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Statement by Paulo Nogueira Batista, Executive Director for Haiti, Héctor Torres, Alternate Executive Director, and Ketleen Florestal and Carlo Hubert Janvier, Advisors to the Executive Director, December 17, 2014

Author(s):
International Monetary Fund. Western Hemisphere Dept.
Published Date:
January 2015
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1. On behalf of our Haitian authorities, we thank staff and management for the reports and the constructive dialogue. This last review of the 2010 Extended Credit Facility (ECF) marks the closure of an era when policies were guided by the urgent need to reconstruct infrastructure, render functional public institutions and avoid a humanitarian crisis after the devastating earthquake of 2010. On the macroeconomic front, the key objective was to ensure robust growth through public investments that were to be mostly externally financed. Exchange rate volatility was to be restrained in a context where the authorities had minimum control over the timing, uses and volumes of inflows of foreign exchange. On the structural front, the 2010 program aimed at strengthening financial public management with an emphasis on increasing expenditure controls and transparency mainly through the implementation of the Single Treasury Account. It also sought to improve tax administration and debt management.

2. Although generally below projections, economic growth has been steadily increasing. While commendable progress was achieved on the structural front, several important issues linger and need to be addressed head-on in the period ahead. Among these our authorities consider as priorities: the improvement in the performance of the electricity sector; the enhancement of transparency and efficiency in public expenditure management systems, in particular through the full implementation of the Single Treasury Account; and the phasing-out of the fuel subsidy. Natural disasters (e.g.: floods, hurricanes, droughts) remain a key risk that needs to be taken into account in all public planning and programming. But new challenges are emerging, including the recent resignation of the Prime Minister and impending formation of a Government, the beginning of an electoral year and the decreased availability of donor grants and of PetroCaribe financing for Haiti. Such challenges make the strengthening of tax collection and the rationalizing of tax administration even more pressing.

3. Maintaining macroeconomic stability is indispensable to achieve robust and sustainable growth, eradicate extreme poverty and achieve greater social cohesion. A successor ECF would help safeguard the progress achieved thus far and entice additional concessional financing and private investment as well as more effective and efficient aid.

Private sector initiative

4. The Haitian authorities count on the participation of the private sector (domestic and foreign) in the construction of public and social infrastructures and the creation of new jobs. Several initiatives have already been taken to encourage private investment. A Public Private Partnership (PPP) unit created within the Ministry of Economy and Finance is entrusted with the preparation of the institutional framework for PPPs in infrastructure projects. Management contracts are among the options being considered to improve the delivery of public services such as electricity. Simultaneously, the Ministry of Economy and Finance is spearheading the creation of an investment fund.

5. Measures to strengthen the legal framework for doing business are also considered essential. Reforms in the energy sector are one among several initiatives that will require changes in the legal framework. A presidential commission is revising the regulations that the business community has identified as outdated or excessively cumbersome. The commission has already made available a number of draft laws to the public and some of them have been submitted to Parliament.

6. Credit scarcity is one of the main factor depressing private activities. With technical assistance from the World Bank and the Inter-American Development Bank (IDB), a credit bureau was opened in July 2014 with the remit of reducing information asymmetries that have been identified as one of the obstacles to the provision of credit for commercially viable projects. The authorities are also developing projects and preparing legislation to support the SME sector. A new legal framework to regulate and strengthen microfinance is under parliamentary consideration. Last September, the central bank launched an ambitious financial inclusion strategy to ensure that even the most humble Haitians can have access to credit and financial services.

Donor engagement

7. The authorities acknowledge the need to address weaknesses in absorptive capacity but also call on donors to facilitate their task by (i) better aligning their cooperation programs with national priorities; (ii) avoiding the creation of parallel structures that weaken public institutions by stripping ministries of their experienced and most valued staff with compensation packages that cannot be matched by the public sector; (iii) harmonizing procurement rules; and (iv) ensuring that funds pledged are disbursed in a timely and predictable manner. Regarding the latter, the authorities believe that it is counterproductive to condition disbursements to the approval of legislation as this leverages parliamentarians and forces the government into horse-trading with lawmakers.

8. Technical assistance (TA) deserves to be revisited. In order to strengthen institutional capacity and increase the efficiency of TA, a critical mass of public servants with specific skills needs to be formed and this can only be achieved in a reasonable timeframe through in-country training initiatives and the more frequent use of resident advisors. Delivering TA through short-term expert visits or participation of officials in external forums (courses, seminar or conferences) can only reinforce the government’s institutional capacity in the long run and in a limited fashion. Additionally, more coordination among donors is warranted, particularly when financing sector specific TA, in order to avoid duplication of efforts and conflicting recommendations.

