming real GDP growth and the primary deficit equal the historical 1995-2003 averages, only marginally differs from the baseline, as the impact of lower growth is offset by a lower primary deficit. Under the most extreme stress test (real GDP growth in 2005 and 2006 is assumed to be one standard deviation lower than the baseline growth rate), indicators of total public debt decline much less favorably than under the baseline, with the highest debt ratio in 2013.

3. The analysis suggests that Haiti’s debt burden will remain high for a considerable period. Under the present financing mix, Haiti’ s debt burden—in terms of NPV of debt-to-exports—would remain above 150 percent over the medium term. Moreover, Haiti’ s debt burden is very sensitive to changes in the external environment and financing mix. Haiti’ s debt indicators would remain above the sustainability thresholds for several years under the “most extreme stress” test, and would improve more slowly than under the baseline scenario if key variables were to remain at their historical averages.

4. These conclusions are not intended to preempt the results of the planned preliminary HIPC DSA, which will be based on more detailed debt data and a different methodology. The planned study will assess Haiti’ s HIPC eligibility on the basis of NPV of debt-to-exports ratio, and is expected to be prepared jointly with World Bank staff in late 2005.4

Key Assumptions and Scenarios

Key assumptions underlying the baseline scenario:

  • Current account: Income elasticity of imports is assumed to be unity. Exports grow somewhat faster than GDP (reflecting their potential in manufacturing, agriculture, and tourism). Private remittances would stabilize as a share of GDP during 2005–09 and decline gradually thereafter.

  • Capital account: Foreign direct investment is assumed to grow in line with GDP, net annual borrowing to remain positive in the long run (but fall as a share of GDP), and the terms of new borrowing to be highly concessional (based on the weighted average of the present financing mix) interest rate of 1.6 percent, grace period of 9.6 years, and a maturity of 38 years);

  • External debt in arrears not addressed until 2007;

  • Public sector revenues and grants as a percentage of GDP increase up from 13 to 23 percent over the projection period. Public sector expenditure increases in line with public sector revenues and grants.

  • The average real interest rate on domestic short-term debt is 1 percent.

  • Unless otherwise noted, a 5 percent discount rate is used for all years and all creditors.

Main alternative scenarios:

  • Historical scenario: Key variables are assumed to remain at their historical (1995–03) averages in 2004–23. These variables include real GDP growth, CPI inflation (used as a proxy for GDP deflator due to data deficiencies), noninterest current account in percent of GDP, and non-debt creating flows (Table 1);

  • The most extreme stress test is a combination of lowering growth of real GDP, export value, and private and official transfers by one-half standard deviation, and increasing the GDP deflator by the same magnitude;

  • Variable discount rate: The discount rates are projected to move in lockstep with WEO projected U.S. dollar LIBOR rates i.e., 3.31 percent in 2005, 4.12 percent in 2006, and 4.35 for outer years;

  • The higher grant element scenario assumes that half of current borrowing is provided in the form of grants.

Table 1.

Haiti: External Debt Sustainability Framework, Baseline Scenario, 2003-23 1/

(In percent of GDP, unless otherwise indicated)

article image
Source: Staff simulations.

Includes both public and private sector external debt.

Derived as [r - g - r(1+g)]/(1+g+r+gr) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and r = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that NPV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations for 1995-2003.

Table 2.

Haiti: Sensitivity Analyses for Key Indicators of Public and Publicly Guaranteed External Debt, 2003-23

(In percent)

article image
Source: Staff projections and simulations.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and nondebt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Table 3.

Haiti: Averages and Standard Deviations Used for Alternative Scenarios

article image
Source: Fund staff calculations.
Table 4.

Haiti: Total Public Sector Debt Sustainability Framework, Baseline Scenario, 2003-2023

(In percent of GDP, unless otherwise indicated)

article image
Sources: Country authorities; and Fund staff estimates and projections.

Gross debt including domestic bonds issues by the central bank.

Gross financing need is defined as the primary deficit plus de bt service plus the stock of short-term debt at the end of the last period.

