Chapter

Appendix II How to Conduct a Debt Sustainability Analysis: The Case of Haiti

Author(s):
Bergljot Barkbu, Marie-Helene Le Manchec, and Christian Beddies
Published Date:
February 2009
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This appendix complements Section III by providing a hands-on example of implementing the Debt Sustainability Framework (DSF) in a particular country case (Haiti).16 The joint IMF–World Bank debt sustain-ability analysis (DSA) presented here assesses the sus-tainability of Haiti's external and domestic public debt. On the basis of this DSA, it was concluded that Haiti continues to be at high risk of external debt distress, although Heavily Indebted Poor Countries (HIPC) Initiative- and Multilateral Debt Relief Initiative (MDRI) -type debt relief at the HIPC completion point would reduce the debt and debt-service indicators to below the indicative thresholds.17 The following sections explore in greater detail the rationale for this conclusion.

Background

The DSA presented in this appendix is based on the DSF and updates the previous low-income country (LIC) DSA, which was undertaken at the HIPC Initiative decision point approval in November 2006 (see IMF and IDA, 2006c).

Haiti's public debt as of end-September 2007 amounted to 30 percent of GDP. Most of the debt was owed to external creditors (26 percent of GDP), mainly the Inter-American Development Bank (44 percent), the World Bank (34 percent), and bilateral creditors (15 percent). Loans from external creditors had long maturities and were highly concessional. The small stock of domestic debt (4 percent of GDP) was composed of central bank bonds with maturities that did not exceed one year. Apart from the central bank bonds, which were held by the domestic banking system, the Haitian government had no other privately held domestic or foreign debt.

Haiti's debt management capacity remains weak, although steps are being taken to strengthen it. The Central Bank of Haiti (BRH) and the Ministry of Economy and Finances (MEF) are jointly responsible for debt management, but there is no centralized debt database, and information sharing between the BRH and the MEF is inadequate. This situation has resulted in differing accounting methodologies and conflicting data. However, Haiti is currently receiving technical assistance from the United Nations Conference on Trade and Development to put together a single database on public external debt.18 In addition, in late 2007 the Center for Latin American Monetary Studies provided technical assistance to the MEF to strengthen the institutional aspects of debt management and analysis, particularly DSA.

Assumptions

The essence of the macroeconomic framework remains unchanged from the 2006 LIC DSA exercise, although a number of assumptions have been updated (Table A1 and Box A1):

