Haiti: Use of Fund Resources—Request for Emergency Post-Conflict Assistance
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International Monetary Fund
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Publication Date:
11 Nov 2005
eISBN:
9781451817621
Language:
English
Keywords:
ISCR; CR; financing; Emergency Post-Conflict Assistance; EPCA financing; IMF policy advice; IMF's Emergency Post-Conflict Assistance; fiscal year; debt service; foreign exchange; current account; broad money; Emergency assistance; Commercial banks; Credit; Current account balance
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This paper discusses the Use of IMF Resources in Haiti and Request for Emergency Post-Conflict Assistance (EPCA). The EPCA-supported program was on track until May 2005. All end-December and end-March targets were observed, inflation declined, the exchange rate stabilized, and net international reserves were increased. However, following expansionary fiscal and monetary policies during May–June, most end-June targets were missed. Also, while many structural measures were implemented as envisaged, progress on key structural measures, including the census of public employment and domestic arrears, was delayed.

Abstract

This paper discusses the Use of IMF Resources in Haiti and Request for Emergency Post-Conflict Assistance (EPCA). The EPCA-supported program was on track until May 2005. All end-December and end-March targets were observed, inflation declined, the exchange rate stabilized, and net international reserves were increased. However, following expansionary fiscal and monetary policies during May–June, most end-June targets were missed. Also, while many structural measures were implemented as envisaged, progress on key structural measures, including the census of public employment and domestic arrears, was delayed.

I. Background

1. A transition government was formed in March 2004 and has received concerted international support to stabilize the political and economic situation and lead the country to national elections. A United Nations stabilization mission (MINUSTAH) has been deployed in Haiti since June 2004, and in July 2004 donors pledged US$1.1 billion of financial assistance through September 2006. The elections are scheduled to take place in November–December 2005.

2. Following a successful completion of a Staff Monitored Program (SMP), the authorities requested an Emergency Post-Conflict Assistance (EPCA) from the Fund. The SMP spanned the April–September 2004 period, and the EPCA-supported program—covering the period October 2004 to September 2005—was approved by the Executive Board on January 10, 2005. The program sought to consolidate macroeconomic stabilization that had been gained in the earlier six-month SMP and provide a framework for continued donor assistance.

3. The EPCA-supported program was on track until May 2005. All end-December and end-March targets were observed, inflation declined, the exchange rate stabilized, and net international reserves were increased. However, following expansionary fiscal and monetary policies during May–June, most end-June targets were missed. Also, while many structural measures were implemented as envisaged, progress on key structural measures—including the census of public employment and domestic arrears—was delayed.

4. Despite progress in stabilizing the economy and restoring the government’s authority over the country, economic recovery has fallen short of expectations. The impact of the conflict in early 2004 was initially compounded by the devastating floods in May and September, which caused the loss of thousands of lives and extensive material damage. Subsequently, the recovery has been hampered by disappointing progress in dealing with the security situation, slow external disbursements, and long-standing administrative and infrastructure constraints. As a result, activity has been sluggish and large portions of population continue to live well below the poverty line.

5. More recently, there are signs that the political and security situation has improved. MINUSTAH and the national police have succeeded in bringing down violent crime in Port-au-Prince and reducing the climate of insecurity. Also, prospects for holding safe and fair elections later this year have improved as all key political parties submitted their candidates to the electoral council. However, the slow pace of voter registration has delayed elections to November 20 and December 11, 2005.

6. The Haitian authorities have requested a second purchase under the Fund’s EPCA policy. The authorities would like the Fund to remain closely engaged in Haiti and have proposed a financial program that would cover October 2005–September 2006, with indicative targets set through March 2006, and which would be supported by the second EPCA purchase. The new government is expected to be in office in early 2006, at which time it could initiate discussions of a future PRGF arrangement, subject to a satisfactory performance under the second EPCA-supported program.

7. Haiti continues to meet the conditions for post-conflict assistance from the Fund.1 In particular: (i) there remains an urgent balance of payments need; (ii) Haiti’s institutional and administrative capacity has been disrupted, so that it cannot implement a program with upper-tranche conditionality; (iii) there is, nonetheless, capacity for policy planning and implementation, as well as demonstrated commitment on the part of the authorities; and (iv) Fund assistance would continue to be part of the international effort to address the aftermath of the conflict that includes assistance from the World Bank, the Inter-American Development Bank (IDB), the European Union (EU), the United States, Canada, and other donors.

II. Recent Economic Developments

8. The macroeconomic situation and outlook have deteriorated in recent months. Following a year of improvement, worsening security conditions, slower than anticipated donor disbursements, and rising oil prices began to weigh more heavily on confidence and key activity indicators such as tax revenues and credit growth. These factors also contributed to an unprogrammed fiscal expansion in mid-year and a slackening of monetary discipline. As a result:

  • The growth projection for 2004/05 (October–September) has been lowered to 1½ percent. There are downside risks to this projection, especially with a recent tightening of financial policies that has been needed to compensate for shortfalls in donor support, and political and security situation could deteriorate.

  • Inflation has picked up. Consumer prices rose by about 6¼ percent during April-August, and the end-September objective of reducing the 12-month inflation rate to 15 percent is at risk (Text Figure 1).

  • The exchange rate has come under pressure. The increase in violent incidents over the summer reduced confidence and led to capital outflows, and drop in private remittances and visitors. As a result, following several months of stability, the gourde depreciated by about 10 percent during May-September 2005 (Text Figure 2). In real effective terms, however, the gourde remains 19 percent above the March 2004 level (Text Figure 3).

  • The external position has remained vulnerable. The central bank has avoided purchasing foreign exchange since April to ease pressures on the gourde, and the government’s foreign exchange needs caused net international reserves (NIR) to fall to US$49 million by end-July, and gross reserves dropped to the equivalent of only two weeks of imports. Subsequently, two IDB disbursements have helped NIR to rebound to about US$75 million in mid-September.2

  • The use of central bank financing of the budget is being eliminated. Earlier in the year, the government borrowed from the central bank to cover higher outlays as well as revenue shortfalls caused by worsened security conditions and a strike by customs officials.3 However, stricter expenditure controls implemented since early July, strong revenue performance in August and recent IDB disbursements are expected to bring cumulative central bank financing to a surplus by the end of the fiscal year in September.

  • Liquidity growth has been excessive. Gourde deposit rates have been negative in real terms and until mid-August were below dollar deposit rates, contributing to a decline in gourde term deposits and rapid growth in currency in circulation and dollar deposits.

  • Commercial banks’ asset quality has continued to deteriorate. Credit to the private sector has remained stagnant in real terms while the share of non-performing loans, increased from 8.3 percent in December 2004 to 9.6 percent in June 2005. Also, one of the largest banks experienced a deterioration in its portfolio and the central bank intensified supervision of its operations. However, according to official statistics the financial position of the banking system appears stable as capital adequacy ratio at end-June was 15.7 percent and banks’ profitability has improved.

  • Most quantitative targets for end-June were missed. Targets for end-June and end-September were to be confirmed in the context of the authorities’ request for a second EPCA purchase that had been originally intended for Board consideration in early July 2005.4

Text Figure 1.
Text Figure 1.

Haiti: Inflation 1/

(In percent)

Citation: IMF Staff Country Reports 2005, 404; 10.5089/9781451817621.002.A001

Text Figure 2.
Text Figure 2.

Haiti: Exchange Rate and NIR

Citation: IMF Staff Country Reports 2005, 404; 10.5089/9781451817621.002.A001

Text Figure 3.
Text Figure 3.

Haiti: Nominal and Real Effective Exchange Rates 1/

(1990=100)

Citation: IMF Staff Country Reports 2005, 404; 10.5089/9781451817621.002.A001

9. Fiscal policy discipline is being restored. The authorities issued a supplementary budget for April-September 2005 in early June that would have required G1.5 billion of additional financing (0.9 percent of GDP) for April–September 2005. However, they subsequently responded by scaling back or canceling several programs, such as compensation to victims of cooperatives fraud, as well as a new program of government support to the private sector (0.3 percent of GDP).5 The fiscal position has strengthened further as revenue shortfalls in April–June were more than offset by a strong overall revenue performance and large unanticipated one-time tax payments (arrears and licenses) in August–September 2005.6

10. Monetary policy is being tightened, albeit haltingly. By end-March 2005, excess reserves of the banking system reached 25 percent of required reserves, while interest rates remained negative in real terms.7 The central bank’s (BRH) initial steps to tighten monetary conditions in late April in response to emerging pressures on the exchange rate were reversed in May. However, in the face of continued exchange rate pressures by end-June, the BRH absorbed G2.1 billion of liquidity from the banking system, and raised interest rates on central bank 91-day bonds from 7 percent to 13 percent; interest rates were increased again to 15.6 percent in August (Text Figure 4). Interest rates are still negative in real terms (Text Figure 5), the BRH’s net domestic assets substantially exceeded program ceilings and base money increased by 5¼ percent during July-September 2005 (Table 1).