Revenues including grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations based on 1995-2003.

Historical average for 1998-2003.
1

MINUSTAH includes about 6,000 troops and 1,400 international police.

2

See A Common Vision of Sustainable Development: National Report on Millennium Development Goals, UNDP and Government of Haiti, 2004.

3

External assistance was pledged in support of a broad reform and development program (the Interim Cooperation Framework - ICF) prepared jointly by the authorities and donors. The pledges also included extensive technical assistance to address key institutional reforms necessary to support economic growth.

4

There are no monthly statistics on production and Haiti does not produce quarterly GDP data.

5

Since June 2001, reserve requirements are 31 percent of gourde and dollar deposits at the commercial banks.

6

According to preliminary data for January–February 2005, Haiti’s textile exports were not affected by the elimination of ATC quotas.

7

At a March 2005 meeting in Cayenne (French Guyana) donors agreed on a list of projects that would be disbursed on an accelerated basis.

8

Two technical assistance missions from FAD—on revenue administration and tax policy, and on public expenditure management—are envisaged to help enhance the budget preparation process.

9

Haiti’s fiscal performance and medium-term issues are discussed in the accompanying selected issues paper.

10

It is generally agreed that a flexible exchange rate is appropriate in situations with low level of international reserves, weak fiscal position and vulnerability to real shocks.

11

Average daily wages in the assembly sector are estimated at US$4–5 (equivalent to monthly wages of about US$100).

12

The HOPE Act, currently under consideration by the U.S. congress, is intended to provide limited duty-free access to certain Haitian exports of apparel products manufactured with components originating in the U.S. or countries to which the U.S. grants trade preferences. Last year, the HERO Act—a more favorable alternative for Haiti to the HOPE Act—lapsed without Congressional approval.

13

The main sources of the BRH’s financial losses are subsidized lending to the central government and high sterilization costs, resulting in losses estimated at 1 percent of GDP in 2003/04. See Selected Issues paper “Losses of Haiti’s Central Bank.”

14

See Annex V—Debt Sustainability Analysis.

1

Ratios are calculated relative to exports of goods and services.

2

The stock of domestic debt consists of central bank short-term bonds held by commercial banks.

3

Other shocks (scaled to historical levels) that were tested and found to produce less “extreme” results include: borrowing on less favorable terms, lower real GDP and export growth, as well as a sharp depreciation of the exchange rate.

4

Haiti does not qualify under the “fiscal window,” which requires a revenue-to-GDP ratio above 15 percent (as well as a 30 percent exports-to-GDP ratio).

Same Series

Other IMF Content

Other Publishers

  • Collapse
  • Expand
Cover IMF Staff Country Reports
Haiti: Staff Report for the 2005 Article IV Consultation and Review of the Program Supported by Emergency Post–Conflict Assistance
Author:
International Monetary Fund
Volume/Issue:
Volume 2005: Issue 206
Publisher:
International Monetary Fund
ISBN:
9781451817614
ISSN:
1934-7685
Pages:
71
DOI:
https://doi.org/10.5089/9781451817614.002
Text Figure 1.

Haiti: Exchange Rate 1/

(1990=100)
Figure 1.

Haiti- Inflation and Monetary Developments 1/
Text Figure 2.

Haiti: Gross Reserves
Figure 2.

Haiti. Fiscal Developments 1/

(In percent of GDP; fiscal year ending September 30)
Figure 3.

Haiti. External Developments
Figure 1.

Haiti: Actual and Trend GDP growth 1970-2003
Figure 2.

Haiti: GDP growth and external aid, 1970-2003
Text Figure 3.

Haiti. Real GDP Growth
Figure 1.

Haiti: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2004-2023

(In percent)
Figure 2.

Haiti. Indicators of Public and Publicly-Guaranteed External Debt Under Alternative Scenarios, 2004-23

(In percent)
Figure 3.

Haiti: Indicators of Total Public Debt Under Alternative Scenarios, 2004-2023 1/

(In percent)