Haiti
Selected Issues

This Selected Issues paper on Haiti examines the observed reduction in outstanding real bank credit to the private sector. It examines the evolution of credit and real GDP growth and uses demand and supply indicators to characterize the reduction in credit allocation to the private sector. The paper also provides an overview of the taxation system for the major petroleum products under the present fixed pricing policy and a hypothetical implementation of the 1995 law introducing a flexible pricing mechanism.

Abstract

This Selected Issues paper on Haiti examines the observed reduction in outstanding real bank credit to the private sector. It examines the evolution of credit and real GDP growth and uses demand and supply indicators to characterize the reduction in credit allocation to the private sector. The paper also provides an overview of the taxation system for the major petroleum products under the present fixed pricing policy and a hypothetical implementation of the 1995 law introducing a flexible pricing mechanism.

Haiti: Basic Data

I. Social and Demographic Indicators 1/

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Sources: Haitian authorities; World Bank; and Fund staff estimates and projections.

Social indicators of development, the World Bank.

In relation to broad money at the beginning of the period.

Haiti has no short-term debt.

Average reference exchange rate of the central bank for August 2001.

I. Overview

1. This report presents a set of chapters that examine various topics of current interest in Haiti. Chapter 1 focuses on the observed reduction in outstanding real bank credit to the private sector and analyzes its possible causes. In examining the issue of whether the observed reduction was driven by supply or demand factors or a combination of them, the chapter examines the evolution of credit and real GDP growth and uses demand and supply indicators to characterize the reduction in credit allocation to the private sector.

2. Chapter 2 provides an overview of the taxation system for the major petroleum products under the present fixed pricing policy and an hypothetical implementation of the 1995 law, introducing a flexible pricing mechanism. This chapter analyzes the implication for tax revenues and prices under the two scenarios. Would the authorities apply the law during FY 2001/02, they would collect tax revenue close to those under the present policy, owing to the downward trend in international oil prices, with marginal impact on prices, while eliminating the uncertainties coming from changes in international oil prices and the exchange rate.

3. Chapter 3 analyzes the sustainability of Haiti’s current account, assessing whether the continuation of the current policies and trends are sustainable in the medium term. Following an analysis of the behavior of the exchange rate, the main factors of vulnerability affecting the current account are identified, and a sensitivity analysis of the current account to petroleum prices, grants, and remittances is carried out.

II. The Recent Evolution of Credit to the Private Sector in Haiti1

Abstract

The broad similarity in the recent evolution of real GDP growth and of the growth of bank credit to the private sector since 1998 raises the issue of whether the reduction in bank credit to the private sector was driven by supply or demand or a combination of both. This chapter establishes that the increased issuance of bonds by the central bank at attractive interest rates, the increase in required reserves ratios on both gourde and dollar liabilities, coupled with rising nonperforming loans, are the supply factors that appear to have contributed to the crowding out of private sector credit. Exogenous factors, including a prolonged political impasse, a massive reduction in foreign aid and a slowing down of exports, combined with a reduction in imports and declining private investment, are the demand factors that may have contributed to the observed decline in credit to the private sector. Overall, the supply factors appear to have dominated the demand factors. This would explain the observed negative association between the real growth of credit to the private sector and the increase in the real interest rate in the last two years.

A. Introduction

1. Over the last four years, Haiti’s economic growth has gradually weakened, as the real GDP growth rate fell from about 3 percent during FY 1997/98 to an estimated negative 2 percent during FY 2000/01. During the same period, real bank credit growth to the private sector fell from about 7 percent to around negative 11 percent. The broadly similar evolution of real GDP growth and real private sector bank credit growth raises the issue of whether the reduction in bank credit to the private sector resulted from a decline in the supply of credit, from a weaker demand for bank credit, or from both lower supply and demand.

2. The supply of bank credit to the private sector may have been negatively affected by tight monetary conditions, as the central bank gradually tightened monetary policy in FY 1999/2000 and FY 2000/01. Supply may also have been lowered by a perceived increase in lending risk and a cautious bank lending behavior, emanating from an increase in nonperforming loans.

3. The observed decline in real bank credit growth by itself does not constitute evidence of a reduction in credit supply, as it may reflect lower demand for bank credit by the private sector, in the context of the weakening of economic activity. As will be explained in this chapter, there is evidence that in the context of Haiti’s economy, both supply and demand factors played a role in the observed decline in real credit to the private sector, in particular in the last two years.

