Haiti: Staff Report for the 2015 Article IV Consultation and Request for a Three-Year Arrangement Under the Extended Credit Facility—Debt Sustainability Analysis
Author: International Monetary Fund. Western Hemisphere Dept.
Publication Date:
24 Jun 2015
eISBN:
9781513588209
Language:
English
Keywords:
ISCR; CR; government; SDR; oil price decrease; price; Petrocaribe debt inflow; short-to-medium terms; concessional terms; financing terms; US$ terms; Oil prices; Debt sustainability analysis; Debt sustainability
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Haiti’s recently completed arrangement under the Extended Credit Facility (ECF) helped to maintain macroeconomic stability after the 2010 earthquake. While Haiti has seen four consecutive years of growth, reducing poverty requires higher and sustained growth rates.

Abstract

Haiti’s recently completed arrangement under the Extended Credit Facility (ECF) helped to maintain macroeconomic stability after the 2010 earthquake. While Haiti has seen four consecutive years of growth, reducing poverty requires higher and sustained growth rates.

This Debt Sustainability Analysis (DSA) was prepared in accordance with the revised joint Bank-Fund debt sustainability framework (DSF) for low-income countries (LICs).1 Haiti’s risk of debt distress has improved from high to moderate on the back of significantly lower oil prices and some fiscal consolidation. However, the balance of risks is still to the downside, and a rebound in oil prices would result in an increase in the likelihood of debt distress and the risk of external debt distress would become high again.2 The country’s main challenge continues to be ensuring macro stability while protecting social and investment spending needed for social cohesion and growth. Policies under the baseline scenario assume improved energy policies that allow to broadly lock-in the fiscal gains associated with lower oil prices. The country’s external debt profile is vulnerable to changes in oil prices, borrowing conditions and the exchange rate; moreover, a decline in the rate of growth would have a negative impact on public debt. The cost of a sudden stop of Petrocaribe inflows would be lower than previously assessed (EBS/14/33) provided oil prices continue to be at lower levels. However, given the extreme sensitivity of Haiti’s debt to shocks, improvements in the risk of debt distress implied by this DSA should be interpreted with great caution. It is essential that Haiti maintain prudent macroeconomic policies, strengthen debt management and public financial management, and deepen structural reforms to boost exports and growth.

Background

1. At end-2014, Haiti’s stock of public sector debt amounted to US$2,279 million, (24.8 percent of GDP), composed almost exclusively by external debt on concessional terms (Text Table 1). External debt amounted to US$1,825 million, of which US$136 million corresponded to multilateral debt, and US$1,690 million to bilateral debt, mainly to Venezuela (US$1,574 million of Petrocaribe debt). Domestic public debt was about US$230 million, mostly in the form of treasury bills largely held by commercial banks and about US$45 million is a publicly guaranteed debt to a commercial bank contracted by the state-owned electricity company EDH (Electricité d’Haïti).

Text Table 1.

Haiti: Structure of External Public Debt at end-2014

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Sources: Haitian authorities; and Fund staff estimates.

The debt ratio differs slightly from that in Tables 1a and 3a given the use of average, instead of end-of-period, exchange rates.

2. Other outstanding creditor and debtor positions with the private sector appear in favor of the public sector. The non-financial public sector remains a net creditor to the consolidated banking system, mainly reflecting Petrocaribe and other deposits at commercial banks (about US$228 million at end-2014). In addition, the public sector maintains a debtor position vis-à-vis independent power producers (IPPs), for arrears accumulated by EDH for about US$350 million; in turn the IPPs have accumulating arrears to the central government (US$200 million at end-2014), for the provision of fuel.

A. Macroeconomic Outlook, 2015–35

3. Haiti’s main challenge is to balance the need for a gradual fiscal adjustment with large social and investment needs. A stronger-than-warranted fiscal adjustment may result in a better debt profile at the cost of lower GDP growth and slower progress in addressing social needs. Conversely, too large a primary deficit could compromise macroeconomic stability. In particular, the baseline scenario is based on the following assumptions:

  • Projections include an annual average real GDP growth of about 3.4 percent, starting from 2.5 percent growth rate in 2015, increasing to 3.8 by 2019 as structural reforms yield higher growth, and then declining progressively to 3 percent by 2035.

