Haiti: Selected Issues

Abstract

Haiti: Selected Issues

Monetary Policy and Financial Intermediation in Haiti1

A. Introduction

1. Monetary policy in Haiti is geared towards containing inflation, but the transmission mechanism is weak and assessing the policy stance is at times challenging. Containing inflation in a context where tradable goods are a large share of the CPI necessitates a moderate path for exchange rate depreciation. The central bank (BRH) has strived to achieve this goal through a mix of exchange rate market interventions and open market operations. As in many other low-income countries, the BRH also resorted to changes in legal reserve requirements to conduct monetary policy, which are transmitted to aggregate demand through the credit channel. While monetary policy has been broadly successful in maintaining price stability, policy formulation is hampered by data gaps, transmission is complicated by Haiti’s vulnerability to shocks and by the shallow domestic market, and assessing the policy stance is at times difficult. The effectiveness of monetary policy in ensuring a moderate inflation rate depends on the implementation of a consistent policy mix, most importantly, a sustainable fiscal policy. This should anchor exchange rate depreciation expectations in the medium term. Against that backdrop, monetary policy could be strengthened by allowing additional exchange rate flexibility to respond to shocks, promoting financial deepening to better transmit policy changes onto interest rates, and by strengthened communication on the underlying policy stance.

2. Financial intermediation in Haiti is low and concentrated, and greater competition and an improved regulatory framework is needed to promote financial inclusion. The financial system is dominated by a few local banks, and cooperatives and microfinance institutions are relatively small and still mostly unregulated. Credit is low and heavily concentrated, in part reflecting lack of information on creditworthiness and difficulties in collecting on debt. A credit bureau was established to improve information-sharing on the creditworthiness of individual borrowers, and in time should support credit access to first-time borrowers. The authorities have recently launched a financial inclusion strategy, which aims to raise the share of adults with access to formal financial services. While efforts to direct more payments through the financial system and an improved regulatory environment will help grow the sector, broad financial inclusion will require reforms to promote the use of collateral, including of land.

B. Monetary Policy

3. The BRH’s objectives are to ensure a low and stable rate of inflation and to preserve the external value of the Gourde. The BRH does not have an objective for the exchange rate, but in recent years has used a combination of monetary policy tools to limit depreciation to the 3–4 percent range (Chart 1). Central bank autonomy is set out in law, and the BRH pursues its goals with operational independence that is respected by the fiscal authorities.

Chart 1.
Chart 1.

Exchange Rate Depreciation

(gourdes per dollar, percent y/y)

Citation: IMF Staff Country Reports 2015, 158; 10.5089/9781513541587.002.A003

Sources: BRH; and IMF staff estimates.

4. Inflation is heavily influenced by (tradable) food and energy staples. Inflation, as measured by the consumer price index (CPI), is heavily weighted towards a few imported food and energy staples. Food accounts for half of the CPI basket, and food and energy together account for two-thirds. As imports of food and energy are about 20 percent of GDP, the pass-through from exchange rate depreciation to inflation is high.

5. The BRH relies mostly on changes in legal reserve requirements to conduct monetary policy. Like many low-income countries (LICs) that have shallow domestic financial markets, the BRH primarily manages liquidity through reserve requirements, which in Haiti are currently 38 percent and 41 percent on gourde and dollar deposits, respectively (IMF 2012). The BRH also conducts open market operations through the issuance of central bank bills, and uses the interest rate on its bills as a signal of the monetary policy stance. The BRH also intervenes periodically in the foreign exchange market, and both sells and buys U.S. dollars. The strong inflows after the earthquake pushed the BRH to intervene in the market to buy foreign exchange (to avoid an appreciation of the Gourde), while the absorption of these flows resulted in the BRH mainly selling US$ during the past couple of years (Chart 2).

Chart 2.
Chart 2.

Net BRH FX Intervention

(Millions of US$, cumulative since October 2010)

Citation: IMF Staff Country Reports 2015, 158; 10.5089/9781513541587.002.A003

Sources: BRH Aide Memoire; and IMF staff calculations.

6. Monetary transmission is primarily effected through the credit and exchange rate channels. Reserve requirements and open market operations adjust the level of gourde liquidity, impacting the level of banks’ excess reserves. These moves also impact the exchange rate channel, as excess gourde liquidity generates foreign exchange pressures (through credit growth), although the demand for foreign currency also responds to changes in expectations (including political uncertainty). A high level of dollarization (by introducing a foreign currency component into the money supply), is another complicating factor. The interest rate and asset channels are weak in Haiti, as it is in most LICs with shallow domestic financial markets (Mishra and Montiel, 2012). Changes in the interest rate on BRH bills do not have a significant impact on other interest rates in the economy. Both market lending and deposit rates have remained fairly steady in recent years (see Section B).