Table A1.Haiti: Long-Term Macroeconomic Assumptions, 2007–27(Fiscal year ending September 30)
Averages
2007200820092010201120122013201420152016201720182019202020212022202320242025202620272008-172018-27
National income and prices(Annual percentage change)
GDP at constant prices3.23.74.04.04.04.04.04.04.54.54.54.54.54.54.54.54.54.54.54.54.54.14.5
GDP deflator9.09.77.56.85.65.05.05.05.05.05.05.05.05.05.05.05.05.05.05.05.06.05.0
Real GDP per capita (local currency)1.42.02.32.32.32.32.42.42.93.13.13.13.23.23.33.33.33.33.33.33.32.53.3
Consumer prices (end of period)7.99.07.06.05.05.05.05.05.05.05.05.05.05.05.05.05.05.05.05.05.05.75.0
External sector
Exports of goods and nonfactor services5.417.014.78.68.68.28.27.76.96.96.96.97.17.17.37.47.57.57.67.67.69.47.4
Imports of goods and nonfactor services7.816.410.48.08.38.07.86.56.96.66.66.76.56.26.06.06.06.05.95.95.98.56.1
Central governmentTotal revenue and grants25.826.816.311.911.710.89.39.710.29.710.310.39.710.29.89.810.29.810.210.89.612.710.0
Central government revenue115.433.415.913.313.412.912.510.611.110.311.111.010.311.011.311.311.011.210.911.510.014.411.0
Central government expenditure22.130.118.113.312.211.510.09.510.49.710.010.29.810.09.89.810.19.810.310.89.913.510.1
National income(In percent of GDP, unless otherwise indicated)
Consumption102.396.693.892.892.191.490.290.490.490.390.290.190.089.989.689.388.988.588.287.787.191.888.9
Private93.486.282.881.480.479.278.078.378.278.178.178.077.977.877.577.276.876.476.075.574.980.176.8
Public8.810.411.111.411.812.212.112.212.212.212.112.212.112.112.112.112.112.112.212.212.211.812.2
Investment30.031.632.733.835.136.336.536.636.636.736.836.836.936.937.037.037.037.137.137.337.335.337.0
Private23.224.024.825.927.228.428.428.428.428.428.428.428.428.428.428.428.428.428.428.428.427.228.4
Public6.87.67.97.98.07.98.18.28.28.38.48.48.58.58.68.68.68.78.78.98.98.08.6
GDP per capita (U.S. dollars)660.3767.3801.8835.8871.2908.2948.6990.81,040.11,093.91,150.71,210.61,273.91,340.71,412.31,487.81,567.61,652.01,741.01,834.51,933.3940.81,545.4
External sector
Noninterest current account deficit0.40.5-1.0-0.9-1.0-1.2-1.4-1.4-1.6-1.7-1.8-1.8-1.7-1.7-1.6-1.6-1.5-1.4-1.3-1.2-1.1-1.1-1.5
Exports of goods and nonfactor services12.112.012.913.213.613.914.114.414.414.414.514.514.614.714.814.915.015.115.315.415.613.715.0
Imports of goods and nonfactor services-37.2-36.6-38.1-38.8-39.7-40.4-41.1-41.2-41.4-41.4-41.4-41.4-41.4-41.2-41.0-40.8-40.5-40.3-40.0-39.8-39.5-40.0-40.6
External current account balance1-6.6-7.5-7.5-7.4-7.6-7.9-7.9-7.9-8.0-7.6-7.5-7.2-6.9-6.7-6.4-6.2-5.9-5.7-5.3-5.2-4.9-7.7-6.0
External current account balance20.2-1.3-1.2-1.3-1.5-1.7-1.7-1.9-2.0-2.1-2.1-2.0-2.0-2.0-1.9-1.8-1.7-1.6-1.5-1.4-1.3-1.7-1.7
Liquid gross reserves (in months of imports of goods and services)2.52.72.93.03.13.03.13.13.23.23.23.23.23.23.23.23.33.33.33.33.33.13.2
Central government
Central government overall balance2-0.5-1.0-1.4-1.6-1.7-1.9-2.0-2.0-2.0-2.0-2.0-2.0-2.0-2.0-2.0-2.0-2.0-2.0-2.0-2.0-2.0-1.8-2.0
Total revenue and grants15.216.917.617.718.018.318.318.418.418.418.518.618.618.718.718.718.818.818.919.119.118.018.8
Central government revenue110.312.112.512.713.213.614.014.214.414.414.614.814.915.015.315.515.715.916.016.316.313.615.6
Central government expenditure15.717.918.919.319.720.120.320.320.420.520.520.620.620.720.720.720.820.820.921.121.119.820.8
Source: Country authorities; and IMF staff estimates and projections.

Excluding grants.

Including grants.

Source: Country authorities; and IMF staff estimates and projections.

Excluding grants.

Including grants.

  • Medium-term assumptions (through 2012) reflect actual outcomes in FY2007 and forward-looking expectations under the Poverty Reduction and Growth Facility (PRGF)-supported economic program. Key changes include a significantly more appreciated national currency than was assumed in the 2006 LIC DSA (by about 20 percent), which raises the U.S. dollar value of GDP. Furthermore, projected exports are higher owing to the estimated impact in 2008 and 2009 of the HOPE Act, which went into effect in mid-2007.19
  • Assumptions for 2013–27 are mostly unchanged, absent major developments that would have warranted changes to the long-term perspectives of the economy. Overall, the security situation and institutional environment are expected to stabilize further, while fiscal and monetary policies are projected to remain sound and supportive of foreign and domestic investment. Export activity is assumed to be a key driver of economic growth, with the recovery of domestic demand also playing a significant role. In terms of financing assumptions, international support is projected to persist in the long term, albeit declining as a share of GDP. Reflecting a somewhat more conservative assessment, assumptions regarding access to domestic financing have been lowered. Domestic bond issuances are projected to reach 1 percent of GDP a year by 2027, compared with 1.5 percent of GDP in the 2006 LIC DSA.

Box A1.Macroeconomic Assumptions for the Low-Income Country Debt Sustainability Analysis

Real GDP is projected to grow by 4.4 percent on average during the projection period (2007–27). Growth would initially rise to about 4 percent, as improvements in security and sustained political and macroeconomic stability provide for an environment that is more conducive to private activity and consumption. In the longer term, growth is projected to rise somewhat faster (4.5 percent), on the assumption that critical infrastructure and human capital bottlenecks that are currently holding the economy back will be gradually overcome.

Private investment is expected to be an important driver of growth, with the level of annual investment increasing by some 5 percentage points of GDP over the projection period. A significant portion of private investment is expected to materialize in the form of foreign direct investment (FDI). Public investment is also projected to rise, by about 2 percentage points of GDP.

Exports are expected to accelerate temporarily in the short term, as a consequence of the Haitian Hemispheric Opportunity through Partnership Encouragement (HOPE) Act, and then rise steadily, supported by FDI. Overall, this would translate into average growth rates of 9 percent (dollar value) in the first half of the period, and about 7 percent in the second half.

