A. PRGF and IDA Status

4. Haiti is currently an IDA-only country, with a nominal per capita GNI of about US$450 in 2005 (using the World Bank’s Atlas methodology). A PRGF arrangement is scheduled to be discussed by the IMF Board in parallel with this document.⁶ Haiti will continue to need substantial concessional assistance from the international community and is likely to remain an IDA-only country and eligible for PRGF resources for the foreseeable future.

B. Dimensions of Poverty

5. Political and economic instability, recurrent deterioration in security, low growth, and high inequality and poverty have been the key challenges confronting Haiti in the past. The impact of prolonged political conflicts and violence, periods of high external assistance followed by the withdrawal of economic support, and natural disasters has been severe. Real income per capita has declined on average by 2 percent annually over the past twenty years. Haiti’s pattern of socio-economic development has been characterized by marked inequalities in access to productive assets and public services, which, together with low growth, has resulted in widespread poverty.

6. Haiti is the poorest country in the Latin America and Caribbean region and amongst the poorest in the world. The 2005 United Nations Human Development Index ranked Haiti 153rd out of 177 countries. About 54 percent of Haiti’s population lives below the US$1 a day poverty line and 78 percent below US$2 a day (2001 data).⁷ An overwhelming share of the rural population lives in poverty.⁸ There are also large pockets of urban poverty in slum areas in Port-au-Prince, although many small cities and municipalities have lower poverty rates. Wide disparities exist regionally, with poverty being lowest in the Ouest region (34 percent), which includes the capital Port-au-Prince, and highest in the Nord-Est region (81 percent). Nonetheless, even in the Ouest region poverty is extremely high by international standards (higher than that of any country in Latin America and the Caribbean). Income inequality in Haiti is also high. Nearly half of national income goes to the richest 10 percent of the population.⁹

7. On social indicators Haiti ranks very low. Although adult illiteracy decreased from 60 percent in 1990 to 52 percent in 2003, it remains the highest in the Latin America and the Caribbean region and is higher than the average for low-income countries. Only 55 percent of children aged 6–12 are enrolled in school; in rural areas this indicator is even lower at 23 percent. Food deprivation and limited access to health care, due to poor infrastructure and lack of qualified personnel and drugs, have resulted in dire health conditions for Haiti’s poor. Haiti also faces a high incidence of HIV/AIDS. UNAIDS estimates that 5.6 percent of the adult population has HIV. Despite all the risk factors in Haiti, there is some evidence that HIV/AIDS prevalence rates have not increased significantly in the last decade and may even have declined. UNAIDS credits this positive trend to close public-civil collaboration and sustained political commitment to contain the disease.

Table 1.

Haiti: Selected Poverty and Social Indicators

^1/Latin American and the Caribbean region.

^2/Low-Income Countries.

^3/UNDP, Human Development Report 2005.

^4/World Bank, 2006 World Development Indicators (for LAC and LIC). World Bank, staff estimates (for Haiti). Calculated using the World Bank Atlas method.

^5/World Bank, 2006 World Development Indicators.

^6/World Bank, staff estimates based on the ECVH 2001 data.

Table 1.

Haiti: Selected Poverty and Social Indicators

		Haiti	LAC 1/	LIC 2/
Population (million, 2002)3/		8.3	540	2,615
	Of which rural (percent)	62.5	23.3	69.8
	Annual population Growth (2003–15)	1.4	1.3	1.6
Life expectancy at birth (Years, 2003) 3		51.6	71.9	58.4
GNI per capita (2005 for Haiti, 2004 for LAC and LIC) 4/		450	3,576	507
Incidence of Poverty (percent of the population below the US$1 a day poverty line, 2001 data for Haiti; 202 data for LAC) 5		53.9	8.9
Adult literacy ratio (percent of people age 15 and above, 2003) 3/		51.9	89.6	60.8
Primary school net enrollment ratio (percent of relevant age group, 2001) 6		55
Infant mortality rate (per thousand, 2003) 3/		76	27	80
Child mortality rate (per thousand, 2002) 3/		118	32	124
Maternal mortality rate (per 100,000 live births, 2000) 5/		680	194	682
Access to improved water source (percent of population, 2002) 3/		71	89	77
Prevalence of HIV/AIDS (percent of persons age 15–49, 2003) 3/		5.6	0.7	2

^1/Latin American and the Caribbean region.

^2/Low-Income Countries.

^3/UNDP, Human Development Report 2005.

^4/World Bank, 2006 World Development Indicators (for LAC and LIC). World Bank, staff estimates (for Haiti). Calculated using the World Bank Atlas method.

^5/World Bank, 2006 World Development Indicators.

^6/World Bank, staff estimates based on the ECVH 2001 data.

View Table

Table 1.

Haiti: Selected Poverty and Social Indicators

		Haiti	LAC 1/	LIC 2/
Population (million, 2002)3/		8.3	540	2,615
	Of which rural (percent)	62.5	23.3	69.8
	Annual population Growth (2003–15)	1.4	1.3	1.6
Life expectancy at birth (Years, 2003) 3		51.6	71.9	58.4
GNI per capita (2005 for Haiti, 2004 for LAC and LIC) 4/		450	3,576	507
Incidence of Poverty (percent of the population below the US$1 a day poverty line, 2001 data for Haiti; 202 data for LAC) 5		53.9	8.9
Adult literacy ratio (percent of people age 15 and above, 2003) 3/		51.9	89.6	60.8
Primary school net enrollment ratio (percent of relevant age group, 2001) 6		55
Infant mortality rate (per thousand, 2003) 3/		76	27	80
Child mortality rate (per thousand, 2002) 3/		118	32	124
Maternal mortality rate (per 100,000 live births, 2000) 5/		680	194	682
Access to improved water source (percent of population, 2002) 3/		71	89	77
Prevalence of HIV/AIDS (percent of persons age 15–49, 2003) 3/		5.6	0.7	2

^1/Latin American and the Caribbean region.

^2/Low-Income Countries.

^3/UNDP, Human Development Report 2005.

^4/World Bank, 2006 World Development Indicators (for LAC and LIC). World Bank, staff estimates (for Haiti). Calculated using the World Bank Atlas method.

^5/World Bank, 2006 World Development Indicators.

