Statement by Mr. Nogueira Batista, Executive Director for Haiti, Ms. Florestal, Government-Provided Advisor, and Mr. Simon, Government-Provided Advisor, March 26, 2014

This Seventh Review Under the Extended Credit Facility of Haiti focuses on economic activity that continued to advance in FY2013, despite negative weather events early in the fiscal year. The fiscal deficit increased to 6.7 percent of GDP in FY2013 owing to a gasoline price freeze that dented revenues and on transfers to the electricity sector. The evolution of monetary aggregates reflected government policies and some dedollarization, while the banking system remained well capitalized and profitable. The macroeconomic outlook and the conditions for policy implementation are subject to a number of downside risks.

Abstract

This Seventh Review Under the Extended Credit Facility of Haiti focuses on economic activity that continued to advance in FY2013, despite negative weather events early in the fiscal year. The fiscal deficit increased to 6.7 percent of GDP in FY2013 owing to a gasoline price freeze that dented revenues and on transfers to the electricity sector. The evolution of monetary aggregates reflected government policies and some dedollarization, while the banking system remained well capitalized and profitable. The macroeconomic outlook and the conditions for policy implementation are subject to a number of downside risks.

1. On behalf our Haitian authorities we would like to thank staff for maintaining a constructive dialogue. The staff’s has made commendable efforts to understand the domestic post-earthquake context and ensuing constraints.

2. The staff report is relatively balanced and rich in information. Our authorities particularly appreciate the highlighting of the constraints inherent to the way foreign assistance is being delivered in Haiti. As we have stated on previous occasions, the fact that aid is provided largely outside the budget and often directly executed by NGOs and private firms weakens coordination and efficiency. After observing that “some analysts suggest that aid disbursed by some donors may have had to pass multiple layers of sub-contracts and sub-grants before reaching the intended group”, staff rightly asserts that circumventing the public sector may have weighed negatively on government effectiveness. We welcome staff’s recognition of a point the authorities have been making for some time and hope that this will contribute to a better coordinated delivery of aid.

3. The staff report covers extensively program performance and recent macroeconomic and financial developments. Hence, we will focus primarily on the structural agenda for achieving sustainable and inclusive growth.

Recent developments and outlook

4. Growth performance in FY13 was better than programmed in spite of the impact of several external shocks including the devastating cyclone Sandy that led to extensive damages in the agricultural sector. Macro stability was maintained with inflation subdued due to stable international prices of basic goods, the freezing of domestic petroleum prices and the measures taken by the central bank to limit the depreciation of the gourde. The supply of locally grown agricultural products quickly picked up as a result of the government’s timely measures in support of the sector. Stronger exports also played an important part in keeping economic recovery on track.

5. Haiti’s development requires substantial investments, public and private. However, external support which had been relatively abundant since the tragedy of 2010 is being phased out. PetroCaribe funds have been financing, on a concessional basis, an increasingly significant part of public investments during the past fiscal years. Our authorities are very appreciative of the support they receive from Venezuela but are conscious of the need to diversify sources of financing and to carefully balance the use of loans with debt sustainability. Recently, they have explored with the Venezuelan government the possibility of repaying part of the PetroCaribe debt in kind through exports of goods.

6. Another constraining factor is the late approval of the FY14 budget that could prevent the government from fully implementing its growth and investment policies. That said, efforts to increase tax collection and combat fraud are redoubling and results at the level of customs receipts are already being felt.

7. The other binding aspect of the financing constraint may be the inability of the government to increase the maturity of treasury bills considering that the domestic market seems unresponsive to the issuance of instruments with tenors of six months or more.

Challenges in achieving sustainable structural change

8. As indicated in the staff report, performance under the program is broadly satisfactory although progress on structural reforms is constrained by capacity and infrastructure limitations. Some elements of the political context also need to be factored in to better project and understand future outcomes. For example, the FY14 budget is only approaching approval now –six months into the fiscal year–following a negative vote by Parliament in September 2013 and several subsequent negotiation rounds.

9. Some important structural reforms in public financial management depend on parliamentary approval of draft legislation. The new organic law for the Ministry of Economy and Finance is essential for the complete adoption of strengthened structures for debt management and the roll out of the Single Treasury Account (STA). A revision of the law creating the Directorate of Budget is also necessary. The revision will seek to rationalize expenditures and simplify procedures, increase transparency in the execution of the budget and strengthen the responsibility of accountants and managers.

10. Pending the adoption of new legislation, the Government is moving forward with public financial management reforms using all the flexibility offered by the existing administrative and legal framework. For example, ahead of the new organic law for the Ministry of Economy and Finance, commendable progress has been achieved towards adopting the single treasury account (STA), a complex endeavor that requires careful planning and strong coordination between the Ministry and all public sector entities. Beginning in April, the number of accounts per public sector entity will be reduced to only three: one for expenditure, one for resources and another one for investment. The entire process is projected to be completed by end of June 2014 at which time the number of accounts of public entities in local currency will shrink to 237 from 534, according to the Ministry of Economy and Finance.