4. The remainder of this chapter is organized as follows. Section B examines the evolution of credit and real GDP growth between FY 1997/98 and FY 2000/01. Section C applies demand and supply indicators to characterize the credit slowdown during that period. Section D presents some conclusions.

B. The Evolution of Credit

5. The estimated real growth rate of credit2 to the private sector (12-month percentage changes) showed a downward trend over the period (Figure 1), declining from about 7 percent in September 1998 to an average of around zero percent during FY 1998/99 and FY 1999/2000, and about negative 11 percent during FY 2000/01.

Figure 1:
Figure 1:

Real Credit Growth-Constant Exchange Rate

Citation: IMF Staff Country Reports 2002, 018; 10.5089/9781451817584.002.A001

6. Real bank credit to the private sector declined at a faster pace than the growth rate of the economy (Figure 2), entailing a decline in bank credit to the private sector outstanding relative to GDP. It should be noted that there is no capital market in Haiti; Haitian businesses and individuals have to turn to the banking sector for borrowing. As there is no evidence of an increasing recourse to foreign bank borrowing, the observed reduction in bank credit as a ratio to GDP may be interpreted as an indication that shrinking real credit supply was a causal factor that contributed to the weakening of economic growth. However, caution is required in interpreting the data, as the elasticity of real GDP to real credit may be significantly different from unity, reflecting sectoral differences in the recourse to bank credit. It is therefore necessary to examine a broader set of supply and demand indicators (see section C below).

Figure 2:
Figure 2:

Real Credit Growth-Constant Exchange Rate (RCGE) and GDP Growth Rate

Citation: IMF Staff Country Reports 2002, 018; 10.5089/9781451817584.002.A001

C. The Contributions of Supply and Demand Factors

Supply

7. Factors affecting negatively the banks’ supply of credit are likely to have played a significant role in the decline of real bank credit to the private sector during the period. These factors included the following elements:

  • The central bank issued bonds in increasing amounts and at rising interest rates, to offset the liquidity impact of continuing high budgetary deficits3. This offered banks with an attractive, risk-free alternative to private sector credit. The budget deficit appears to have crowded out private sector credit through the enlarged issuance of central bank bonds.

  • In addition, required reserves ratios were raised in several steps between July 1997 and September 2001, on gourdes liabilities from 26 percent to 31 percent, and on dollar liabilities from 12 percent to 21 percent. Other things being equal, these changes reduced the ability of banks to lend and increased their intermediation costs, thus lowering credit supply.

  • Coupled with these supply factors, there was an increase in nonperforming loans (from 6.8 percent of total loans in September 2000 to 8.9 percent in June 2001), that induced banks to be cautious and selective in private sector lending, as evidenced by the declining trend of risk-adjusted assets relative to capital. Banks lowered their ratio of risk-weighted assets to capital from about 11 percent in September 1999 to 7 percent in June 2001 (Figure 3), more than required by prudential guidelines.4

Figure 3:
Figure 3:

Risk-Weighted Assets to Capital

Citation: IMF Staff Country Reports 2002, 018; 10.5089/9781451817584.002.A001

Demand

8. A number of indicators suggest that credit demand was also a major factor behind sluggish credit growth.

  • Exogenous factors had a strong negative impact on domestic demand and on the private sector’s expectations. These factors included a prolonged political impasse, a massive reduction in budgetary aid and a marked slowing down of foreign-funded investment projects. Negative expectations appear to have contributed to a weakening of economic activity, a reduction in imports and declining private sector investment, all of which entailed a fall in the private sector demand for bank credit.

  • In addition to weak domestic demand and pessimistic expectations, representatives of the Haitian private sector have cited the exogenous slowing down of exports to the United States as an important factors underlying the sluggish economic activity, and hence the reduced demand for bank credit.

Net effect of supply and demand shifts

  • Since early 2000, real interest rates and real private sector credit have tended to move in opposite directions (Figure 4). The negative correlation was particularly strong during FY 2000/01, with sharply rising real lending rates5 associated with a marked contraction in real credit. This evolution suggests that Haitian borrowers reduced their demand for credit as real financial costs soared, and that the credit market settled at a new equilibrium reflecting lower supply and demand.