7. The implementation of monetary policy is complicated by Haiti’s vulnerability to shocks. Weather events and natural disasters, shifts in the terms of trade, foreign financing, and political events have been important drivers of inflation and of foreign exchange pressures in Haiti. The shallow domestic interbank market also amplifies shocks by increasing volatility in the foreign exchange market. The BRH has a clear understanding of how shocks propagate in the economy, but insufficient data hampers calibration of the policy response. A lack of high frequency macroeconomic data (particularly in the agricultural sector) and a limited capacity for liquidity forecasting complicates monetary policy. Treasury management by the central government, which needs significant improvement, introduces additional volatility into the level of gourde liquidity. The pressure on government deposits could increase as aid and foreign financing diminishes, provided fiscal consolidation does not proceed as needed.

8. Assessing the stance of monetary policy is sometimes challenging. Policy rates are used for signaling, but their role is hampered by a weak transmission mechanism to other interest rates in the economy. Increases in the level of reserve requirements have also signaled tightening, but a number of exemptions lower the effective reserve rate and complicate the measuring of the intended policy stance (Chart 3). There has been significant fluctuation in the volume of central bank bills in recent years, and amounts outstanding have not always tracked movements in the policy rate, which also complicates the assessment of the policy stance (Chart 4). And while there is a quarterly note on monetary policy and a monthly note on inflation, changes in policy are not always announced, and forward guidance is not provided.

Chart 3.
Chart 3.

Headline and Effective Required Reserves

(Percent of Deposits, weighted average of goude and dollar rates)

Citation: IMF Staff Country Reports 2015, 158; 10.5089/9781513541587.002.A003

Sources: BRH FMI Weekly; and IMF staff estimates.
Chart 4.
Chart 4.

BRH Bills Outstanding

(Billions of gourdes and interest rate)

Citation: IMF Staff Country Reports 2015, 158; 10.5089/9781513541587.002.A003

Sources: BRH FMI Weekly; and IMF staff estimates.

9. The effectiveness of monetary policy would be increased by a better understanding of the transmission mechanism, and by a strengthened operational framework. The transmission mechanism should be better understood, including through the production of quality and timely macroeconomic and financial data. The use of exemptions on the implementation of reserve requirements should be avoided and open market operations should be used to ensure that market interest rates are close to targets. This will make the policy stance more clear and avoid instances where the signaling provided by policy rates is different than that implied by the implementation of open market operations (Chart 5). To strengthen the communication of the policy stance, the central bank could consider publishing a synthetic indicator that takes all factors impacting liquidity absorption into account, such as a weighted average of the effective reserve rates and the rates on outstanding BRH bills (Chart 6).

Chart 5.
Chart 5.

BRH Liquidity Absoportion

(Three month rolling average of required reserves and BRH bills outsanding as a percent of total deposits)

Citation: IMF Staff Country Reports 2015, 158; 10.5089/9781513541587.002.A003

Sources: BRH FMI Weekly; and IMF staff estimates.
Chart 6.
Chart 6.

BRH Monetary Policy Rates

(Weighted average of percent changes in effective reserve rates and BRH bill rates, since October 2010)

Citation: IMF Staff Country Reports 2015, 158; 10.5089/9781513541587.002.A003

Sources: BRH FRMI Weekly; and IMF staff estimates.

10. Maintaining the exchange rate anchor requires keeping a foreign exchange buffer that is credible for market intervention. Anchoring medium-term inflation expectations in the mid-single digits requires an international reserve buffer that allows the Central Bank to credibly intervene when negative shocks materialize. Rebuilding buffers after increased intervention following shocks requires of increased exchange rate flexibility, and of a fiscal policy that is consistent first, with recovering, and then, maintaining, appropriate buffers. Staff analysis suggests that, in the case of Haiti, international reserves should be in the range of 4–5 months of prospective imports.2

C. Financial Intermediation and Financial Inclusion

11. The level of financial intermediation is a key determinant of economic growth, but is very low in Haiti. The role of the financial system as an intermediary between depositors and borrowers, addressing information asymmetries to convert savings into productive credit, is crucial to economic growth (Levine et al, 2000). In the case of Haiti, however, financial intermediation is very low, credit concentrated, and financial services entail high costs.

