Haiti
Selected Issues and Statistical Appendix
Author: International Monetary Fund
Publication Date:
23 Aug 2007
eISBN:
9781451817690
Language:
English
Keywords:
ISCR; CR; Haiti; fund staff estimate; exchange rate; revenue; appreciation pressure; competitiveness problem; trend raise; IMF staff estimate; CPI datum; Real effective exchange rates; Exports; Competition; Western Hemisphere
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This Selected Issues paper analyzes Haiti’s external competitiveness. The analysis shows that the country has been experiencing equilibrium real exchange rate appreciation pressures, which have originated more recently from the rising inflow of transfers. The paper discusses avenues for further developing Haiti’s monetary policy framework to help consolidate a stable low-inflation environment and support deepening domestic financial markets. The analysis suggests that Haiti’s monetary policy regime could be strengthened through a two-step approach. The paper also focuses on options to increase domestic revenues as a means of funding priority expenditures.

Abstract

This Selected Issues paper analyzes Haiti’s external competitiveness. The analysis shows that the country has been experiencing equilibrium real exchange rate appreciation pressures, which have originated more recently from the rising inflow of transfers. The paper discusses avenues for further developing Haiti’s monetary policy framework to help consolidate a stable low-inflation environment and support deepening domestic financial markets. The analysis suggests that Haiti’s monetary policy regime could be strengthened through a two-step approach. The paper also focuses on options to increase domestic revenues as a means of funding priority expenditures.

Overview

The Selected Issues paper accompanying the 2007 Article IV staff report covers three topics that are central to Haiti’s challenge of further consolidating economic stability and converting the incipient recovery into a sustainable economic expansion.

The first chapter analyzes Haiti’s external competitiveness. Competitiveness is key to support a sustainable balance of payments position, notably by allowing an adequate contribution of the export and import-substitution sectors to economic growth. While the analysis in this chapter is not conclusive of a price competitiveness problem in Haiti, it shows that the country has been experiencing equilibrium real exchange rate appreciation pressures, which have originated more recently from the rising inflow of transfers. Because macroeconomic policy responses to this phenomenon would be costly and unlikely to be effective, the chapter concludes that policy should focus mainly on addressing the widespread non-price competitiveness problems. These offer significant scope for improvement, and addressing them could foster needed productivity growth in the export and import substitution sectors.

The second chapter discusses avenues for further developing Haiti’s monetary policy framework, to help consolidate a stable low-inflation environment and support deepening domestic financial markets. The analysis in the chapter suggests that Haiti’s monetary policy regime could be strengthened through a two-step approach. Empirical evidence of a weak interest channel and a strong historical relationship between monetary aggregates and inflation indicate that monetary policy could be more effective in the short term through an increased focus on controlling inflation via the supply of base money. In addition, the institutional foundations for the conduct of monetary policy could be strengthened, through measures to increase central bank autonomy. Over time, as steps are taken to encourage financial market deepening and the interest rate transmission channel becomes stronger, a transition toward a more advanced monetary policy regime could be considered, including inflation targeting.

The concluding chapter focuses on options to increase domestic revenues as a means of funding priority expenditures. Growth in Haiti remains constrained by multiple structural bottlenecks, many of which are caused by insufficient provision of essential public goods and services. Increasing the provision of essential public goods and services without compromising macroeconomic stability requires additional resources, including from a higher domestic revenue effort. Chapter III discusses how this could be achieved. It finds that domestic revenues could be raised significantly through carefully sequenced actions on three fronts: strengthening tax administration; broadening the bases of major taxes; and, in due course, adjusting some tax rates and fees that are low by international standards.

I. Assessing Haiti’s External Competitiveness1

A. Introduction

1. Haiti has experienced a substantial long-term appreciation of its real effective exchange rate (REER). In the last 10 years, the pace of this appreciation trend has accelerated, accompanied, among other things, by a large increase in remittances by the Haitian diaspora. In very recent months, the onset of nominal exchange rate appreciation has become a matter of national concern and debate.2 From a surveillance perspective, both the most recent appreciation episode and the observed long-term REER appreciation trend raise at least three questions:

  • Is there an external sustainability or vulnerability issue?

  • Is the current REER misaligned with fundamentals?

  • Is there a competitiveness problem that could affect medium term growth prospects?