^6/World Bank, staff estimates based on the ECVH 2001 data.

8. Given the significant gaps in development indicators, Haiti is unlikely to achieve all its Millennium Development Goals (MDGs) by 2015. Public sector contribution to the provision of basic social services has been very limited and, as a result, the majority of the Haitian population does not have access to these services. For instance, 90 percent of primary schools are non-public and charge fees that represent, on average, 20 percent of the incomes of the poorest quintile, thus barring access to many families. Quality is also a problem, 70 percent of schools lack accreditation and 60 percent of teachers are unqualified. As with education, health services are predominantly provided by non-public institutions (70 percent) and the quality is generally poor. Overall, only 28 percent of the population has access to health facilities. Similarly, most of the clean water and sanitation services are non-publicly provided. Despite the predominant role of the private sector in the provision of basic social services, the normative and regulatory role of the Government is weak. The Government plans to introduce measures to address immediate social problems while developing and implementing strategies to help Haiti make progress towards reaching the MDGs. With continued external financial assistance (including HIPC and MDRI relief) Haiti could reach some MDGs, notably goal 2 (achieve universal primary education) and goal 7 (combat HIV/AIDS, malaria and other diseases), and make progress towards reaching the others.

C. Recent Political and Security Developments

9. Following the insurrection that quickly evolved into a widespread violent conflict in early 2004, President Aristide resigned and left the country. The political crisis that followed was halted with the establishment of a Transition Government mandated to organize elections and undertake measures in the areas of security, development, and creating the ground for a new national dialogue. The Political Transition Agreement established the political framework in which the Transition Government operated. To address the high instability and violence that prevailed, the United Nations Security Council authorized the deployment of a Multinational Interim Force, later replaced by the United Nations Stabilization Mission in Haiti (MINUSTAH). The mandate of the forces was to help the Transition Government reestablish the security and stability required for the advancement of the constitutional and political process in the country. While security has improved since 2004, outbursts of violence are still occurring.

10. The recent successful presidential and parliamentary elections provide an opportunity to overcome the legacy of past decades. A coalition Government has been formed, including ministers from different political parties. The coalition Government received almost unanimous approval in Parliament, raising hopes for moving forward with an ambitious agenda to improve access and quality of basic social services, modernize the state, pursue and deepen governance reform, wage a war against corruption, and promote private sector investment.

11. The security situation remains fragile, especially in the capital, Port-au-Prince. The July 2006 International Conference for Haiti’s Economic and Social Development underlined the need for a coordinated and rigorous action from all partners to reestablish a climate of security, which is indispensable to achieve social and economic objectives. President Préval has shown a determination to reach out to all political and social forces in Haiti in a spirit of reconciliation and dialogue. Also, recently the Government launched a disarmament and community reinsertion program for armed groups and intends to pursue ongoing efforts to reform the police and the judiciary.

D. Policy Track Record

12. Since mid-2004, Haiti’s economic and social recovery and its structural reforms have been supported by donors under the Interim Cooperation Framework (ICF). The ICF, presented by the Transition Government at the July 2004 donors’ conference in Washington, D.C., provided an interim framework until an elected Government was in place. The ICF framework was extended by the current Government to September 2007 at the July 2006 conference. ¹⁰ The initial macroeconomic framework was established under the Fund’s staff-monitored program (SMP) covering the period April–September 2004. Over the following two years, the authorities’ macroeconomic program has been supported by the IMF’s EPCA, with disbursements in January and October 2005 (US$30.3 million). Following the clearance of arrears to IDA (US$52.3 million) in early 2005, the Government also received support from IDA to implement economic governance reforms (through an Economic Governance Reform Operation, EGRO, of US$61.0 million, and two Economic Governance Technical Assistance grants of US$2.0 million each) and to support the country’s recovery through community driven interventions, disaster prevention and management activities, transport and territorial development programs and electricity. The Inter-American Development Bank (IDB), the European Union (EU) and bilateral donors have also provided significant financial and technical assistance.

13. During 2004–06, Haiti made significant progress toward strengthening macroeconomic stability (see Table 2). The economy has gradually recovered from the political turmoil and severe floods experienced in 2004 and annual GDP growth is expected to increase to 2.5 percent in FY2006 from 1.8 percent in FY2005.¹¹ However, security problems have adversely affected economic activity, donor project implementation and other inflows of foreign exchange. With increased revenues and tighter expenditure controls, the central Government overall deficit (including grants) was reduced from 3.5 percent of GDP in FY2003 to 1.4 percent in FY2006. This has largely eliminated recourse to central bank financing of the central Government deficit. This substantial fiscal adjustment has also helped reduce end-of-period inflation from 37.8 percent in FY2003 to 12.4 percent in FY2006; however this rate of inflation is still high relative to comparable low income countries. Net international reserves (NIR) have increased, raising import coverage from 1¼ months of imports of goods and services in FY2003 to an estimated 1.8 months in FY2006. The authorities’ program supported by the EPCA remains on track, and preliminary data indicate that key end-September 2006 quantitative targets have been met.

Table 2.

Haiti: Selected Economic and Financial Indicators

(Fiscal year ending September 30)

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

^1/Excludes commercial banks’ foreign currency deposits with the BRH.

^2/Gross reserves excluding capital contributions to international organizations.

Table 2.

Haiti: Selected Economic and Financial Indicators

(Fiscal year ending September 30)

		2003	2004	2005	2006
					Prel.
(Annual percentage change, unless otherwise indicated)
GDP at constant prices		0.4	−3.5	1.8	2.5
Real GDP per capita		−1.7	−5.4	−0.2	0.8
Consumer prices (end-of-period)		37.8	21.7	14.8	12.4
(In percent of GDP)
Central government overall balance (including grants)		−3.5	−2.4	−0.7	−1.4
(Changes in percent of beginning-of-period broad money)
Broad money (including foreign currency deposits)		39.8	9.1	20.3	9.1
(Annual percentage change, unless otherwise indicated)
Net international reserves (in millions of U.S. dollars) 1/		38.8	54.5	70.6	125.7
Liquid gross reserves (in millions of U.S. dollars) 2/		157.1	207.4	228.5	330.8
	In months of imports of the following year	1.2	1.4	1.4	1.8

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

^1/Excludes commercial banks’ foreign currency deposits with the BRH.

