Haiti: Selected Issues

Abstract

Haiti: Selected Issues

Opportunities and Challenges for Growth1

A. Introduction

1. Achieving a sustained increase in living standards in Haiti will require deep-seated reforms across a range of areas. Diversifying the export base is needed to cushion the impact of severe shocks that have reduced per capita income and prevented a sustained increase in the capital stock. Integration into global-value chains (GVCs) would allow Haiti to take advantage of its proximity to the U.S. market and favorable trade preferences to generate employment, spur the creation of human capital, and allow Haiti to begin climbing the value added chain. As secure property rights are essential to increased investment, reforms are needed to address Haiti’s persistent uncertainty over land ownership and weak conflict resolution institutions. Haiti’s poor infrastructure, notably in electricity, imposes significant costs on firms and is also a key bottleneck to growth.

2. Haiti is one of the most open economies in Latin America and the Caribbean (LAC), and has carved out a place in world apparel exports through preferential trade agreements with the U.S. However, the absence of strong institutions and complementary structural reforms to augment trade policy, combined with continued vulnerability to a high incidence of shocks, resulted in the failure of trade reforms to stimulate growth. Implementing structural forms will help to attract investments in higher value added activities and aid Haiti in moving up the GVCs, beginning with the apparel industry.

3. Export diversification is important to reduce vulnerability to shocks. Haiti is subject to a high incidence of shocks, with 75 percent of Haitians subject to one or more economically damaging shocks per year (World Bank, 2014). The country’s narrow range of exports and dependence on food imports, further exacerbates its vulnerability to shocks. To reduce it, export diversification is crucial for an open low-income country like Haiti. Empirical evidence shows that, following a wave of trade reforms to open their economies, the diversification spurts of LICs in the 1990s have been associated with a pronounced decrease in growth volatility and have increased their resilience to shocks (IMF 2014).

4. The U.S. HELP and HOPE trade initiatives provide Haiti with an opportunity to integrate into global value chains (GVC) and begin climbing the value added ladder. Geographic proximity with the U.S. and low labor costs (despite low productivity) are additional comparative advantages. Integrating into GVCs requires increasing labor productivity, improving infrastructure, property rights, and the business climate, and upholding international labor standards. Better access to finance would also encourage domestic and foreign investment in the apparel industry.

5. Strengthening property rights and the land tenure system is essential to unlock growth. Haiti’s current land tenure system (where informal land rights exist alongside a complex and archaic legal system), is a serious obstacle to Haiti’s development. Establishing a modern land cadastre, which would both accurately survey each parcel of land and establish clear ownership, would greatly advance the goal of establishing secure and transferable property rights in Haiti. Such a system would incentivize investments to improve real property, allow land to be used as collateral, reduce costly and time-consuming conflicts over land rights, and provide information that could be used for tax purposes.

6. Inadequate basic public infrastructure constitutes a serious deterrent for investment and a bottleneck to growth. A lack of infrastructure means that enterprises must often furnish their own sanitation, security, and energy, and cope with increased costs in transport and logistics. These bottlenecks have been shown to be a significant constraint to growth (IMF 2014). Improved infrastructure would promote higher investment by reducing these costs, but also by reducing uncertainty by providing a concrete demonstration of the state’s determination to maintain a stable business environment.

7. In particular unreliable, insufficient, and unwarrantedly expensive electricity supply hampers investment, growth, poverty reduction, and fuels fiscal vulnerabilities. Inadequate service (including frequent, long, and unplanned blackouts) forces the private sector to generate its own electricity, which reinforces a vicious cycle of high cost and poor service, and prevents taking advantage of economies of scale in production. The electricity sector is a drag to the budget and an important source of macro vulnerability. The deficit of the state-owned electricity company (EDH) was 2.5 percent of GDP in FY2014 (nearly 20 percent of tax revenues), and was financed by central government transfers and loans, and by an accumulation of arrears. Only about 30 percent of the population is connected to the grid, with access among the rural poor being even lower. Large transfers to cover EDH’s deficit crowd out priority spending in education, health and security. High delinquency rates for large electricity consumers result in a more regressive distribution of income.

B. External Trade: Diversify Exports to Reduce Vulnerability to Shocks

8. The U.S. is Haiti’s largest export market, while the Dominican Republic has become the largest source of imports. The majority of apparel exports are shipped to the U.S., Haiti’s main trading partner. In the 1980s, close to 90 percent of exports were with the U.S. and E.U. countries. In 2013, trade to the U.S., as a share of total exports, increased thanks to the generous trade preferences in the apparel sector and new trade partners (Canada, Korea, China) have replaced EU countries (Figure 1). In 2013, imports from the US decreased (as a share of total imports) compared to 1980, in favor of the Dominican Republic.

Figure 1.
Figure 1.