Haiti’s banking sector features a few large players. The system is composed of nine banks, two of which are state-owned (BNC and BPH), two are foreign-owned (CNBA and Scotia), and five are domestic. However, the sector is dominated by two domestic private banks: Sogebank and Unibank, which together provide about two-thirds of private sector credit. The top three banks (including BNC) account for over 80 percent of total assets (BRH 2014). This level of concentration is common in the region, but the small presence of foreign-banks (6.5 percent of assets) is unusual (FinStats 2015).

12. Domestic credit is low, and there is a significant excess of deposits over bank credit. Despite rapid credit growth in the years after the 2010 earthquake, bank lending to the private sector remains under 20 percent of GDP, which is the lowest in the region (Chart 7). However, total deposits (at around 40 percent of GDP) are not low by regional standards. This excess of deposits over bank credit is due to high reserve requirements, but also because a relatively large share of assets takes the form of non-credit domestic investments, often in affiliated enterprises (Table 1, Chart 8).

Chart 7.
Chart 7.

Domestic Credit to Private Sector

(Percent of GDP)

Citation: IMF Staff Country Reports 2015, 158; 10.5089/9781513541587.002.A003

Sources: National Authorities; and IMF staff estimates.
Table 1.

Balance Sheet of the Aggregated Banking System

(end-December 2014, percent of GDP)

article image
Source: BRH “Rapport Statistiques et Indicateurs Financiers,” Q1 2015.
Chart 8.
Chart 8.

Bank Deposits and Private Sector Credit

(Percent of GDP)

Citation: IMF Staff Country Reports 2015, 158; 10.5089/9781513541587.002.A003

Sources: FinStats Database; and IMF staff estimates

13. The formal banking system is concentrated in Port-au-Prince. Haiti has a third of the number of bank branches on a per capita basis as in Nicaragua, and a quarter of the number of branches per person as in the neighboring Dominican Republic, but 67 percent of bank branches, and 85 percent of total deposits, are located in the Port-au-Prince area, which only has about 25 percent of Haiti’s population (BRH 2014 and BRH/World Bank 2014) (Chart 9).

Chart 9.
Chart 9.

Port-au-Prince and the Provinces

(Share of total deposits and population, percent of total)

Citation: IMF Staff Country Reports 2015, 158; 10.5089/9781513541587.002.A003

Sources: BRH, IHSI; and IMF staff estimates.

14. Relatively few borrowers account for a significant share of credit, reflecting a lack of information on creditworthiness and difficulties in collecting on debt. There were about 100,000 loans outstanding in December 2014 (out of a population of over 10 milion). Moreover, most banks extend around 40 percent of their credit to their 10–15 largest clients. For the system as a whole, the 100 top borrowers account for about half of total credit, reflecting limited creditworthiness information and a dysfunctional system for recovering debt.3 In such a system, close personal relationships can substitute for formal institutional mechanisms for collecting on collateral (Bond and Rai, 2002.

15. Credit spreads are high, although top clients can borrow on more favorable terms. Average lending rates have hovered around 20 percent in recent years, even as savings rates have remained near zero (Chart 10). However, the weighted-average lending-deposit spread in Haiti was about 8 percent in 2013, similar to that in the Dominican Republic and lower than that in Nicaragua or Jamaica (each about 14 percent; Finstats 2015). This suggests that relatively few large borrowers can access credit at rates close to banks’ own costs of funds, while smaller borrowers pay significantly higher rates, likely reflecting higher perceived risk premia in a context where information asymmetries are still significant.

Chart 10.
Chart 10.

Savings and Lending Rates in Gourdes

(Percent)

Citation: IMF Staff Country Reports 2015, 158; 10.5089/9781513541587.002.A003

Sources: FMI Weekly; and IMF staff estimates.

16. The sectoral distribution of bank loans suggests credit is concentrated in the consumption sector. Trade (wholesale and retail) is the largest category, followed by real estate, and a range of other services together are another important destination of credit. Industry receives about 15 percent of total credit, mostly to the food and beverage industry. Agriculture receives almost no credit from the formal banking system.

17. The discussion above suggests that more competition, better information, and an improved regulatory framework are needed to increase financial intermediation and boost growth. As discussed by Poghosyan (2012), a narrow credit base and high margins are common in LICs, reflecting a lack of competition and high intermediation costs imposed by weak institutions. Addressing these constraints can boost financial intermediation, reduce its costs, and promote growth. The high costs of financial intermediation in Haiti constrain growth not only by limiting access to credit (Haiti ranked 171th in the world on this indicator in the 2015 Doing Business survey), but by driving up the costs of receiving remittance transfers. Over half of all households receive remittances from the Haitian diaspora (Herrera et al, 2014), yet the fees associated with these transfers are over double that in Nicaragua (Chart 11).