2. To answer these questions, this paper looks at the factors behind REER appreciation, analyzes whether the REER is in line with fundamentals and assesses the impact on competitiveness. The next section gives background on REER appreciation in Haiti, the third section assesses price competitiveness using indicator-based as well as equilibrium analysis, the fourth section analyzes non-price competitiveness issues, and the final section concludes with policy implications.

B. Background

3. Haiti’s CPI-based REER has appreciated very significantly over the past 50 years, with strong volatility around the trend (Figure 1).3 Periods of sharp depreciation, which often coincided with periods of political turmoil, were followed by even larger real appreciations in politically more tranquil periods.4 In the last fifteen years, REER appreciation was mostly driven by higher inflation relative to trading partners, not nominal effective appreciation of the Haitian gourde (Figure 2). However, since 2003 this situation seems to be gradually reversing, with a steady decline of the large inflation differential and a stabilization of the exchange rate in nominal effective terms.5

Figure 1.
Figure 1.

Real Effective Exchange Rate

Citation: IMF Staff Country Reports 2007, 292; 10.5089/9781451817690.002.A001

Sources: IMF Information Information Notice System and IMF staff estimates.
Figure 2.
Figure 2.

Changes in Nominal Prices and Nominal Effective Exchange Rate

Citation: IMF Staff Country Reports 2007, 292; 10.5089/9781451817690.002.A001

Sources: IMF Information Notice System.

4. REER appreciation has not been associated with an increase in real GDP per capita and productivity, as would be expected. Contrary to the stylized fact that growth of a country’s real GDP per capita tends to be positively correlated with an appreciation of its real exchange rate, Haiti’s real GDP per capita has collapsed compared to its trading partners while the real exchange rate has appreciated.6 This trend has been somewhat less pronounced in the last ten years (Figure 3).

Figure 3.
Figure 3.

Haiti’s Real GDP per Capita vis-à-vis Trading Partners

Citation: IMF Staff Country Reports 2007, 292; 10.5089/9781451817690.002.A001

Sources: IMF World Economic Outlook; Information Notice System; and IMF staff estimates.

5. Over the last ten years, the real exchange rate appreciation has been associated with a strong increase in transfers, especially workers’ remittances (Figure 4).7 While remittances have risen in many countries in the region, Haiti’s reliance on them has become particularly high (they reached about 20 percent of GDP in 2006, exceeding exports of goods and services and FDI as a source of financing for imports). Standard economic theory suggests that transfers (private or official aid grants) would be positively correlated with REER appreciation. Transfers (or any capital inflow) impact the real effective exchange rate by raising overall income and demand for both tradables and nontradables. If the country is a price-taker in world markets, the price of tradables will not rise (by the law of one price), but the price of inelastically supplied non-tradables will rise and lead to an appreciation of the real exchange rate.8 In Haiti, a growing rate of financial dollarization, coupled with increased dollar lending to construction and real estate, and continued appreciation pressure on the gourde, suggest that transfers finance more than just consumption from abroad.9

Figure 4.
Figure 4.

Composition of Current Transfers

Citation: IMF Staff Country Reports 2007, 292; 10.5089/9781451817690.002.A001

Sources: IMF Balance of Payments Statistics.

6. REER appreciation has accelerated during the macroeconomic stabilization phase of the past three years (Figure 5). Since the cessation of central bank financing of the budget deficit, the gourde has stabilized and, since the onset of the new PRGF-supported program, has even begun appreciating in nominal terms. This has helped further dampen inflation, now down to 8 percent from almost 40 percent 3 years ago.

Figure 5.
Figure 5.

Inflation and Exchange Rate

Citation: IMF Staff Country Reports 2007, 292; 10.5089/9781451817690.002.A001

Sources: Haitian authorities.

C. Price Competitiveness

7. There are a number of ways to measure competitiveness, including through evaluating outcomes, but data limitations in Haiti are binding. The most obvious method is evaluating the REER and its impact on the current account and the export sector. Other methods include competitor-based real exchange rates, and the “internal real exchange rate,” that is, relative prices of the non-tradables sector to the tradables sector. However, it is difficult to distinguish among these sectors in Haiti, as discussed further below. The quality of Haiti’s CPI data is broadly satisfactory, but there are no data on wages, unit labor costs or producer prices. Moreover, BOP data is relatively incomplete in the sense that the UN “grant” of security services is not reflected in the official statistics, and remittances are likely underestimated.10

8. The analysis that can be undertaken with the available data is not conclusive of a price competitiveness problem in Haiti. To investigate whether the real appreciation has led to external deficits, losses of export market shares or implies a price competitiveness problem, the macroeconomic impacts of REER appreciation are examined (indicator-based analysis), and the equilibrium exchange rate is estimated to determine whether the phenomenon is a result of changing fundamentals.