^2/Gross reserves excluding capital contributions to international organizations.

View Table

Table 2.

Haiti: Selected Economic and Financial Indicators

(Fiscal year ending September 30)

		2003	2004	2005	2006
					Prel.
(Annual percentage change, unless otherwise indicated)
GDP at constant prices		0.4	−3.5	1.8	2.5
Real GDP per capita		−1.7	−5.4	−0.2	0.8
Consumer prices (end-of-period)		37.8	21.7	14.8	12.4
(In percent of GDP)
Central government overall balance (including grants)		−3.5	−2.4	−0.7	−1.4
(Changes in percent of beginning-of-period broad money)
Broad money (including foreign currency deposits)		39.8	9.1	20.3	9.1
(Annual percentage change, unless otherwise indicated)
Net international reserves (in millions of U.S. dollars) 1/		38.8	54.5	70.6	125.7
Liquid gross reserves (in millions of U.S. dollars) 2/		157.1	207.4	228.5	330.8
	In months of imports of the following year	1.2	1.4	1.4	1.8

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

^1/Excludes commercial banks’ foreign currency deposits with the BRH.

^2/Gross reserves excluding capital contributions to international organizations.

14. Progress has also been achieved in the implementation of structural and economic governance measures, notably under the EPCA and EGRO. As of early 2004, Haiti was confronted with significant weaknesses in economic governance and management, which impeded the efficient use of both domestic resources and external financing.¹² The main weaknesses were in the following areas: (i) budget formulation, execution and reporting; (ii) public procurement; (iii) public enterprise management and road maintenance; (iv) human resource management; and (v) the financial sector. Progress in these areas are as follows:

• Budget formulation, execution and reporting. Prior to 2004, the Government had at times operated without approved budgets or with budgets approved late into the fiscal year. Procedures for budget formulation and execution were weak and a significant share of public resources was channeled through multiple comptes courants held by individual ministries and used non-transparently.¹³ In addition, internal controls were impaired by the lack of a well-structured accounting system or external audits of Government budgets. Recent Government measures to address these weaknesses include: (i) passage of a new Organic Budget Law¹⁴ and adoption of a new budget classification and chart of accounts; (ii) approval of the budgets for FY2005 and FY2006 before the start of the fiscal year and regular public dissemination of key budget allocations and execution information; (iii) preparation of the FY2006 budget according to the new budget classification and expansion of the automated system for budget management (SYSDEP) from 5 ministries and units to 17;¹⁵ (iv) a drastic reduction of discretionary spending through ministerial comptes courants;¹⁶ and (v) strengthening the external audit function with a decree on the organization and functioning of the supreme audit institution, the Cour Supérieure des Comptes et Du Contentieux Administrative (CSCCA). The CSCCA is in the process of catching up on Government accounts audits which, together with the resumption of Parliament oversight functions, will strengthen external controls. Other measures have proceeded more slowly: (i) a mechanism for monitoring budgetary transfers to the electricity sector has been established but is not yet effective and an independent audit of the transfers has not taken place; and (ii) a survey of domestic payment arrears of the central Government has been completed but not yet fully verified and a strategy to address them has not been formulated.

• In the early 2000s, public procurement operated under a 1989 decree which had not been fully implemented and had several flaws, and sole-source contracts and unadvertised bidding were the norm. Since 2004, the institutional framework for public procurement has been strengthened through: (i) the passage of a new Procurement Decree and the creation of the National Commission for Public Procurement (CNMP) in 2004; (ii) the preparation of standard bidding documents; and (iii) the publication of lists of Government contracts and of a supplier database. The recent hiring of an international procurement consulting firm will help the CNMP to strengthen procurement capacity in line ministries.

• In 2004 an Anti-Corruption Unit (ULCC) was created and staffed as an autonomous entity under the Ministry of Economy and Finance (MEF). The Unit is conducting a comprehensive diagnostic survey of the state of governance and the perception of corruption in Haiti as an input to the design of a national anti-corruption strategy and has prepared a draft law for public sector employees’ asset declaration.¹⁷

• Public enterprises have been characterized by inadequate financial and operating practices and a lack of managerial accountability, often accompanied by the siphoning of budgetary resources. Due to the limited resources for maintenance and investment, the quality and reliability of services provided by these enterprises deteriorated over the years. Poor governance practices were particularly acute in the electricity (EDH) and telecoms (TELECO) utilities, and the port authority (APN), which are critical for economic growth. In 2006, financial audits of APN, TELECO and EDH and an accounting rehabilitation of TELECO and EDH were completed. In 2005–06, the Government took a number of measures to strengthen the Road Maintenance Fund (FER), created in 2003 as the cornerstone of Haiti’s road maintenance strategy. The FER now has reached a basic level of institutional capacity with the recruiting of key staff and the definition of its operational procedures.

• In the area of public expenditure management (PEM), an Assessment and Action Plan (AAP) to strengthen the capacity of Haiti to track poverty reducing public spending was prepared jointly by IDA and IMF staffs in consultation with the authorities in June 2006. Compared to an informal assessment undertaken in 2004, the 2006 AAP confirms that improvements in PEM performance resulting from the above reforms.¹⁸ The reforms started from a very low base of economic governance and focused on critical institutional and legal changes related to public expenditure and public enterprise management. These efforts will require follow-up actions and additional reforms to ensure that (i) procedures and practices are consistent with the revised legal and institutional framework; (ii) mechanisms to better target public resources are set up; (iii) the quality of monthly fiscal data is improved; and (iv) citizens are empowered in ways that will improve public sector transparency and accountability. In this respect, governance measures aimed at making public service delivery more responsive and effective and improving the comprehensiveness of the budget are needed to increase the effectiveness and transparency of public resource use.

• In 2005 the Government introduced a mechanism for civil society to monitor its program of economic governance reforms. This mechanism became operational in early 2006, following capacity building by both the Government and civil society organizations. A summary of the monitoring reports prepared by civil society organizations has been published on the MEF website. A workshop with the Government relevant agencies and ministries and civil society organizations was held in June 2006 to review the experience in implementing the monitoring mechanism and identify measures to improve its effectiveness.

