Several unexpected shocks have threatened to upset, during this first half of 2008, the socio-political situation in Haiti. Natural disasters (hurricane and floods) and the recent surge of world commodity prices, particularly that of basic foodstuffs (rice, cooking oil and flour) and petroleum products, have exacerbated inflationary pressures. The CPI, which the authorities had managed to reduce to single digits in late 2007, jumped from around 10 percent to more than 16 percent within the first three months of 2008. As staff indicated in its Report, core inflation (defined as headline inflation excluding food, fuel, and transport) has remained relatively stable. Above all, the sharp increase of the price of rice–the basic staple of the average Haitian’s diet - during the month of March has worsened the situation of the most vulnerable segments of the population and led in early April to food riots and a non-confidence in Parliament that forced the resignation of the Prime Minister.

In the wake of the crisis, the Government quickly adopted short-term emergency measures that included a temporary subsidy for the price of rice and the suspension of the automatic adjustment of petroleum prices at the pump. Our authorities are very cognizant of the limited efficiency and unsustainable nature of these measures and already at the beginning of this week the President of the Republic has officially announced the Government’s decision to discontinue in the next few days the petroleum price subsidy, which has already cost more than half a billion gourdes of fiscal receipts forgone for the months of March to April.

As a response to the food crisis, the Government has simultaneously sought to put in place better targeted and longer-term programs with durable impact on agricultural production and poverty reduction. They are thankful that several donors have quickly responded to their call for assistance mostly through the advanced disbursement or reallocation of already pledged funds and through humanitarian assistance but also, in some cases, through direct budget support. Nevertheless, the total envelope pledged so far remains short of the amounts needed to topple the difficulties engendered by the food and oil price hikes. The authorities have increased their efforts to raise fiscal revenues and intensified their dialogues with donors. They strongly prefer to refrain from central bank financing and are wary about the longer-term implications on growth and poverty reduction of diverting resources away from investments in the social and economic sectors.

The representatives of the donor community on the ground have explained to the authorities that they (particularly the bilateral donors) were limited in their capacity to offer budget support either because of new policy guidelines in their capitals or headquarters or because of their budget cycles, which made it hard to commit new funds in any form in the short run. Our authorities also understood that some donors were in fact hesitant to supply additional financial support before a new government was in place. With respect to this concern, our authorities have asked us to stress that several measures have been taken to ensure that public administration continues to carry out its functions and that the caretaker government is able, through the leadership of the President and with the support of several political parties and Parliament members, to take decisions of a more permanent nature that are needed to ensure continuity in their policy engagements and to face the numerous challenges at hand. The signing of the Letter of Intent and of the supplementary Memorandum of Economic and Financial Policies by the Minister of Finance after being given power of attorney by the President serves as an illustration of the exceptional procedures available within the Haitian legislation during this interim period.

The successive rejection by Parliament of two persons chosen by the President to occupy the function of Prime Minister may be puzzling. The apparent stalemate around this nomination is indeed a cause of concern. It delays the settling in of a government with full powers to present legislation to Parliament and to engage the State fully and directly without recourse to burdensome procedures. Nevertheless, these events should be considered as part of the democratic process adopted by Haiti through the Constitution of 1987. It should also be noticed that the vetting process is being done peacefully.

Effectively, the ratification of the choice of the Prime Minister in Haiti is a multi-step process that is completed separately by each chamber of Parliament. First, each chamber has to determine if the candidate designated by the President of the Republic has the credentials stipulated by the Constitution. Within each chamber of Parliament, a committee is assigned the responsibility of determining this eligibility and of presenting a favorable or adverse report to the assembly of deputies or of senators. This report–favorable or not–is in turn put to vote. If the vote is positive the President can formally nominate the designated candidate and then he/she would be invited by Parliament to present his/her cabinet members and general policy statement for approval.

Again, we must emphasize that the Haitian legislation offers the tools to ensure the smooth working of government in the interim. It is also worth noting that a consensus has been reached with the political parties and members of Parliament for the adoption of the PRSP as the chief guideline for short- and long-term strategic policy choices. Within the same mindframe and through specific delegation of the President, the caretaker government was able to reach an agreement on budget appropriations for the rest of the fiscal year ahead of the adoption of a budget rectification law.

Under very difficult circumstances, the Haitian authorities are managing to preserve the stabilization gains of the past couple of years. They are determined to continue implementing prudent macroeconomic management measures including, if warranted, further tightening of monetary policy to rein in inflation. Already inflation seems to have been somewhat subdued as the monthly variation of the CPI was 1.1 percent in April and 0.5 percent in May compared to 4.5 percent in March. Also the depreciation of the exchange rate, which had been more than 2.5 percent during the month of March, has more or less stabilized since then, with the exchange rate remaining below 39 gourdes per dollar. With the increased costs of food and oil, the authorities remain concerned about the financing of the current account and the possibility of the recent exchange rate depreciation feeding in further inflation. The elimination of the oil price subsidy will also have its impact on inflation. Fortunately, despite the global deceleration of growth, particularly that of the US economy, remittances have only shown a modest slow-down. Another positive factor is the passing of the HOPE II Act by the US Congress, which should encourage the maintenance or even increase of investments in the textile export sector. The additional access the authorities are requesting under the PRGF is meant to help ease the Central Bank’s adjustment efforts, to contribute to finance the widening current account deficit and to help safeguard a comfortable level of net international reserves.

Despite the severe shocks that hit the economy, and the social and economic difficulties that the food crisis has entailed, the authorities continued to honor their engagement under the PRGF. All but one performance criteria were observed during the period under review and most structural benchmarks were met. As staff notes, the breach at end-March of the zero ceiling of net central bank financing to the non-financial public sector was small (less than 0.05 percent of GDP) and due to credit extended to the public telecom company TELECO to support its restructuring costs ahead of the central bank’s disengagement. These costs include severance pays for the separation of thousands of TELECO’s employees.

On the structural front, the delay in strengthening the programming units of line ministries is exclusively due to the scarcity of qualified human capital on the domestic market and the Government’s determination to hire professionals with the needed level of expertise and experience instead of settling for junior professionals who would have to be trained and would not have the immediate impact sought. As far as the central bank’s recapitalization plan is concerned, our Haitian authorities have asked us to take this opportunity to thank the staff of MCM for their valuable initial comments on the draft plan submitted as they look forward to taking full benefit of additional IMF TA ahead of the new September 2008 test date.

We, therefore, ask your support for our authorities’ request of approval of the third review and fourth disbursement under the PRGF as well as the augmentation of access and increased interim assistance under the HIPC initiative.

The challenges Haiti faces for the remainder of this fiscal year are well summarized in the MEFP and the staff report. However, in view of staff’s assessment of downside risks to the program it may be important to affirm the following:

1. The approval of key legislation (e.g. the banking law, custom code, FY09 budget) may be further delayed by the protracted process of approval of a new Prime Minister. However, certain dispositions can be adopted by presidential decree. For instance, this procedure can be used for additional grants targeted to the financing of projects not originally in the budget.

2. Under the program only one structural measure for end of September 2008, i.e., the submission of a new organic law for the DGI (Internal Revenue Administration) to Parliament, is dependent upon the existence of a new government.