Haiti: Selected Trade Indicators

Citation: IMF Staff Country Reports 2015, 158; 10.5089/9781513541587.002.A001

Source: World Trade Organization (WTO); the Direction of Trade Statistics (DOTS) Database; National Authorities; Global Competitiveness Report (2014-15); and IMF staff calculations.1/ Imports data is missing for years 1990-94.2/ The estimate for CARICOM includes: Antigua and Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Saint Lucia, St. Kitts and Nevis, St. Vincent and the Grenadines, Suriname, and Trinidad and Tobago (when available).

9. Haiti’s trade deficit (as a share of GDP), increased significantly over the last two decades. Imports of goods increased from 23 percent of GDP in 1980–84 to 43 percent of GDP in 2010–13. Exports, in turn, were mostly unchanged (at about 10 percent of GDP). The (significantly larger) trade deficit began to be financed increasingly with remittances from Haitians that migrated abroad given political instability and economic deterioration. Indeed, remittances accounted for about a fifth of Haiti’s GDP in recent years (Chart 1).

Chart 1.
Chart 1.

Remittances and Trade

(percent of GDP)

Citation: IMF Staff Country Reports 2015, 158; 10.5089/9781513541587.002.A001

Sources: National Authorities; and IMF staff calculations.

10. The composition of trade also changed significantly, with exports becoming undiversified and the size of food imports increasing in importance. External sales of finished apparel products accounted for 50 percent of total exports (on average) during the 1980s, while coffee accounted for 23 percent of exports (on average). External food purchases accounted for 25 percent of imports on average (6 percent of GDP), while fuel accounted for 14 percent on average (4 percent of GDP) (IMF, 1983, 1985). Over the past two decades, exports became undiversified. In 2010-2013 apparel accounted for nearly 90 percent of exports, while export of food staples accounts for less than 5 percent. While changes in import composition were not as significant, this masked large changes in import levels and in terms of trade. Accordingly, food imports accounted for 18 percent of imports (7.6 percent of GDP), while fuel imports accounted for 26 percent (10 percent of GDP) in 2010–2013.

11. The composition of trade makes Haiti extremely vulnerable to external shocks. Haiti’s dependence on agricultural and oil imports makes it vulnerable to terms of trade and weather shocks, particularly those related to price fluctuations for food staples. Since the 1980s, a series of negative terms-of-trade shocks were experienced in Haiti: in 1981–92 (a fall in coffee prices), 2000–02 (a fall in coffee and cacao prices), and 2008 (a rise in imported food prices) (World Bank, 2014). Natural disasters (hurricanes, floods, a devastating earthquake, and droughts) also had a negative impact on agricultural production, pushing up food and energy imports and impacting negatively on domestic agricultural production.

12. Not surprisingly, Haiti’s revealed comparative advantage (RCA) measures show declines in agricultural goods and increases in apparel since the mid-1990s2. Calculated RCA, as developed by Balassa (1965), using export data where X represents exports by the country i/the world n of product k, and t represents the year (see expression 1).

13. The RCAs calculated reveal that Haiti’s specialization in apparel has steadily increased over the past 15 years. At the same time, its exports of agricultural products (fruits, and coffee) have steeply declined. Indeed, Haiti’s coffee exports (in volume terms) in 2013 were only 5 percent of its 1995 level.

RCAikt=XiktXitXnktXnt(1)

14. External trade trends in Haiti also underscore the importance of implementing structural alongside trade reforms. East Asian countries, Mauritius and Chile all implemented trade liberalization policies in the 1990s, which boosted their growth performance (World Bank, 2005) and accompanied their trade reforms with structural reforms which strengthened institutions and entrenched macroeconomic stability. Some of these countries (e.g., India, China, Mauritius) also opted for partial trade liberalization, either by relaxing protection in one sector at a time (India), or by pursuing a dual track approach to liberalizing via special economic zones for export industries (China, Mauritius). Strong institutions (e.g. low corruption, sound infrastructure in Mauritius), along with the maintenance of stable inflation rates and a competitive real exchange rate (Mauritius, India, Chile), via sound policy, provided long-term credibility for trade liberalization policies. (World Bank, 2005).

15. Haiti, in contrast, liberalized trade against the backdrop of domestic turmoil and indecisive implementation of structural reforms. Reforms in the late 1980s included the elimination of import and export license restrictions, as well as lower customs duties (except for agricultural goods). In the mid-1990s, Haiti eliminated import restrictions and reduced tariffs on agricultural goods to 15 percent (from 40–50 percent). Specific rates (0–3 percent) were introduced for basic products (e.g., rice, sugar, flour, and cement) (IMF, 2011).3 Tariffs have remained broadly unchanged since then. Haiti’s simple average applied tariff is the lowest in the region at 4.8 percent. Although agriculture has a higher-than-average tariff (8.2 percent), it is nonetheless lower than in comparator countries. The combination of a reduction in tariffs for agricultural goods, deteriorated infrastructure, and an uncertain policy framework, contributed to a further decline of the agricultural sector, which was already experiencing a secular decrease in productivity. The unsteady domestic situation during the 1990s was also reflected in a dramatic decline in the exports of manufacturing goods (Lundahl, 2013). (Figure 1).