Figure 4:
Figure 4:

Real Credit Growth-Constant Exchange Rate (RCGE) and Real Lending Rate (RLR)

Citation: IMF Staff Country Reports 2002, 018; 10.5089/9781451817584.002.A001

D. Conclusions

9. It appears that over the last four years, and especially during FY 1999/2000 and FY 2000/01, both supply and demand factors have contributed to the shrinking real bank credit to the private sector. While demand for credit seems to have been constrained by pessimistic expectations on the part of borrowers and swelling financial costs as a result of rising real lending rates, credit supply appears to have been negatively affected by increased issuance of central bank bonds, raised required reserves ratios, and higher perceived lending risks by banks. However, the observation that the increase in the real interest rate was associated with a decline in the private sector credit since early 2000, suggests that the supply factors were the main driving force behind the reductions in credit to the private sector. The decline in real credit exacerbated the slowdown of the economy underway as a result of the sluggish domestic demand and the exogenous weakening of exports to the United States.

III. Petroleum Taxation and the Application of the 1995 Law6

Abstract

Petroleum-based revenue in Haiti is vulnerable to changes in international oil prices and in the exchange rate, as the authorities follow a policy of fixed prices at the pump. However, in 1995, the Haitian authorities promulgated a law introducing a flexible pricing mechanism for petroleum prices, which has never been consistently applied. This chapter analyzes the implications for prices and tax revenue of the continuation of the present policy, and of a hypothetical application of the law during FY2001/02. The flexible pricing mechanism is projected to yield revenues very close to those under the current policy, owing to the present downward trend in international oil prices, with marginal impact on prices. The chapter analyzes the sensitivity of revenue to an increase in international oil prices and to a depreciation in the exchange rate.

A. Introduction

10. In 1995, the Haitian authorities promulgated a law introducing a flexible pricing mechanism for petroleum products. The aim of the law was to eliminate uncertainties in petroleum taxation revenue due to changes in international prices and in the exchange rate. The law has never been consistently applied, as prices at the pump have remained fixed during extended periods of time. Most recently, prices at the pump have been kept unchanged during FY 2000/01, following a long-delayed increase in September 2000, by 40 percent on average. Taxes fluctuated widely within the wedge between the variable imports and distribution costs and the fixed price at the pump. As a result, changes in the international price of oil and in the exchange rate of the gourde vis-à-vis the U.S. dollar, led to large fluctuations of petroleum-based government revenue over the last five years.

11. In this chapter, tax revenue from petroleum products7 during FY 20001/02 is studied under two alternative scenarios: the continuation of the present fixed-price policy, or the hypothetical application of the 1995 law in FY 2001/02. In both scenarios prices and revenues were projected on the basis of the future prices of oil as of end-November 20018, and assuming a stable exchange rate throughout the year9 as well as stable volumes of oil imports, consistent with the projected weak economic activity during FY 2001/02.

12. Revenue projections for FY2001/02 show that both scenarios yield about the same amount of revenue, at almost identical prices at the pump. However, whereas the present policy of fixed prices at the pump introduces uncertainties in petroleum-based revenues, the flexible pricing mechanism provided under the 1995 law would shield budget revenue from fluctuations in the international oil prices and the exchange rate. Moreover, the flexible pricing policy would secure petroleum-based fiscal revenues with almost no change in prices at the pump.

13. The remaining of the chapter is structured as follows. Section B describes the evolution of the petroleum products, focusing on imports, prices and tax revenues. Section C analyzes the sensitivity of tax revenues to changes in the exchange rate and changes in oil international prices. Section D concludes.

B. Petroleum Products—Imports, Prices, and Tax Revenue

14. Petroleum imports accounted for 16 percent of total imports in FY2000/01, with an estimated CIF cost of US$115 million (3 percent of GDP). Import volumes for the major products decreased in FY2000/01 except for kerosene (Table 1). Gasolines and diesel imports dropped significantly, reflecting the weakening in economic activity over the last fiscal year. Kerosene experienced an annual increase of almost 3 percent in volume terms. In gourde terms, imports dropped by 11 percent in FY 2000/01 with respect to 2000, kerosene being the only product for which imports in value terms increased in FY 2000/01 (by 3 percent). Regarding the relative importance of each product in the total value of petroleum products imports, diesel accounts for more than half the imports in 2001 (53 percent of total imports), followed by kerosene (22 percent of major petroleum imports), regular gasoline (20 percent of total major petroleum imports), and premium gasoline for 5 percent of petroleum imports.