Imports are also projected to expand, fueled by inputs for the textile export sector and domestic demand from high investment and remittances-driven consumption. However, the pace of imports will be tempered to some extent by import substitution.

Inflation is expected to decline from 7.9 percent in 2007 to 5 percent in 2011 and beyond. This projection is based on an expectation of continued sound monetary policy and public sector financing, as well as a gradually increasing domestic supply of goods and services.

The fiscal deficit is projected to stabilize at 2 percent of GDP from 2013 onward, reflecting rising budget execution capacity and a relative decline in grant support. Domestic revenues are projected to rise by about 4 to 5 percent of GDP as tax administration and tax policy reforms are implemented. However, these revenue gains are outpaced by rising expenditures necessary to address critical infrastructure needs and restore the supply of essential social services. Budget financing would remain mostly external, because domestic financing is assumed to be introduced only very gradually in the medium term (it would reach about 1 percent of GDP in 2027).

The balance of payments is expected to weaken temporarily, because the projected expansion of investment would widen the current account deficit in the first half of the projection period. However, the solid export performance and expected moderation in import growth will help revert part of this deterioration in the long run. Grants are assumed to decline relative to the economy's size, while private remittances are estimated to grow in line with economic growth in the United States. The current account deficits are expected to be financed largely by FDI and concessional lending.

External Debt Sustainability

Baseline

The baseline scenario assumes interim HIPC debt relief in 2007 and 2008, but no completion point (Table A2 and Figure A1).20 In this scenario, external debt indicators remain below the indicative debt-burden thresholds during the entire projection period, with the exception of the present value (PV) of the debt-to-exports ratio, which remains above the indicative threshold of 100 percent until 2020 and falls only slightly below it afterward.21 Debt-service payments do not display a smooth pattern throughout the projection period, partly because of PRGF repayments that are due from 2012 to 2015.

Table A2.Haiti: External Debt Sustainability Framework, Baseline Scenario, 2007-2711(In percent of GDP, unless otherwise indicated)
ActualHistorical Average2Standard Deviation3Projections
2005200620072008200920102011201220132007-12 Average201820272013-27 Average
External debt (nominal)131.029.725.623.023.023.323.624.024.324.823.3
Of which:public and publicly guaranteed (PPG)31.029.725.623.023.023.323.624.024.324.823.3
Change in external debt-6.2-1.3-4.1-2.60.00.30.30.40.30.0-0.2
Identified net debt-creating flows-9.9-6.7-7.4-0.5-0.7-0.6-0.4-0.2-0.10.2-0.9
Noninterest current account deficit-3.4-0.3-0.70.21.51.00.91.01.21.41.41.71.11.5
Deficit in balance of goods and services (G&S)27.028.623.224.725.125.626.126.626.926.924.0
Exports13.914.412.112.012.913.213.613.914.114.515.6
Imports40.843.035.336.638.138.839.740.441.141.439.5
Net current transfers (negative=inflow)-30.5-28.6-23.7-23.85.7-23.5-24.0-24.3-24.5-24.7-24.9-24.7-22.5-23.9
Of which:official-7.6-7.9-5.4-6.2-6.4-6.2-6.1-6.2-6.2-5.2-3.6
Other current account flows (negative=net inflow)0.1-0.3-0.2-0.1-0.2-0.3-0.4-0.4-0.6-0.5-0.4
NetFDI (negative=inflow)-0.6-3.3-1.2-0.71.0-1.0-1.0-1.0-1.0-1.0-0.9-0.8-1.2-1.0
Endogenous debt dynamics3-5.9-3.0-5.5-0.6-0.6-0.6-0.6-0.6-0.6-0.7-0.7
Contribution from nominal interest rate0.80.30.30.30.30.30.30.30.30.30.2
Contribution from real GDP growth-0.6-0.6-0.7-0.8-0.9-0.9-0.9-0.9-0.9-1.0-1.0
Contribution from price and exchange rate changes-6.1-2.7-5.1
Residual43.75.43.3-2.00.70.90.70.60.4-0.10.7
Of which:exceptional financing1.0-0.20.70.00.00.00.00.00.00.00.0
Present value (PV) of external debt516.915.215.115.115.215.315.315.113.9
In percent of exports139.1126.9116.5113.9111.7110.2108.4104.189.7
PV of PPG external debt16.915.215.115.115.215.315.315.113.9
In percent of exports139.1126.9116.5113.9111.7110.2108.4104.189.7
In percent of government revenues159.5125.9120.8119.1116.2112.3109.4102.285.3
Debt service-to-exports ratio (in percent)17.57.58.96.37.27.16.56.66.86.15.5
PPG debt service-to-exports ratio (in percent)17.57.58.96.37.27.16.56.66.86.15.5
PPG debt service-to-revenue ratio (in percent)27.610.210.26.27.47.46.76.76.86.05.2
Total gross financing need (billions of U.S. dollars)-0.1-0.10.00.10.10.10.10.10.10.20.2
Noninterest current account deficit that stabilizes debt ratio2.81.03.53.60.90.70.91.01.11.71.2
Key macroeconomic assumptions
Real GDP growth (in percent)1.82.33.00.82.03.94.04.04.04.04.04.04.54.54.2
GDP deflator in U.S. dollar terms (change in percent)19.79.720.86.013.414.02.21.91.91.92.04.02.02.01.9
Effective interest rate (percent)62.51.31.41.30.61.31.21.31.21.21.21.31.41.11.2
Growth of exports of G&S (U.S. dollar terms, in percent)16.916.94.77.311.316.614.78.68.68.28.210.86.97.66.8
Growth of imports of G&S (U.S. dollar terms, in percent)13.718.22.29.69.322.710.48.08.38.07.810.96.75.95.8
Grant element of new public sector borrowing (in percent)50.750.750.750.750.750.750.750.750.750.7
Aid flows (in billions of U.S. dollars)70.40.50.50.60.60.70.70.80.81.01.3
Of which: grants0.10.20.30.30.40.40.40.40.40.50.6
Of which: concessional loans0.10.10.10.10.10.20.20.20.20.30.4
Grant-equivalent financing (in percent of GDP)85.86.16.05.95.95.54.93.74.5
Grant-equivalent financing (in percent of external financing)886.286.184.784.483.482.382.479.981.5
Memorandum items:
Nominal GDP (billions of U.S. dollars)4.34.86.07.17.68.08.59.09.613.123.2
(PV,-PV,_i)/GDP,_i (in percent)1.10.80.91.01.01.01.00.90.80.9
Source: Country authorities; and IMF staff estimates and projections.