• The inadequate quality and quantity of human resources have been an impediment to public sector efficiency in Haiti. This results from the scarcity of skilled people and the lack of an adequate incentive and accountability system to attract, maintain and motivate civil servants. Public sector employment in Haiti is very small by international standards. In 2004, public sector employment corresponded to 0.7 percent of the population, compared with 2.0 percent in Africa and 7.7 percent among developed market economies.¹⁹ Dealing with these shortfalls in a manner that supports sustained public sector efficiency will likely require increasing the efficiency of the use of scarce human resources and implementing reforms involving systemic restructuring of the civil service. In 2004, a new Civil Service Decree was enacted. A Coordination Unit in the Prime Minister’s Office has taken on the human resource functions as a first step to overseeing the implementation of the Decree and a census of employment in selected ministries has been completed.

• Financial sector stability has been maintained, but weaknesses have been identified in the mechanism of monetary management and in financial audit and controls of the Central Bank of Haiti (BRH), and the BRH has experienced operational losses. The authorities are preparing a plan to address these weaknesses, including with technical assistance provided by the IMF. A draft of a new banking law is expected to be finalized and submitted to Parliament later this year. In addition, the financial statements of the BRH for FY 2004 were published, however with a year delay. Financial statements for FY2005 have not yet been published. The BRH was also subject to a safeguards assessment in relation to drawings under the EPCA and the vulnerabilities identified by that assessment are now being addressed; and the BRH has strengthened its surveillance of credit cooperatives.

15. While significant progress has been made in implementing macroeconomic, structural and governance reforms, setting Haiti on a path of economic recovery will remain a major challenge. Economic recovery will critically require restored security, but a sustained improvement in security will in turn depend on the delivery of quick and visible improvements in the living conditions of the Haitian population. Furthermore, strengthened public institutions and improved economic governance are needed to ensure that economic growth is inclusive and sustained over time. The financial and technical support of the donor community will be critical to help the Government address these challenges. While current conditions in Haiti present significant risks going forward, the provision of HIPC debt relief will contribute to creating fiscal space for much needed poverty-related expenditures and encourage reforms in public expenditure management.

A. The PRSP Formulation Process

16. In September 2006, the Government completed the preparation of the I-PRSP which was initially drafted in late 2005 by the Transition Government and subsequently revised by the current Government to reflect its development priorities. The I-PRSP outlines the main areas of intervention envisaged by the authorities to reduce poverty as well as the steps to be undertaken in the preparation of the full Poverty Reduction Strategy (PRS).²⁰ The Government’s main development priorities are to consolidate macroeconomic stability, enhance physical infrastructure, expand access to social services, improve economic governance and strengthen public institutions. This program represents a continuation of the axes and the strategic objectives of the 2004 ICF, with an increased emphasis on a national development approach including all of Haiti’s departments and communes and interventions aimed at meeting pressing social and economic needs in disadvantaged and conflict-prone areas.

17. The Government has begun the preparation of a full PRSP. The participation process will be broadened and deepened in the preparation of the full PRSP. The I-PRSP includes a detailed strategy for the consultations which will include members of Parliament, civil society organizations, affected stakeholders, and the donor community and will target the poor through meetings in communes and departments. The I-PRSP also describes the process through which the mechanism for monitoring and evaluation of the PRSP will be developed.

18. The full PRSP would be expected to build on the I-PRSP by (i) presenting a comprehensive medium and long-term strategy and an agenda for its implementation; (ii) establishing efficient mechanisms and easy-to-monitor indicators for progress, including for the MDGs; (iii) refining the structural reform agenda and providing more detailed and focused sector strategies; (iv) clearly defining priority expenditures within the framework of a strengthened public sector investment program; and (v) identifying interventions to enhance public sector program and project implementation capacity.

B. Macroeconomic Framework²¹

19. An important objective of the authorities is to achieve robust and sustainable real economic growth. Real output growth is projected to average 4.2 percent over the period FY2006–25.²² In the short term, real output growth is projected to strengthen sharply from 1.8 percent in FY2005 to 4.0 percent in FY2007, assuming significant improvements in security conditions, continued strong external support, and increased public investment. Over the long term (FY2015–2025), real output growth is expected to average 4.5 percent. ²³ This projected improvement in real output growth depends critically on maintaining security, sustained political and macroeconomic stability, progress on economic governance, and improvements in social and economic infrastructure, contributing to higher private investment, including FDI.

20. The authorities are also aiming for low and stable inflation, to foster an environment conducive to long-term growth. End-of-period inflation has declined from 37.8 percent in FY2003 to an estimated 12.4 percent in FY2006 following substantial fiscal adjustment. Building on recent strengthening of fiscal discipline and change in the conduct of monetary policy, inflation is expected to decline gradually to 5.0 percent by FY2011.

21. Macroeconomic stability is also expected to be supported by fiscal prudence. Over the projection period, the central Government overall deficit is expected to average about 2.0 percent of GDP. The Government is expected to increase revenues and seek concessional external financing to allow for increased pro-poor spending, higher investment and the institutional development of central and local Governments, while maintaining debt sustainability after the delivery of HIPC Initiative assistance.

22. Fiscal revenues are projected to increase gradually to about 16.0 percent of GDP by FY2025, compared to about 9.6 percent over FY2004–06. The Government intends to implement measures to boost revenues, including through the strengthening of customs control in the provinces, enhanced computerization of tax and customs administration offices, and reinforcing the tax audit mechanism.

23. Government expenditures are expected to be re-oriented toward strengthening the institutional capacity of the Government and increasing spending in key areas such as security, health and education. Rebuilding social and economic infrastructure is expected to be the core of the public investment program which is expected to be financed largely by external donors. The framework assumes that the share of pro-poor spending in overall outlays will increase to assist in poverty reduction and meeting the MDGs.

24. For the long-term growth projection to materialize, Haiti’s level of investment has to increase markedly, by more than 4.0 percentage points of GDP over the projection horizon.²⁴ Initially, higher investment will come from higher public investment, especially in public infrastructure, helping to create the conditions for private sector development. An improvement in security is pivotal to ensure this outcome. As infrastructure constraints are gradually removed, agricultural production and exports are expected to pick up. Improvement in tourism infrastructure would create favorable conditions for the tourism industry which notably caters to the large Haitian diaspora.