Indicator-Based Analysis

9. An assessment of current account flows highlights that Haiti’s growing trade deficit is financed by increasing transfers. Figure 6 shows that the current account including transfers has remained largely in balance over the past decades, notwithstanding REER appreciation. Excluding transfers, however, the current account deficit has grown with the appreciation, mainly through increased import demand, and now amounts to as much as 28 percent of GDP.11 Consumption and imports are thus in principle vulnerable to an interruption in transfers, particularly remittances, although these have so far proven very resilient to the domestic economic and political cycle. Transfers have also more generally been shown to represent a more stable and less cyclical source of financing than other capital flows.12

Figure 6.
Figure 6.

Current Account

Citation: IMF Staff Country Reports 2007, 292; 10.5089/9781451817690.002.A001

Sources: IMF International Financial Statistics.

10. Export indicators have improved throughout the past decade, but have not recovered from the collapse during the embargo in the early 1990s. At slightly above 14 percent of GDP (down from 25 percent during the 1980’s), Haiti’s exports of goods and services are small and highly concentrated in garments.13 Exports to the U.S. account for about 85 percent of total Haitian exports. Since the lifting of economic sanctions in 1994, Haiti’s share of total U.S. imports has remained relatively constant in spite of the REER appreciation, but at a much lower level than before the embargo (Figure 7). Haiti’s non-textile assembly exports were nearly eliminated as a result of the embargo, and have never recovered, which could be partly due to the REER appreciation. The volume and market share of apparel exports has managed to recover somewhat more, mainly through significant consolidation of the industry and a step down the value-added ladder to inexpensive garments of lower quality, such as T-shirts (Figure 8).

Figure 7.
Figure 7.

Haiti’s Share of U.S. Total Imports

Citation: IMF Staff Country Reports 2007, 292; 10.5089/9781451817690.002.A001

Sources: IMF Information Notice System; United States International Trade Commission.
Figure 8.
Figure 8.

Haiti’s Share of U.S. Apparel Imports

Citation: IMF Staff Country Reports 2007, 292; 10.5089/9781451817690.002.A001

Sources: IMF Information Notice System; United States International Trade Commission.

11. Competitor-based effective real exchange rates indicate that Haiti has lost somewhat less ground than suggested by the overall REER. For textiles and agriculture, the real exchange rate appreciation vis-à-vis competitors on the U.S. export market has been less dramatic over the past two decades, as evidenced by Figures 9 and 10. As of December 2006, the REER vis-à-vis coffee and cocoa competitors in the Caribbean Basin Trade Partnership Act (CBTPA) was actually weaker than in 1990 and 1999.

Figure 9.
Figure 9.

Competitor Based REER, Textile Exports to the United States

Citation: IMF Staff Country Reports 2007, 292; 10.5089/9781451817690.002.A001

Sources: IMF Information Notice System; IMF International Financial Statistics; and United States International Trade Commission.
Figure 10.
Figure 10.

Competitor based REER, Coffee and Cocoa exports to the United States

Citation: IMF Staff Country Reports 2007, 292; 10.5089/9781451817690.002.A001

Sources: IMF Information Notice System; IMF International Financial Statistics; and United States International Trade Commission.

12. Analysis of tradables vs. nontradables inflation does not show that the relative price of non-traded goods has been increasing, although this could reflect measurement problems. An increase in the relative price of non-tradable goods would normally be expected, given the strong appreciation of the CPI-based REER. However, distribution costs in the tradables sector are quite high, as a result of weak infrastructure and scale-inefficient operations, which makes the two sectors difficult to distinguish when using CPI data.14 Unfortunately, no producer price data or sectoral wage series are available for Haiti for determining alternative measures of price developments for tradables and nontradables. Recently, however, there has been anecdotal evidence of a demand push and bottlenecks in the non-tradables sector, such as shortages of construction services and rising real estate prices, which may be early signs of increasing relative prices in the non-tradables sector.