Public private partnerships and the business environment

11. While efforts are being intensified to improve tax collection and reduce dependency on external assistance, the government knows that private investments need to play a crucial role and is continuing to devise ways to promote their participation. Hence, different models of public private partnerships are being formalized. These include the adoption of innovative schemes to encourage the creation of agricultural firms. One key challenge in the agricultural sector in Haiti is the limited number of sufficiently large parcels of land that can allow for some economies of scale and the production of competitive goods. Small farmers are being encouraged to constitute larger production units to facilitate access to credit as well as increase efficiency.

12. Another initiative is the promotion of micro-parks with mixed ownership (private/public) particularly in the government’s chosen four priority sectors including agro-industry and manufacturing. The idea is to pool the supply of public services (e.g., water and electricity) as well as that of plants, machinery and administrative buildings. In this model, technical assistance to upgrade managerial and production skills will be provided by the government. Six such micro-parks in different regions of the country are in preparation.

13. The Haitian government is also planning a complete overhaul of the “doing business” legal apparatus to improve and modernize the business environment and promote entrepreneurship. Following an extensive dialogue with representatives of the private sector, the President of the Republic has designated a high level task force comprising renowned lawyers specializing in business and commercial law to review the code of commerce and all other legislation related to doing business. This task force also has to draft new legislative proposals. Simultaneously, legislation to create the appropriate framework for mining, a sector with recently discovered significant potential, is also being drafted with the support of donors.

Phasing out electricity and petroleum subsidies

14. As underlined in the staff report, subsidies to the electricity company and to the consumption of petroleum products have reached prohibitive levels. Forgone taxes from the freezing of domestic petroleum prices for the first six months of this fiscal year are estimated by the Ministry of Finance to have reached 2.8 billion gourdes representing more than half of the Treasury bonds to be issued during the fiscal year. To eliminate fully the subsidy to petroleum consumption, prices would have to be raised by substantial amounts. In practice, only a gradual adjustment with accompanying measures to attenuate the impact on the poor can be considered. With the technical support of the World Bank, the authorities are finalizing plans to establish targeted subsidies and start as soon as feasible a gradual increase of prices at the pump.

15. Subsidies to the public electricity company (Electricité d’Haïti - EDH) consume another significant part of budget resources (2.5 billion gourdes for this fiscal year). Even so, the supply of electricity is limited, unreliable and expensive. Hence, the government’s objective is two-prong. On the one hand, it seeks to eliminate the heavy burden of EDH on the budget. On the other, it aims to ensure that energy no longer constrains growth and development. The goal is to arrive at a situation in which the private sector and the population at large have reliable access to electricity at a reasonable cost. The primary challenge in the short term is to bring EDH to financial soundness. This necessarily implies the renegotiation of contractual terms with the independent power producers (IPPs) –a point we believe could have been emphasized in the staff report. These contracts were negotiated under previous administrations and are perceived by the authorities to be very unfavorable to the State.

16. The Haitian authorities are convinced that for the longer term, a new strategic model is needed. It would have to be one in which the State no longer bears all the risks. One avenue is the decentralization of the production and distribution of electricity to increase competition in a sector now characterized by low efficiency and high concentration. A high level commission has recently been created by the Prime Minister to boost energy sector reform. This commission includes representatives of USAID, IDB, WB and IMF.

Exchange rate and monetary policy

17. The central bank has retained the accommodative stance adopted since 2011. Two factors have contributed to the continuation of this stance: first, the evolution of commodity prices on the international market and, second, quantitative easing and the low interest rates practiced by the Federal Reserve. However, circumstances have changed and in light of recent fluctuations in the foreign exchange market the central bank decided to begin tightening its stance with the tools at its disposal including interest rates and reserve requirements.

18. The central bank wishes to reaffirm its commitment to an improvement in the functioning of the foreign exchange market. However, the market’s shallowness and the limited number of actors are barriers to the adoption of a single-price auction. To overcome these difficulties the Fund has agreed to provide technical assistance to determine the feasibility of an electronic platform that would favor the deepening of the foreign exchange market.

Financial Sector

19. The various measures initiated to improve access to credit are starting to bear fruit. The law against money laundering and the financing of terrorism has been adopted by Parliament and promulgated in November 2013. The authorities are confident that the new AML/CFT legal framework is consistent with FATF standards and will be a major step in strengthening governance in the financial sector. Its adoption in conjunction with a new legal framework for microfinance and credit unions offers better perspectives for the expansion of credit and financial deepening. The approval of the draft microfinance law and the new insurance law will also be instrumental in improving the management of risks and consumer protection.