1. Recent macroeconomic developments

Under the Emergency Post-Conflict Assistance (EPCA) covering the period from October 2004 until September 2005, the Haitian authorities made substantial progress in stabilizing the economy and strengthening institutions, notwithstanding adverse external shocks and a problematic security situation. Benchmarks and targets were largely met during the first two quarters of the program.

In the second quarter of 2005 (third quarter of the program and of the fiscal year), following low levels of revenue collection and lower than expected external financial assistance, the Government temporarily resorted to financing from the Central Bank. Concerns regarding the risks to the IMF program posed by such financing further delayed the disbursement of much-needed budget support and caused Haiti to deviate from the quantitative targets that had provisionally been agreed with the Fund for end-June. The authorities promptly took corrective measures, however, to reverse the situation. Expenditure controls and record tax revenues in August and September, due in particular to administrative efforts and to the collection of arrears from cellular phone companies, allowed the Government to reverse earlier Central Bank financing more than in full by the close of FY05, while at the same time postponing to the first quarter of the new fiscal year the disbursement of US$ 15 million from a World Bank structural adjustment loan.

Monetary policy also had to be tightened to mop up excess liquidity and ease pressure on the exchange rate. That pressure was exacerbated by the sharp increase in oil prices and by delays in the disbursement of external assistance. The Central Bank progressively increased interest rates on its paper – first by 2, and then by 5 further percentage points, respectively, in June and in August this year. This past October 10^th, the rate on its 91-day bond was raised from 15 to 18 percent per year, firmly in positive territory in real terms when compared to a consumer price inflation that is projected, under the program, to be 10 percent in the fiscal year extending from October 2005 to September 2006. Under the prevailing circumstances, however, the Central Bank found it difficult to intervene in the foreign exchange market to meet quarterly NIR targets, and during the last quarter of the program these targets had to be relaxed in consultation with the Fund. The observance of the modified program targets during the last quarter of the fiscal year was achieved through fiscal adjustments and the disbursement of the second tranche of an IDB Policy-Based Loan.

2. Progress with structural reforms

On the structural front, all programmed measures have been implemented, including key policy actions that were delayed during the first two quarters of FY05. The authorities have completed a census of employment in the National Police, Ministry of Health and Ministry of Education for the Port-au-Prince metropolitan area. As for the census of domestic arrears, a significant amount of claims on the government have been registered in the Ministry of Economy and Finance following the publication in the newspapers of three notices inviting the public to make such registration. The authenticity of the claims is presently being verified by a Ministry task force. A strategy to deal with domestic arrears, including a payment schedule, will be laid out once their outstanding stock is officially determined.

In the electricity company EDH, a mechanism for continuous monitoring of the use of budgetary transfers has been put in place. It includes an independent audit to be carried out by a private firm. Furthermore, competitive acquisition procedures will be adopted to replace existing contracts at their expiration and to convert protocols for electricity supply into contracts by end-December 2005.

An Anti-Corruption Unit, created by ministerial decree and entrusted with corruption prevention and awareness, information dissemination and administrative investigation, has been operational since September 2004, with a clearly established work program and operational plan. Several corruption cases identified by the Unit have been referred to the judicial authorities for prosecution. The Unit has also recently completed, in partnership with IDA, a comprehensive diagnostic survey on corruption practices with a view at incorporating its conclusions into a medium term anti-corruption strategy.

A key element of the reform efforts is the strengthening of the central bank. The authorities have taken decisive measures to decrease the constraints on the BRH’s ability to conduct monetary policy. The losses of the central bank, estimated at 1 percent of GDP in 2004, have been reduced by more than two thirds. Recognizing the heavy toll that subsidized credit to the central government has had on the central bank’s balance sheet and the risks to the economy of the bank’s deficit, the Ministry of Economy and Finance has agreed to begin making payments to the BRH on outstanding credits that will at least cover the bank’s operational costs. A recapitalization plan, which includes the conversion of subsidized credit to the government into interest-bearing bonds, is to be implemented starting this fiscal year.

In line with the recommendations of the Fund’s Safeguards Assessment report published last June, the board of the BRH approved in August 2005 the bank’s internal audit charter, so as to increase the effectiveness of the Internal Audit Department. Simultaneously, the accounting function is being strengthened and the central bank continues its practice of publishing interim and annual audit reports. A new Central Bank Law with provisos consolidating central bank independence and reinforcing the bank’s ability to supervise the financial system has also been drafted.

