Haiti: Staff Report for the 2019 Article IV Consultation—Debt Sustainability Analysis
Author: International Monetary Fund. Western Hemisphere Dept.
Publication Date:
20 Apr 2020
ISBN:
9781513541464
Language:
English
Keywords:
ISCR; CR; staff appraisal; Moïse; deterioration in food security; U.S. dollar; article IV discussion; food assistance; anti-corruption policy priority; Energy sector; Natural disasters; Arrears; South America; Central America; Caribbean; Global; debt carrying capacity; sustainability analysis; burden indicator threshold; dynamics equation; debt indicator; Debt sustainability analysis; Stress testing
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2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Haiti

Abstract

2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Haiti

Public Debt Coverage

1. Coverage. Gross public debt used for the DSA covers the central government, local governments, extrabudgetary autonomous organisms, the state-owned electricity company, Electricité d’Haiti (EDH), and advances by the central bank to the government. No data is available on guaranteed debt, including to other state-owned enterprises (SOE), and non-guaranteed SOE debt.

2. Gross domestic public debt is calculated as the sum of claims of the overall banking sector (including the central bank) to the non-financial public sector (NFPS) plus suppliers’ credits and domestic arrears reported by the authorities. The banking claims data come from the 10R and 20R tables reported by the Banque de la République d’Haiti (BRH). The education fund Programme de Scolarisation Universelle, Gratuite, et Obligatoire (PSUGO) and social security funds (Pension civile and Office Nationale d’Assurance-Vieillesse—ONA) are consolidated with the rest of the NFPS. In the absence of data, the calculation for domestic public debt does not include T-bills and bonds held outside of the banking sector.

3. External debt data come from the BRH and include debt to multilateral and bilateral creditors and payment arrears to a foreign oil company. External debt is defined on a residency basis.

Haiti: Public Debt Coverage

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The default shock of 2% of GDP will be triggered for countries whose government-guaranteed debt is not fully captured under the country’s public debt definition (1.). If it is already included in the government debt (1.) and risks associated with SoE’s debt not guaranteed by the government is assessed to be negligible, a country team may reduce this to 0%.

Background on Debt

4. At the end of the 2019 fiscal year, Haiti’s stock of public sector debt totaled US$3.7 billion (47 percent of GDP).2 External public debt accounts for 58.2 percent of total outstanding public debt (27.4 percent of GDP) of which 86 percent is debt arising from oil imports financed by Venezuela’s Petrocaribe. The remainder is largely concessional debt from multilateral creditors, including the International Fund for Agricultural Development (IFAD) and the IMF. There is no publicly available information on private external debt. Domestic public debt amounts to US$1.5 billion, mostly in the form of central bank advances to the government. External technical arrears to Venezuela of about US$260 million (as of September 30, 2019) are in the process of being resolved.3

Haiti: Structure of Public Debt at end-2019

(Fiscal-year basis)

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Sources: Haitian authorities, and Fund staff estimates.

5. Debt has increased since the debt relief that followed the 2010 earthquake. Haiti benefited from about US$1 billion in debt relief from international creditors after the earthquake, including US$268 million from the IMF (under the Post-Catastrophe Debt Relief Trust Fund) and US$36 million from the World Bank.4 As a result, external public debt fell from 19 percent at end-FY2009 to less than 9.0 percent of GDP in FY2011. Since then, debt has increased steadily, mostly driven by disbursements related to the PetroCaribe agreement with Venezuela on the external side, and by unremunerated advances from the central bank on the domestic side. More recently, the government obtained funding from domestic suppliers (US$123 million) in FY2018 and signed a loan from Taiwan Province of China (US$150 million) in January 2019, although the latter has not been disbursed.5

6. Fiscal policy and public borrowing have been more conservative than was projected in the last DSA of November 2016. Fiscal policy proved more conservative than expected in FY2017, with the NFPS posting a primary deficit of only 0.7 percent of GDP compared to the 4.1 percent of GDP projected in the 2016 DSA. As a result, the present value of public debt stood at 30.4 percent of GDP in September 2018.6

Background on Macroeconomic Forecasts

7. The baseline scenario assumes conservatively a low growth, sub-optimal equilibrium with enough resolution of the political crisis in the short-term to permit a degree of stability but not enough to implement ambitious reforms. This would allow for some resumption in activity and external financing.