25. The external current account deficit (excluding grants) is expected to decline from 7.5 percent of GDP in FY2006 to about 5.2 percent of GDP at the end of the projection period largely due to improvements in net exports. The import-to-GDP ratio is projected to decline by 2.4 percentage points of GDP in the long term due to lower aid flows and increases in local production, e.g., in the agricultural sector. Rising exports (by 2.0 percentage points of GDP) are also expected to contribute to the improvement in the current account.²⁵ International reserves are expected to increase from 1.6 months of imports of goods and services in FY2005 to over three months from FY2011.

C. Reform Agenda

26. The reform agenda going forward is reflected in the I-PRSP prepared by the Government and presented to IDA and the IMF in September 2006. The Government has expressed its commitment to maintaining macroeconomic stability, pursuing and deepening the structural and economic governance reform agenda of the last two years and making significant efforts in fighting corruption. The agenda is strong in cross-cutting governance initiatives which, in addition to strengthening security, are necessary if Haiti is to achieve the high, sustained and shared economic growth that is required to reduce poverty and bring about meaningful change in the living conditions of the Haitian population.²⁶

27. The Government intends to continue to strengthen public expenditure management. Specifically, the Government plans to: (i) align public spending with the priorities identified in the I-PRSP and, when completed, the PRSP, reflecting emphasis on pro-poor growth; (ii) introduce a medium term framework which will include budget projections consistent with the PRSP expenditure priorities; (iii) adopt an automated mechanism to track poverty-reducing public expenditure and publicly disseminate quarterly expenditure reports; and (iv) ensure accountability and oversight of its accounts in strict observance of the prevailing legal framework. In addition, the Government intends to strengthen the procurement function, by adopting and implementing a new law in line with international best practice and ensuring compliance by all Government purchasing agencies, and continue to publish Government contracts awarded. The IMF and IDA staffs will assist the authorities in the evaluation of existing systems of public finance management and the identification of additional areas where further reforms and technical assistance are needed.²⁷

28. The Government also plans to improve the management of public enterprises and road maintenance. The Government will modernize public enterprises to increase their efficiency and maximize their profitability. Particular emphasis will be given to improving governance and transparency. The Government intends to enforce annual audits of key public enterprises in line with the prevailing legal and regulatory framework guiding them and to ensure that key audit recommendations are addressed. In the electricity sector, all Government transfers to the electricity utility (EDH) will be monitored and will be independently verified and a competitive bidding process for petroleum purchases for the sector will be introduced. Also, the Government intends to continue the improvement of the institutional capacity of the road maintenance agency (FER) to ensure good management practices, including transparency and accountability of its operations.

29. To increase public sector employees’ accountability, the Government intends to adopt and implement a law on asset declaration, including sanctions for non-compliance. In addition, in 2007 the Anti-Corruption Unit (ULCC) will submit for Government approval a multi-sectoral strategy to fight corruption.²⁸ The Government also intends to continue to support the ongoing mechanism for civil society to monitor economic governance reforms.

30. Reforms will also focus on improving the monetary policy framework and policy instruments to reduce inflation. Measures and reforms will include the auction mechanism for central bank bonds, recapitalization of the central bank, which will also cease its non-core activities, and submission to Parliament of a new central bank law. Financial statements of the BRH will be subject to annual audits and their results published. The Government also intends to submit a new banking law and issue implementing regulations. Additional measures may be taken in the financial sector following a Financial Sector Assessment to be conducted at the request of the Government by the IMF and IDA in early 2007.

31. The Government is committed to forcefully implement measures to boost revenue and fight fraud and tax evasion. In particular, it plans to establish customs control at all ports of entry and borders, reinforce and restructure tax collection agencies, increase the accountability of collection agents, and enhance computerization of tax and customs administration offices. In addition, to reduce the vulnerability of the budget to external shocks, the Government will continue to implement a flexible price-setting mechanism for petroleum prices.

32. Private sector development is key for growth in Haiti. The Government intends to promote the sector by improving security and stability, enhancing infrastructure and protecting property rights, establishing one facilitation center for investors, and over the medium term revising the relevant investment and tax laws. With 62.5 percent of the Haitian population living in rural areas, most of which are poor, increasing agricultural productivity and diversification are amongst the Government’s priorities to revitalize the economy and reduce poverty. The actions and reforms that the Government plans to introduce in this sector include: (i) increasing smallholder access to credit and other agricultural inputs: (ii) rehabilitating agricultural infrastructure; (iii) improving land tenure rights to promote investment in irrigation and storage; and (iv) increasing extension activities and the promotion of new seed varieties.

33. The authorities intend to modernize and strengthen the Central Government. This will involve first determining the number, mission, and function of ministries and autonomous entities and later rationalizing employment and the salary policy in the public sector. Such systemic restructuring of the civil service will help increase the efficiency of the use of scarce human resources. Over the coming year, the Government plans to update the public sector employee database and ensure its regular use, and define the system, applicability and procedures for new recruitments and promotions based on performance. Decentralization of Government authority and public services, through a medium-term plan requiring significant strengthening of institutional capacity for effective local Government functioning, will help Government services to be closer to the users and promote inclusion and participation of all levels of the population.

34. The Government’s plan for the Education Sector is described in the National Education and Training Plan (NETP). The NETP, and most recently the I-PRSP, define key actions and reforms required to improve the education system and broaden access, particularly of the poor: (i) increase public resources allocated to education for both improved access and quality; (ii) strengthen the capacity of the Government to fulfill its planning, coordination and normative responsibilities; and (iii) establish the National Education Partnership Office (NEPO) and the National Partnership Fund (NPF). The NEPO is designed to promote policy dialogue and operational coordination between the public and non-public sectors, including supervision and evaluation of non-public schools by the State while the companion NPF would provide a public financing mechanism to help poor families pay for the school fees of their children in non-public schools. This is the first real sector governance structure which encompasses all key education stakeholders, promoting not just effective dialogue between the public and non-public sectors but also accountability and transparency in the use of public education funds, particularly those channeled through the National Partnership Fund.²⁹

35. The Government is preparing a National Strategic Plan for the Reform of the Health Sector (NSPRHS). The NSPRHS and also the I-PRSP, define as key actions and reforms to increase the access and quality of heath service provision: (i) increase public resources to improve access and quality of health care; (ii) strengthen the capacity of the Government to fulfill its planning, coordination and normative responsibilities; (iii) promote policy dialogue and operational coordination between the public and non-public sectors; (iv) enhance preventive measures, particularly by introducing mass immunization campaigns for infants and school children; (iv) increase the number of health units at the commune level that can provide a minimum service package; (v) expand the availability of essential drugs; and (vi) introduce a transparent and accountable mechanism to provide free access to health services to the poorest Haitians.