Table 1:

Import Volumes by Petroleum Product, 2000–01

(In barrels)

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15. The authorities use the actual import cost (inclusive of insurance and freight) as the base for the computation of the domestic prices. The components of taxation are the following: (i) a fixed excise applied only to gasoline (set at 3.3033 gourdes per gallon); (ii) a variable excise10 set initially at 6.8 gourdes for gasoline, 4 gourdes for diesel and 0.44 for kerosene in the 1995 law; (iii) a verification fee (4 percent of the landed value11); and (iv) a custom duty (5.78 percent of the landed value).12 The first two taxes constitute specific rates of duty as they are based on the quantity of the product sold, while the latter two are ad valorem rates based on the CIF value.13

16. In order to keep prices at the pump fixed, the authorities need to adjust taxes per gallon to make up for changes in costs per gallon. Figure 1 describes the evolution of the tax per gallon charged for each of the petroleum products in FY 2000/01. Gasoline was heavily taxed, and kerosene was subsidized by around 3 gourdes per gallon, with a total cost for the budget of G92 million.14 From a social viewpoint, petroleum taxation and pricing policy has considerable implications for the distribution of income in Haiti. While kerosene is widely used for cooking by the poor segments of the population, premium gasoline is consumed by the better off.

Figure 1:
Figure 1:

Tax per gallon, by product

Citation: IMF Staff Country Reports 2002, 018; 10.5089/9781451817584.002.A001

17. Prices would change only marginally under the 1995 law for FY2001/02 (Table 2). Regular and premium gasoline prices would have decreased (by an annual average decrease of 1 percent and of 14 percent respectively in 2002), with prices for kerosene increasing by only 2 percent.

Table 2:

Evolution of Domestic Prices, 2001–02

(In million of gourdes)

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18. Petroleum-based fiscal revenues were estimated at almost G550 million in FY 2000/0115 (0.6 percent of GDP, and 8.5 percent of total budget revenue). Under the present pricing policy petroleum-based revenues for FY2001/02 are projected to reach around G1.2 billion (1.4 percent of GDP)(Table 3). Would the authorities apply the 1995 Law for FY2001/02, projected revenues (to nearly G1.2 billion) would be almost at the same level as under the current policy. This is mainly due to the downward trend in oil international prices.

Table 3:

Evolution of Tax Revenues, 2001–02

(In million of gourdes)

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19. Notwithstanding total revenue from petroleum taxation estimated at almost G550 million in FY2000/01, there was a revenue loss relative to the taxes that would have been due under the 1995 law. Figure 2 describes the evolution of the tax gap during FY 2000/01 and its projection for FY 2001/02 under the present pricing policy. The tax gap is the difference between the price at the pump that would prevail would all taxes be fully charged as per the 1995 law, and the actual price at the pump. A negative tax gap implies that the authorities are not charging the full amount of taxes, thereby incurring a revenue loss in the form of an opportunity cost. A positive tax gap implies that the authorities are charging more than the legal amount of taxes (which may happen under the present pricing policy if the international price of oil drops below a certain threshold). In FY 2001/02 the loss in revenues was estimated at G844 million (1 percent of GDP). The projected loss in revenues for FY 2001/02 would be reduced to around G70 million, as the treasury would keep under-collecting revenues from the three major products (regular gasoline, diesel and kerosene) for an amount of G112 million, while over-collecting about G40 million on gasoline.

Figure 2:
Figure 2:

Tax Gap per Gallon

Citation: IMF Staff Country Reports 2002, 018; 10.5089/9781451817584.002.A001

20. Under the future international oil prices as of end-November 2001, the budget would collect taxes during FY 2001/02 on all four products including kerosene, even if the present policy of fixed prices is maintained. Table 4 summarizes the average impact per gallon under two scenarios: under the present policy, or assuming the application of the 1995 law during FY 2001/02. Under the former, taxation would increase on all four products, with the highest rise in taxes on diesel. Under the latter, taxation of premium gasoline would drop by 11 percent, while taxes on the other products would increase substantially, especially for diesel (from almost 2 gourdes to 7 gourdes per gallon) and kerosene. The large increase in the impact per gallon for diesel and kerosene reflects the elimination of the negative tax gaps in FY2001/02.

Table 4:

Taxation Impact per Gallon

(In gourdes)

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C. Sensitivity Analysis

21. Although the loss in revenues is projected to be low in FY 2001/02 given future international oil prices as of end-November 2001, the fixed price policy introduces serious uncertainties in government revenue collection. If international oil prices or the exchange rate go up substantially, the treasury may end up paying importers negative taxes as CIF prices and distribution costs may become higher than the price at the pump (this was the case with respect to kerosene in FY 2001/02). If international oil prices increase to US$31 per barrel,16 petroleum-based fiscal revenues would be reduced to zero.

22. This section assesses the sensitivity of petroleum-based revenue to (i) a 15 percent depreciation in the annual average exchange rate (to G 28.2 per US dollar from G 24.5, see Figure 3); and (ii) an increase in oil prices by US$10 per barrel in the second half of FY 2002, under the present pricing policy and the hypothetical application of the law.