16. For Haiti, the main challenge remains to pair trade policy with structural reforms more conducive to export diversification and growth. Although there is some room to use tariffs (converging to CARICOM averages) to stimulate the agricultural sector, steep increases in tariffs may only result in higher domestic food prices, a worse income distribution, and promote rent-seeking activities. Instead, a number of structural reforms could improve the productivity of the agricultural sector and encourage export diversification. A number of surveys document how Haiti compares negatively with peers in competitiveness, infrastructure quality and governance. (Figure 1). Trade policy is not a substitute for institutional strengthening.

C. Integrating to GVCs to Support Growth and Job Creation

17. A value chain represents all activities that firms would engage to bring a product to the market. Value chains have become increasingly global and resulted in more interconnection between economies as well as more specialization in specific activities and stages of in the value chain rather than in industries. GVCs are also a contributing factor to growth and productivity as well as employment. Integration in a GVC facilitates economic development and is often an easier path to higher living standards than building a complete value chain. Case study evidence generally suggests that countries which integrated successfully in GVCs instead of pursuing domestically-based industrialization experienced better outcomes in the activities and sectors studied (OECD, 2014).

18. Integration to GVCs underpinned increases in GDP per capita in array of countries including Cambodia, China, Costa Rica, the Czech Republic, Mexico, Thailand and Vietnam. Policies to increase openness to trade and investment, improve the business environment, and the creation of export zones seemed to have played a role in the integration of countries into GVCs (World Bank, 2014).

19. In particular, the value chain for apparel production is extremely globalized. The apparel industry is a typical entry point for the integration of developing countries into GVCs, as related skills can be acquired relatively easily. This GVC is organized in the following segments: (i) raw material supply, including: natural and synthetic fibers; (ii) provision of components, such as the yarns and fabrics manufactured by textile companies; (iii) production networks made up of garment factories, including their domestic and overseas subcontractors; (iv) export channels established by trade intermediaries; and (v) marketing networks at the retail level (Chart 2). Developing countries (as Bangladesh, Lesotho, and Nicaragua), are often present in the production network segment of the apparel value chain, due to various advantages such as favorable trade agreements, abundant labor supply, and proximity to end markets. Production activities involve cutting, sewing, supplying trim, or shipping the ready-made garment.

Chart 2.

20. Preferential trade agreements (usually between developing and developed markets) have supported the integration in the apparel GVC. In this regard,

  • Bangladesh benefits (since the 1980s) from preferential market access to the EU (Generalized System of Preferences) and the MFA quota system4 which allowed the country to enter the lowest segments of the apparel value chain and become one of the top exporters in the low-cost apparel industry. Bangladesh is concentrated in the production of high-volume, low value-added basic products that are supplied into the low and medium market segment in the E.U. and the U.S.

  • Lesotho became a large apparel exporter to the U.S., partly due to preferential trade agreements5, although the subsequent phase out of MFA system in 2005 led to a decline in Lesotho’s apparel exports (Chart 3). For Lesotho, AGOA was instrumental to attract FDI, almost exclusively from Taiwanese investors which used their factories mainly for cut-make-trim (CMT) operations, while financing, sourcing fabrics, product development and design, logistics, merchandising and marketing were carried out in Taiwan (Staritz and Morris,2013). Lesotho’s apparel firms export mainly five pocket denim jeans and knit tops such as T-shirts and polo shirts.

  • For Nicaragua, it was the signing of the CAFTA-DR TPL agreement with the US that led to a surge in its apparel exports to the US (Chart 4).6 Nicaragua is primarily competing in lower unit value segments of the chain (knitted shirts and intimate apparel) (Frederick, Bair, and Gereffi, 2014).

  • Haiti has long benefitted from regional trade preferences, in the apparel sector. Since 1983, Haiti and other Caribbean countries have benefitted from duty-free access to the U.S. market of certain apparel exports that are made of U.S. materials. However, international sanctions against Haiti in the early 1990s cut exports almost to zero. More recently, the U.S. granted more flexible trade preferences specific to Haiti to help the country attract investment and create jobs (HOPE Act). These preferences were deepened as part of the rebuilding process (HELP Act) Trade preferences in the HOPE/HELP acts are based largely on duty-free treatment for apparel articles made with third-country inputs, especially fabric. Because the U.S. is Haiti’s primary export destination, apparel exports and employment grew significantly after the adoption of these laws.

Chart 3.
Chart 3.