36. The Government plans to prepare a strategy to combat HIV/AIDS in consultation with civil society and the donor community. The I-PRSP indicates that the strategy will also define the institutional framework needed for the planning, coordination and monitoring of the actions and reforms introduced in the context of the strategy. In parallel, the authorities intend to continue the ongoing efforts to improve care for those already infected and to raise awareness and prevention.

37. To improve access and the quality of water as well as the provision of sanitation, the Government plans to implement the following actions and reforms: (i) reorganize the public institutions of the water sector; (ii) improve and protect water sources; and (iii) ensure the regular collection of solid residues. The Government plans to define its agenda for other sectors, notably environment, infrastructure, manufacturing and tourism. The I-PRSP introduces the broad lines for the development of these sectoral strategies. Given the nature and depth of the challenges facing Haiti and the existing weak institutional capacity, the impact of the reforms is expected to be incremental and have a medium to long term horizon.

A. Debt Reconciliation Status

38. The DSA presented below was prepared jointly by the authorities and the staffs of IDA and the IMF, based on loan-by-loan data for public and publicly-guaranteed debt outstanding and disbursed as of end-September 2005 provided by the authorities and creditors. The reconciliation process was completed in September 2006, with 100 percent of multilateral and bilateral debt reconciled.³⁰

B. Structure of External Debt

39. Haiti’s public and publicly guaranteed external debt was estimated at US$1.3 billion in nominal terms as of end-September 2005, equivalent to US$932.9 million in NPV terms (Table 3 and A1).³¹ Multilateral creditors accounted for 82.2 percent of the total, with IDA and the IDB representing 37.9 percent and 40.0 percent of total claims, respectively.³² Bilateral creditors accounted for 17.8 percent of Haiti’s external debt, with Paris Club creditors accounting for 14.4 percent.³³

40. Bilateral creditors have indicated their willingness to reschedule arrears and debt service payments in the context of the PRGF arrangement and the HIPC decision point. Italy, France, and Spain are the largest bilateral creditors, with 5.2 percent, 4.8 percent and 2.9 percent of total claims, respectively. Claims by these creditors include approximately US$35.4 million in arrears. Haiti has obtained an informal deferral on debt service payments from Italy, France, and Spain during the program supported by the EPCA.

Table 3:

Haiti: External Debt, end-September 2005

(in units indicated)

Sources: Haitian authorities and staff estimates

Table 3:

Haiti: External Debt, end-September 2005

(in units indicated)

				US$ million	Percentage of total
Total				1,336.3	100.0
	Multilateral			1,097.8	82.2
		IDA		507.1	37.9
		IDB Group		533.9	40.0
		Other		56.8	4.2
	Bilateral			238.5	17.8
Memorandum Items:
	NPV of debt after traditional debt relief			928.3
			percentage of exports	176.7

Sources: Haitian authorities and staff estimates

View Table

Table 3:

Haiti: External Debt, end-September 2005

(in units indicated)

				US$ million	Percentage of total
Total				1,336.3	100.0
	Multilateral			1,097.8	82.2
		IDA		507.1	37.9
		IDB Group		533.9	40.0
		Other		56.8	4.2
	Bilateral			238.5	17.8
Memorandum Items:
	NPV of debt after traditional debt relief			928.3
			percentage of exports	176.7

Sources: Haitian authorities and staff estimates

41. Arrears to all multilateral creditors have been cleared. In 2004, Haiti cleared about US$1 million in arrears to the International Fund for Agricultural Development (IFAD) and the OPEC Fund for Development. Concessional arrears clearance operations were also approved by the IDB and IDA. In particular, Haiti cleared US$30.9 million in arrears to the IDB in July 2003, and US$52.3 million to IDA in January 2005. The NPV reduction contained in these operations is estimated at US$33.1 million for IDA and US$9.7 million for the IDB Group. In accordance with the methodology agreed with multilateral development banks, the NPV of Haiti’s external debt (as of end-September 2005) includes the NPV reduction contained in the arrears clearance operations of the IDB and IDA.³⁴

C. Possible HIPC Initiative Assistance

42. Haiti’s debt in NPV terms, after full application of traditional debt relief mechanisms, is estimated at US$928.3 million (as of end-September 2005). This is equivalent to 176.7 percent of exports of goods and services (Table A2).³⁵ Haiti qualifies for debt relief under the HIPC Initiative’s export window, having an NPV of debt-to-exports ratio above the 150 percent threshold.

43. The reduction of Haiti’s NPV of debt-to-exports ratio from 176.7 percent to 150 percent would require HIPC debt relief of US$140.3 million in NPV terms. This implies a common reduction factor of 15.1 percent. Based on proportional burden sharing, multilateral assistance would amount to US$120.0 million (in NPV terms) and bilateral assistance to US$20.4 million (in NPV terms).

44. The modalities and timing of the delivery of the HIPC Initiative assistance will be decided by each creditor following the approval of the decision point. Nevertheless, in order to assess the impact of the HIPC Initiative assistance the following assumptions have been made³⁶:

• IDA will provide assistance amounting to US$52.8 million in NPV terms, including US$33.1 million already provided through the concessional rescheduling of arrears. Immediately following the approval of the decision point by the Boards of IDA and the IMF, IDA will begin to provide the remaining assistance (US$19.7 million) in the form of debt-service reduction on debt outstanding and disbursed as of end-September 2005.