Fiscal year ending September 30, includes both public and private sector external debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Derived as [r-g-r(l+g)]/(l+g+r+gr) times previous period debt ratio, r = nominal interest rate, g = real GDP growth rate, and gr = 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 p V of private sector debt is equivalent to its face value.

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

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Source: Country authorities; and IMF staff estimates and projections.

Fiscal year ending September 30, includes both public and private sector external debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Derived as [r-g-r(l+g)]/(l+g+r+gr) times previous period debt ratio, r = nominal interest rate, g = real GDP growth rate, and gr = 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 p V of private sector debt is equivalent to its face value.

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

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Figure A1Haiti: Indicators of Public and Publicly Guaranteed External Debt

(In percent)

Source: IMF staff projections and simulations.

Alternative Scenarios and Stress Tests

The alternative scenario based on historical averages of key variables leads to a lower trajectory of debt indicators compared with the baseline scenario (Table A3). However, this outcome does not indicate that the baseline projection is overly pessimistic. The historical scenario results in lower debt-burden indicators because of exceptionally low levels of external financing in the past 10 years, when donors curbed their assistance in light of high levels of social and political conflict. Over this period, the current account posted an average deficit of only 0.2 percent of GDP, compared with an average deficit of 1.5 percent of GDP assumed in the baseline projection.