Lesotho: Apparel Exports to United States

(percent of total U.S. imports)

Citation: IMF Staff Country Reports 2015, 158; 10.5089/9781513541587.002.A001

Sources: U.S. Department of Commerce (OTEXA); IMF staff estimates.
Chart 4.
Chart 4.

Nicaragua: Apparel Exports to United States

(percent of total U.S. imports)

Citation: IMF Staff Country Reports 2015, 158; 10.5089/9781513541587.002.A001

Sources: U.S. Department of Commerce (OTEXA); IMF staff estimates.

21. Despite trade preferences, Lesotho and Nicaragua continue to be mainly at the low-value added end of the apparel industry. Nicaragua is mainly present in the assembly segment of the GVC, with no significant spillovers to domestic production of inputs. In this regard, a relatively large apparel sector, (at the local or regional level) is generally required to attract investment in fabric production, particularly in the woven segment (Staritz and Frederick, 2014). In Lesotho, a challenge has been that labor productivity is low compared to Asian countries specialized in low-cost apparel industries (as Cambodia and Vietnam)

22. Haiti’s apparel exports increased sharply since 2009, but they are also at the low end in terms of value added (Charts 5 and 6). Apparel foreign sales represented 90 percent of exports as of 2014. However, the value added in the sector is still low (around 3 percent). Production is still limited mostly to simple knits and some woven products. The mix is slowly shifting, however, toward greater production of more complicated woven goods (e.g. khaki pants) (Hornbeck, 2010). Employment in the apparel industry is still relatively low (30,000 workers, of which 65 percent are women; Better Work, 2014). Most companies are located in the SONAPI industrial park in the outskirts of Port-au-Prince, although an industrial park in the Dominican border employs 6,500 workers (Grupo M), and a subsidiary of a Korean company (S & H Global) located in the CARACOL industrial park (near Cap Haitien) employs 2500 workers.

Chart 5.
Chart 5.

Haiti: Apparel Exports to United States

(percent of total U.S. imports)

Citation: IMF Staff Country Reports 2015, 158; 10.5089/9781513541587.002.A001

Sources: U.S. Department of Commerce (OTEXA); IMF staff estimates.
Chart 6.
Chart 6.

Haitian Apparel Exports to the United States

(rolling 12-month sum)

Citation: IMF Staff Country Reports 2015, 158; 10.5089/9781513541587.002.A001

Sources: National Authorities; U.S. Department of Commerce (OTEXA); IMF staff estimates.
Chart 7.
Chart 7.

Global Value Chain: Value-Added Stages

Citation: IMF Staff Country Reports 2015, 158; 10.5089/9781513541587.002.A001

Source: Fernandez-Stark, K., Frederick, S. and Gereffi, G. (2011).

23. Bangladesh increased the value added of apparel exports by developing a domestic textile industry for knitted textiles which allowed exporting firms to source locally. In 1994, Bangladesh introduced a cash incentives program for exporters of apparel products using domestic fabrics, which allowed the country to increase the value added of its exports. Thus, an increasing share of firms do more than cutting and sewing, as they are also responsible for input sourcing. That said, Bangladesh is facing constraints in the form of shortage of skilled workers, supervisors and managers as well as concerns with labor and environmental compliance which have become a requirement from buyers to enter sourcing networks (Staritz, 2011).

24. Increasing value added and labor productivity is essential to preserve investment, as trade preferences usually have a sunset clause. Both Nicaragua and Lesotho are facing the expiration of trade preferences with the US, which could lead to a significant decrease in their exports. Similarly, Haiti benefits from generous trade preferences from the US which are set to expire in 2020 unless an extension is granted.

25. Haiti’s ability to attract investment into higher value activities (including in apparel) will require the steady implementation of reforms, and may benefit from an extension in preferential market access. Challenges that will need addressing include (i) a shortage of personnel with specialized skills (especially in management), and still-low labor productivity;7 (ii) high electricity costs (and generally poor infrastructure); (iii) a lack of commercial property to accommodate factories of 2000 employees and more; (iv) a lack of access to finance; (v) and high administrative costs (including at customs). The implementation of reforms to address these shortcomings will require time, and thus the extension of preferential market access could provide needed time for such reforms to mature and generate investment in the production of higher value-added manufacture goods.

D. Strengthening Property Rights to Unlock Growth

26. A functioning land cadastre system is essential to Haiti’s economic development. Secure and transferable property rights promote domestic and foreign private investment, improve resource allocation by allowing speedy and low-cost transactions, and improve access to credit by allowing land to be used as collateral (Besley and Ghatak, 2009). A cadastre would also deepen the tax base and allow for more equitable and transparent taxation. Finally, the land protection and improvements incentivized by secure title can reduce vulnerabilities to natural disasters; key priorities in a country with a level of land degradation and with frequent exposure to disasters.