3. The new EPCA

The authorities seek Board approval, at this time, for a program under which they will continue to carry on the reforms initiated under the previous EPCA. It covers the six-month period ending in March 2006, when the next government is due to take office and will hopefully be in a position to agree to a program that could be supported by the Fund’s Poverty Reduction and Growth Facility. During these six months, the authorities are determined to consolidate the institutional and macroeconomic framework established during the past two years. The underlying thread of the reforms is to improve transparency, accountability and efficiency in the management of public affairs.

The extensive reform agenda contemplates not only actions under the EPCA program but also with the World Bank and the IADB, through Structural Adjustment (EGRO) and Policy Based Loans (PBLs). On the fiscal and governance front, the reform agenda encompasses:

• continued reinforcement of budget management and expenditure controls, including a review of the computerized system of public expenditure management and return to the regular practice of producing an annual audit;

• reestablishing the annuity of the budget: for the second year in a row, the budget for FY05 was adopted by the Council of Ministers before the beginning of the fiscal year;

• eliminating recourse to central bank financing: notwithstanding the immense needs of the public sector to meet urgent and important social and political priorities, and the scarcity of resources, the interim government has insisted on establishing a tradition of fiscal discipline by fixing and observing a target of zero central bank financing;

• reinforcing customs controls and fighting fraud and corruption at the Internal Revenue Service (DGI) in order to bring tax collection closer to potential;

• substantially reducing the use of current accounts in the execution of public expenditures and making their residual use stringently regulated and transparent;

• involving the public in the budgeting process, with data dissemination through the internet and the press and consultations with civil society and donors;

• improving transparency and efficiency in procurement, with the creation of a National Procurement Board (CNMP) and publication of results of all tendered contracts;

• enhancing transparency in the management of public enterprises through financial and management audits and the reestablishment of sound accounting practices;

• safeguarding key social and investment expenditures and improving their efficiency: among other measures, a private/public partnership office was created with a mandate covering mechanisms of subsidization of private educational institutions in poor communities.

4. Donor support

Economic recovery has been significantly weaker than expected, reflecting the impact of insecurity on business confidence, delays in donor project disbursements, and weaknesses in institutional and administrative capacity. While the authorities are committed to continue with reform efforts, particularly those geared to improve revenue performance, governance and absorptive capacity, stronger budgetary assistance is crucial for the sustained improvement of social conditions in Haiti and for the fight against extreme poverty. Over time, increases in tax revenues should help decrease the dependency on donor funds.

The transition government is keenly aware that the new elected government will take office in the middle of the fiscal year and considers it most important that the financial means be readily available for the new administration to operate during the first six months of its term. The Haitian authorities have been forcefully seeking donor support to cover the remaining financing gap for FY06. A donors’ meeting will be held in Brussels on October 2021. Haiti is hopeful that donors will be sensitive to the necessity to commit early to ensure timely disbursement of budget support within the 2006 fiscal year.

Parliamentary and presidential elections are now scheduled to take place by mid-December 2005 and a new President is to be sworn into office on the constitutionally-mandated date of February 7, 2006. The Haitian National Police and the United Nations Mission for the Stabilization of Haiti have been working together to improve security and to prepare the ground for fair and safe elections. The electoral process could not take place without the support of the international community and they are a key step for Haiti’s future.

Strengthening donor coordination, streamlining procedures and improving implementation support will be crucial for effective and timely disbursement of external assistance. In particular, efforts on the part of donors to strengthen local capacities to facilitate project preparation and execution would be welcome. Haiti is thankful to the European Union for its recent unblocking of a significant amount of funds, some of which, it is hoped, will go towards closing the financing gap of the second half of the fiscal year, estimated at present at more than US$ 30 million. We wish to express the authorities’ appreciation for the additional support that Canada, France and Spain have offered to close the financing gap of the first six months of FY06, allowing the conclusion of this EPCA, and also for the US$7 million to be disbursed by the United States in the second half of the new fiscal year.

Haiti’s track record of program implementation has greatly improved despite the complexity of the problems the country has to cope with. Going forward, it would be important to expedite as much as possible, with the collaboration of the Fund and the World Bank, the steps necessary for a PRGF program and leading to the decision point under HIPC. More immediately, this would imply renewed efforts in drafting the I-PRSP, which has been initiated by the Haitian authorities.