23. In terms of revenues, a 15 percent depreciation in the exchange rate would imply a drop of an estimated 20 percent with respect to revenues projected for FY2001/02 under the present pricing policy and under present trend in international oil prices (to less than G 1 billion). Would the authorities apply the flexible pricing policy, revenues would increase by 5 percent17 and prices would increase by an average of 7 percent, as the changes in the exchange rate would be passed through to prices at the pump.

24. An increase by US$10 per barrel (50 percent relative to the price as of end-November) to 28 dollars per barrel would reduce petroleum-based revenue by an estimated 44 percent compared to the level projected for FY 2001/02 under the fixed price policy (to around G700 million). Under the flexible pricing policy, revenue would increase by around 10 percent (to some G 1.3 billion) (1.5 percent of GDP), reflecting higher custom duties and verification fees (that are based on ad valorem rates). Prices per gallon would increase by an average of 18 percent.

D. Conclusions

25. The present policy of fixed prices at the pump introduces large uncertainties in petroleum-based revenue, as taxation fluctuates with variations in international oil prices and in the exchange rate. By contrast, the flexible pricing mechanism provided under the 1995 law would shield budget revenue from fluctuations in these two factors. Barring exceptional turbulences on the international oil market, it would also ensure more frequent but smoother adjustments of prices at the pump, in contrast with the infrequent but very large price changes under the fixed price policy. Given the level of international oil prices prevailing at end-November 2001, introducing the flexible pricing policy at that time would have secured petroleum-based revenue with almost no change in prices at the pump.

26. From the point of view of income distribution, the 1995 law provides for a progressive taxation of petroleum products, as gasoline is more heavily taxed than kerosene. The latter however would no more be subsidized under the full implementation of the law. In view of the importance of kerosene for the poor and of environmental considerations, one may argue that it should remain subsidized.

IV. Exchange Rate and Current Account Sustainability in Haiti18

Abstract

The export sector in Haiti is weak and current account financing from non-debt-creating flows is small. Against this background, the country has not experienced a currency crisis and the real exchange rate has slowed its appreciating trend in the last two years. However, the lack of improvement in the macroeconomic fundamentals, the low level of net international reserves, and the unsettled political situation, make the country vulnerable to external shocks. The analysis presented in this chapter shows that Haiti’s current account deficit appears sustainable; however, the medium-term projections are based on optimistic views regarding economic growth. The results of a sensitivity analysis on petroleum prices, grants and remittances underscore the high vulnerability of Haiti’s external sector.

A. Introduction

27. The export sector in Haiti is weak and current account financing from nondebt-creating flows is small. Grants and official external financing have become permanent inflows, reflecting the traditional dependence on foreign assistance. Foreign direct investment is almost nonexistent. Remittances rank as the first source of foreign exchange, reflecting the increasing migration of Haitians. Against this background, the country has not experienced a currency crisis and the real exchange rate has slowed its appreciating trend in the last two years. However, the lack of improvement in the macroeconomic fundamentals, the low level of net international reserves, and the unstable political situation, make the country vulnerable to external shocks. This chapter focuses on the sustainability of the current account, analyzing whether the continuation of the current policies and trends are sustainable in the medium term. Following an analysis of the behavior of the exchange rate, the sustainability of the current account is assessed. The assessment its extended to the identification of the main factors of vulnerability affecting the current account and to a sensitivity analysis of some relevant variables such as petroleum prices, grants, and remittances.

B. Current Account and Exchange Rate Issues

28. Haiti’s CPI-based real effective exchange rate (REER) has appreciated since 1995. During 1995–99, the REER appreciated at an average annual rate of about 11 percent. In the last two years the REER appreciation has slowed, reflecting the more frequent adjustments to the gourde. Despite the overall appreciating trend, the current account deficit has been narrowing, indicating the growing role of remittances and grants, and the changing structure of exports and imports in Haiti. In 2001, grants and remittances represented 60 percent of the current account inflows while exports of goods and services accounted for 37 percent. With imports driven in large part by current transfers, Haiti’s current account is not highly responsive to real exchange rate developments. The analysis of current account sustainability has to consider the issue of lack of effectiveness of real exchange rate policy to adjust the current account.

Figure 1:
Figure 1:

Real Effective Exchange Fund

Citation: IMF Staff Country Reports 2002, 018; 10.5089/9781451817584.002.A001

29. The CPI-based REER does not take into account unit labor costs. Therefore, it does not capture competitiveness gains from production and wages. This explains the growth of free-trade-zone exports when the CPI-based REER is appreciating. Labor costs have remained low and thus competitive to attract investment to the free-trade zones.