Table 1.

Haiti: Indicative Targets, September 2004–September 2005 1/

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

Refer to technical memorandum for definitions of indicative targets.

To all creditors except those who agreed on debt service deferral.

Not targets. Cumulative flows over the program period.

Estimated from weekly data provided by authorities.

Text Figure 4.
Text Figure 4.

Haiti: BRH bonds

Citation: IMF Staff Country Reports 2005, 404; 10.5089/9781451817621.002.A001

Text Figure 5.
Text Figure 5.

Haiti: Real Interest rates 1/

Citation: IMF Staff Country Reports 2005, 404; 10.5089/9781451817621.002.A001

11. Key structural measures have been implemented, although with some delays. For example, a census of employment in the police, education, and health sector was completed only in September, past the initial end-March due date and in a less comprehensive manner than expected.8 The authorities published three notifications of the registration of domestic arrears, but the initial notification provided only a short deadline for reporting claims to relevant ministries. Also, the list of beneficiaries of government-backed programs for the private sector were published much later than envisaged. On the positive side, spending through discretionary ministerial accounts has been limited to below 10 percent of budgetary credits, central government accounts for 2002/03 have been transmitted to the Cour Superieure des Comptes et du Contentieux Administratif (CSCCA) for audit, and systematic pre-audit of government spending was eliminated as of July 1.

12. International donors reiterated their support for Haiti at conferences in Cayenne and Montreal but actual disbursements fell short of expectations. During October 2004–June 2005, total donor budgetary financing (grants and loans) was US$196 million, US$44 million lower than programmed. The shortfall was mostly accounted for by lower project disbursements, reflecting delays in project preparation by donors and the authorities, and security concerns.

III. Economic and Political Risks

13. Haiti continues to meet the conditions for post-conflict assistance, but there remain significant risks to macroeconomic stability and to the Fund’s involvement.

  • Security. Despite continued deployment of the United Nations (U.N.) security forces, the government’s authority is not fully established in some provinces and kidnappings and violent crime continue, in particular in the Port-au-Prince area.

  • Political process. Security concerns, delays in the voter registration process, and low participation may undermine the success and legitimacy of the elections scheduled for late 2005.

  • External position. Sluggish donor support, coupled with weaker foreign exchange inflows from remittances and visitors and the rise in world oil prices, have increased pressures on the exchange rate and have caused large financing gaps to emerge into the medium term.

IV. Policy Discussions

14. The authorities re-iterated their commitment to maintaining financial stability through the period of political transition and to revive economic activity. The proposed program for October 2005–September 2006 would be consistent with the authorities’ pledge to avoid central bank financing of the budget over time and to strengthen Haiti’s external position.9 However, the authorities noted that this task had been further complicated by continued insecurity, a slower-than-anticipated pace of donor disbursements, pressures on the exchange rate, and a sizable external financing gap.

15. The main focus of discussions was on the policy corrections needed in light of the more difficult macroeconomic and security situation and delays in donor disbursements. The authorities emphasized their commitment to modify their fiscal plans for the 2005/06 budget in order to ensure these were consistent with available resources, and to also tighten the monetary policy stance in order to preserve macroeconomic stability. It was recognized, however, that the changed circumstances would require significant amendments to the quantitative objectives that had been set earlier.

16. The authorities stressed the importance of a Fund-supported program during the coming political transition. A second EPCA program would help discipline policies during the forthcoming political transition and provide a necessary framework for donors’ support and would facilitate a move to a possible PRGF arrangement in 2006. Against this background, it was agreed to establish a financial program through September 2006, with indicative targets set through March.

A. Key Macroeconomic Policy Issues

Fiscal policy and reforms

17. The mission welcomed that the supplementary budget for April–September 2005 had been implemented in a manner that avoided recourse to central bank financing. The authorities agreed that the potential threat to financial stability outweighed the possible benefits of fiscal expansion in the present circumstances. Accordingly, central government outlays were limited to high priority areas—wage bill, interest payments, and necessary funding of public sector entities, as well as G220 million for domestically funded public investment. The budget also provided G178 million of transfers for fuel purchases for the electricity company (EDH) to ensure power supply in Port-au-Prince of maximum 12 hours a day. The authorities agreed with the staff that in particular in view of tight budget constraints, the new program of support to the private sector and the payments to the victims of the cooperatives fraud should be postponed.

18. The authorities and staff agreed on a 2005/06 central government budget that would permit some increase in social services and infrastructure investment. The budget is based on relatively conservative macroeconomic parameters—real GDP would grow by 2.5 percent, CPI inflation would decline to 10 percent, and the overall deficit (excluding grants) would be 6.3 percent of GDP, to be fully financed by external assistance. In addition:

  • Revenues are targeted at 9.3 percent of GDP. The mission agreed that such a conservative revenue projection was appropriate, given the risks related to the security/political situation and donor support. The authorities viewed this target as consistent with historical trends and attainable, especially once customs controls were extended to all border points.

  • The expenditure ratio would rise to 15.6 percent of GDP, from 14.1 percent of GDP this year. This would mainly reflect increases in externally-financed projects, including in social sectors, and recent wage increases.10 The authorities agreed not to further increase wages and salaries during the next fiscal year until payrolls are adjusted according to the results of the census of public sector employment and adequate budgetary resources are available. The budget would also include resources to strengthen the position of the central bank (see below), and to prepare a strategy to address domestic arrears based on the survey to be completed by December 2005.

  • The authorities have requested additional donor support. This support is needed to close the remaining financing gap for April–September 2006 which is estimated at US$30.6 million or 0.7 percent of GDP.

19. Measures are being taken to strengthen revenue performance and expenditure management. In the area of tax policy and administration, pre-shipment verification will be extended to all ports of entry and borders of Haiti and the use of central taxpayer file on the basis of tax payers’ Fiscal Identification Number will be introduced. On the expenditure side, the authorities are committed to: (i) ensuring that all new recruitment and promotions are within budget allocations of the spending ministries; (ii) limiting discretionary spending through ministerial current accounts to below 10 percent of budget non-wage credits; and (iii) completing by the Anti-Corruption Unit of their investigation of corruption in the check distribution process by December 2005.11

Monetary and Financial Sector Policies.

20. The mission urged the authorities to tighten monetary conditions. In particular, base money growth appeared excessive and—coupled with interest rates that were negative in real terms—threatened the achievement of the program’s inflation objective and exchange rate stability. Therefore, the mission recommended that the BRH absorb excess liquidity sufficiently to bring real interest rates to positive levels.

21. The monetary authorities stated that they were committed to achieving the program’s external and inflation objectives. They explained that the earlier relatively lax policy stance had reflected a desire to support economic activity as well as concern that issuing central bank paper to withdraw liquidity would worsen the BRH’s losses. However, the BRH had recognized the need to stem the growing pressures on the exchange rate and by end-June acted to absorb liquidity by issuing bonds and raised interest rates. During discussions, the authorities indicated their commitment to taking further steps, as needed, to raise interest rates to levels positive in real terms.

22. The authorities requested Fund assistance in developing a strategy for financial sector reform. In the near term, a price-based bond auction mechanism, as recommended by the MFD technical assistance mission, would be re-established to help provide clearer signals about market conditions and the stance of monetary policy. The authorities have revised drafts of a new central bank law that would establish independence of the central bank and of a banking law, and are working on a medium-term strategy to reduce reserve requirements and enable more efficient financial intermediation.

23. The authorities are developing a strategy to address BRH losses.12 A MFD technical assistance mission recommended that the government convert its outstanding liabilities to the BRH into government bonds and that all future credit to the government bear a market based interest rate. A strategy for recapitalization of the central bank is being prepared and as a first step, increased payments by the Treasury to the BRH have been included in the 2005/06 budget. The Fund is providing technical assistance to develop a plan for a more fundamental recapitalization of the central bank over the medium term.