Chart 11.
Chart 11.

Costs of Processing Remittances

(Average cost of sending US$ 200, percent)

Citation: IMF Staff Country Reports 2015, 158; 10.5089/9781513541587.002.A003

Sources: FinStats 2015; and IMF staff estimates.
Table 2.

Sectoral Allocation of Credit

(December 2014, percent)

article image
Source: BRH; and IMF staff estimates.

18. The BRH launched a credit bureau in FY2014. The credit bureau (the Bureau d’Information sur le Crédit, BIC), developed in collaboration with the IDB and the IFC, is intended to expand access to credit by providing lenders with a continuously updated database on the creditworthiness of potential borrowers. In the first stage of its operation, bank and non-bank financial institutions are required to report to the BIC on credit extended to each borrower. The BIC will help current borrowers demonstrate their creditworthiness to other potential lenders, potentially increase competition among lenders while increasing incentives for borrowers to honor their debts. To help potential first-time borrowers receive credit, the authorities are considering a second stage where would-be borrowers could build a credit history, for example by providing proof of payment of utilities (such as EDH and DINEPA), in order to establish creditworthiness for a first-time loan. This broadening data reporting to the BIC would be beneficial to unbanked individuals and small enterprises because it would facilitate their building a credit history without necessarily having had formal access to credit, thus overcoming the trap of not being eligible for credit without having a previous credit history (IFC 2012). In expansion of the credit bureau to cover nontraditional data beyond the banking system would require legislation, however.

19. The cooperative and microfinance sector is another avenue to promote more competition in the financial sector, but the sector is small. There are 90 registered savings and cooperative financial institutions with about 639 thousand members as of end-September 2013. Unlike commercial banks, cooperatives are focused outside of Port-au-Prince, with about 80 percent of branches located in the provinces. However, known total assets of the entire sector were just over G 5 billion, or under 1.5 percent of GDP. The sector is growing, but not at a rapid pace: there were 59 thousand borrowers as of end-September, compared with 47 thousand in 2009.

Table 3.

Evolution of Savings and Credit Cooperative Sector

(units as indicated)

article image
Source: BRH; and IMF staff estimates.

20. Modernization of the regulatory environment for cooperatives would help spur its development. Cooperatives are regulated by a 2002 law that placed supervisory responsibilities at a unit within the BRH, but maintained an existing institution (the Conseil National des Coopératives, CNC) with licensing responsibilities. In practice, the actions of the two institutions are not well coordinated, leading to licensing delays and incomplete information on the sector (IMF 2013). Most cooperatives are not registered, and the BRH does not publish information on the sub-sector (compared with comprehensive data published each quarter on banks). Revisions to the legal framework for cooperatives that would clarify the roles of the BRH and CNC and simplify registration procedures have been pending for several years, but have not been approved by parliament.

21. The microfinance sub-sector remains unregulated, with limited data availability. There are two types of microfinance institutions in Haiti. The first are microfinance subsidiaries of registered commercial banks. Several commercial banks operate such subsidiaries, which sometimes receive support from foreign donors by extending guarantees (USAID 2013). Other microfinance institutions are operated by non-governmental organizations, or function as local, small credit unions. Relatively little information is available on the sector, but one estimate based on self-reported data suggests that loans are around G 4 billion, or 1 percent of GDP (Microfinance Information Exchange, 2015). A study funded by USAID and published in 2012 used sampling methodology to estimate that there might be 200 such institutions in Haiti with total assets of about G 10 billion (Lhermite, 2012), but since few microfinance institutions report data to the central bank, it is difficult to verify this estimate. The BRH has been developing a draft law that would regulate microfinance institutions, but it has not yet been submitted to parliament.

22. The government’s National Strategy for Financial Inclusion aims to raise the share of the population that has access to financial services while safeguarding the stability of the financial system. The strategy, developed in coordination with the World Bank, aims to raise the share of adults that have an account with a formal financial institution from 27 percent to 45 percent in five years. Key action items are further developing the legal framework of the financial system, the credit bureau, and promoting more competition in the money transfer business to reduce costs (all noted above). Other measures include revisiting the requirements for opening up a bank account (such as on minimum account balances), studying the feasibility of making social payments through the banking system. One key reform priority laid out in the financial inclusion strategy is facilitating the use of collateral, including real assets (for which the authorities are drafting a law), and land. The latter will require a functioning land cadastre and improving property rights (see Selected Issues Paper “Opportunities and Challenges for Growth”).