Equilibrium Real Exchange Rate Analysis

13. To assess the real exchange rate in relation to fundamentals in the Haitian economy, cointegration (VECM) techniques are employed on annual data between the 1971 and 2006. The data set presented in Figure 11 includes:

Figure 11.
Figure 11.

Variables in the Dataset

Citation: IMF Staff Country Reports 2007, 292; 10.5089/9781451817690.002.A001

Sources: IMF databases; International Country Risk Guide; and Fund Staff estimates

  • Relative real GDP per capita, calculated vis-à-vis Haiti’s seven most important trading partners. As previously noted, higher relative real GDP would be expected to be associated with an appreciated real exchange rate.

  • Net foreign assets (NFA) as reported in Lane and Milesi-Ferreti (2006). The series was extended using IFS data for the last three years. For reasons of taking logs the sign of NFA was inverted, so that a positive stock denotes Haitian net claims on the rest of the world. A priori, a positive relation between NFA and an appreciated real exchange rate would be expected, since debtor countries will need a more depreciated real exchange rate to generate the trade surpluses necessary to service their external liabilities.15

  • Current transfers, which includes both remittances and public transfers. As previously noted, higher transfers would be expected to be associated with an appreciated real exchange rate.

  • The world price of oil, as a proxy for Haiti’s commodity terms of trade. Higher commodity terms of trade (i.e. lower oil price) should appreciate the real exchange rate through real income or wealth effects.

  • Political risk variables. The International Country Risk Guide (ICRG) has only been publishing its Political Risk Rating since 1984, and therefore a dummy variable approach was employed to capture the effects of political crises in the full data sample.16 Higher political risk would be expected to be associated with depreciation of the real exchange rate.

All variables, except the political dummy, are non-stationary. In contrast to many real exchange rate studies government expenditure is not included, because of a lack of reliable data. In any case, this omission may be less relevant in the case of Haiti, because government expenditures are not very large (around 12 percent of GDP, according to national accounts data).

14. Net foreign assets and transfers both provide information content on capital inflows, but vary in importance depending on the length of the data sample. Both series are highly correlated as illustrated by Figure 12. Over the last ten years, NFA appears to have been driven mainly by the strong inflows of current transfers, in particular remittances. In Haiti, the increase in dollar deposits in the commercial banking system has remained a relatively constant percentage of transfers and gross export receipts, with NFA as a steady share of dollar deposits.17 For the regressions covering the whole data sample, NFA was included in the models, since it is a much broader measure of external wealth, including prior to the period where transfers began to rise significantly.

Figure 12.
Figure 12.

Net Foreign Assets and Current Transfers

Citation: IMF Staff Country Reports 2007, 292; 10.5089/9781451817690.002.A001

Sources: IMF Balance of Payments Statistics; Lane and Milesi-Ferretti (2006); and IMF staff estimates.

15. The empirical analysis indicates that capital flows and political risk have been important determinants of the real exchange rate over the past decades. Table 1 presents the estimation results:

Table 1.

Vector Error Correction Models

article image
Source: IMF staff estimates

  • The results show that a VECM including relative real GDP fares badly. The real exchange rate is not error correcting in Model (1), and the sign of the coefficient on GDP is not in line with theory.

  • Model (2), however, which excludes GDP, shows error correction in REER and a cointegrating relation with the expected signs. Higher NFA tend to be associated with a strengthening of the real exchange rate, and higher oil prices or political crises with a weakening.

  • Models (3) and (4), which include the ICRG Political Risk Rating instead of the dummy, and thereby only use the latter part of the data sample, corroborate the importance of political developments. In addition, similar results are obtained regardless of whether NFA or current transfers are used.

All the cointegration results remain when changing to Engel-Granger techniques that require estimation of fewer parameters.

16. The models show that much of the appreciation of the real exchange rate is an equilibrium phenomenon in line with fundamental developments in Haiti’s economy. Figure 13 shows that the equilibrium exchange rate implied by Model (2) explains a large part of the fluctuations in the REER since 1971.18 Similarly, Figure 14 shows that Model (4), through trends in political risk and current transfers, can explain much of the observed movements in the real exchange rate.

Figure 13.
Figure 13.