Table A3.Haiti: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2008–27(Fiscal year ending September 30; in percent)
Projections
20082009201020112012201320182027
PV of debt-to-GDP ratio
Baseline1515151515151514
A. Alternative scenarios
A1. Key variables at their historical averages in 2009–27115151414131396
A2. New public sector loans on less favorable terms in 2009–2721516161718182122
B. Bound tests
B1. Real GDP growth at historical average minus one standard deviation in 2009–101516171717171715
B2. Export value growth at historical average minus one standard deviation in 2009–1031516181818181715
B3. U.S. dollar GDP deflator at historical average minus one standard deviation in 2009–101517181819191817
B4. Net non-debt-creating flows at historical average minus one standard deviation in 2009–1041519222222222117
B5. Combination of B1–B4 using one-half standard deviation shocks1519262525252419
B6. One-time 30 percent nominal depreciation relative to the baseline in 200951521212122222120
C. Country-specific alternative scenarios
C1. PetroCaribe agreement1515161718191815
C2. HIPC Initiative/MDRI15667891213
PV of debt-to-exports ratio
Baseline12711711411211010810490
A. Alternative scenarios
A1. Key variables at their historical averages in 2009–27112711410810296906237
A2. New public sector loans on less favorable terms in 2009–272127121122124127129141143
B. Bound tests
B1. Real GDP growth at historical average minus one standard deviation in 2009–1012711711411211010810490
B2. Export value growth at historical average minus one standard deviation in 2009–103127149182178175172162131
B3. U.S. dollar GDP deflator at historical average minus one standard deviation in 2009–1012711711411211010810490
B4. Net non-debt-creating flows at historical average minus one standard deviation in 2009–104
127145170165162158146109
B5. Combination of B1–B4 using one-half standard deviation shocks127158203197193189175130
B6. One-time 30 percent nominal depreciation relative to the baseline in 2009512711711411211010810490
C. Country-specific alternative scenarios
C1. PetroCaribe agreement12711712012512913312496
C2. HIPC Initiative/MDRI12744475257617985
PV of debt-to-revenue ratio
Baseline12612111911611210910285
A. Alternative scenarios
A1. Key variables at their historical averages in 2009–27112611811310698916135
A2. New public sector loans on less favorable terms in 2009–272126125128129129130139136
B. Bound tests
B1. Real GDP growth at historical average minus one standard deviation in 2009–1012612713212912412111395
B2. Export value growth at historical average minus one standard deviation in 2009–103
12612914113713212811892
B3. U.S. dollar GDP deflator at historical average minus one standard deviation in 2009–10
126133145141136133124104
B4. Net non-debt-creating flows at historical average minus one standard deviation in 2009–104
126150178172165159143103
B5. Combination of B1–B4 using one-half standard deviation shocks126156202195187181163118
B6. One-time 30 percent nominal depreciation relative to the baseline in 20095126171169164159155145121
C. Country-specific alternative scenarios
C1. PetroCaribe agreement12612112513013213412292
C2. HIPC Initiative/MDRI126454954586278121
Memorandum item:
Grant element assumed on residual financing (i.e., financing required above baseline)64949494949494949
Debt service-to-exports ratio
Baseline67767765
A. Alternative scenarios
A1. Key variables at their historical averages in 2009–27167766653
A2. New public sector loans on less favorable terms in 2009–27267777889
B. Bound tests
B1. Real GDP growth at historical average minus one standard deviation in 2009–1067767765
B2. Export value growth at historical average minus one standard deviation in 2009–103
6910991098
B3. U.S. dollar GDP deflator at historical average minus one standard deviation in 2009–1067767765
B4. Net non-debt-creating flows at historical average minus one standard deviation in 2009–10467888887
B5. Combination of B1–B4 using one-half standard deviation shocks68999998
B6. One-time 30 percent nominal depreciation relative to the baseline in 2009567767765
C. Country-specific alternative scenarios
C1. PetroCaribe agreement67767786
C2. HIPC Initiative/MDRI64322234
Debt service-to-revenue ratio
Baseline67777765
A. Alternative scenarios
A1. Key variables at their historical averages in 2009–27167776653
A2. New public sector loans on less favorable terms in 2009–27267877888
B. Bound tests
B1. Real GDP growth at historical average minus one standard deviation in 2009–1068877876
B2. Export value growth at historical average minus one standard deviation in 2009–10367877776
B3. U.S. dollar GDP deflator at historical average minus one standard deviation in 2009–1068988876
B4. Net non-debt-creating flows at historical average minus one standard deviation in 2009–10467888887
B5. Combination of B1–B4 using one-half standard deviation shocks68999998
B6. One-time 30 percent nominal depreciation relative to the baseline in 200956111010101087
C. Country-specific alternative scenarios
C1. PetroCaribe agreement67777786
C2. HIPC Initiative/MDRI64322234
Memorandum item:
Grant element assumed on residual financing (i.e., financing required above baseline)64949494949494949
Source: Country authorities; and IMF staff estimates and projections.>Note: HIPC Initiative = Heavily Indebted Poor Countries Initiative and MDRI = Multilateral Debt Relief Initiative.

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

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

Exports 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 foreign direct investment.

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.

Source: Country authorities; and IMF staff estimates and projections.>Note: HIPC Initiative = Heavily Indebted Poor Countries Initiative and MDRI = Multilateral Debt Relief Initiative.

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

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

Exports 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 foreign direct investment.

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.

Other bound tests confirm that Haiti's debt distress classification is largely a function of its small export sector. Under the most extreme shock—a combined adverse shock to all key variables: real GDP growth, export growth, U.S. dollar GDP deflator, and non-debt-creating capital inflows—all external debt indicators still remain below the indicative debt-burden thresholds except for the PV of the debt-to-exports ratio, which reaches 203 percent in 2010 before reverting to 130 percent in 2027.

Large amounts of additional concessional external financing would worsen debt indicators. For instance, fully spending and absorbing the financing that could potentially become available under the PetroCaribe agreement would keep the PV of the debt-to-exports ratio permanently above the indicative threshold, with a peak of 135 percent in 2014. However, as in the baseline scenario, the PetroCaribe financing would not lead to breaches of the indicative thresholds for other external debt indicators (Box A2).