  • Real GDP is estimated to have dropped in FY2019 amidst a protracted political crisis. Growth for FY2020 is projected to stay negative at around -0.4 percent. Absent comprehensive reforms, medium-term growth prospects remain grim with potential growth reaching only 1.5 percent, taking the high probability of natural disasters and their effect on growth into account.7 Revisions in the macroframework vis-à-vis the 2016 DSA reflect economic developments since then and staff’s current baseline projections.

  • After peaking above 20 percent y/y in 2019, inflation is expected to stabilize and gradually converge to a single digit over the medium term. A stable real exchange rate vis-à-vis the U.S. dollar is assumed over the longer term, so the nominal bilateral exchange rate is driven by the inflation differential vis-à-vis the United States.

  • The deficit of the NFPS is estimated at 3.8 percent of GDP in FY2019, as domestic revenues dropped and currency depreciation pushed up the cost of fuel subsidies. The deficit is projected to contract to 3.1 percent of GDP by FY2025, constrained by the lack of financing and limited additional credit from the BRH. Beyond 2025, the deficit is projected to widen to 4.1 percent of GDP on average to account for the likely impact of natural disasters. Those would increase both current spending for emergency assistance to victims and capital spending for reconstruction purposes. The resulting deficit increase is expected to be mostly externally financed through concessional multilateral or bilateral financing.

  • The current account deficit is estimated to have shrunk to 2 percent of GDP in FY2019 owing to weak import growth and higher remittances. The deficit is expected to widen in the longer term as remittance inflows normalize and the impact of natural disasters ensues.

Haiti: Macroeconomic Assumptions Compared to the Previous DSA

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

8. Future gross financing needs are assumed to be met both internally—by the rollover of central bank advances to the government—and externally. Central bank advances are not remunerated. Remaining internal financing takes the form of short-term treasury bills held by commercial banks. The share of internal financing coming from T-bills is assumed to increase in the long-term as the domestic financial market deepens.8 External debt financing, contracted or guaranteed, is assumed to be mostly concessional. It is assumed that the IDA18 allocation to Haiti will be replenished to similar levels every IDA cycle.

9. The baseline assumptions are credible. The realism tool shows some differences between past and projected debt dynamics coming in part from the impact on external debt of a lower current account deficit and FDI balance and for total public debt from a lower primary deficit, suggesting that previous vintages were pessimistic (Figure 3). The current baseline scenario projects debt-creating flows above those actually observed in the past 5 years, but the latter may also reflect improvements in the coverage and measure of debt.

Figure 1.
Figure 1.

Haiti: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2020–40

Citation: IMF Staff Country Reports 2020, 121; 10.5089/9781513541464.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2030. Stress tests with one-off breaches are also presented (if any), while these one-off breaches are deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.2/ The magnitude of shocks used for the commodity price shock stress test are based on the commodity prices outlook prepared by the IMF research department.
Figure 2.
Figure 2.

Haiti: Indicators of Public Debt Under Alternatives Scenarios, 2020–40

Citation: IMF Staff Country Reports 2020, 121; 10.5089/9781513541464.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2030. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.
Figure 3.
Figure 3.

Haiti: Drivers of Debt Dynamics-Baseline Scenario External Debt

Citation: IMF Staff Country Reports 2020, 121; 10.5089/9781513541464.002.A003

1/ Difference between anticipated and actual contributions on debt ratios.2/ Distribution across LICs for which LIC DSAs were produced.3/ Given the relatively low private external debt for average low-income countries, a ppt change in PF3 external debt should be largely explained by the drivers of the external debt dynamics equation.

10. The projected fiscal adjustment is realistic. The planned adjustment falls outside the top quartile of the distribution of past adjustments of the primary fiscal deficit, suggesting a reasonable and credible pace of adjustment (Figure 4).

Figure 4.
Figure 4.

Haiti: Realism Tools

Citation: IMF Staff Country Reports 2020, 121; 10.5089/9781513541464.002.A003

11. The growth forecast for 2020 and 2021 is driven by the assumed stabilization of the political situation unrelated to the projected fiscal adjustment. The baseline growth projection assumes near-zero growth in FY2020 as the political stabilization and ensuing reduction in uncertainty allow for a modest recovery in the second half of the year. Growth would further recover in 2021. This growth path is largely independent of the expected fiscal adjustment which would result from a resumption of activity supporting higher revenue collection (Figure 4).