Equilibrium Real Exchange Rate, Model (2)

Citation: IMF Staff Country Reports 2007, 292; 10.5089/9781451817690.002.A001

Note: Dotted lines denote 95 percent bootstrapped confidence band.Sources: IMF Information Notice System; and IMF staff estimates.
Figure 14.
Figure 14.

Equilibrium Real Exchange Rate, Model (4)

Citation: IMF Staff Country Reports 2007, 292; 10.5089/9781451817690.002.A001

Note: Dotted lines denote 95 percent bootstrapped confidence band.Sources: IMF Information Notice System; and IMF staff estimates.

17. Both models indicate that the appreciation in recent years has been stronger than implied by fundamentals, but a firm conclusion on misalignment cannot be drawn. The small number of observations in the sample makes the estimation uncertain, and the deviation of the REER from the estimated equilibrium is within the error margin for both models.19 Furthermore, since 2004 there have been structural developments associated with the stabilization of the economy that could be expected to appreciate the equilibrium real exchange rate (ERER), but which cannot be captured by the models. These include the ceasing of central bank financing of the government deficit, as well as the establishment of a strong UN military force, which has an annual budget equal to 10 percent of GDP and creates demand for domestic goods and services.

D. Non-price Competitiveness

18. Haiti fares poorly in most qualitative measures of non-price competitiveness. Despite significant gains in government transparency, expenditure management and stabilization of the security situation during the last three years of reform, investor confidence has yet to improve. Haiti ranks below most countries in the region, as well as other PRGF-eligible countries, including those with lower GDP per capita, as evidenced by the ICRG rankings of corruption, contract viability, and law and order (Tables 2 and 3). In Transparency International’s 2006 corruption perceptions index, Haiti ranked at the bottom of 163 countries.20

Table 2.

Haiti’s Ranking vis-à-vis Regional Competitors in Tourism and Agriculture as of January 2007

article image
Source: International Country Risk Guide.
Table 3.

Haiti’s Ranking vis-à-vis Selected PRGF Eligible Countries as of January 2007

article image
Source: International Country Risk Guide.

19. Wage costs in Haiti are low, but businesses face extraordinary high non-wage costs.21 In the World Bank’s 2007 Ease of Doing Business report, Haiti ranked second-to-last for the Western Hemisphere (Table 4). While Haiti fares poorly in the region on almost all indicators, it fares better relative to a select PRGF-country cohort (Table 5). However, even against these PRGF-eligible countries, Haiti’s performance on some indicators such as days needed to start or close a business and investor protection is worse. The time needed to register property is also higher: in sub-Saharan Africa an average of 108 days is needed, while in Haiti the average time is 683 days. 22 More generally, there are a number of other problems, such as the need for expensive private security services, high transport costs due to dilapidated infrastructure, and high electricity costs. In Port-au-Prince, electricity service is only available 8 hours per day on average, forcing businesses to self-generate electricity at very high cost to ensure reliable supply. The authorities are well aware of these problems and are trying to address them, but progress has been slow, even though a step to reduce bureaucratic red tape was taken recently through the opening of a “guichet unique” (one-stop office for establishing businesses) in downtown Port-au-Prince.

Table 4.

World Bank Ease of Doing Business Indicators for Latin America

article image
Source: World Bank, Doing Business, 2007.
Table 5.

World Bank Ease of Doing Business Indicators for Selected PRGF Countries

article image
Source: World Bank, Doing Business, 2007.

E. Conclusions

20. Haiti’s economy has experienced substantial REER appreciation over the long term and more recently, even though the current account has remained relatively balanced owing to rising transfers. Reliance on transfers is very high, with workers’ remittances exceeding exports in goods and services and FDI. This dependence harbors some vulnerability, which is reduced to the extent that transfers are not debt-creating and tend to be more stable than other types of capital inflows. To mitigate remaining risks, further development of Haiti’s export and import substitution sectors would be desirable to diminish the need for adjustment if the pace of transfers were to drop. While Haiti’s exports have recovered somewhat from their collapse after the imposition of an economic embargo in the early 1990s, the sector remains fairly small, concentrated, and undiversified. Further recovery will depend on Haiti’s competitiveness, both in its price- and non-price dimension.