• IMF assistance is estimated at US$3.1 million in NPV terms. Immediately following the approval of the decision point by the Boards of IDA and the IMF, the IMF will extend interim assistance—provided that the necessary financing assurances are in place—in the form of debt-service reduction. Following the approval of the prospective PRGF arrangement, Haiti is expected to repurchase the amounts outstanding under the EPCA with more concessional PRGF resources. This would result in relatively low levels of debt service falling due during the interim period. As a consequence, most of the IMF’s HIPC Initiative assistance is expected to be disbursed after the completion point.³⁷

• The IDB assistance will amount to US$60.4 million in NPV terms, including US$9.7 million already provided through the concessional rescheduling of arrears.³⁸ The remaining US$50.7 million (in NPV terms) in assistance is expected to be delivered through a reduction in debt service.

• All other multilateral creditors are assumed to provide debt-service reduction starting at the decision point or the completion point, until their contributions meet the requirement under the HIPC Initiative.

• Paris Club bilateral creditors are assumed to provide a flow rescheduling on Cologne terms—i.e., a 90 percent NPV reduction—after Haiti reaches the decision point, with delivery of the remaining required assistance at the completion point through a stock-of-debt operation. The rescheduling on Cologne terms is expected to translate into US$14.9 million in NPV terms.

• Comparable treatment would be provided by non-Paris Club official bilateral creditors.

45. Based on these assumptions, the HIPC Initiative would provide debt relief totaling US$ 212.9 million (in nominal terms) over time. This represents a contribution of US$ 110.9 million from multilateral creditors and US$ 102.0 million from bilateral creditors. Interim debt relief is estimated to amount to US$19.8 million, US$13.3 million in FY2007 and US$6.5 million in FY2008 (Table A4).³⁹

46. Status of creditor participation. IDA and IMF staffs have initiated consultations with multilateral creditors and the Paris Club. So far, IDA, IMF, IDB, IFAD, and Paris Club creditors have indicated their willingness to provide HIPC Initiative debt relief to Haiti.⁴⁰ These creditors account for 95.7 percent of total HIPC Initiative relief.

D. Debt Sustainability Analysis

47. The debt sustainability analysis presented in this section is based on an updated macroeconomic framework compared to the preliminary document (see Box 1). However, the main assumptions underpinning the macroeconomic framework remain broadly unchanged. The framework assumes sustained economic growth, underpinned by improved security and political stability, the decisive implementation of structural reforms, particularly in the areas of economic governance, and infrastructure improvement to promote private investment. The framework also assumes the continuation of sound macroeconomic policies, including maintaining fiscal prudence while increasing revenues and seeking concessional external financing.

48. Under the updated macroeconomic framework and assuming the unconditional delivery of HIPC Initiative assistance, Haiti’s NPV of debt-to-exports ratio is expected to fall gradually from 150 percent as of end-September 2005, to approximately 99 percent by 2025 (Table A5).⁴¹ The NPV of debt-to-exports ratio is expected to remain consistently below the HIPC threshold of 150 percent throughout the projection period. External debt service as a ratio of exports is also expected to decline gradually.

E. MDRI and Possible Bilateral Assistance Beyond HIPC

49. Haiti would qualify for MDRI debt relief from IDA upon reaching the completion point. However, at completion point Haiti is not expected to have eligible debt for MDRI relief from the IMF.⁴² The MDRI debt relief provided by IDA would cover all outstanding debt disbursed prior to end-December 2003 (that is not already subject to HIPC debt relief), and MDRI debt relief would start at the beginning of the quarter following the completion point.

50. MDRI debt relief from IDA could amount to US$464.4 million in nominal terms (US$243.3 million in NPV terms), assuming that Haiti reaches the completion point by end-September 2008. This compares with possible HIPC Initiative assistance of US$212.9 million (US$140.3 million in NPV terms). Haiti would forgo an estimated US$18.6 million in debt relief in the event of a one year delay in reaching completion point.

51. After conditional delivery of HIPC assistance and MDRI, Haiti’s NPV of debt-to-exports ratio is expected to fall significantly to 91.2 percent at completion point, from an estimated 153.5 percent at the end of FY2007 (Table A6 and Figure 2). It is expected to remain within the 91–102 percent range over the projection period.⁴³ Compared to the projection including only HIPC assistance, this represents a reduction of almost 40 percentage points at completion point (Table A6 and Figure 2).

52. The expected delivery of bilateral assistance beyond that required by the HIPC Initiative would further reduce the NPV of debt-to-exports ratio to about 94.1 percent by FY2025, compared with the 98.6 percent that would be attained under the HIPC Initiative alone. The amount of possible bilateral assistance beyond HIPC is estimated at about US$118.1 million in nominal terms.

F. Sensitivity Analysis

53. Three scenarios are suggested to test the sustainability of Haiti’s external debt, after assuming full delivery of HIPC Initiative assistance (Table A7 and Figure 2).

• The first scenario considers the sensitivity of the projections to less favorable concessionality on new borrowing. Interest rates in this scenario are assumed to be 100 basis points higher than in the baseline scenario. Under this scenario, Haiti’s NPV of debt-to-exports ratio slowly deteriorates, compared to the baseline scenario. This deterioration would reach 17.2 percentage points in FY2025, leaving the ratio at about 115.7 percent in 2025.

• The second scenario considers the sensitivity of the projections to lower exports growth. In this scenario, exports are assumed to grow at 5.0 percent, an average reduction of about 2.5 percentage points compared to the baseline scenario.⁴⁴ Lower export growth is assumed to reduce Government revenues, through lower GDP, and to increase the need for new financing. Based on these assumptions, the NPV of debt-to-exports would breach the HIPC threshold in FY2011 and reach 171.7 percent in FY2025 (Table A7). Compared to the baseline scenario, this represents a deterioration of approximately 0.4 percentage points in FY2006, steadily increasing to almost 73.2 percentage points by FY2025.

• The third scenario considers the sensitivity of the projections to lower GDP growth. In this scenario, GDP growth is assumed to be 2.0 percentage points lower on average than in the baseline scenario. Inability to significantly enhance security, improve social and economic infrastructure, and implement structural reforms would weaken private sector confidence and investment. The resulting lower GDP growth would translate into lower Government revenues and the need for increased new borrowing. Under this scenario, the NPV of debt-to-exports would slowly decline until FY2012, reaching 131.8 percent. Thereafter, the NPV of debt-to-exports would gradually increase reaching 161.8 percent by FY2025. Compared to the baseline scenario, this represents an increase in Haiti’s NPV of debt-to-exports ratio of about 0.4 percentage points in FY2006 increasing to 63.2 percentage points by FY2025.