Table 1.

Selected Economic Indicators (2013)

article image
Sources: UN Comtrade; World Economic Outlook (WEO) Database; WDI Database; and National Authorities.

Per 8-hour workday

27. Haiti’s existing land tenure system is largely informal, particularly in rural areas. Surveys have found that 68 percent of the urban population and 97 percent of the rural population live on land without clear access to title (de Soto, 2000). Instead, an informal land tenure system based on occupancy and family ties developed after the Haitian revolution with the dissolution of the plantation system. While the same basic land titling system has existed since 1825 (when a Civil Code based on the French system was adopted), landowners had little incentive to pursue formal title. Haiti’s legal institutions were weak and politicized, costs prohibitively expensive, and pursuing formal title required interaction with a government often perceived as hostile, particularly as it was not clear how much settled land originally belonged to the Haitian state (Lundahl, 2013).

28. Informal land tenure eventually resulted in fragmented plots and contributed to conflicts over ownership and environmental degradation. Informal land system can adequately protect property rights when there are strong social norms, as has long been the case in rural Haitian communities, and some scholars argue that Haiti’s informal system works reasonably well in the context of weak official institutions (Smucker et al, 2000). However, as growing population fully settled Haiti’s cultivable land by the turn of the 20th century, and given limited opportunities outside of agriculture, a fragmentation of parcels began that continues today. Today, rural land parcels are generally too small to support a decent living, and adding to inefficiency is that a farmer’s land is often composed of several tiny parcels that can be located at some distance from each other (Lundahl, 2013). The need to continuously occupy land to maintain a claim also hinders economic development, and in urban areas after the 2010 earthquake, it slowed reconstruction by deterring owners from demolishing damaged structures. The informal system also generates conflicts over land, and in the absence of reliable written records, can invite fraudulent claims. The inherent uncertainty of the system also deters investment, and studies have found that it contributes to environmental degradation by reducing incentives to long-term planning (Dolisca et al, 2007).

29. The formal land title system is complex and archaic, making Haiti one of the most difficult places to register property in the world. According to the World Bank’s 2015 Doing Business survey, Haiti ranks 175th out of 189 countries in the ease of registering property (World Bank, 2015)8. After a sales agreement between parties is reached, the first step in registering property is to conduct a survey, which follows an 1890 law that the report be hand-written. Thereafter, a notary public prepares a sale agreement that is then submitted to one of about 140 local communal offices of the Tax Department DGI, which then hand-writes the calculations and text of the assessment notice. After the taxes are paid, the DGI requires an additional 6–9 months to hand-record and transcribe the documents, finally returning the documents to the notary public, and a copy to the central DGI office in Port-au-Prince. There is no central land registry, although the central DGI office does maintain a chronological paper record of transactions in several thousand books, dating back to 1824 (OAS 2010).

30. In the absence of a nationwide land cadastre, the system relies heavily on notary publics and surveyors, with the DGI representing the state. The key role of notary publics (which have a special legal status, and are appointed for life by the President) is to ensure that clear title exists, before it is transferred. However, with over 500 notaries in the country, and no central registry, notaries may not be able to adequately trace the required chain of title going back at least twenty years. Notaries may also not be able to discover prior claims on the land that could invalidate the transaction, such as whether the previous owners respected inheritance laws requiring land to be divided among children, or whether a previous promise to sell the land was made (which in Haiti is binding, see Haiti Property Law Working Group, 2012). The use of surveyors adds to the time and expense of registering property, particularly in Haiti’s archaic legal framework, and surveyors are only licensed by commune but sometimes practice out of it, potentially invalidating the transaction. Fraud amongst both notaries and surveyors is also a problem. The DGI represents the state in the transaction, but its role is primarily tax collection, not record-keeping, and the fact that taxes were paid on a previous transfer of title does not ensure that there is no dispute over ownership of the parcel of land.

31. The parallel existence of an informal and complex formal system of land tenure, together with land fragmentation and weak conflict resolution systems, generates conflict and uncertainty over the ownership of land. The first potential conflict arises if a parcel previously formed part of the informal system, and no formal title exists. Titling such property requires compiling oral histories and local documentation as to who have valid claims on a piece of land (Earth Institute, 2012), which given the principle that land be shared amongst descendents can involve a large number of people. Where title does already exist it can often be contested, given Haiti’s weak capacity to implement a complex process, but also because the legal structure facilitates such objections. For example, anyone (regardless of whether their name is on a title or not) can object to a land survey, halting it and sending it to a local judge to evaluate the claim. If a land title dispute is sent to the wider court system, the Organization of American States reports that the average length of conflict resolution is five years (OAS 2010). In recent projects undertaken by USAID, such conflicts have delayed projects by as much as two years, despite the fact that the underlying projects had high-level government backing (GAO 2013).