Box A2.The Impact of PetroCaribe on Debt Sustainability

Haiti could obtain substantial concessional external financing from Venezuela for its oil purchases under the PetroCaribe agreement. The agreement was ratified by parliament in March 2007. The authorities are currently working to overcome logistical difficulties that have impeded oil deliveries under PetroCaribe terms so far. At current oil prices, the accord provides for the deferral of 40 percent of oil imports over a period of 25 years (with a two-year grace period), at 1 percent annual interest. The underlying grant element of this facility is estimated at almost 50 percent (using current U.S. dollar discount rates). The agreement specifies that up to a maximum of 14,400 barrels a day could be imported. Haiti's oil needs that could be covered through PetroCaribe deliveries are estimated to be about 10,500 barrels a day in 2008. For the present simulation, it is assumed that refined products imported by Haiti under Petro-Caribe will grow in line with total oil imports and that deliveries under PetroCaribe terms will take place for a total of five years. This implies additional financing of about 1.6 percent of GDP on average per year.

The additional external borrowing through PetroCaribe could significantly increase external debt and debt-service payments in the medium term, notwithstanding its high concessionality. Under a scenario with PetroCaribe financing, the present value (PV) of the debt-to-exports ratio would peak at 135 percent in 2014 before converging back to values below the threshold in 2025. In a scenario with completion point debt-stock reduction and PetroCa-ribe financing, the PV of the debt-to-exports ratio would increase quickly so that by 2015 its trajectory would be no different from the baseline (see figures).

Present Value of External Debt-to-Exports Ratio

Source: IMF staff projections and simulations.

External Debt Service-to-Exports Ratio

Source: IMF staff projections and simulations.

Debt relief at the HIPC completion point would substantially improve Haiti's debt situation. Assuming HIPC-and MDRI-type debt relief at the completion point would reduce the PV of the external debt-to-exports ratio well below Haiti's indicative debt-burden threshold of 100 percent.22 However, large-scale borrowing, less concessional financing terms, and large adverse shocks could still raise Haiti's PV of the external debt-to-exports ratio above the indicative threshold in the longer term.

Public Sector Debt Sustainability

Baseline

Under the baseline scenario, Haiti's public debt remains little changed throughout the projection period (Table A4 and Figure A2). The PV of the public debt-to-GDP ratio would remain broadly constant at about 19 percent. Public expenditure is expected to rise significantly through 2012, but stronger revenue efforts and external grants should contain the need for debt-creating financing. In the long term, the country's relatively low initial public debt burden and economic growth would allow primary deficits of 1.3 percent of GDP on average, without threatening sustainability. Because domestic indebtedness is projected to increase only slightly from 4 to 5 percent of GDP during the projection period, the trajectory of total public debt largely follows the dynamics of external debt.