Table 1:

Current Account Inflows in Selected Countries in 2000

(In percent of total current account inflows)

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Corresponds to FY 2000/01.

30. The export sector in Haiti is the smallest in the Latin American and Caribbean region, representing only 8.6 percent of GDP in 2001 compared to an average in Latin America of 18.1 percent and an average of 48.1 percent for the CARICOM countries. Haiti’s structure of exports has changed markedly in the past several years from relying mainly in agriculture to exclusively on light manufactures, both of which accounted, respectively, for 9 percent and 83 percent of total exports in 2001. The change of structure that took place in the second half of the 1990s is explained by the emergence of free-trade-exports zones after the lifting of the embargo attracted mainly by low wages and market access granted by United States. The new structure of exports is comprised of a buoyant free-trade-zone exports sector,19 a weak agricultural, and other exports sector.

Figure 2:
Figure 2:

Composition of Exports

Citation: IMF Staff Country Reports 2002, 018; 10.5089/9781451817584.002.A001

Table 2:

Composition of Exports

(In percent of total exports)

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31. A key issue is the increasing importance of remittances in the economy and the immediate impact on the welfare of those receiving remittances. A depreciation of the nominal exchange rate increases the income of those receiving remittances.20 Hence, aggregate private consumption goes up and the demand for imports of those receiving remittances remains unchanged.21 In addition, nontradable become cheaper in dollar terms.

C. Current Account Sustainability

32. Despite a widening of the trade deficit for the period 1995–2001, the current account is almost covered by current transfers to the government (in the form of grants) and to households (in the form of remittances). Both grants and remittances have become not only key BOP characteristics, but also permanent inflows to the economy. Remittances have increased from levels lower than US$100 millions at the beginning of the 1990s to a preliminary estimate of US$582 millions in 2001. As evidence from other countries indicates, due to the increasing migration trends the inflow of remittances is not expected to decelerate in the medium term.22 Grants have been a regular inflow, reaching a peak of US$410 millions following the lifting of the embargo in 1995 and declining thereafter. According to donors the level of US$161 millions in 2001 is the minimum amount kept for humanitarian reasons. In the medium term, following the resolution of the political impasse, grants are likely to increase.

Figure 3:
Figure 3:

Donations and Remittances in millions of US$

Citation: IMF Staff Country Reports 2002, 018; 10.5089/9781451817584.002.A001

33. The relevant estimation of the current account deficit should include grants. In the past, the staff’s estimation of the current account deficit excluded grants based on the assumption that were transitory inflows. Since grants are a regular and predictable inflow, an appropriate estimation of the current account deficit should include them.23 During 1994–2001, the current account including grants has hovered around balance. This low current account deficit indicates moderate stress to net international reserves with the exception of periods of exogenous shocks such as sudden increases in petroleum prices, natural disasters, and banking and private sector outflows motivated by political events.

Figure 4:
Figure 4:

Current Account Deficit in percent of GDP

Citation: IMF Staff Country Reports 2002, 018; 10.5089/9781451817584.002.A001

Current account sustainability assessment

34. Using the standard definition of sustainability, the fact that Haiti was in default with its foreign financial obligations in 2001 would define its current account position as unsustainable. However, the accumulation of arrears reflects a political decision rather than the lack of resources to service the external debt. Haiti’s net international reserves stood at US$180 million at end-September 2001, while its stock of arrears amounted to US$17.8 million at end-2001. Haiti decided not to pay some of its financial obligations, responding to the decision of the international financial institutions and the international community to withhold further disbursements until a political solution is achieved and the country builds a macroeconomic track record under an IMF’s staff monitored program. The assessment of sustainability has to ignore these circumstances and concentrate on the medium-term external debt dynamics.