Fiscal and public financial management

9. As highlighted in the staff report, progress since the seventh review has been broadly satisfactory. The implementation of the Single Treasury Account was particularly challenging. Difficulties included finding office space to host the accounting centers (“postes comptables”), organizing outreach and training sessions for relevant personnel in sector ministries and ensuring a smooth transition to the new system. After a bumpy start, the Single Treasury Account is now well underway towards full implementation.

10. The subsidization of the electricity company (EDH) and low petroleum prices at the pump have overburdened public finances. A gradual convergence of domestic fuel prices to international prices will increase fiscal revenues. Contracts with independent power producers (IPPs) in the electricity sector need to be revised to improve government finances and support growth. To decrease non-technical losses of the electricity company, the authorities are considering several new measures including the use of pre-paid meters and transforming small private illegal distributors of electricity into formal entrepreneurs who would buy pre-paid electricity from EDH and sell it retail to their clients, mostly those with low purchasing power.

Money, credit and the financial sector

11. T-bill placement was lower than envisaged and the gap in financing the fiscal deficit was filled by a larger drawdown on government deposits at the central bank (BRH). Hence, the performance criterion on BRH credit to the central government was missed. However, broad money grew moderately, below nominal GDP growth. The BRH tightened monetary policy during the second half of the fiscal year by increasing interest rates and reserve requirements. The central bank also sought with the combination of these instruments to contain the dollarization of deposits and credit. With the exchange rate depreciating only moderately, the effect of exchange rate pass-through on inflation was limited. Inflation stayed at a low single digit level (5.3 percent) in FY14. In light of the deceleration of credit to the private sector, the authorities decided in September 2014 to lower liquidity constraints on commercial banks by allowing them to include treasury bills as part of reserve requirements. International reserves were maintained between 4 to 5 months of imports, higher than the stipulated under the program.

12. The financial system remains healthy. Most banks are well capitalized and profitable and there has been a steady increase in the level of financial intermediation. The reduction of policy rates initiated in 2011 reduced incentives to hold BRH bonds; accordingly, they account for only 2.8 percent of banks’ assets in 2014 compared to 6.7 percent in 2010.

13. Financial cooperatives and microfinance institutions have a fundamental role in promoting growth and fighting poverty given their extensive presence in both urban and rural areas. Parliament has committed to approve legislation to regulate them. However, given recent political developments and the number of laws awaiting approval, it is not anticipated that the legislation will be promulgated in the very short term.

The Ex Post Assessment and future engagement

14. The first Ex Post Assessment mission’s role was to assess the Fund’s engagement in Haiti under the two most recent arrangements of 2006 and 2010 with a view to drawing lessons for the future. Our authorities have already issued a comprehensive written comment1 on the draft report they had received ahead of the discussions with the mission chief. They have requested us to convey the following additional comments:

  • They agree with staff that planned reforms should not be overly ambitious; nevertheless, change processes do not have to be as protracted as the experiences mentioned in paragraph 38 of the EPA report where, based on a Paul Collier study “an average time of 59 years to transition from fragility” is estimated. With determined leadership and national consensus, Haiti can become a middle income country within the next decade.
  • They also agree that in fixing targets for fiscal policy, “the challenge is to balance the need for fiscal consolidation with Haiti’s large social and infrastructure needs and to determine a feasible pace of adjustment consistent with the social and political context” (ref. paragraph 41, second bullet point).
  • Full domestic ownership of an arrangement with the Fund requires that the authorities remain in the driver’s seat while the Fund helps them marshal political consensus in support for the program’s objectives.

15. Finally, since the EPA report refers to the missed performance criterion on account of the repos, the authorities have asked us to come back to the issue. With the repos transaction, the BRH simply sought to diversify the central bank’s portfolio by investing funds in safe securities with higher returns. In the authorities’ view, reserve management should not be unduly constrained, given that capital preservation plays a key role in the central bank’s investment policy. Limits to routine reserve management operations like repos should not be imposed under a Fund program. This point has been clearly made by the authorities and by this chair in previous discussions. The slowness of the Fund’s response is yet another indication of the bureaucratic and inflexible approach that often sets the tone in this institution.

1Haiti-Ex Post Assessment of Longer-Term Program Engagement (SM/14/319), Appendix 1 pages 31-33.

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