54. The sensitivity analysis indicates that Haiti’s exports performance is pivotal to service its external debt after HIPC assistance.⁴⁵ A robust external debt position would also be contingent on vigorous real GDP growth and the composition and terms of external assistance. The analysis also underscores the importance of strong and sustained Government’s efforts to: (i) re-establish security; (ii) provide a conducive environment for private investment, notably through infrastructure improvement and strengthening of state institutions, to develop exportable production (traditional and nontraditional); and (iii) implement a prudent debt management strategy. For their part, donors will need to ensure that external assistance is heavily weighted toward grants.

A. Triggers for the Floating Completion Point

55. IDA and IMF staffs have reached understandings with the authorities on the completion point triggers, summarized in Box 2. The triggers incorporate the views expressed by Executive Directors during the discussions of the preliminary HIPC document. In addition to the standard triggers on the PRSP, macroeconomic stability, medium-term macroeconomic framework, tracking of poverty related expenditures, and alignment of priority expenditures with those identified in the I-PRSP and PRSP, there are specific and monitorable policy measures on public finance management and governance, tax policy and administration, social sectors, and external debt management. These triggers support the economic and social development of Haiti and are considered essential to the success of the HIPC Initiative in the country. Public finance management and governance triggers reflect the need to (i) strengthen public finance management and transparency, notably in the areas of budget management, public expenditure controls and procurement; (ii) enhance accountability of high public sector officials for their sources of income and assets; and (iii) promote governance and transparency in key public enterprises. Triggers on tax policy and administration are intended to increase the revenue-to-GDP ratio, which is considerably lower in Haiti than in other PRGF-eligible countries. The Government plans to meet the triggers within two years of the HIPC Decision Point.⁴⁶

B. Monitoring the Floating Completion Point Triggers

56. IDA and IMF staffs will work together to monitor the completion point triggers, with each institution leading on issues where its staff has primary competence, while also incorporating contributions of the staff from the other institution. IMF staff will take the lead in monitoring macroeconomic stability and budget control and management. IDA staff will take the lead in monitoring progress in the preparation of the PRSP, as well progress on sector-related triggers, including those pertaining to governance, service delivery, and tracking poverty-related expenditures (including those financed by HIPC Initiative assistance). IDA and IMF staffs will jointly monitor structural reform and progress in improving external debt management.

C. The Use and Monitoring of Enhanced HIPC Initiative Assistance

57. The Government is committed to ensuring that assistance under the HIPC Initiative is used to enhance poverty related spending. Securing the effective use of debt relief assistance for poverty reduction and, more generally, the capacity to implement and monitor a shift in the composition of expenditure toward poverty-related objectives is a key element of the HIPC Initiative. The authorities will continue their ongoing efforts to strengthen the programming, management and control of public expenditures, and to improve service delivery in key sectors. Within this framework, the technical assistance that is already being provided by IDA, IMF, IDB and other donors will be important to establish adequate budget management capacity.

58. While Haiti does not have a budget classification by program or a fully functional budget classification, there are mechanisms in place that can be used to adequately monitor the use of resources made available by the HIPC Initiative. The June 2006 joint IMF and IDA Assessment and Action Plan (AAP) for tracking poverty-related expenditure concluded that the recently introduced budget and accounting classifications allow monitoring of budget allocations and expenditures following two dimensions: (i) administrative (ministries, central and regional departments) including development projects; and (ii) economic (expenditure types). The budget is also presented in the annexes of the budget law following a functional classification with 10 broad categories (such as education and health). The functional classification is prepared from broad estimates from the administrative classification. Also, in the absence of a program budget, projects are individually coded within the administrative classification allowing recording and reporting on projects’ expenditures.

59. On the basis of the AAP recommendations, the use of resources made available by the HIPC Initiative prior to completion point will be monitored at the entity (e.g., ministries, public institutions, and executing agencies) and the project levels. Entities, which are already coded in the budget classification, will be identified according to their core mandate in relation with poverty reduction. The same process will be followed to identify individual projects in areas which contribute to poverty reduction as defined in the I-PRSP. There are already mechanisms in place to record expenditures according to their destinations. This will allow monitoring both budget allocations and expenditures for both the entities and projects identified as contributing to poverty reduction.⁴⁸

60. The Government intends to use HIPC related savings to fund activities identified in the I-PRSP and which will be included in the PRSP. The relatively limited resources from HIPC initiative assistance would focus largely on health, education, water and environment while other areas, such as major infrastructure programs, would be financed by other external resources (Box 3). The poverty-related programs and projects to be financed within the interim assistance have been included in the FY2007 budget and would need to be included in subsequent budgets. In addition, IDA’s ongoing Economic Governance Technical Assistance Grant II (EGTAG II) and a follow-on Economic Governance Reform Operation II (EGRO II) currently under preparation will provide resources to strengthen and modernize the public procurement system with the above mentioned adoption and implementation of a new procurement law promoting transparency and competition in line with international best practices.

61. The periodic budget execution reports published by the MEF on its web page provide a tool to monitor and publicly disseminate the use of resources made available by the HIPC Initiative in-year. Measures are also being taken to become current with the audit of the annual Government accounts by the CSCCA. This will provide external and independent validation of the budget execution reports. The Government intends to institutionalize monitoring and evaluation mechanisms in the context of the PRSP, which will have an important role in providing oversight on the allocation of resources for poverty reduction, notably savings from debt relief.

D. The Views of the Authorities

62. The authorities have emphasized that Haiti’s external debt burden and debt service are unsustainably high and could delay the economic and social reform programs. They have also noted that Haiti is the poorest country in the Western Hemisphere and one of the poorest in the world, with a significant share of the population lacking access to basic services such as education, health and safe water. The authorities have indicated that the violence and political instability that marred the country aggravated the level of poverty, especially in urban slums. Debt relief that could be available under the HIPC Initiative would help free resources to finance critical social and infrastructure programs as well as improve access to primary education, preventive health care and the fight against HIV/AIDS. For the authorities, the resulting improvements in social conditions will help in the efforts to reverse violence and political instability.