B. Governance and Transparency

24. The authorities agreed with the staff that continued efforts are needed to achieve a lasting improvement in the management and transparency of the public sector. These could build on the following actions implemented so far:

  • Census of public sector employment. Census reports have been completed in 68 ministries and other public sector entities, including in the ministries of health and education, and the national police; and public sector payrolls are being adjusted accordingly. The authorities recognize that a full-fledged census should be implemented as soon as security conditions and resource availability permit;

  • Survey of domestic arrears. Public announcements were issued for registration of unpaid claims on the central government and a program for their settlement will be developed during 2005/06;

  • Transparency of government operations. The information on budget execution as well as the list of beneficiaries of a government-backed scheme for businesses that suffered losses during the early 2004 conflict and from the June 2004 fires will continue to be published in local newspapers and on the government’s website;

  • Transfers to EDH. A monitoring mechanism for the use of government transfers to the EDH has been put in place in consultation with World Bank staff, monthly reports on transfers and associated electricity output will be published, and independent audit of these reports will begin by end-October 2005. Furthermore, competitive acquisition procedures will be applied in the electricity sector;

  • Audits of public sector accounts. The report for the central government accounts of 2002/03 will be published after their audit by CSCCA is completed. This will be followed by an audit of 2003/04 accounts;

  • Consumer price index. A new price index was introduced in June 2005, to better capture price developments beyond the Port-au-Prince area.

25. The mission urged the authorities to continue with implementation of a flexible price-setting mechanism for petroleum prices. The authorities explained that less than full adjustment in petroleum prices in recent months reflected their intention to gradually phase in the recent sharp increases in international prices. However, they agreed with the staff that delaying adjustment would have negative fiscal and resource allocation effects and reiterated their commitment to implement this mechanism as envisaged.

26. The authorities agreed with the staff on a plan to strengthen data reporting and reliability. A committee established last May has met regularly and recommended steps to improve reporting of data required for program monitoring. Regarding the monetary data, the internal audit mechanism has been strengthened and a process established to improve the timeliness of reporting. A plan will be agreed with Fund staff based on a comprehensive review of fiscal and monetary data collection and reporting, leading to regular and automated data transmissions to the Fund.

C. External Sector

27. The authorities and mission agreed on the need to revise downward the original NIR targets. The authorities stressed that in the context of an unsettled security situation and rising international petroleum prices it would not be possible to make up for reserve losses to date without putting undue pressure on the gourde. For these reasons they could only commit to increasing NIR to US$84 million by end-September 2006. Moreover, the external assistance that had been pledged to Haiti thus far would help cover Haiti’s external debt-service obligations, fuel purchases for maintaining electricity supply, and other priority government needs, but would not allow any further increase in NIR during the period to March 2006. While recognizing these constraints, the mission stressed that this would leave NIR at low levels and that it would be essential for the BRH to maintain a steady pace of foreign exchange purchases to avoid any shortfall in the revised NIR targets.

28. The staff recognized the importance of timely disbursements of budget assistance. Two IDB loans (US$24.5 million) have been recently disbursed, and conditions for disbursements from the World Bank (US$14.5 million) and the IDB (US$10 million) expected before end-2005 have been largely completed. The authorities agreed that it was important to work closely with donors to avoid procedural and other delays in disbursement of existing pledges, and also to seek additional assistance to fill the financing gap of US$30.6 million that was estimated for the second half of the fiscal year13 In this context, the authorities have requested donor assistance in the preparation of capital investment projects for 2005/06, including to address capacity constraints in line ministries that hamper project preparation. Steps are also being taken to strengthen aid coordination with donors, including by improving the flow of information about on-going and planned projects.

D. Program Issues

Access and capacity to repay the Fund

29. The proposed purchase under the Fund’s EPCA policy is for SDR 10.245 million (12.5 percent of quota). The rate of charge on the proposed purchase would be subsidized to an annual rate of 0.5 percent, consistent with Haiti’s PRGF eligibility. The proposed access is consistent with the revised EPCA policy and with Haiti’s financing needs during July 2005-March 2006, taking into account the resources pledged by other donors.

30. Haiti is expected to meet its financial obligations to the Fund in a timely manner. The country has been current on its debt-service obligations to the Fund since the early 1990s. Taking into account Haiti’s purchase of 12.5 percent of quota under the EPCA in January 2005, the proposed purchase in October is consistent with the annual access limit under the EPCA (25 percent of quota); Fund credit outstanding would peak in 2006 at 27 percent of quota and 5¼ percent of exports of goods and services. Debt service to the Fund would remain below 2 percent of exports of goods and services.

Program monitoring

31. The authorities’ economic program would cover the fiscal year October 2005-September 2006. However, the financial program and quarterly targets were agreed for December 2005 and March 2006. Targets for April–September 2006 would be confirmed with the new government by March 2006 either as interim targets in the context of PRGF negotiations or some alternative monitoring arrangement.

32. The staff will monitor program execution based on quarterly indicative targets, structural benchmarks, and quarterly staff visits. Quarterly indicative targets for end-December 2005 and end-March 2006 will be set as presented in Table 1 of the MEFP. Attachment II presents policy actions to be implemented by March 2006, including those that would be introduced as structural benchmarks.

Technical assistance

33. Haiti’s institutional and administrative capacity has been adequate for program implementation under the policy on EPCA, but large technical assistance needs remain. Recent Fund missions prepared summaries of the needs in areas of public finance and monetary management, and with the authorities’ consent these have been shared with other donors to improve coordination and effectiveness of technical assistance to Haiti. The Fund is also preparing technical assistance to strengthen the financial position of the central bank, and a multi-topic statistical mission is planned later this year. This latter mission will be particularly helpful in improving data reporting to the Fund and for program monitoring.

Safeguard Assessment

34. A safeguards assessment of the Banque de la République d’Haiti was completed in August 2005. It identified a number of vulnerabilities, in particular in the areas of financial reporting, internal audit and controls. To address these vulnerabilities staff proposed various measures, including a strengthening of the accounting function of the bank and of procedures for the compilation, reporting, and verification of monetary data reported to the Fund, as well as improvements in the operations of the BRH’s Internal Audit Unit. The BRH has indicated that it has already started to implement some of the recommendations and progress will be monitored by staff.

V. Staff Appraisal

35. Haiti is entering a crucial period in its political transition and in its economic stabilization and recovery program. Considerable improvements in the security situation and in economic performance had been achieved last year and in early 2005. However, the deterioration in the security situation earlier this year has contributed to delays in the preparations for national elections scheduled later this year and this has also a negative impact on the economy, as well as on donor and other inflows of foreign exchange.

36. Looking forward, there is a critical need to improve security conditions in Haiti. This will be essential for ensuring fair and safe elections, and for implementing the social and economic agenda agreed with donors last year. In this context, the recent decision by the United Nations to increase its stabilization force in Haiti is a welcome development.

37. Stringent fiscal discipline and good governance will be crucial for fostering private sector-based recovery and for assuring donors that external assistance will be used effectively. It is encouraging, therefore, that the authorities have decided to implement fiscal policies consistent with the principle of avoiding central bank financing of the budget. This has required scaling back the outlays from the levels envisaged in the supplemental budget, and strictly limiting spending to high priority areas, including for basic social services, security, and domestically-funded investment. The staff also welcomes the authorities’ and donors’ commitments for the 2005/06 budget which would increase the provision of social services and public investment using external assistance while also avoiding central bank financing over time.

38. The BRH needs to ensure that monetary conditions are tight enough to protect the program’s inflation and external objectives. Welcome steps have already been taken to absorb excess liquidity in the banking system and to raise interest rates. However, these were taken only after market pressures had already built and it will be important for the central bank to conduct its operations in a more forward-looking and pre-emptive manner. The authorities are also strongly encouraged to re-establish a price-based bond auction mechanism, since this would help provide clearer signals of the policy stance. The staff welcomes the authorities’ intention to cover the losses of the BRH and to develop a plan to recapitalize the central bank, and encourages publication of the audit of the BRH’s accounts.

39. The staff welcomes the recent steps to improve transparency and governance in the public sector. The recently completed census of employment in key ministries and public sector entities has helped demonstrate a commitment to strengthening good governance and should also yield budgetary savings by eliminating ghost workers from the government’s payroll. A full-fledged census should be implemented once the security situation allows and resources are available. Also encouraging are the steps to address domestic arrears and the publication of information on budget execution and government programs of support to the private sector. The authorities’ intention to publish the audits of the central government accounts for 2002/03 and the forthcoming audit of 2003/04 accounts are also welcome. Of critical importance is the establishment of a mechanism to ensure that government transfers to the EDH are linked to electricity supply targets, and that all new contracts on electricity production are based on open and competitive bids. As important is rapid progress in extending customs control to all border points of entry to further improve revenue performance.