32. A modern cadastre system is essential to addressing these challenges. A functioning cadastre would delineate individual parcel boundaries across the whole country, eliminating the need for the archaic surveying system. The cadastre would also confirm land ownership, together with any associated rights or liens. A cadastre would reduce uncertainty over land rights, encourage investments, and reduce conflicts over land. In Haiti’s case, no cadastre has been completed since 1784 (CIAT 2015).

Table 2.

Summary of the Steps to a Sale by Genuine Deed

article image
Sources: Haiti Property Law Working Group; Haiti Land Transaction Manual.

Certain procedures can be done simultaneously.

33. A wide range of government institutions participate in efforts to build a cadastre. The Office national du cadastre (ONACA) is an autonomous agency created in 1984 under the authority of the Ministry of Public Works, Transportation, and Communications (OAS 2010). ONACA is tasked with developing a land cadastre covering the whole country, although it made little progress prior to the earthquake (OAS 2010). In rural areas ONACA shares responsibility with the Institut National de la Réforme Agraire (INARA), part of the Ministry of Agriculture. The Centre National de l’Information Géospatiale (CNIGS), part of the Ministry of Planning, is tasked with using satellite imagery survey the territory of Haiti. The DGI, part of the Finance Ministry, is another key entity involved in the land cadastre, and it is tasked with scanning its written records into machine-readable form. The Comité Interministériel d’Aménagement du Territoire (CIAT), an inter-ministerial committee headed by the Prime Minister’s office, is tasked with coordinating the activities of the ministries above as well as other involved ministries (including the Ministries of the Interior and of the Environment; Haiti Property Law Working Group 2012). Finally, Haiti’s 140 communes administer state land at the local level, and are key participants as well.

34. The authorities’ plan is to first develop a non-legally binding national cadastre, starting in several targeted areas. The Plan Foncier de Base (basic land plan) aims to build a cadastre before pursuing legislation. Therefore, in its initial stages the cadastre would not issue titles or change the legal competencies of notaries and surveyors. The plan relies on several simultaneous efforts, including (i) developing high-precision of cartography of Haiti’s territory; (ii) digitization of the DGI archives as well as legal documents that are relevant to land ownership; and most crucially (iii) work on the ground. Staff from ONACA and INARA work together with locally-recruited staff and the public to more accurately delineate properties as well as to verify ownership. Within three years, the authorities plan to complete the initial cadastre in 8 rural communes and the city center of Port-au-Prince. Completion of a nationwide cadastre, and passage of a new land law, is envisaged in about ten years.

E. Overhauling the Electricity Sector: Lifting a Bottleneck to Growth

35. The electricity sector is a bottleneck to growth. High electricity prices hurt Haiti’s competitiveness, and an unreliable service (including frequent, long, and unplanned blackouts) force the private sector to generate its own electricity, which reinforces a vicious cycle of high cost and poor service, and prevents taking advantage of economies of scale in production.

36. The electricity sector is a drag to the budget and an important source of macroeconomic vulnerability. The deficit of the state-owned electricity company (EDH) was 2.5 percent of GDP in FY2014 (nearly 20 percent of tax revenues), and was financed by central government transfers and loans, and accumulation of arrears with independent power providers (IPPs). In particular, in FY2013–FY2014, on-budget transfers to EDH amounted to 0.7 percent of GDP, while off-budget transfers in the form of Petrocaribe-related flows reached 0.9 percent of GDP. Moreover, an IPP exercised guarantees against the central government for unpaid electricity sold to EDH for 0.3 percent of GDP. In addition, EDH has run arrears with IPPs, which in turn ran arrears on fuel purchases with BMPAD (an autonomous government agency that manages Petrocaribe flows).

37. The electricity sector has set back efforts at poverty reduction. Only about 30 percent of the population is connected to the grid, with access among the rural poor being even lower. Coverage has remained about constant for decades, as EDH’s unsustainable financial situation impeded investment in expanding the grid. High electricity generation costs push up the cost of providing water and sewage services, which are essential for poverty reduction. Large transfers to cover EDH’s deficit crowd out priority spending in education, health and security. High delinquency rates for large electricity consumers result in a more regressive distribution of income.

38. The quality of service is poor. Average hours of electricity supplied are low and variable, and blackouts are long and unplanned. Supply of electricity is higher in Port-au-Prince and lower in the provinces (Chart 8). Financial support from Venezuela (in the context of the Petrocaribe initiative) allowed increasing service hours and reducing blackouts during the last few years, but given lack of progress in reducing technical and non-technical losses, a reduction or a stop of these resources will likely result in longer blackouts.

Chart 8.
Chart 8.

Electricity Distributed to Port-au-Prince

(Percent of total)

Citation: IMF Staff Country Reports 2015, 158; 10.5089/9781513541587.002.A001

Sources: Haitian National Authorities; and IMF staff calculations.