  • A stable real exchange rate vis-à-vis the US dollar.

  • Oil prices are projected to decline in 2015 and increase gradually in 2016–20 in line with WEO, and to remain constant in real terms thereafter.

  • Fiscal projections include an upfront fiscal consolidation, as the positive fiscal impact of lower oil prices is locked in. Domestic revenues of the central government increase to about 18.4 percent of GDP by 2035 (from 12.5 percent in 2014), while foreign grants will gradually decrease to about 2 percent of GDP (from 6.5 percent of GDP in 2014). Primary expenditure (including EDH’s deficit) is projected to decline from 27.8 percent of GDP in 2014 to 21.1 percent in 2035, with capital expenditure (domestically and externally financed) stabilizing at 10 percent of GDP by 2035, reflecting lower Petrocaribe financing. This would involve an adjustment in the non-financial public sector (NFPS) primary balance of about 6 percentage points of GDP during the projection period. The primary deficit in 2035 (about 0.6 percent of GDP) would be consistent with a decreasing debt ratio. For the external outlook, projections consider a significant improvement of the trade deficit (from 32.8 percent of GDP in 2014 to 13.5 percent in 2035), in large part due to lower oil prices, and gradually increasing FDI (from 1.1 percent of GDP in 2014 to 3.7 percent in 2035). The projections further assume Petrocaribe debt inflows will decrease significantly, given the reduced oil bill (from 11.1 percent of GDP in 2014 to 8.2 percent in 2010 (the end of the WEO projection period). As the country develops, transfers (both official and remittances) would decline gradually, from 26.3 percent of GDP in 2014 to 11.2 percent in 2035.

4. Gross financing needs will be covered by a combination of external and domestic debt. Gross financing needs are projected to average about 3.3 percent of GDP per year, which will be financed by external debt flows (about 3.0 percent of GDP) and the rest by domestic debt (and deposit withdrawals in 2015–17). The DSA assumes that external borrowing would be almost evenly split between Petrocaribe flows and additional external bilateral borrowing at concessional terms. Domestic borrowing would comprise only treasury bills with 1–5 year maturities, and 8.8 percent interest rate (in US$ terms). For 2015–17, withdrawals of balances of the PCDR account are also projected, for a total amount of 1.6 percent of GDP.3

5. The DSA projects that public debt will grow from about 25 percent of GDP in 2014 to 39 percent of GDP in 2035. In turn, external debt will grow from around 21.4 percent of GDP in 2014 to 30.5 percent of GDP in 2035. External debt accumulation would be lower than in the previous DSA, as Petrocaribe inflows will be lower on the back of a decreased oil bill.; the grant element of new borrowing would increase slightly from 36 percent to 38 percent due to greater resort to multilateral financing. (Tables 1 to 3).

Table 1.

Haiti: Public Sector Debt Sustainability Framework, Baseline Scenario, 2012–2035

(In percent GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

The DSA reflects flows for the non-financial public sector. Central Bank accounts are mostly balanced. Debt is expressed in gross terms.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Table 2.

Haiti: Sensitivity Analysis for Key Indicators of Public Debt, 2015–2035

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Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

Table 3a.

Haiti: External Debt Sustainability Framework, Baseline Scenario, 2012–2035 1/

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r - g - p(1+g)]/(1+g + p+gp) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

The main differences in the medium-term macroeconomic assumptions with respect to the previous DSA are as follow (Text Table 2),

  • GDP growth was marked down slightly in view of recent performance; the positive impulse to growth from lower oil prices was assumed to be broadly offset by the effect on growth of a more challenging socio-political environment. Inflation would be broadly unchanged as lower oil prices are only marginal passed on to consumers.

  • Government revenues are projected to be larger on the back of the elimination in 2015 of foregone revenues linked with fuel taxes.

  • Export growth would follow a similar trajectory as in the previous DSA, given the HELP and HOPE initiatives, which provide advantageous conditions for apparel exports to the U.S. Imports, however, were revised down significantly given decreased oil prices, but non-oil imports are similar, reflecting the country’s needs to rebuild infrastructure, as well as Haiti’s status as a net food importer.

  • Remittances continue to be significant in the short-to-medium terms (19.8 percent of GDP in 2014, almost double all goods exports) and are projected to decline to 9.4 percent of GDP in 2035, similar to the previous DSA.