40. The staff supports the authorities’ efforts to mobilize additional donor financing and to accelerate disbursement of the pledged assistance. The first priority would be to make every effort to ensure that policies are consistent with agreements reached with donors so that budgetary assistance can be disbursed as envisaged. At the same time, donor support is needed to alleviate capacity constraints within the line ministries to prepare and implement capital investment projects. Nonetheless, a large financing gap of US$30.6 million remains for 2005/06 and the authorities and donors are encouraged to work together to fill this gap on a highly concessional basis.

41. Further improvements are needed in data reporting to the Fund for program monitoring and surveillance. The staff welcomes the establishment of the committee to strengthen data reporting, and the steps taken to improve the timeliness and integrity of monetary data, and supports the authorities’ request for technical assistance to improve Haiti’s economic statistics. The implementation of the new consumer price index is an important achievement of Haiti’s statistical services.

42. In the staff’s view, Haiti continues to meet the conditions for post-conflict assistance. Haiti’s balance of payments needs remain urgent, while the present institutional and administrative capacity is not sufficient to implement a program that could be supported by a Fund arrangement. However, performance to date under the SMP and the EPCA-supported program demonstrates that the authorities have sufficient capacity and commitment to implement the program they are presenting as a basis for Fund support. The proposed purchase from the Fund would support a macroeconomic framework to underpin a broader international support to Haiti. Taking into account the authorities’ commitment and the performance under the SMP and the EPCA, the catalytic role Fund resource would play, and notwithstanding the risks that arise in the present difficult political and security situation, the staff supports the authorities’ request for Fund assistance under the post-conflict emergency assistance policy.

Table 2.

Haiti: Selected Economic and Financial Indicators

Fiscal Year Ending September 30

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

Excluding grants.

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

External current account balance excluding official capital grants.

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

Excludes commercial banks’ foreign currency deposits with the BRH.

Gross reserves excluding capital contributions to international organizations.

Table 3a:

Central Government Operations

(in millions of gourdes)

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

Includes statistical discrepancy.

Table 3b.

Haiti: Central Government Operations

(in percent of GDP)

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

Includes statistical discrepancy.

Table 3c:

Central Government Operations

(in millions of gourdes)

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

Includes statistical discrepancy.

Net BRH financing in 2005/06 is equal to central government’s net savings accumulated at the BRH during 2004/05.

Table 3d.

Haiti: Central Government Operations

(in percent of GDP)

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

Includes statistical discrepancy.

Net BRH financing in 2005/06 is equal to central government’s net savings accumulated at the BRH during 2004/05.

Table 4.

Haiti: Summary Accounts of the Banking System

(Fiscal Year Ending September 30

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

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

Excludes special accounts.

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

Table 5.

Haiti: Balance of Payments

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

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

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

Excludes commercial banks’ foreign currency deposits with the BRH.

Includes short-term capital and errors and omissions.

Includes commercial banks’ foreign currency deposits with the BRH.

Table 6.

Haiti: Medium-Term Scenario

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Sources: Haitian authorities; and Fund staff estimates.

Includes exceptional outlays.

Table 7.

Haiti: Indicators of Fund Credit, 2004-2009

(In fiscal years ending September 30)

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

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

For 2006-09, converted at the program exhange rate (42 gourdes per U.S. dollar).

Including SDR charges.

After subsidization of GRA charges.

Table 8.

Haiti: Stock of Arrears and Projected Debt Service, 2000-2005 1/

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

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Sources: BRH; and staff projections

Data on the stock of arrears do not match the flow data as both are subject to data reconciliation.

Excluding arrears reduction.

Table 9.

Haiti: Donor Pledges and Disbursements, 2004-06

(In millions of US dollars)1/

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Sources: Donors; and staff estimates and projections.

Excluding humanitarian relief, financing of the United Nations contingent in Haiti, and deferred

Pledged at the July 2004 donor conference in Washington D.C.

Subsequent to the July 2004 donors conference, Canada’s pledge was increased to 180 million Canadian dollars.

Table 10.

Haiti: Budgetary Financing, by Donor and Type 1/

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Sources: Haitian authorities; and Fund staff estimates.

In fiscal years (October-September), unless otherwise noted; excludes humanitarian assistance.

Includes funds for clearance of arrears to the World Bank.

Includes informal deferral of debt service to France, Italy, and Spain granted in early 2005 (until a PRGF program is in place).

Disbursements consist of 60 percent concessional loans and 40 percent grants; does not include possible new financing that is not yet identified.

Table 11.

Haiti: Millennium Development Goals

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Sources: World Bank; UN Statistics Division; and Fund staff estimates.

Data for 2004 are the same as 2003 data.

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

ATTACHMENT I

Port-au-Prince, Haiti

October 5, 2005

Mr. Rodrigo de Rato

Managing Director

International Monetary Fund

700 19th Street, N.W.

Washington, D.C. 20431

U.S.A.

Dear Mr. de Rato:

1. During its first year in office, the transition government of Haiti implemented a prudent macroeconomic policy that helped to stabilize the economy and carried out several measures to strengthen key institutions and governance in order to address the aftermath of an armed political conflict in early 2004. In the period leading to the handover of power to the elected government, we remain committed to making progress toward restoring security and rebuilding administrative and institutional capacity. However, Haiti needs continued assistance from the international community if it is to consolidate the progress achieved so far and to continue to fully address the longstanding structural issues that have hampered sustained economic growth and to strengthen the still-vulnerable external position.

2. The government has worked with the international community to restore security and revive economic activity. The Haitian National Police and the United Nations Mission for the Stabilization of Haiti (MINUSTAH) have been working together to improve security and prepare the ground for fair and safe elections. On the economic front, over the period April 2004–March 2005 we have successfully implemented a Staff Monitored Program followed by an Emergency Post-Conflict Assistance (EPCA) supported program. During this period, we have met all quantitative targets under both programs and made progress on key structural measures. We expect to meet most of the program’s objectives by end-September 2005. Also, progress has been achieved in implementing an Interim Cooperation Framework (ICF) for the period July 2004–September 2006, prepared jointly by the government and the international community. However, disbursements of donor assistance have been slower than anticipated, and although more recently the situation has improved, security remains a prime concern. These challenges required modifications in our macroeconomic policies, which are outlined in the attached Memorandum of Economic and Financial Policies (MEFP).

3. The government’s program follows the principal objectives of the previous EPCA-supported program. In particular, it seeks to: (i) strengthen security and prepare national elections in late 2005; (ii) consolidate the stabilization gains and create conditions for economic recovery and reconstruction of government and social infrastructure; (iii) enhance governance and institutional capacity of public administration; (iv) improve access to basic services; and (v) create employment for the unskilled and for displaced populations. The financial objectives of the proposed program are consistent with our firm resolve to avoid central bank financing of the government’s budget and to strengthen Haiti’s external position. The government believes that the policies outlined in the attached MEFP are adequate to achieve the objectives of its economic and financial program, but it will take any further measures that may become necessary for this purpose. Already, it has completed the key policy actions defined in its discussions with Fund staff, and it has decided to delay the consideration of any salary adjustments until the completion of the public employment census at the earliest.

4. In order to facilitate the implementation of the program and address the vulnerable balance of payments position, the government of Haiti requests assistance under the IMF’s EPCA policy in an amount of SDR 10.245 million, equivalent to 12.5 percent of quota, consistent with our balance of payments needs and with the annual limit of access to EPCA of 25 percent of quota. This EPCA-supported macroeconomic program would extend until March 2006 when the newly-elected government will take office. At that time, the newly-elected government will be in a position to agree on a program that could be supported by the Fund’s Poverty Reduction and Growth Facility (PRGF). We expect negotiations on a PRGF to begin in early 2006.

5. Haiti will consult with the Fund on the implementation of the program and any revisions to the policies contained in the MEFP, in accordance with the Fund’s policies on such consultations. The government will communicate to the IMF all the information needed to monitor progress in implementing the program.

Sincerely,

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ATTACHMENT II Haiti—Memorandum of Economic and Financial Policies for October 2005–March 2006

I. Background

1. The extended political conflict that resulted in an armed rebellion and led to a change in government in March 2004 continues to affect the economic, social and political situation in Haiti. While substantial progress has been achieved in stabilizing the economy and the government’s authority has essentially been restored throughout the country, Haiti’s institutional and administrative capacity remains weak. Moreover, security concerns and low business confidence persist, hindering the rebuilding of the country’s economic and social infrastructure, and large portions of Haiti’s population remain in highly fragile conditions.