39. To attenuate supply constrains and unreliable service, the private sector has resorted to self-generation. Self-generation is observed both at the household and commercial – industrial clients. Although some clients use self-generation as a hedge for blackouts, many have decided to be disconnected from the grid outright. This prevents economies of scale in electricity generation (Chart 9), perpetuates high costs, increases the size of the oil bill (as self-generation is expensive), hurts competitiveness, and worsens the financial situation of EDH (as clients willing and with the capacity to pay go off grid). In addition, it complicates the political economy of the sector, as the profit rate of those supplying services for self-generation (diesel generators, fuel, etc) is inversely related with EDH’s performance.

Chart 9.
Chart 9.

Electricity Production

Citation: IMF Staff Country Reports 2015, 158; 10.5089/9781513541587.002.A001

Sources: Haitian National Authorities; and IMF staff calculations.

40. State-owned EDH is the main player in the sector. EDH is in charge of distribution and transmission of electricity, and conducts some electricity generation. The electricity system is organized in nine grids, the largest of which includes Port-au-Prince. Three IPPs (Sogener, E-Power and Haytrac) and a tri-national enterprise (PBM, Petion-Marti-Bolivar) generate most electricity. EDH’s board (chaired by the Minister of Public Works, and that includes a representative of the Ministry of Finance), is responsible for tariff determination and for approving EDH’s budget (among other responsibilities), but has rarely met during the past few years, complicating the implementation of needed reforms. The regulation of the sector corresponds to the Ministry of Public Works.

41. EDH’s revenues are constrained by serious governance problems. The capital (Port-au-Prince) concentrates about 75 percent of energy supplied. Average effective tariffs have decreased over the past few years due to a change in the composition of the client base (with increases in the share of residential customers and a decrease in that of commercial and industrial customers, which in increasing numbers generate their own electricity). The average effective tariff for FY2014 is nonetheless very high at 28 cts/kwh. Total energy billed in FY2014 represented only 40 percent of energy supplied, as a consequence of both theft (non-technical losses) and capacity and governance issues (technical losses). Delinquency is high: in addition to poor billing rates, the average delinquency rate for FY2014 was over 30 percent. The cash recovery index (the product of billing and collection) is thus extremely low: about 25 percent in 2014: In other words, EDH received in revenue only 25 cents per dollar of electricity supplied (Chart 10).

Chart 10.
Chart 10.

Performance Indicators of EDH

(Percent of electricity distribution)

Citation: IMF Staff Country Reports 2015, 158; 10.5089/9781513541587.002.A001

Sources: Haitian National Authorities; and IMF staff calculations.

42. EDH’s expenditures are unwarrantedly large. This is the result of expensive and inefficient oil-based electricity generation, onerous IPP contracts, and an outsized wage bill, which has increased during the past few years. Investment is insufficient to maintain and expand the grid. Resources for investment in recent years have come mainly from donors.

43. Very high electricity costs reflect a biased generation matrix and onerous contracts. About 90 percent of installed electricity generation capacity is based on oil-derivatives (diesel and heavy fuel oil), contributing to large generation costs. These are projected to be larger in FY2015–FY2017 as the largest dam in the country (in Peligre) is being repaired. IPP contracts incorporate large markups, take-or-pay clauses, and government guarantees, which make the generation bill even more onerous. Uneven tax treatment of fuel purchases add, at times, to costs.9

44. Cross arrears are rampant, which complicates planning, introduces noise in financial accounts, and prevents investment. EDH’s stock of arrears with IPPs at end-FY2014 is estimated at US$144 million (1.5 percent of GDP), while those with PBM were estimated at US$142 million (1.5 percent of GDP). Arrears of IPPs and PBM vis-à-vis BMPAD for fuel purchases were estimated at about US$220 million (2.4 percent of GDP). Delinquent electricity bills of the private sector vis-à-vis EDH were estimated at about G3 billion at end-FY2014 (0.7 percent of GDP). In turn, debt of Municipalities (for public lighting) was estimated at about G1.5 billion (0.3 percent of GDP).

45. The World Bank, the IDB and the U.S. have programs to support the sector’s development, but performance to date has been disappointing. In particular, IFI programs target the improvement of the network, installation of meters to support billing and collection, and increased transparency and governance, among other. Disbursements have been lower than expected on the back of slow progress in the implementation of reforms.

46. Putting EDH onto a sustainable footing will reduce fiscal vulnerabilities, promote private investment, and be instrumental in supporting growth and poverty reduction. Overhauling the financial situation of EDH will be beneficial in the long-term, but will affect vested interests in the short term. Advancing reforms will, therefore, require strong ownership on the part of the authorities. A recent initiative in the form of a memorandum of understanding for the sector (the “Electricity Sector Protocol”) with the participation of the sector’s main stakeholders is a good step in that direction. Coordination of actions among all stakeholders (including donors) is essential for creating momentum and ensuring that reforms advance. A master plan for the sector would be instrumental in coordinating actions. The recent selection of Électricité de France (EDF) to draft such a plan is encouraging.