Text Table 2.

DSA 2015 vs. DSA 2014

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Source: Haitian authorities; and Fund staff estimates and projections.

B. Debt Sustainability Outlook, 2015–35

6. Haiti’s risk of external debt distress improved from high to moderate. The more favorable assessment reflects lower oil prices (with significant fiscal impact), as well as consolidation efforts initiated by the Haitian authorities in early 2015. No debt threshold would be breached under the baseline scenario (Fig.1). Caution is however essential in interpreting these results. First, while the debt service-to-exports and the debt service-to-revenue ratios under the baseline scenario would not breach the respective thresholds during the projection period, they are on an upward trend. Second, a permanent increase in oil prices (of 50 percent) would result in the breach of most thresholds, and a return to a situation of high debt distress (see section C). Under the previous LIC-DSA, the ratios of PV of debt to GDP, to exports and to revenue would be breached by 2021–2022; the ratio of debt service to revenue was a boarder case, and the ratio of debt service to exports, while below the threshold during the projection period, was on an upward trend.

7. Haiti’s external position is vulnerable to changes in borrowing terms and to higher exchange rate depreciation. Haiti’s external debt remains vulnerable to shocks, particularly on borrowing terms. An increase by 200 bps in the interest rate over the entire projection period would cause the thresholds for the PV of debt -to-exports ratio and the PV of debt-to-GDP ratio to be breached starting from FY2028 (Table 3b). In addition, while the debt service-to-exports and the debt service-to-revenue ratios would not breach the respective threshold during the projection period, they would be on an upward trend under terms and depreciation shocks, respectively. Higher oil prices would result in increased stress, as described below.

Table 3b.

Haiti: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2015–2035

(In percent)

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Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

8. Public sector debt indicators continue to be vulnerable to growth and policy shocks. Under the baseline scenario, the PV of debt-to-GDP ratio would remain below the threshold (Table 2). Shocks to growth and the primary balance would result in unsustainably high public debt indicators. The threshold for the PV of debt-to-GDP ratio would be exceeded by FY2028.

C. Increased Stress Scenarios

A ‘Sudden Stop’ of Petrocaribe Inflows

9. The likelihood of a stop of Petrocaribe flows increased since the last DSA. Significantly lower oil prices have worsened Venezuela’s (already very tight) financing constrains. As a result, the likelihood of change in financing terms, or an outright stop, of Petrocaribe financing has become more likely.

10. A stop of Petrocaribe flows would lead, in the short-term, to fiscal adjustment and lower GDP growth. A sudden stop of Petrocaribe flows starting in FY2016 would impact investment spending and the financing of the electricity sector, negatively affecting growth. The shock to growth would bring domestic tax revenues below the baseline. The impact on the economy would be cushioned by a decrease in domestic revenues, some drawdown of government deposits (including Petrocaribe deposits), a reduction in international reserves, and additional bilateral assistance.

11. The impact on the economy would be lower than previously assessed given lower oil prices. The decline in oil prices causes an automatic decrease in Petrocaribe financing (as the latter depends on the size of the oil bill), even if Petrocaribe continues. The lower financing flows compared with the last DSA (1.3 percent of GDP on average in 2015–17), will be more than offset by the improvement in the oil bill (3.3 percent of GDP on average during 2015–17). The effect of a stop of residual Petrocaribe flows (2.0 percent on average during 2015–17), is expected to subtract about 1 percent point from growth in FY2016–FY2017, as the authorities would be compelled to curtail Petrocaribe-financed capital expenditures and transfers to the electricity sector.

12. The stock of public debt would remain broadly unchanged and the risk of external debt distress would remain moderate. Debt ratios would deteriorate slightly in the aftermath of the shock, given lower GDP growth, and some REER depreciation. However, the lower Petrocaribe flows would force a somewhat faster fiscal consolidation, and thus, debt ratios would be broadly unchanged with respect to the baseline at the end of the projection period.

A Rebound of Oil Prices

13. Higher oil prices would result in increased external debt distress. A permanent increase in oil prices by 50 percent in 2016 would complicate policy implementation, and would result in decreases in GDP growth and in fiscal pressures, in particular through the impact of the higher prices on electricity generation and thus, on EDH’s deficit. Under this scenario, the debt stock would increase to above 50 percent of GDP by 2035.