2. The transition government requested international assistance in stabilizing the economy and restoring security, with a view to creating conditions for fair and safe elections in late 2005. The international community responded by pledging US$1.1 billion in new external assistance for the period July 2004–September 2006 to support a broad reform and development program, detailed in the Interim Cooperation Framework (ICF), aimed at restoring security and promoting national dialogue, strengthening key institutions and governance, promoting economic recovery, and improving access to basic services. A macroeconomic framework guiding our policies and enabling donor assistance was established by a six-month Staff Monitored Program (SMP) implemented during April-September 2004, followed by an Emergency Post-Conflict Assistance (EPCA) supported program covering the period October 2004-September 2005.

3. As the country prepares for national elections scheduled for November-December 2005 and for political transition in early 2006, the transition government seeks the continued support of the international community to build on the stabilization gains achieved to date, strengthen administrative and institutional capacity, and implement policies conducive to national reconciliation and economic recovery. A macroeconomic program supported by the IMF’s Emergency Post-Conflict Assistance is a critical element in the recovery effort.

II. Recent Economic Developments and Performance under the Program

4. Economic recovery has been significantly weaker than expected, reflecting the delays in donor project disbursements and the impact of insecurity on business confidence. The prospects for growth were further constrained by the low availability of external resources. As a result, the macroeconomic framework for 2004/05 has been revised, reflecting economic recovery below expectations, rising international petroleum prices, and the original program’s targets for inflation and NIR have had to be eased. Real GDP growth is now targeted at 1.5 percent, the decline in consumer price inflation at about 15 percent (end of period), and the increase in NIR at US$65 million.

5. Following an extended period of falling inflation and broad exchange rate stability, consumer prices increased by 6.2 percent during April–August 2005, the gourde has come under pressure and net international reserves (NIR) of the central bank (BRH) declined to below US$50 million in July. The increased balance of payments pressures stemmed largely from higher international prices for Haiti’s fuel imports, capital outflows, and negative net flows from tourism. However, aided by recent disbursements of budgetary assistance, NIR rebounded to about US$73 million by mid-September 2005.

6. Against the backdrop of lagging economic recovery, lower-than-anticipated donor disbursements, and persistent security concerns, the government, seeking to address the country’s critical needs, released in June 2005 a supplementary budget that envisaged an increase and re-prioritization of expenditures during June–September 2005. However, in view of weak revenue performance and the absence of additional external financing, the government moved expeditiously to implement a set of budget adjustments, including reductions in capital expenditures in order to reduce the fiscal deficit to a level consistent with its commitment to avoid central bank financing.

7. Policy corrections have been introduced in recent months, and, together with a very strong revenue performance in August, have brought our fiscal program back on track. However, most of quantitative benchmarks of the EPCA-supported program were missed for end-June 2005, and several end-September targets are not expected to be met, in large part due to exogenous shocks affecting the economy. By contrast, all structural benchmarks under the EPCA-supported program have already been implemented. In particular:

  • a census of employment has been completed in 68 ministries and public sector entities, resulting in the elimination of more than 1,000 workers from public sector payrolls;

  • a survey of domestic arrears on wages and salaries, goods and services, and investment is underway, and the three notices inviting the public to register their claim on the government were published by July 2005;

  • spending through discretionary current accounts has been limited to just 4 percent of budgetary credits for nonwage spending, well below the 10 percent program ceiling;

  • the Anti-Corruption Unit has been operational since last November;

  • the pre-audits of the state-owned telephone company, Teleco, and electricity company, EDH, have been initiated;

  • requests for offers for audits of the remaining three public sector enterprises (the metropolitan Port-au-Prince water utility, CAMEP; the national airport authority, AAN; and the national seaport authority, APN) were published;

  • arrears to the World Bank have been cleared, and selected Paris Club creditors have granted Haiti an informal deferral of debt-service obligations;

  • an IMF safeguards assessment and the external audit of the BRH’s accounts have been completed;

  • surveillance of cooperatives by the BRH has been strengthened;

  • the BRH has developed formal internal procedures for the compilation and reporting of monetary program data to the IMF consistent with the Technical Memorandum of Understanding;

  • the central government accounts for 2002/03 have been submitted to the Cour Supérieure des Comptes et du Contentieux Administratif (CSCCA) for their audit;

  • the executive order (arrête) ending systematic a priori controls by the CSCCA was prepared by the Minister of Economy and Finance and approved by the Council of Ministers in June 2005 and the controls were eliminated as of July 1, 2005;

  • the MEF-BRH working group on program monitoring has met regularly since November 2004;

  • the list of businesses and the financial benefits received by them from the Industrial Development Fund (‘FDI) and Banque National de Credit (BNC) have been published on the Ministry of Economy and Finance (MEF) website; and

  • a new CPI (with August 2004 base) was introduced in June 2005.

III. The Post-Conflict Program for October 2005–March 2006

8. The transition government’s program for October 2005–March 2006 seeks to complete the political transition while consolidating the macroeconomic stabilization achieved to date. The key objectives of the program continue to be to reinforce security and prepare the national elections, create conditions for economic recovery, enhance governance and institutional capacity of the government, create employment and improve access to basic services for the unskilled and for displaced populations. These objectives have also guided the preparation of the budget for FY2005/06, which has been subject to consultations with political parties and the civil society. The transition government is determined to implement this program and requests continued support from the IMF under its EPCA policy. We are also seeking continued support from other development partners that pledged assistance in July 2004 under the ICF and reconfirmed their support at two donors’ meetings, first in Cayenne, French Guyana, in March 2005, then in Montreal, Canada, in June 2005.

Objectives and Macroeconomic Framework

9. The macroeconomic framework for 2005/06 targets real GDP growth of 2.5 percent, inflation of 10 percent, and an increase in NIR to US$84 million. The central government’s budget deficit in 2005/06 will be financed without any recourse to BRH credit. We are committed to prioritizing expenditures to support key social and investment programs and enhance transparency and accountability of public sector operations within a budget whose deficit will be financed fully by external resources.

10. The key economic objectives of the program are summarized below:

Haiti: Key Economic and Financial Indicators

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Excludes commercial banks’ foreign currency deposits with the BRH.

11. The success of the government’s macroeconomic stabilization policy in 2005/06 is highly dependent on the improvement of the security conditions, smooth political transition following the elections, and timely donor assistance.

Fiscal Policy

12. The macroeconomic framework for 2005/06 is based on a real GDP growth of 2.5 percent, and inflation of 10 percent. These growth and inflation objectives are consistent with the net external financing of the budget of 5.5 percent of GDP with domestic revenues—at 9.3 percent of GDP. A draft of the budget will be submitted for discussion by the Council of Ministers in time to enable its approval by end-September 2005.

13. Revenues are projected to increase to G17.2 billion (9.3 percent of GDP). To ensure that the projected revenue levels are achieved as envisaged, the income tax law and the vehicle registration tax will be updated, the authorities will also simplify customs procedures, strengthen tax administration, assure tighter control in the granting of fiscal exonerations, make operational the two customs control points along the national highways leading to Portau-Prince from the north (from the ports of Gonaïves and Saint-Marc) and from the south (from the ports of Miragoane and Petit-Goave), strengthen the customs inspection brigades, continue the fight against fiscal fraud and tax evasion, reinforce business tax verification and control procedures for the delivery of fiscal discharges (quitus fiscal), intensify the pursuit of tax delinquents, apply strictly the law dealing with the recovery of tax arrears, oblige taxpayers to produce their income tax returns as condition for all administrative formalities, and reinforce the administrative structures of the DGI and of the AGD.

Haiti: Central Government Budget

(In percent of GDP)

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14. Key assumptions for budget expenditures in 2005/06 are as follows: (i) total central government expenditures will be contained at 28.8 billion (15.6 percent of GDP), without any recourse to central bank financing; (ii) wages and salaries will increase to G7.1 billion (3.9 percent of GDP, from 3.5 percent in 2004/05); goods and services (net operations) will increase to G4.5 billion; (iii) transfers and subsidies to public and non-profit entities will amount to G4.2 billion, allowing for a decline in real terms based on expected improvement in their efficiency; (iv) transfers to the EDH are programmed at G178 million per month to cover the supply of fuel consistent with planned electricity production; (v) capital expenditures will increase to G11.0 billion (6.0 percent of GDP from 4.5 percent in 2004/05), of which domestically-funded projects and counterpart funds for foreign-financed projects will amount to G1.7 billion. The budget will include resources to recapitalize the BRH, as discussed below.

15. The authorities are committed to improving public financial management and revenue administration. In this respect, they welcome the recommendations of the recent missions of the IMF’s Fiscal Affairs Department. To improve revenue collection, the government will ensure that each taxpayer has a unique Fiscal Identification Number (NIF), reinforce the use of central taxpayer file based on the NIF starting in October 2005 and agree on a strategy to monitor progress. The government will also start implementing in October 2005 an operational plan to implement pre-shipment verification to all ports of entry and borders of Haiti. To strengthen and unify the budget formulation process, the new budget nomenclature will be used for all revenues and for current expenditures. To ensure transparency of the budget and its execution, the post “autres interventions publiques” are being limited to 2 percent of domestically-financed spending, while discretionary spending through ministerial current accounts will remain below 10 percent of budget non-wage credits.