47. Strengthening EDH’s management and the sector’s regulation are priorities. EDH’s Board should meet regularly to ensure, inter alia, that budgets are approved on time, that EDH accounts are audited, and that financial audits are published. Tariffs should be reviewed to ensure that price signals are appropriate for an efficient utilization of electricity supply. This should stop the leakage of large clients in industrial and commercial sectors to off-grid self-generation. Penalties for non-payment should be reviewed and enforced. Inspections on clients and evaluations on the quality of service should be led by the regulatory body and proceed on a regular basis.

48. Improving the quality of service should result in an improvement in collection. Although service improvements can only proceed gradually, some actions can be taken in the short-term. On the latter, EDH can establish a calendar of outages by affected area, which should improve planning of demand by the private sector.

49. EDH’s revenues need to be swiftly increased. Efforts should be geared at increasing billing and collection, and tackling theft. The initial focus should be on the largest clients, who constitute the lion’s share of EDH’s revenues. Payment regularization plans should be considered for clients with large payments arrears, and to create a culture of payment for smaller clients (including by, e.g., requiring paid electricity bills in loan applications or for a driving license).

50. The government should remain current in its electricity bill. The minister of finance should centralize the payment of electricity bills for all central government institutions. The budget should provide for the cost of public lighting, as its cost is too large for municipalities to bear with their own resources. Municipalities should contribute to payments in relation with consumption and revenues.

51. EDH’s expenditures need to be controlled and reduced. The wage bill should be controlled. Electricity provision contracts need to be analyzed together with IPPs to attenuate wide dispersion of costs despite similar technologies. All contracts with IPPs need to be published to improve accountability and transparency. Use of different IPPs needs to proceed on a marginal cost rule. A competitive and transparent bidding process needs to be followed in all decisions impacting electricity costs, including on the construction of new generation facilities by EDH, and all documentation need to be published. Consolidating cross arrears will add clarity to financial statements of the sector’s participants.

52. Going forward, the electricity generation matrix needs to be diversified, and isolated grids interconnected. Haiti has potential for wind-based, hydro, and biomass-electricity generation. Overhauling EDH to make it financially sustainable, strengthening regulation and transparency should result in increased investment in lower-cost generation alternatives. Interconnecting the now isolated grids will create a national market, and will allow significant electricity cost reductions in the provinces.

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1

Prepared by Anta Ndoye (SPR), Lawrence Norton, Daniela Cortez, and Gabriel Di Bella (all WHD)

2

Revealed Comparative Advantage (RCA) was calculated using Balassa (1965). Product classes k were obtained by aggregating HS (Harmonized System) product codes related to fruit (all 5-digit codes beginning with 80 or 81), coffee (all 5-digit codes beginning with 901), and finished apparel (all 6-digit codes beginning with 61, 62, 64, or 64) for annual export trade flows from the CEPII BACI International Trade Database (Gaulier and Zignago 2010).

3

Haiti became a member of the WTO in 1996.

4

Korea and other East Asian countries started to invest in and source from Bangladesh, motivated by Multi-Fiber Arrangement (MFA) quota hopping and by access to Bangladesh’s abundant supply of low-cost labor.

5

The African Growth and Opportunity Act (AGOA) is a nonreciprocal trade preference program that provides duty-free treatment to U.S. imports of certain products from eligible sub-Saharan African (SSA) countries, including Lesotho. Its current authorization expires on September 30, 2015. AGOA extends duty-free treatment to certain apparel and footwear products, which are not eligible under GSP.

6

Nicaragua was granted a Tariff Preference Level (TPL) under CAFTA-DR free trade agreement that allows apparel made of certain cotton and synthetic fiber to enter the U.S. duty free under CAFTA-DR if assembled in Nicaragua, regardless of the origin of the fabrics. The TPL will expire on December 31, 2014

7

Wage costs in Haiti are lower than in Bangladesh and Nicaragua but productivity is generally lower.

8

Haiti’s ranking assumes that the underlying land title is clear and undisputed, which is frequently not the case.

9

Fuel purchases for electricity generation are generally tax exempt, although EDH and at times, Haytrac, (the smallest IPPs which supplies the south of the country) pay the same taxes charged at the pump. In contrast, fuel purchases by the two largest IPPs (Sogener and E-Power, which serve the capital Port-au-Prince) are tax exempted. This is also the case for PBM (which serves the second largest city, Cap Haitien)

Haiti: Selected Issues
Author: International Monetary Fund. Western Hemisphere Dept.