21. Equilibrium exchange rate analysis does not suggest, on balance, that the Haitian gourde is misaligned, but the recent acceleration in REER appreciation should nevertheless be watched. Most of the recent appreciation reflects changes in underlying fundamentals, particularly the rapid increase in remittances and other transfers. The estimated equilibrium real exchange rate models indicate that in the past three years, the REER has appreciated to some extent beyond what fundamentals would imply. However, these deviations from the estimated equilibrium are within the error margins, and the analysis is constrained by data limitations and recent structural change. Also, periods of rapid stabilization, such as the one Haiti is experiencing, are often accompanied by strong real appreciations. Still, because of its intensity, the recent REER appreciation merits continued monitoring.

22. Because Haiti’s appreciation appears to be largely an equilibrium phenomenon, the scope for a macroeconomic policy response is limited. Fiscal restraint represents a standard policy response to real appreciation, but substantial immediate spending needs—including to address critical developmental bottlenecks—do not leave much space for further fiscal consolidation at this time. On the other hand, attempts to stem nominal appreciation through systematic intervention would likely be ineffective over time.23 Unsterilized foreign exchange purchases would ultimately push up the inflation differential between Haiti and its trading partner countries, and thus not prevent REER appreciation. Sterilized intervention would be very costly. However, the authorities could strengthen their monetary policy instruments and regime, to ensure that monetary programs are implemented as planned and do not exacerbate pressures on the nominal exchange rate in the short term.24

23. Policy efforts should focus on addressing widespread non-price competitiveness problems, which at this stage appear to be a binding constraint to growth. REER appreciation, although an equilibrium phenomenon, still poses a challenge to the competitiveness of the tradables sector. If productivity in that sector does not rise, there is a real risk that future growth and much needed diversification will not materialize. Tackling the key problems that contribute to the very high costs of doing business in Haiti appears most conducive to support productivity, and should thus be a policy priority. This will also be important to ensure that the country can benefit from development opportunities such as the recent HOPE Act, which provides preferential access for Haiti’s textile sector to the U.S. market.

References

  • Balassa, B., 1964, “The Purchasing-Power Parity Doctrine: A Reappraisal,” Journal of Political Economy, Vol. 72, pp. 584–96.

  • Bugamelli, M., and F. Paterno, 1995, “Do Workers’ Remittances Reduce the Probability of Current Account Reversals?”, World Bank Research Working Paper 3766.

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  • Fernandez de Cordoba, G. and T. Kehoe, 2000, “Capital Flows and Real Exchange Rate Fluctuations Following Spain’s Entry into the European Community,” Journal of International Economics, 51, pp.49 -78.

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  • Lopez, H., Molina, L., and M. Bussolo, 2007, “Remittances and the Real Exchange Rate,” World Bank Policy Research Working Paper 4213.

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  • Lane, P. and G. Milesi-Ferretti, 2006, “The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970-2004,” IMF Working Paper No. 06/69.

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  • International Monetary Fund, 2006, “Methodology for CGER Exchange Rate Assessments.”

  • International Monetary Fund, 2005, “World Economic Outlook—Globalization and External Imbalances”

  • Obstfeld, M. and Rogoff, K., 1996, Foundations of International Macroeconomics, Cambridge, MA: The MIT Press.

  • Everaert, G. and L. Jaramillo, 2005, “Haiti–Assembly Sector Exports,” IMF Selected Issues Paper.

  • Burstein, A., Neves, J., and S. Rebelo, 2000, “Distribution Costs and Real Exchange Rate Dynamics during Exchange-Rate-Based Stabilizations,” NBER Working Paper 7862.

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1

By Laure Redifer and Kristian Hartelius.

2

Haiti’s exchange rate regime is classified as a managed float in the IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions (AREAR), but it is a borderline case. In recent years, there has been very little exchange rate management, as the authorities have been constrained by a very low level of foreign reserves.

3

Throughout the paper the real exchange rate is defined so that an increase implies a depreciation.

4

The REER depreciated sharply in the years following the end of the second Duvalier regime in 1986, and the years 1990 and 2003, which saw the early terminations of Bertrand Aristide’s two presidential terms.

5

In recent months, the gourde has even begun to appreciate substantially in nominal terms.

6

Obstfeld and Rogoff (1996) document the stylized fact, for which Balassa (1964) provided the theoretical explanation. Haiti’s relative real GDP per capita is calculated as a weighted index vis-à-vis its seven most important trading partners.