16. In managing the budget, the periodic daily programming has been abolished and the monthly Tableau des Opérations Financières de l’Etat (TOFE) will be used for making decisions on cash spending and approval of spending requisitions. The government will establish a list of priority and non-priority expenditures and rank expenditures within these categories. This list will be used for limiting expenditure approvals should short-term revenue collection under-perform relative to monthly targets. The authorities have been consulting with the IMF staff on significant modifications to budget implementation.

Monetary and Exchange Rate Policy

17. Our strategic objective is to bring inflation down to single-digit levels and to reduce external vulnerability by increasing net international reserves. Consistent with this objective:

  • For 2005/06, we target a decline in inflation to 10 percent (end-of-period) and an increase in net international reserves of the BRH to US$84 million.

  • The BRH has established ceilings on its net domestic assets and to ensure that the program’s external and inflation objectives can be met, it will adjust interest rates and issue its bonds, as appropriate, to control liquidity; interest rates will be raised to positive levels in real terms. In consultation with the IMF and with its technical assistance, the BRH will introduce a weekly price-based auction for its bonds tailored to specific institutional characteristics of Haiti and establish a formal quarterly macroeconomic forecasting model and weekly liquidity forecasts starting in December 2005.

  • The BRH will avoid foreign exchange market intervention, except for meeting its quarterly program NIR target.

  • The BRH will consult with the IMF staff on foreign exchange market developments and central bank policies.

18. The government recognizes the need to address BRH losses and increase its independence. Interest charges on outstanding BRH credit to the central government are below market levels and do not provide adequate return to cover the operational costs of the central bank. In the near term, the central government will agree with the BRH on monthly payments for outstanding credit that would cover its operational costs. The government and BRH will finalize by end-December 2005 a recapitalization plan for the central bank. Specifically, if the central government budget cannot accommodate the full cost of recapitalization, the government will seek donor assistance or will implement the plan over 2-3 years, consistent with the available resources. As a first step, agreement has been reached on an increased level of payments by the Treasury to the BRH.

19. A revised draft of a new central bank law that would establish the independence of the central bank has been prepared. Also, a revised draft banking law has been submitted to commercial banks for their comments. It is envisaged that both drafts would be finalized by the time a new parliament is constituted. The BRH will consult with IMF staff and if needed, request technical assistance from the Fund.

20. The accounting function within the BRH is being strengthened by (i) BRH management adopting a decision to either centralize the accounting reconciliation function or make the accounting staff in all departments functionally responsible to the bank’s Finance Department, (ii) instructing the bank’s International Operations Department to record all off-balance sheet items in the BRH’s accounting system, and (iii) developing a formal timetable and detailed instructions for the monthly financial closing process.

21. To communicate the orientation of monetary policy and receive feedback, the BRH will continue monthly briefing sessions between the BRH and the banking sector and introduce quarterly briefings for the private sector. The BRH Board approved in August 2005 the internal audit charter to enable the Internal Audit Unit to increase its effectiveness in performing its mission.

22. The BRH will continue to monitor the financial condition of commercial banks and will strengthen its oversight of certain banks whose financial position has weakened in recent weeks. The BRH will also strengthen surveillance of cooperatives, including by expanding on-site inspections.

Structural Reforms and Governance

23. The government remains committed to improving public sector governance and transparency, and addressing institutional weaknesses. Although the administrative and institutional capacity in certain ministries and in the provinces remains disrupted, key ministries and the central bank have largely preserved their capacity to conduct their work and we intend to continue to implement the structural measures in line with our past and present commitments. In particular:

  • By end-December 2005, the authenticity of the identified domestic payment arrears of the central government will be verified and a definitive strategy to clear them will be prepared by March 2006.

  • The government is committed to achieving full accountability and transparency in the electricity sector. Accordingly: (i) a mechanism for continuous monitoring of the use of budgetary transfers to the EDH consistent with the targets for electricity supply will become operational starting in October 2005, and information on government transfers and on associated electricity production will be published monthly and an independent audit of this mechanism will be put in place by end-October 2005; (ii) competitive acquisition procedures will be applied to existing contracts for electricity production upon their expiry, and for converting protocols for electricity supply into contracts by end-December 2005; and (iii) the pre-audit of EDH will be completed by end-December 2005, and the audit of the FY 2004/05 accounts, for which the request for manifestation of interest was launched on July 8, 2005, will begin by January 15, 2006 and be completed within three months.

  • The 2003/04 pre-audit of Teleco will be completed by December 2005, and the 2004/05 audit of Teleco will be initiated by March 2006, with a projected completion date of June 2005.

  • As for the three other public enterprises targeted for financial and management reviews, bids for the technical audit of CAMEP (Metropolitan Port-au-Prince Potable Water Authority) have been received and the requests for bids for the IDB-financed financial audit have been published in international press and the firm for technical and financial audit of CAMEP will be selected by mid-October 2005, and the audit initiated shortly thereafter. A firm for the financial audit of APN (Seaport Authority) will be selected by mid-October 2005. The financial audit of AAN (Airport Authority) is being carried out by a domestic firm for lack of donor financing for an international audit.

  • The information on budget execution as well as the list of beneficiaries of government-backed programs for businesses that suffered losses during the early 2004 conflict and from June 2004 fires will continue to be published quarterly.

  • A flexible price-setting mechanism for petroleum products (based on 1995 law and as reinstated in 2003) will continue to be implemented fully, to ensure that domestic prices move in line with international oil prices and to protect the central government revenue base.

  • We will publish the audit report for the central government accounts of 2003/04 by December 2005. We will also publish the completed audits of the BRH for 2003/04.

  • As in view of the present security situation and limited administrative capacity the census of employment has been completed largely based on attendance lists rather than actual head count, a full-fledged census will be implemented once the security situation allows and adequate resources are available.

24. We intend to publish the LOI and MEFP for this program to keep the public informed about the government’s policies and objectives and to reaffirm our commitment to transparency and economic reform.

External Financing

25. Haiti continues to face substantial external financing needs as reconstruction of economic and social infrastructure requires a large volume of critical imports, while gross liquid official reserves of the BRH remain low. To help meet the projected financing requirements, while still increasing the BRH’s official reserves, we are requesting a second purchase under the IMF’s emergency assistance. We are also urgently seeking additional support from donors to meet the country’s financing requirements, which cannot be met without additional external resources. In particular, we will:

  • Seek support from donors especially for fuel supplies, and for elections. We will also seek to secure additional budgetary support to help cover Haiti’s 2005/06 remaining external financing requirements.

  • Request donor assistance in the preparation of capital investment projects for 2005/06. There are significant capacity constraints in line ministries that hamper preparation of projects that could be financed by donors. We will moreover work with the donor community to streamline and render more flexible their own procedures to assure a more rapid pace of disbursements.

  • Strengthen aid coordination with donors. In particular, we are working with donors to improve the flow of information about on-going and planned projects to enhance aid coordination with the budget.

26. In consultation with IMF and World Bank staff, we have begun the external debt data reconciliation process.

Program Monitoring

27. Performance under the program will be monitored using quarterly indicative targets, structural indicative benchmarks and quarterly reviews. Indicative targets for end-December 2005, and end-March 2006, as specified in Table 1, relate to net international reserves and net domestic assets of the central bank; net domestic banking sector credit to the nonfinancial public sector; net central bank credit to the central government and total nonfinancial public sector; domestic arrears of the central government; external arrears accumulation; and nonconcessional external loans contracted or guaranteed by the central government. The definitions of these indicative targets are provided in the attached Technical Memorandum of Understanding (TMU). Data for program monitoring will be provided to Fund staff as stipulated in section III of the TMU. Given the uncertainty of the amount and timing of disbursement of budgetary assistance, our program includes two adjusters (see TMU). The main policy actions envisaged under the program are listed in Table 2, including those constituting structural indicative benchmarks and prior actions.

Table 1.

Haiti: Indicative Targets, September 2005–March 2006 1/

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

Refer to technical memorandum for definitions of indicative targets.

Program exchange rate of G42/US$.

To all creditors except those who agreed on debt service deferral.

Not targets. Cumulative flows over the program period.

Table 2.