35. The criterion used here to define current account sustainability is the constant total-external-debt-to-GDP ratio, by which a current account deficit is defined as sustainable if does not exceed a minimum required to maintain the external-debt-to-GDP ratio constant. The stock of total public external debt is US$1.2 billion, equivalent to 31.9 percent of GDP in 2001. Table 3 shows the minimum noninterest current account balance for different combinations of real GDP growth and real interest rates on foreign debt. The values are obtained by using the following formula:

Current Account/GDP = (real interest rate-real GDP growth rate) * (Total-debt-to-GDP ratio)

The current account values to be compared in the table need to consider only the noninterest current account less all the financing through nondebt-creating flows. Since Haiti does not receive substantial amounts of foreign direct investment or equity, and the behavior of bank’s net flows is unpredictable, there is no need to adjust the noninterest current account for predictable financing components of the capital and financial account. This is a conservative approach as the current account position would be stronger in the medium term if some nondebt-creating flows, such as foreign direct investment, become active components of the external sector.24

Table 3:

Minimum Current Account Sustainable Balance

(In percent of GDP)

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36. Most of Haiti’s external debt is on concessional terms. In the medium term the average-nominal-interest rate for the external debt is only 1.0 percent and the average-real-interest rate is -1.1 percent (the medium-term international inflation is 2.2 percent). The medium-term projections envisaged in the staff report assume a medium-term real GDP growth rate of 4 percent. From Table 3, the minimum noninterest current account balance is a deficit of 1.6 percent of GDP, i.e., a higher deficit is deemed unsustainable. The staff projects a gradual decline of total-external-debt-to-GDP ratio from 31.9 percent in 2001 to 22.9 percent in 2006. The assumptions for the medium-term are presented in Table 4. The projected noninterest current account values over the medium term are less negative than the minimum sustainable value of -1.6 percent. In consequence, in the basis of the medium-term assumptions in the macroeconomic framework, Haiti’s current account deficit would be sustainable. However, the medium-term projections are based on optimistic views regarding the political scenario, entailing a growth rebound in 2003. Grants are assumed to pick up, as it happened in the mid-1990s after the embargo lifting and remittances will continue growing. The medium-term projections have benefited from the prevailing low oil prices—oil imports represented about 17 percent of the total value of imports in 2001.

Table 4:

Medium-Term Projections

(In percent of GDP; unless otherwise indicated)

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D. Vulnerabilities Affecting the Current Account Sustainability

37. There are vulnerabilities that could affect the sustainability of the current account. The key identified vulnerabilities include: increases in oil prices, decline in remittances, low foreign aid, and low level of net international reserves.

External shocks

38. The current account in Haiti is extremely vulnerable to external shocks particularly to a surge in petroleum prices, and natural disasters such as hurricanes. Oil price shocks have a direct impact on the balance of payments, and the recent decline in oil prices will represent a gain from a lower oil bill. A surge in petroleum prices will put pressure on the current account due to the somehow inelastic demand of oil, which translates to immediate higher current account deficits.

Grants

39. Donors have indicated that the current level of grants at about US$161 million in FY 2000/01 is at the minimum level, and no further curtailment of grant is envisaged. A pessimistic scenario would entail the minimum level of grants in the medium term, rather than the increase in foreign aid assumed in the staff’s projections. Indeed, it can be argued that an important proportion of grants are food aid, imported goods, and technical assistance, hence grants are in a one-to-one relation with imports and service debits. Therefore, any change in grants is offset by a symmetric change in imports or service debits leaving the current account deficit unchanged.

Decline in remittances

40. Remittances is an important variable of vulnerability. In other countries the decline in remittance inflows occurs more than one generation after migration subsides. In Haiti migration continues, suggesting that more remittances are expected in the medium term. The economic slowdown in the U.S. economy has only transitory effects. Remittances are likely to return to the same increasing trend when the U.S. economy recovers. However, the huge negative errors and omissions in the second half of the 1990s,25 raise the possibility of an overestimation of remittances. Lower remittances may translate in higher current account deficits; however, there is not a one-to-one relation since remittances also translate in less imports.

Low level of net international reserves

41. The low level of net international reserves has been a permanent vulnerability factor faced by Haiti. There is no cushion to face a sudden deterioration of the current account. In September 2001, NIR stood at US$180 million(less than 2 months of imports of goods and services). The central bank foreign exchange liabilities arise only from obligations to pay public sector debt service. However, other obligations have been paid by drawing down reserves such as the construction on the central bank new building and the issuing of new currency bills. In times of crisis the private sector approaches the central bank to meet its foreign currency needs. Thus, although evidence shows that the economy has weathered shocks such as hurricanes and oil price surges in the past without a foreign exchange crisis, the current low coverage justifies a larger level of reserves.

Sensitivity analysis

42. The extension of the sustainability assessment entails a sensitivity analysis of the vulnerabilities affecting the external sector. The sensitivity of the medium-term current account will be evaluated separately on three key variables: petroleum prices, donation inflows, and remittance inflows. In three different scenarios, petroleum international prices are assumed to remain at the same level of 2001 for the whole medium term, grants are assumed to remain at their minimum level of about US$160 million, and remittances remain unchanged at the same level of US$582 millions in 2001. A combination of the scenarios would yield a worse current account deficit. Figure 5 presents the medium-term current account deficit under those assumptions.