Table A4.Haiti: Public Sector Debt Sustainability Framework, Baseline Scenario, 2005-27(In percent of GDP, unless otherwise indicated)
Actual1Historical Average2Standard EstimateDeviation2Projections
2005200620072008200920102011201220132008-13 Average201820272014-27 Average
Public sector debt334.333.629.627.027.227.527.627.728.529.028.3
Of which:foreign-currency-denominated31.029.725.623.023.023.323.624.024.324.823.3
Change in public sector debt-5.4-0.7-4.0-2.60.20.40.00.20.8-0.10.1
Identified debt-creating flows-0.5-7.1-5.4-3.0-0.6-0.20.00.40.00.40.0
Primary deficit0.00.1-0.50.91.10.20.60.91.11.31.30.91.21.31.3
Revenue and grants13.113.515.116.917.617.718.018.318.318.619.1
Of which:grants3.53.54.84.85.15.04.94.74.33.82.7
Primary (noninterest) expenditure13.113.614.617.118.218.619.119.619.619.920.4
Automatic debt dynamics-0.5-7.1-4.6-3.0-1.0-0.9-1.0-0.8-1.4-0.9-1.3
Contribution from interest rate/growth differential-1.4-1.3-1.0-1.0-1.0-1.0-1.1-1.1-1.0-1.2-1.1
Of which:contribution from average real interest rate-0.7-0.50.00.10.10.00.0-0.10.00.10.1
Of which:contribution from real GDP growth-0.7-0.8-1.0-1.1-1.0-1.0-1.1-1.1-1.1-1.3-1.2
Contribution from real exchange rate depreciation1.0-5.8-3.5-2.00.00.10.00.3-0.3
Other identified debt-creating flows0.00.0-0.3-0.2-0.3-0.2-0.1-0.10.00.00.0
Privatization receipts (negative)0.00.00.00.00.00.00.00.00.00.00.0
Recognition of implicit or contingent liabilities0.00.00.00.00.00.00.00.00.00.00.0
Debt relief (HIPC Initiative and other)0.00.0-0.3-0.2-0.3-0.2-0.1-0.10.00.00.0
Other (specify, e.g., bank recapitalization)0.00.00.00.00.00.00.00.00.00.00.0
Residual, including asset changes-4.96.41.40.40.80.50.1-0.30.8-0.50.2
Present value (PV) of public sector debt20.919.219.219.419.219.019.619.319.0
Of which:foreign-currency denominated16.915.215.115.115.215.315.315.113.9
Of which:external16.915.215.115.115.215.315.315.113.9
PV of contingent liabilities (not included in public sector debt)0.00.00.00.00.00.00.00.00.00.00.0
Gross financing need42.21.61.31.72.02.22.32.42.72.62.9
PV of public sector debt-to-revenue ratio (in percent)5137.9113.6109.5109.4106.5104.2107.0103.799.6
Of which:external111.589.985.785.284.283.683.981.273.1
Debt service-to-revenue ratio (in percent)5,516.711.412.09.17.67.56.86.27.37.28.4
Primary deficit that stabilizes the debt-to-GDP ratio5.40.83.52.80.40.61.11.20.51.31.2
Key macroeconomic and fiscal assumptions
Real GDP growth (in percent)1.82.33.20.92.13.74.04.04.04.04.04.04.54.54.5
Average nominal interest rate on foreign exchange debt (in percent)2.51.51.21.10.71.51.41.41.31.31.31.41.51.41.4
Average real interest rate on domestic currency debt (in percent)-19.1-1.411.23.313.45.04.53.82.92.45.64.04.95.45.1
Real exchange rate depreciation (in percent, + indicates depreciation)2.6-19.6-12.4-1.423.1-8.0
Inflation rate (GDP deflator, in percent)17.616.69.014.56.29.77.56.85.65.05.06.65.05.05.0
Growth of real primary spending (deflated by GDP deflator, in percent)26.55.810.87.711.421.111.06.36.86.64.29.34.84.54.7
Grant element of new external borrowing (in percent)6070807030808070707080708080
Source: Country authorities; and IMF staff estimates and projections.

Fiscal year ending September 30.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Includes nonfinancial public sector and central bank.

Gross financing need is defined as the primary deficit plus debt 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.

Source: Country authorities; and IMF staff estimates and projections.

Fiscal year ending September 30.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Includes nonfinancial public sector and central bank.

Gross financing need is defined as the primary deficit plus debt 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.

Figure A2.Haiti: Indicators of Public Debt Under Alternative Scenarios

(Fiscal year ending September 30; in percent)

Source: IMF staff projections and simulations.

1Most extreme stress test is test that yields highest ratio in 2018.

2Revenue including grants.

Alternative Scenarios and Stress Tests

The evolution of public debt remains robust under most alternative scenarios and bound tests, although there is some vulnerability to lower-than-projected growth rates (Table A5). Permanently lower real GDP growth would lead to a substantial increase in the PV of the debt-to-GDP ratio between FY2008 and FY2027. Scenarios with macroeco-nomic assumptions based on historical averages also lead to a gradually rising debt burden because they imply persistence of the relatively poor growth rates recorded in the past.

Table A5.Haiti: Sensitivity Analysis for Key Indicators of Public Debt, 2008–27(Fiscal year ending September 30; in percent)
Projections
20082009201020112012201320182027
PV of Debt-to-GDP Ratio
Baseline1919191919201919
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages1920202020212224
A2. Primary balance is unchanged from 20081919191817171511
A3. Permanently lower GDP growth11919202020202226
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviation
in 2009–101921222324252833
B2. Primary balance is at historical average minus one standard deviation
in 2009–101920202020202020
B3. Combination of B1–B2 using one-half standard deviation shocks1920212120211918
B4. One-time 30 percent real depreciation in 20091926252524242220
B5. 10 percent of GDP increase in other debt-creating flows in 20091924242424242422
PV of Debt-to-Revenue Ratio2
Baseline114110109106104107104100
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages114112113110108111110111
A2. Primary balance is unchanged from 200811410810610195957959
A3. Permanently lower GDP growth1114110111108107111116137
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviation
in 2009–10114115123124125132147169
B2. Primary balance is at historical average minus one standard deviation
in 2009–10114113115112109112108102
B3. Combination of B1–B2 using one-half standard deviation shocks11411411811311011210393
B4. One-time 30 percent real depreciation in 2009114147143137132131119107
B5. 10 percent of GDP increase in other debt-creating flows in 2009114138137133130132126114
Debt Service-to-Revenue Ratio2
Baseline98876778
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages988778912
A2. Primary balance is unchanged from 200898776777
A3. Permanently lower GDP growth1988767810
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviation
in 2009–10988778811
B2. Primary balance is at historical average minus one standard deviation
in 2009–1098876779
B3. Combination of B1–B2 using one-half standard deviation shocks98877889
B4. One-time 30 percent real depreciation in 200998887889
B5. 10 percent of GDP increase in other debt-creating flows in 200998877889
Source: Country authorities; and IMF staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of 20 (i.e., the length of the projection period).