Haiti: Prior Actions and Main Policy Actions Under the EPCA

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28. The government will not impose restrictions on payments and transfers for international transactions, introduce new or intensify trade restrictions for balance of payments purposes, resort to multiple currency practices, or enter into bilateral payments agreements incorporating restrictive practices with other IMF members. Haiti will consult with the IMF periodically, in accordance with the IMF’s policies on such consultations, concerning the progress made by Haiti in the implementation of policies and measures designed to address the country’s balance of payments difficulties.

ATTACHMENT III Haiti—Technical Memorandum of Understanding

Definition of cumulative targets and adjustments

The Ministry of Economy and Finance, the Bank of the Republic of Haiti (BRH), and Fund staff will use the following definitions of indicative targets and adjustments of the indicative targets to monitor the quarterly performance under the program for October 2005–March 2006.

I. Definitions

Net BRH Credit to the Central Government14

1. The change in net BRH credit to the central government is defined as, and will be measured using:

  • a. Change in net domestic credit to the central government from the BRH according to Table 10R of the BRH from the stock of end-September 2005;

  • b. Change in the stock of donor special accounts according to Table “Comptes Spéciaux” of the BRH from the stock of end-September 2005 will be excluded from change in net domestic credit to the central government as defined above.15

2. Changes in any other special account (as defined in footnote 2) maintained or established at the BRH will be treated as in 1.b above.

3. The changes will be measured on a cumulative basis from the stock at end-September 2005.

Ceilings for the Cumulative BRH Credit to the Central Government

(In millions of gourdes)

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Net Domestic Banking Sector Credit to the Nonfinancial Public Sector16

4. The change in net domestic banking sector credit to the nonfinancial public sector is defined as, and will be measured using:

  • a. Change in the stock of net domestic credit of the public sector from the BRH according to Table 10R of the BRH from the stock of end-September 2005;

  • b. Change in the stock of net domestic credit of the public sector from the Banque Nationale de Crédit (BNC) and other domestic banks from the stock of end-September 2005;

  • c. Change in the stock of donor special accounts according to Table “Comptes Spéciaux” of the BRH from the stock of end-September 2005 will be excluded from the definition of net domestic banking sector credit to the nonfinancial public sector.

5. Changes in any other special account (as defined in footnote 2) maintained or established in the BRH, BNC, or BPH will be excluded.

6. The changes will be measured on a cumulative basis from the stock at end-September 2005.

Ceilings for the Cumulative Net Domestic Banking Sector Credit to the Nonfinancial Public Sector

(In millions of gourdes)

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Net International Reserves

7. The change in net international reserves will be measured using:

  • a. Change in net international reserves (“Réserves de change nettes” of the BRH Table 10R) from the stock of end-September 2005; and

  • b. Minus the change in U.S. dollars deposits of commercial banks at the BRH (“Dépôts à vue US$ des bcm à la BRH” and “Dépots à vue en EURO des bcm à la BRH” of the BRH Table 10R) from the stock of end-September 2005.

8. Data will be valued at the corresponding end-period market exchange rate.

9. For definition purposes, net international reserves are the difference between the BRH’s gross foreign assets (comprising gold, special drawing rights, all claims on nonresidents, and claims in foreign currency on domestic financial institutions) and reserve liabilities (including liabilities to nonresidents of one-year maturity or less, use of Fund credit, excluding trust funds, and any revolving credit from external financial institutions). Swaps in foreign currency with domestic financial institutions and pledged or otherwise encumbered reserve assets are excluded from net international reserves.

10. The changes will be measured on a cumulative basis from the stock at end-September 2005.

Target for Cumulative Change in Net International Reserves

(In millions of dollars)

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Net Domestic Assets of the BRH

11. The change in net domestic assets of the BRH is defined as, and will be measured using:

  • a. Change in currency in circulation (“Monnaie en circulation” of the BRH Table 10R);

  • b. Minus the change in the U.S. dollar amount of net international reserves (program definition according to C above), converted into gourdes at the program exchange rate.

12. The program definition of net domestic assets of the BRH will use a program exchange rate of G42 per U.S. dollar for the period October 2005-March 2006.

13. The changes will be measured on a cumulative basis from the stock at end-September 2005.

Ceilings for Cumulative Change in Net Domestic Assets of the BRH

(In millions of gourdes)

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Nonconcessional Loans

14. The definition of debt comprises all instruments, including new financial instruments that share the characteristics of debt, as set forth in paragraph No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No.12274-(00/85), August 24, 2000).

15. Concessional loans are those loans that provide a grant element of at least 35 percent based on the corresponding OECD’s Commercial Interest Reference Rates (CIRRs).

16. The indicative target limits exclude conventional short-term import-related credits.

17. The ceilings for contracting nonconcessional loans by the central government will be set at zero throughout the program period.

Government Current Accounts

18. Ministerial discretionary accounts are mechanisms for channeling expenditures. In principle, the use of these accounts should be limited to unforeseen emergency outlays.

19. The BRH will be providing monthly information to the Fund staff on the stock of these current accounts for the central government. Central government is as defined in footnote 1.

20. The Ministry of Economy and Finance will be providing monthly information to the Fund staff on transfers to these current accounts for the central government. Central government is as defined in footnote 1.

II. Quarterly Adjustments

21. The quarterly indicative targets will be adjusted for the following amounts:

Adjustment for Domestic Arrears Accumulation

22. The ceilings for net BRH credit to the central government and the net domestic banking sector credit to the nonfinancial public sector will be adjusted downward for the amount of domestic arrears accumulation.

23. Domestic arrears are defined to include: (i) any bill that has been received by a spending ministry from a supplier for goods and services delivered (and verified) and for which payment has not been made within 45 days after the due date of payment; (ii) wage, salary, and other payment to government employees, including direct and indirect allowances, that were due to be paid in a given month but remained unpaid on the 30th of the following month; and (iii) interest or principal obligations which remain unpaid 30 days after the due date of payment. This definition excludes changes in the stock of arrears on account of interest, penalties and valuation changes.

Programmed Flow of Domestic Arrears of the Central Government

(In millions of gourdes)

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Adjustment for External Cash Budgetary Support

24. The program ceilings on BRH credit to the government and the nonfinancial public sector, and on BRH net domestic assets and the floor on NIR reflect the assumed flow of net disbursements of cash budgetary assistance, defined as gross disbursements of cash budgetary assistance less debt service falling due to multilateral and some bilateral creditors (Canada and the U.S.).

25. If during October 2005–March 2006 actual net disbursements of cash budgetary assistance exceed programmed net disbursements by more than US$5 million, the ceiling on net BRH credit to the government and of the public sector and on BRH net domestic assets will be adjusted downward, and the floor on NIR will be adjusted upward, by the amount of the difference between actual and programmed net disbursements in excess of US$5 million, converted into gourdes at the program exchange rate.

26. If actual net disbursements are lower than programmed net disbursements, the ceilings on BRH credit to the government and of the public sector and on BRH net domestic assets will be adjusted upward by 50 percent of the amount of this shortfall, and the floor on NIR will be adjusted downward, converted into gourdes at the program exchange rate. The amount of this adjustment will be limited to US$5 million.

27. The adjuster will be calculated on a cumulative basis from October 1, 2005.

Program disbursements of cash budgetary assistance, and debt service and arrears clearance 1/

(In millions of U.S. dollars)

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Includes debt service to the World Bank, IDB, Canada, and the U.S.

III. Provision of Information to IMF Staff

28. To ensure adequate monitoring of the program, the authorities will provide daily and weekly monetary and fiscal indicators to IMF staff.

Daily

29. Monetary Indicators: (a) Exchange rate; (b) Volume of foreign exchange transactions, of which BRH sales and purchases; (c) Gross international reserves; and (d) Net international reserves.

30. These data will be reported with maximum two-day lag (14-day final).

B. Weekly

31. Monetary Indicators: (a) Stock of BRH bonds; (b) Deposits at commercial banks (in gourdes and U.S. dollars); (c) Credit to private sector (in gourdes and U.S. dollars); (d) Credit to public sector (net); and (e) Currency in circulation.

32. Fiscal Indicators: (a) Receipts and (b) Expenditures.

These data will be reported with maximum five-day lag (four-week final).

ANNEX I Haiti— Fund Relations

As of August 31, 2005

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

II. General resources account

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III. SDR Department:

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IV. Outstanding Purchases and Loans:

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V. Financial arrangements:

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

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VII. Exchange arrangements:

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

VIII. Safeguards assessment

Under the Fund’s safeguards assessment policy, the Banque de la République d’Haiti (BRH) was subject to a safeguards assessment in relation with drawings under the Emergency Post Conflict Assistance facility by Haiti. An assessment was completed on August 5, 2005, and identified a number of vulnerabilities in the safeguards framework of the Bank, in particular in the areas of financial reporting, internal audit, and controls. The BRH is in the process of implementing proposed measures to address the identified vulnerabilities.