References

  • Banque de la République d’Haïti (BRH, 2014). Rapport Statistiques et Indicateurs Financiers : Q1 FY2015. Available at http://www.brh.net/stats_financieres.html

    • Search Google Scholar
    • Export Citation
  • Bencivenga, Valerie R and Bruce D Smith (1991) “Financial Intermediation and Endogenous Growth,” The Review of Economic Studies, Vol 58, No. 2.

    • Search Google Scholar
    • Export Citation
  • Bond, Philip, and Ashok Rai (2002) “Collateral Substitutes in chapter,” Yale University.

  • Fin Stats 2015. World Bank Group, November 2014.

  • Herrera, J, Lamaute-Brisson, N., Milbin, D. Roubaud, F, Saint-Macary, C., Torelli, C, Zanuso, C.. L’Evolution des conditions de vie en Haïti entre 2007 et chapter. La réplique sociale du séisme. IHSI, DIAL, Paris, Port-au-Prince, 2014.

    • Search Google Scholar
    • Export Citation
  • International Finance Corporation (2012) “Credit Reporting Knowledge chapter,” Washington, DC.

  • International Monetary Fund (2012) “Enhancing Financial Sector Surveillance in Low-Income Countries—Background chapter.Washington, DC.

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund (2013) “2012 Article IV Consultation and Fifth Reivew under the Extended Credit Facility-Financial Sector chapter,” Washington, DC.

    • Search Google Scholar
    • Export Citation
  • Levine, Ross, Norman Loayza, and Thorsten Beck (2000); “Financial Intermediation and Growth: Casuality and Causes.Journal of Monetary Economics.

    • Search Google Scholar
    • Export Citation
  • Lhermite François. September 2012. Recensement de L’industrie de la Microfinance en Haiti. Année 2010–11. USAID/HAITI, pp 57.

  • Microfinance Information Exchange (2015). Data available online at: http://www.mixmarket.org/mfi/country/Haiti

  • Mishra, Prachi and Montiel, Peter (2012) “How Effective is Monetary Transmission in Low-Income Countries? A Survey of the Empirical EvidenceIMF Working Paper WP/12/143.

    • Search Google Scholar
    • Export Citation
  • Poghosyan, Tigran (2012) “Financial Intermediation Costs in Low-Income Countries: The Role of Regulatory, Institutional, and Macroeconomic Factors.IMF Working Paper WP/12/140.

    • Search Google Scholar
    • Export Citation
  • United States Agency for International Development (2013) “Evaluation of DCA Guarantees to Micro-Credit Capital and Sogesol, Haiti Final Report.August 2013

    • Search Google Scholar
    • Export Citation
  • World Bank. 2014. Doing Business 2015: Going Beyond chapter. Washington, DC: World Bank Group. DOI: 10.1596/978-1-4648-0351-2. License: Creative Commons Attribution CC BY 3.0 IGO

    • Search Google Scholar
    • Export Citation
1

Prepared by Lawrence Norton and Gabriel Di Bella (WHD)

2

See Selected Issues Paper “External Buffers and Competitiveness to absorb shocks and support growth”

3

Haiti ranks last in the world on the practice of resolving insolvency, according to the World Bank’s Doing Business rankings. An inability to collect debts therefore helps explain why credit is concentrated at a few top clients, as close personal relationships can help ensure repayment.

Haiti: Selected Issues
Author: International Monetary Fund. Western Hemisphere Dept.
  • View in gallery

    Exchange Rate Depreciation

    (gourdes per dollar, percent y/y)

  • View in gallery

    Net BRH FX Intervention

    (Millions of US$, cumulative since October 2010)

  • View in gallery

    Headline and Effective Required Reserves

    (Percent of Deposits, weighted average of goude and dollar rates)

  • View in gallery

    BRH Bills Outstanding

    (Billions of gourdes and interest rate)

  • View in gallery

    BRH Liquidity Absoportion

    (Three month rolling average of required reserves and BRH bills outsanding as a percent of total deposits)

  • View in gallery

    BRH Monetary Policy Rates

    (Weighted average of percent changes in effective reserve rates and BRH bill rates, since October 2010)

  • View in gallery

    Domestic Credit to Private Sector

    (Percent of GDP)

  • View in gallery

    Bank Deposits and Private Sector Credit

    (Percent of GDP)

  • View in gallery

    Port-au-Prince and the Provinces

    (Share of total deposits and population, percent of total)

  • View in gallery

    Savings and Lending Rates in Gourdes

    (Percent)

  • View in gallery

    Costs of Processing Remittances

    (Average cost of sending US$ 200, percent)