14. The stock of external debt would increase significantly and the risk of external debt distress would become high. The ratios of PV of debt to GDP, to exports and to revenue would be breached by 2020–2021; the ratios of debt service to revenue and to exports, while below the respective thresholds during the projection period, would be on an upward trend. Moreover Haiti’s debt would remain vulnerable to terms and depreciation shocks.

D. Conclusions

15. The updated DSA suggests that Haiti’s risk of debt distress improved, but that it could deteriorate should growth fall short or oil prices rebound. The debt is also vulnerable to shocks to growth, borrowing terms and the exchange rate. A sudden stop of Petrocaribe financing would negatively impact growth and bring about a REER depreciation, worsening temporarily public debt ratios. However, the impact of a stop of these flows is much weaker than previously assessed, given that lower oil prices act as the main buffer to absorb the shock. An increase in oil prices would result in increased debt stress and the risk of external debt distress would become high again. This suggests caution in interpreting the observed improvement in Haiti’s debt distress, as it is very likely that a significant portion of the current oil price decrease will prove to be temporary. Against this backdrop, the lower oil prices provide a unique opportunity to switch to good energy policies, which will lock in fiscal and efficiency gains. The implementation of structural reforms (including improving the effectiveness of public investment) is necessary to push up growth above its historical norm, and close to the average for LICs, as assumed in the DSA. As highlighted in the previous DSA, it remains crucial that Haiti maintains prudent macroeconomic policies; strengthens the effectiveness of public investment, debt management, and PFM more generally, improves the sustainability of the electricity sector, and continues the implementation of structural reforms to improve the investment climate, in order to boost exports and growth.

16. The authorities broadly concurred with the main findings of the DSA. Staff and the authorities discussed the main assumptions and conclusions of the updated DSA, as well as main risks affecting surrounding the baseline. The authorities agreed with the need to increase the yield on growth of public investment, and more generally to contain the primary deficit of the non-financial public sector, in view of the financing risks. They agreed on the need to speed up the implementation of reforms, but highlighted that a number of constraints (including the complexity of some reforms, or lengthy discussions originated in the presence of vested interests) have slowed down the process.4

Figure 1.
Figure 1.

Haiti: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2015–2035 1/

Citation: IMF Staff Country Reports 2015, 157; 10.5089/9781513588209.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio on or before 2025. In figure b. it corresponds to a One-time depreciation shock; in c. to a Terms shock; in d. to a One-time depreciation shock; in e. to a Terms shock and in figure f. to a One-time depreciation shock.
Figure 2.
Figure 2.

Haiti: Indicators of Public Debt Under Alternative Scenarios, 2015–2035 1/

Citation: IMF Staff Country Reports 2015, 157; 10.5089/9781513588209.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio on or before 2025.2/ Revenues are defined inclusive of grants.
1

World Bank and IMF (2009). “Review of Some Aspects of the Low-Income Country Debt Sustainability Framework.” (IDA/SecM2009–0397; SM/09/216; BUFF/09/146); World Bank and IMF (2012), “Revisiting the Debt Sustainability Framework for Low Income Countries,” (SM/12/10). In line with the guidance note, “a change in the external risk rating or in the assessment of the overall risk of debt distress since the previous DSA would warrant a full DSA”. Accordingly, this full DSA was prepared jointly by IMF and World Bank staffs.

2

Thresholds are set according to the country’s CPIA ranking. Haiti is classified as a weak performer based on its three-year 2011–13 average score of 2.88 in the World Bank’s Country Policy and Institutional Assessment (CPIA) framework. For weak performers (defined as those with three-year average CPIA ratings below 3.25), the indicative thresholds for external debt sustainability are PV debt-to-GDP ratio of 30 percent and 27 percent when remittances are included; PV debt-to-exports ratio of 100 percent and 80 percent when remittances are included, PV debt-to-revenue ratio of 200 percent, debt service-to-exports ratio of 15 percent and 12 percent with remittances; and debt service-to-revenue ratio of 25 percent.

3

The baseline scenario assumes that the country will be able to secure the concessional financing needed to smooth out the adjustment of the primary deficit over several years, and that structural reforms proceed, but slowly.

4

Discussions were held on a Seminar on Debt Sustainability in Port-au-Prince, during February 2015.