IX. Article IV Consultation

The last Article IV consultation was concluded by the Executive Board on May, 16 2005. Haiti is on the standard 12-month cycle.

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

Technical assistance missions since 1997:

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

ANNEX II Haiti—Relations with the World Bank Group

(Prepared by World Bank Staff)

Following the change of government in March 2004, the World Bank stepped up its engagement in Haiti as part of a broader Government/multi-donors partnership to respond to Haiti’s social, economic and institutional needs. In that context, a joint government-donors needs assessment carried out in May 2004 provided the basis for the Transitional Government’s two-year Interim Cooperation Framework (ICF). The ICF was presented at an international donors conference on July 19-20, 2004 at World Bank Headquarters, where donor countries and international organizations pledged US$1.1 billion in fresh resources to support the implementation of the ICF. The Bank pledged to support the ICF with an exceptional IDA allocation complemented with $3.5 million in small grants from the Post-Conflict Fund and $6.4 million in small grants from the trust fund for Low Income Countries Under Stress (LICUS).

The Bank and the Haitian authorities have since prepared a Transitional Support Strategy (TSS) to program the Bank’s support to Haiti for the period July 2004-June 2006. The TSS was discussed by the Bank’s Board on January 6, 2004. On the same day, the Board approved a fast-disbursing Economic Governance Reform Operation (EGRO) for US$61 million and an emergency recovery and disaster management project for US$12 million. The approval of the IDA assistance followed the clearance of Haiti’s arrears to the World Bank on January 3, 2005. The Bank has also approved a technical assistance grant of US$2 million to strengthen institutional capacity for the design and implementation of policies and help improve the institutional environment for increased donor financing in the future. On July 28, the Bank Board approved a US$38 million grant to support a Community Driven Development project aimed at creating economic and social opportunities for communities in rural areas and small towns. Later in this fiscal year, the Bank plans to provide another grant for US$16 million aimed at supporting regional or communal-level multi-sectoral investment projects; a US$6 million grant to support government’s and other donors’ efforts to solve the most critical problems in the electricity sector in the short to medium term; and another $2 million technical assistance grant for institutional capacity building. In an effort to reduce Haiti’s debt burden, the Bank made a maximum use of the grant provision under IDA 13 to convert in grant 51 percent of its US$75 million fiscal year 2004/05 financing to Haiti. Under IDA 14, the Bank has converted in grant all its fiscal year 2005/06 financing to Haiti amounting to US$62 million.

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

Since July 2004, the Bank’s disbursements to Haiti have amounted to about $52 million, of which more than $46 million in budget support on account of the EGRO. The second tranche of the EGRO (about $15 million) is scheduled for disbursement in the last quarter of calendar year 2005.

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

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

ANNEX III Haiti—Relations with the IDB

(Prepared by IDB Staff)

The IDB’s activities supported by its Transition Strategy of Re-engagement (2003-2004), comprising 10 projects, totaling US$400 million, is presently in full implementation, supporting Haiti’s reconstruction, economic and social recovery and capacity building agenda. In addition, to help finance Haiti’s transition agenda, in March 2005, the Bank approved a follow-up Transition Strategy (2005-2006), with 12 new operations totaling US$270 million, to operationalize in full its pledge of US$263 million (July 2004) in support of the Interim Cooperation Framework. Of these additional loans, 7 have already been approved, for a total of US$202 million and the remaining operations are in advanced readiness for approval. Ongoing Bank interventions, combining investment and policy-based loans, are complemented with a strong program of non reimbursable technical assistance and non financial products to underpin program and policy preparation and implementation and increase country knowledge. The Bank program supports economic governance and anti-corruption measures, rehabilitation of basic infrastructure and services, agricultural intensification, water supply and sanitation, health, education and local development. The follow up 2005-2006 strategy, supporting the key ICF reconstruction priorities and beyond, strengthens these efforts with additional interventions to help stabilize the economy, deepen governance reforms, alleviate pressing social needs, lay the foundation for pro-poor growth, strengthen natural disaster prevention and environmental management, and lead to an elected government in 2006.

The Bank’s program supported by the two successor Transition Strategies now translates into a portfolio of 15 active projects, totaling US$532 million, and a TC program of about 38 operations amounting to about US$14 million. Total Bank disbursements to date are over US$110 million. The IDB’s growing involvement in Haiti thus supports longer-term economic governance reforms, particularly in the critical areas of fiscal management and tax reform and administration, and associated institutional development, in close coordination with the IMF and the World Bank. In parallel, the IDB provides financing for high impact investments to rehabilitate critical infrastructure, in close coordination with the EC, increase productivity, and increase provision of basic services to vulnerable groups and communities on a national level, in coordination with Haiti’s main international partners As an overarching objective, IDB program execution and country dialogue build on an implementation support and institution-building strategy based on a flexible approach, a strengthened country office and a focus on results. This is underpinned by streamlining of Bank procedures and additional special measures and expertise to strengthen local capacities to facilitate project preparation and execution and speed up disbursements. The country dialogue on implementation is systematized in a mechanism of high-level special implementation and monitoring review missions which conduct regular joint reviews with the government to assess execution progress and identify specific action plans to address related issues and facilitate monitoring of results.

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

ANNEX IV Haiti—Statistical Issues

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

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

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

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

Haiti: Table of Common Indicators Required for Surveillance

As of September 14, 2005

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

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

Foreign, domestic bank, and domestic non-bank financing.

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

Including currency and maturity composition.

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

Data collected for the fiscal year, ending September 30.
1

See Haiti: Use of Fund Resources—Request for Emergency Post-Conflict Assistance (IMF Country Report No. 05/65).

2

During August–September 2005, the IDB disbursed two budget support loans totaling about US$25 million.

3

The program also allowed for temporary increases in BRH financing to cover debt-service payments until programmed disbursements in the following quarter.

4

Information on performance under the previous EPCA-supported program was provided in IMF Country Report No. 05/206.

5

The program envisaged capital injections to support establishment of new small enterprises, tax cuts, and interest subsidies for private sector enterprises.

6

The exceptional revenues (0.5 percent of GDP) were payments for new licenses by cellular phone companies and petroleum and other tax arrears.

7

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

8

The census of employment was expected to address the issues of ghost workers and irregularities in the check distribution process. In view of the security situation, capacity constraints, and absence of donor technical support, the census was largely based on attendance lists rather than actual head count.

9

The program for October 2005–March 2006 assumes the use of net BRH financing (corresponding to a cash surplus accumulated during 2004/05), while still leaving the end-March 2006 stock of BRH credit to the central government below its end-March 2004 level.

10

The 2005/06 budget assumes a 26 percent increase in the government wage bill, of which 10 percentage points reflect the carry-over effect of the 2004/05 salary increase, and the remainder is for new hiring (police in particular) and inflation adjustments.

11

These measures were recommended by the April 2005 FAD technical assistance mission on public financial management.

12

These losses reflect the fact that the interest rate on BRH credit to the central government is below the interest rate on the BRH’s interest bearing liabilities.

13

This gap could be covered from resources that would become available to Haiti from the European Union, the IDB, and the World Bank. Haiti will continue to accumulate arrears to some bilateral creditors until a PRGF program is in place, based on an informal agreement confirmed in the context of the first EPCA purchase in January 2005 (IMF Country Report No. 05/65).

14

The central government comprises the presidency, prime minister’s office, parliament, national courts, treasury, and line ministries. It includes expenditures financed directly by foreign donors through ministerial accounts (comptes-courants).

15

Special accounts are transitory accounts of the central government for specific foreign-financed projects or external assistance.

16

The NFPS includes the central government, the public enterprises (e.g., Teleco, EDH, APN, AAN, and CAMEP), and foreign-financed projects.

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Cover IMF Staff Country Reports
Haiti: Use of Fund Resources—Request for Emergency Post-Conflict Assistance
Author:
International Monetary Fund
Volume/Issue:
Volume 2005: Issue 404
Publisher:
International Monetary Fund
ISBN:
9781451817621
ISSN:
1934-7685
Pages:
81
DOI:
https://doi.org/10.5089/9781451817621.002
Text Figure 1.

Haiti: Inflation 1/

(In percent)
Text Figure 2.

Haiti: Exchange Rate and NIR
Text Figure 3.

Haiti: Nominal and Real Effective Exchange Rates 1/

(1990=100)
Text Figure 4.

Haiti: BRH bonds
Text Figure 5.

Haiti: Real Interest rates 1/