Revenues are defined inclusive of grants.

Source: Country authorities; and IMF staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of 20 (i.e., the length of the projection period).

Revenues are defined inclusive of grants.

Main Differences from the 2006 Low-Income Country Debt Sustainability Analysis23

The trajectories of key debt indicators are lower in the current DSA than at the time of the 2006 DSA exercise (Appendix Figure A3).24 The more conservative assumption regarding domestic debt issuances with unchanged financing gaps leads to a faster increase in the PV of external debt. However, the PV of the external debt ratio to both exports and GDP is significantly lower during most of the projection period because of upward revisions in projected exports and U.S. dollar GDP. These improvements are further enhanced in the post-completion-point scenario because of some US$500 million in HIPC/ MDRI-type post-completion-point debt relief from the Inter-American Development Bank, which was committed in 2007 and thus not included in the 2006 LIC DSA.

Figure A3.Haiti: Public External Debt Indicators Compared to 2006 Debt Sustainability Analysis1

Source: IMF staff projections and simulations.

1 Includes interim HIPC debt relief in 2007 and 2008 but no HIPC completion point.

Debt Distress Classification and Conclusion

Haiti's risk of debt distress remains high. Under the baseline scenario—which includes HIPC interim debt relief but no irrevocable debt relief at the floating HIPC completion point or MDRI debt relief—the PV of the debt-to-exports ratio remains above the indicative debt-burden threshold, and sensitivity analysis shows that Haiti's external debt situation is vulnerable to shocks. This result partly reflects Haiti's small export sector, as other debt indicators are below critical thresholds. Moreover, it is worth noting that Haiti's very high and stable level of private remittances (about 19 percent of GDP in FY2007) provides a reliable inflow of foreign exchange to the country, which reduces its external vulnerability to some extent.

Provision of irrevocable HIPC debt relief and MDRI at the floating completion point would result in a substantial reduction of Haiti's debt burden. This suggests some scope for additional external borrowing in order to maximize the resource envelope available to achieve the Millennium Development Goals while limiting the risk of debt distress. However, a careful approach to scaling up external financing would remain advisable, given that debt indicators deteriorate rapidly in scenarios with large additional concessional borrowing—such as the one that may become available under the PetroCaribe agreement—or less concessional financing terms.

Looking ahead, there is a need to further strengthen debt management. Strengthening debt management capacity will be important, among other things, to prepare for and adequately support the development of an active domestic debt market. Priorities in this area, beyond the establishment of a single debt database, include (1) clarifying by law the debt management responsibility of the BRH and the MEF; (2) improving information sharing, including frequent debt reconciliation exercises, between the BRH and the MEF; (3) shortening the procedures for debt-service payments; (4) improving the tracking of disbursements; and (5) training staff.

16The original published version of the 2008 Haiti DSA can be found at www.imf.org/external/pubs/ft/dsa/lic.aspx?cty=HTI&fm =-1&fy=-1&tm=-1&ty=-1. The text has been modified only by adding commentary on specific DSF features, deleting references to the DSF that have been discussed in the main text of this paper.
17Recall from Section III that a country is considered at high risk of debt distress if the baseline scenario indicates a protracted breach of debt or debt-service thresholds but the country does not currently face any payment difficulties.
18The establishment of such a database is a floating completion point.
19The Haitian Hemispheric Opportunity Through Partnership Encouragement (HOPE) Act provides for preferential access of Haitian apparel exports to the U.S. market.
21The World Bank's Country Policy and Institutional Assessment rates Haiti as a poor performer. Under the joint IMF–World Bank DSF, the corresponding indicative debt-burden thresholds are 30 percent for the PV of the debt-to-GDP ratio, 100 percent for the PV of the debt-to-exports ratio, and 15 percent for the debt service-to-exports ratio. See IMF and IDA (2005).
22For this scenario the completion point is assumed to be reached in 2009.
23The 2006 DSA for Haiti can be found at www.imf.org/external/ pubs /f t / dsa / lic.aspx?ct y = HT I&fm = -1& fy = -1& tm = -1& t y = -1.
24The analysis in the 2006 DSA assumed an HIPC stock of debt reduction in the baseline scenario. In line with the most recent guidance on the matter, the baseline in the present DSA includes only interim debt relief. To make both exercises comparable, Figure A2 replicates the 2006 DSA without a stock of debt reduction.

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