7

This may also explain why the deterioration in relative GDP per capita has flattened over the same time period.

8

See for example, Kehoe and Fernandez de Cordoba (2000). The law of one price dictates that REER appreciation would be reflected in the internal relative prices of tradables and nontradables.

9

Eventually, most of the transferred dollars flow out of the country to buy assets or imports, but they fuel demand for domestic goods and services in the mean time. Recent empirical work on Central American and Caribbean countries find that remittances appear to lead to significant real exchange rate appreciation through “Dutch disease” like effects of capital flows overheating the local economy while keeping the nominal exchange rate strong (Lopez, Molina, and Bussolo (2007)).

10

As in many other countries, Haiti’s remittances are likely underestimated in official BOP statistics. According to a recent IDB study, remittances may be some 10–20 percent higher than currently reported.

11

The current account in Haiti is almost exclusively goods, services and transfers; net factor income is very small.

12

See, for example, IMF (2005). Bugamelli and Paterno (2005) find that workers’ remittances help reduce the probability of sharp current account reversals.

13

The textile assembly industry in 2006 accounted for almost 90 percent of total exports of goods, while agricultural products (mainly mango, coffee, and cacao) accounted for about 8 percent. For a more detailed analysis of Haiti’s assembly sector exports, see Everaert and Jaramillo (2005).

14

Anecdotal evidence suggests that a lack of competition may also be contributing to high distribution margins. For a study of the importance of distribution costs when measuring prices of tradable goods, see Burstein, Neves, and Rebelo (2000).

15

See IMF (2006) for a discussion of the relation between NFA and the real exchange rate.

16

The period between 1987 and 1994, as well as 2003, were defined as periods of political crisis in Haiti. These years saw civil strife associated with the end of the Duvalier era and the early termination of Aristide’s two presidential terms.

17

The annual increase in dollar deposits has been 7–14 percent of private transfers plus gross goods and services exports receipts. Under the current regulatory framework, banks can only lend50 percent of their dollar deposits and must constitute reserve requirements of 20 percent. The remaining dollar deposits are either used for cash in vault or to acquire net foreign assets.

18

The equilibrium real exchange rate is defined as the exchange rate implied by the cointegrating relation, evaluated at Hodrick-Prescott filtered values of the fundamentals.

19

There is a particular large uncertainty in the estimation of Model (4) due to the very low number of observations. The bootstrapped error band is, however, more narrow for Model (4) because it better captures the volatility of the real exchange rate during the early 1990’s.

20

However, this was based on very limited survey information and apparently most of the information was gathered from entities not resident in Haiti itself.

21

These are some of the distribution costs referred to earlier.

22

The World Bank’s “ease of doing business” index has 11 categories in total. The categories displayed are those where Haiti fares most poorly.

23

The authorities have been purchasing dollars recently, however, these purchases contribute to the PRGF objective of stockpiling official reserves from their current very low level (2 months of imports), and contribute to seasonal smoothing, as opposed to being a serious policy of exchange rate management.

24

Chapter II of this Selected Issues paper discusses options to strengthen Haiti’s monetary policy framework. See also the staff report for a discussion of recent deviations from the monetary program and staff advice on the short-term monetary policy stance.

Same Series

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Other Publishers

Cover IMF Staff Country Reports
Haiti: Selected Issues and Statistical Appendix
Author: International Monetary Fund
Volume/Issue:
Volume 2007: Issue 292
Publisher:
International Monetary Fund
ISBN:
9781451817690
ISSN:
1934-7685
Pages:
76
DOI:
https://doi.org/10.5089/9781451817690.002

Real Effective Exchange Rate

Changes in Nominal Prices and Nominal Effective Exchange Rate

Haiti’s Real GDP per Capita vis-à-vis Trading Partners

Composition of Current Transfers

Inflation and Exchange Rate

Current Account

Haiti’s Share of U.S. Total Imports

Haiti’s Share of U.S. Apparel Imports

Competitor Based REER, Textile Exports to the United States

Competitor based REER, Coffee and Cocoa exports to the United States

Variables in the Dataset

Net Foreign Assets and Current Transfers

Equilibrium Real Exchange Rate, Model (2)

Equilibrium Real Exchange Rate, Model (4)