Figure 5:
Figure 5:

Sensitivity Analysis

(noninterest current account deficit)

Citation: IMF Staff Country Reports 2002, 018; 10.5089/9781451817584.002.A001

43. The results of the sensitivity analysis indicates a vulnerable situation of Haiti’s external sector. In the three scenarios the noninterest current account becomes unsustainable. All deficits below the -1.6 percent value line are unsustainable. While the less likely scenario is a flat behavior of remittances over the medium term, the accuracy in the measuring of remittances is at stake. A more likely scenario is the continuation of grants at its minimum levels, this is the current policy held by donors under the situation of no solution to the political impasse. Haiti is highly sensitive to petroleum prices, the change of the somewhat optimistic scenario of declining petroleum prices will put pressure on the current account. However, the impact of lower donation inflow, or lower remittances inflow needs to be assessed on a net basis net impact. For example, lower donation or lower remittances causes lower imports also, and thus does not have a one-to-one impact on current account or NIR.

E. Conclusions

44. The analysis underscore the weaknesses of Haiti’s external sector. There is no substantial effects on exports from the appreciation of the REER since the lifting of the embargo in 1995. The large shift in the composition of exports, away from traditional agricultural products, to light manufacturing in export processing zones is due to cheap labor and market access to the U.S. market. Further competitiveness enhancements require speeding the pace of structural reforms. The correct estimation of the current account deficit should include grants, since they have become a permanent component of the economy. Finally, the sustainability assessment indicates a sustainable situation over the medium term; however, the sensitivity of the external sector to key variables such as petroleum prices, grants, and remittances indicates a lightly vulnerable situation. The current account deficit becomes unsustainable under the sensitivity scenarios assumed. This situation is aggravated by the low level of international reserves and the lack of foreign direct investment.

Table 1.

Haiti: National Accounts at Current Prices 1/

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Sources: Haitian Institute of Statistics; Bank of the Republic of Haiti; and Fund staff estimates.

Based on the new national accounts published by the IHSI in April 2001. The national accounts have been benefited of technical assistance by the STA department.

Table 2.

Haiti: National Accounts at Constant Prices 1/

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Sources: Haitian Institute of Statistics; Bank of the Republic of Haiti; and Fund staff estimates.

Based on the new national accounts published by the IHSI in April 2001. The national accounts have been benefited of technical assistance by the STA department.

Table 3.

Haiti: Origin of Gross Domestic Product 1/

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Sources: Haitian Institute of Statistics; Bank of the Republic of Haiti; and Fund staff estimates.

There are serious problems with national accounts in Haiti including incomplete coverage, outdated activity surveys, and poor quality of raw data.

Table 4.

Haiti: Agricultural Production

(In thousands of metric tons)

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Source: Food and Agricultural Organization (FAO).
Table 5.

Haiti: Savings and Investment 1/

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Sources: Haitian Institute of Statistics; Bank of the Republic of Haiti; and Fund staff estimates.

Excluding grants.

Includes Trust Fund, publicly guaranteed capital, SDR allocation, and other unrequited earnings.

Includes monetary capital and net errors and omissions.

Table 6.

Haiti: Monthly Changes in the Consumer Price Index

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Sources: Statistics Department; Bank of the Republic of Haiti; and Fund staff estimates.
Table 7.

Haiti: Consumer Price Index

(Percentage change in period averages)

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Sources: Haitian Institute of Statistics; Bank of the Republic of Haiti; and Fund staff estimates.
Table 8.

Haiti: Changes in Consumer Prices by Category

(Percentage change in period averages)

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Sources: Haitian Institute of Statistics; Bank of the Republic of Haiti; and Fund staff estimates.
Table 9.

Haiti: Prices of Selected Items

(In gourdes per unit)

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Sources: Haitian Institute of Statistics; and Bank of the Republic of Haiti.
Table 10.

Haiti: Selected Price Indicators

(Average for year ended September 30; base year, FY 1975/76 = 100)

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Sources: Haitian Institute of Statistics; and Fund staff estimates.

Data before 1980 were obtained by splicing the old consumer price index based on 1948. Before 1991 the index covered only the Port-au-Prince area and since 1992 the whole country.

Estimate based on calendar year data from the IMF World Economic Outlook.

IMF Information Notice System, data rebased to FY 1980/81 = 100.