Country Classification and Stress Tests

12. The value of the composite indicator to assess debt carrying capacity is 2.86, resulting in a “medium” classification.9 Haiti’s debt carrying capacity would be classified as weak if remittances as a share of GDP were not so high. Remittances-to-GDP above the 15.5 percent cut-off (on average over 2013–22) brings the index above the 2.69 cutoff value (see Table Debt Carrying Capacity). Previous DSA vintages, using the average CPIA score instead of the composite indicator, had a weak debt carrying capacity.

13. This classification sets higher external and public debt thresholds to assess the risk of debt distress. The present value of external debt can go as high as 40 percent of GDP or 180 percent of exports of goods and services, and the present-value of public debt can reach 55 percent of GDP, before the model-based risk of distress increases. The benchmarks for external debt service are 15 percent of exports of goods and services and 18 percent of fiscal revenues.

14. In addition to the standard stress tests, the analysis considers the effects on debt of a one-off major natural disaster shock of a similar magnitude to Hurricane Matthew that hit Haiti in 2016. This type of shock is particularly relevant since, during the past decade, Haiti has been struck by several major natural disasters. This shock assumes damages of 25 percent of GDP, similar to those caused by Hurricane Matthew. The damages and estimated losses following the 2010 earthquake were estimated at 120 percent of FY2009 GDP. However, this type of disaster is not as statistically frequent as hurricanes, thus considered a tail risk event.10

Haiti: Debt Carrying Capacity and Thresholds

Citation: IMF Staff Country Reports 2020, 121; 10.5089/9781513541464.002.A003

Debt Sustainability

A. External Debt Sustainability Analysis

15. Under the baseline scenario, Haiti’s external debt path is projected to breach the indicative threshold from FY2034 onward (Figure 1). No threshold breaches are projected to take place under the standard 10-year projection period. However, Haiti’s institutional fragility and its exceptional vulnerability to large natural disasters and the impact of climate change warrant consideration of the debt dynamics over a longer (20-year) horizon.11 Within that period, two debt indicators show large and sustained breaches of the relevant threshold. The present value of external debt-to-GDP is projected to gradually increase from 15.8 percent in FY2020 to 21.8 percent in FY2030, and up to 44.2 percent in FY2040 on account of external borrowing to finance the (re)construction of infrastructure. Similarly, the present value of debt-to-exports gradually increases from 87.8 percent in FY2020 to up to 237.3 percent in 2040, breaching the 180 percent threshold in FY2034. The external debt service-to-revenue ratio remains one percentage point below the threshold of 18 percent in 2040 thanks to the large share of external debt on concessional terms.

16. The historical scenario highlights the realism of the baseline scenario. The path of debt that would result from key macroeconomic variables in the baseline projection being permanently replaced by their 10-year historical average would imply earlier and more prolonged threshold breaches for all the indicators of public and publicly guaranteed external debt considered.

17. Stress tests confirm the vulnerability of debt dynamics to a drop in remittances and natural disasters. A shock to non-debt flows (decline in both current transfers and FDI inflows by one standard deviation) would bring the present value of external debt persistently above the 180-percent-of-exports threshold, and the debt service-to-revenue ratio above the 18 percent threshold for more than 10 years. A natural disaster shock has the largest negative impact on the external debt trajectory, bringing the present value of debt-to-GDP to 54 percent by 2040 (Table 3).

Table 1.

Haiti: External Debt Sustainability Framework, Baseline Scenario, 2017–40

(in percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.1/ Includes both public and private sector external debt.2/ Derived as[r-g-ρ(1+g) + εα(1 + r)]/(1 + g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, ρ = growth rate of GDP deflator in U.S. dollar terms, ε = nominal appreciation of the local currency, and α = share of local currency-denominated external debt in total external debt.3/ 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.4/ Current-year interest payments divided by previous period debt stock.5/ Defined as grants, concessional loans, and debt relief.6/ 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).7/ Assumes that PV of private sector debt is equivalent to its face value.8/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Table 2.

Haiti: Public Sector Debt Sustainability Framework, Baseline Scenario, 2017–40

(in percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.1/ Coverage of debt: The general government. Definition of external debt is Residency-based.2/ The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections.3/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt.4/ 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 and other debt creating/reducing flows.5/ Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question.6/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Table 3.

Haiti: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2020–40

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the threshold.

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

Includes official and private transfers and FDI.

B. Public Sector Debt Sustainability Analysis

18. Public debt is sustainable under the baseline scenario. Total public debt is projected to remain below 47 percent of GDP until 2025. In present value terms, public debt would reach 35.6 percent of GDP in FY2025, around 20 percentage points below the corresponding benchmark (Tables 2 and 4).

19. Stress test scenarios show debt crossing the public debt benchmark. Under the most extreme natural disaster scenario, the present value of the public-debt-to-GDP ratio would exceed 55 percent the year of the shock and after 2035 (Figure 2, Table 4).

Table 4.

Haiti: Sensitivity Analysis for Key Indicators of Public Debt, 2020–40

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the benchmark.

Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP.

Includes official and private transfers and FDI.

Risk Rating and Vulnerabilities

20. The debt outlook for Haiti is subject to several risks. Public debt is expected to grow as a share of GDP over the medium to long term, as potential growth, accounting for the average annual impact of natural disasters, remains weak and Haiti’s financing needs decline marginally. The present values of the external public debt-to-GDP and debt-to-exports ratios are projected to breach their indicative benchmarks respectively in FY2036 and FY2034 under the baseline. A drop in remittances or a natural disaster shock similar in magnitude to Hurricane Matthew would imply earlier breaches of the thresholds, as would the historical scenario.

21. Haiti remains at high-risk of debt distress. Haiti is a country affected by fragility, conflict, and violence, and one of the countries in the world most exposed to natural hazards and climate change. Looking beyond the first 10 years of the projection horizon, the baseline, most likely scenario accounting for the high probability of natural disasters forecasts protracted and substantial breaches of the external debt burden indicator thresholds, while an additional major natural disaster or a decline in remittances would substantially aggravate these debt dynamics, even under a 10-year horizon. On this basis, judgment has been applied to the model-based rating of moderate risk for both external and overall public debt distress to an assessment of high risk for both measures.

Authorities’ Views

22. The authorities agreed with the debt sustainability analysis and the assessment. The BRH highlighted the implications of the transition to IFRS-9 for the accounting of the central bank’s advances to the government as well as interest payments, and its efforts to develop the market for government debt securities which would help it progressively reduce its financing of the government. They indicated that IFRS-9 compliance would require a higher remuneration of BRH’s claims on the government and the establishment of a timetable for domestic debt payments. They emphasized that achieving growth would require higher levels of investment, particularly in infrastructure. While high public investment can increase the stock of debt, if the associated investments are productive, they would have a positive impact on debt sustainability through higher growth, income and exports. While the authorities agreed that Haiti needs concessional funding, they were skeptical that sufficient concessional resources would be made available to finance productive investments that could generate a strong and inclusive growth.

1

Guidance Note on the Bank-Fund Debt Sustainability Framework for Low-Income Countries (LIC-DSF), February 2018.

2

Annual data refer to the fiscal year ending September 30.

3

Haiti has attempted to pay some of these arrears but the authorities have encountered processing difficulties with financial institutions in making regular payments to Venezuela under the Petrocaribe agreement. Debt service payments to Venezuela are made into an escrow account in U.S. dollars at the central bank.

4

In addition, following the earthquake, the World Bank provided US$508 million in grant financing from the IDA Crisis Response Window (CRW) to support reconstruction and long-term restoration of capacity in the country.

5

The loan package, which includes grants from the government of Taiwan Province of China to compensate for the difference between a low fixed rate and the currently-higher variable rate applicable to the loan, is assessed to be concessional.

6

This number cannot be compared to the present value of public debt reported in the 2016 DSA since the coverage of debt has changed to include the central bank’s advances to the government.

7

The 1.5 percent long-term growth projection is based on a growth accounting exercise, using a neoclassical production function with a labor share of 54 percent (Cicowiez and Filippo, 2018), assuming the same growth rate of labor and capital as during 1996–2018 and zero TFP growth, and subtracting about 1 percent to account for the average impact of natural disasters (Cantelmo, Melina, and Papageorgiou, 2019). Growth of 1.5 percent also corresponds to the average observed real rate over 1996–2018, a period during which 77 natural disasters were recorded in Haiti.

8

Projected internal financing is assumed to be exclusively in domestic currency.

9

The calculation of the composite index uses October 2019 WEO and 2018 CPIA data.

10

See IMF Policy Paper, “Small States’ Resilience to Natural Disasters and Climate Change – Role for the IMF,” December 2016.

11

DSF guidance note, paragraph 87.

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Cover IMF Staff Country Reports
Haiti: 2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Haiti
Author: International Monetary Fund. Western Hemisphere Dept.
Volume/Issue:
Volume 2020: Issue 121
Publisher:
International Monetary Fund
ISBN:
9781513541464
ISSN:
1934-7685
Pages:
88
DOI:
https://doi.org/10.5089/9781513541464.002