Statement by Mr. Bevilaqua, Executive Director for Haiti and Mr. Saraiva, Alternate Executive Director, and Ms. Florestal, Advisor to the Executive Director for Haiti January 24, 2020

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

The discussions for Haiti’s 2019 Article IV consultation took place under exceptional circumstances and are an unequivocal testimony of the strong commitment of the authorities and the IMF team to complete the process. Given the unique circumstances that impeded mission travel to Haiti in November 2019, we commend WHD for making effectual use of the flexibility in Fund’s guidance for completing Article IV consultations in FCS countries. Accordingly, the technical discussions were held mostly through teleconferencing, while the authorities consented to come to Washington for the policy discussions.

The comprehensive set of documents is evidence of the quality of the dialogue between Fund staff and their Haitian counterparts and of the wealth of information gathered during the past four years of continuous Fund engagement. Such engagement led to the adoption and largely successful implementation of the 2018 SMP and to the staff level agreement on an ECF in March 2019. Nonetheless, the repeated socio-political shocks that prevailed since 2015 had impeded the conclusion of program negotiations and Article IV consultations.

The recent socio-economic disruption, which culminated with several weeks of “peyi lok” (country lockdown) whereby all economic and social activities were severely halted, is deemed to have had very damaging and long-lasting impact. In November 2019, at the time of the Article IV discussions, Haiti was at its sixth week of “peyi lok” and at the height of uncertainty. The looming political and social crisis – ignited by the 2018 fuel price hikes -intensified after March 2019 and effectively brought the country to a standstill. For the first time since the devastating 2010 earthquake, GDP is estimated to have contracted, while inflation reached 20 percent yoy, pushed by a 32 percent depreciation of the currency. A humanitarian crisis led by shortages of food and social services has ensued and remains as a major challenge.

Currently, economic activity is gradually resuming, as the security situation has become less volatile and domestic stakeholders seem to tacitly agree that the country must avoid a downward spiral. Challenges abound but there are hopeful signs that the daily life may be starting to normalize, including the reopening of schools after several months. Indisputably, Haiti is at a decisive juncture. However, the complexity of the political situation should not be an impediment to immediately addressing the multiple challenges at hand. While a thorough assessment of the impact of the recent crisis is still pending, it is known that the tourism industry is facing severe challenges, including the closure of hotels. Likewise, with the plunging activity the banking sector and microfinance institutions (MFIs) are confronting the rapid increase of NPLs. In addition, anecdotal evidence of yet another wave of migration of skilled labor suggests that Haiti’s dearth of human capital may become a more binding constraint to growth moving forward.

The Government has reaffirmed its commitment to undertake necessary reforms to reestablish macroeconomic stability and restore the conditions for economic growth. The Haitian authorities share staff’s view that key priorities at this juncture are: curbing economic deterioration, reforming the energy sector, strengthening governance and developing social safety nets. Despite the challenging environment, measures were taken recently to stave off further deterioration of the fiscal balance and avert unsustainable monetary financing. Most notably, the “Pacte de Gouvernance” – a cash management agreement between the Ministry of Economy and Finance and the Central Bank – was renewed to cover the current fiscal year, in an effort to curb monetary financing. The authorities hope that the signing and observance of the governance pact will contribute to quell some of the uncertainty and reassure investors.

Measures have also been taken to rein in tax expenditures, strengthen tax collection, control the accumulation of domestic arrears and improve public financial management. The authorities seek to ensure that discretionary tax exemptions are effectively prohibited and to limit the abuse of this privilege by NGOs and other beneficiaries. Also, to facilitate tax collection, the payment of taxes through banks was recently tested in pilot form and will become effective once a few technical issues are solved. To quell leakages at the border with the Dominican Republic, in line with the protocol signed in 2017, the exchange of information between the custom offices of Haiti and the Dominican Republic has started in September 2019, while certain technical challenges still need to be ironed out. In addition, a training session for custom officers of both countries is scheduled for February 2020 mostly to enhance their coordinated approach in the management of the border.

Moreover, the authorities have drafted a framework – consistent with the Fund’s baseline scenario of no external budget support – to dispel uncertainty and reestablish the budget as a binding fiscal constraint and a tool to promote equity and sustainable growth. The total FY20 budget envelope is to be shrunk by up to 20 percent in comparison to the preceding year due to the sharp drop in fiscal revenues linked to the contraction of economic activity. The details of the budget to be adopted by the new Government during the following few weeks are still being crafted along those lines. It is expected that a positive signaling from the Fund with a possible approval of a program could unleash a more optimistic outlook with further engagement from development partners.

The energy sector is the main source of fiscal imbalance and requires a multi-pronged approach to suppress the leaks and become more competitive, diversified and efficient. The authorities look forward to working with the Fund on fuel subsidy reform in synchrony with the building of appropriate social safety nets. We welcome the analytical chapters on fuel subsidies and the electricity sector and consider the recommendations key inputs for the efforts to be undertaken. As underscored in the staff report, the government has transferred the fuel purchasing responsibility to the private sector. To minimize the risk of fuel shortages, the administration has committed to make regular payments to suppliers of petroleum products in order to reduce arrears. Progress registered in billing and collection at EDH under the SMP continued until early 2019 but were reversed during the recent crisis, since billing and collection were severely hindered by the roadblocks and the interruption in the income flow among the population and businesses. Currently EDH is taking forceful steps to improve its financial performance including by cutting clients in payment arrears off the grid, while being supported by the Ministry of Economy and Finance’s directive instructing public entities to ensure timely payments of their electricity bill.

Strengthening governance and promoting greater transparency and accountability are indeed among the authorities’ highest priorities. Within the framework of accelerating its fight against corruption, the authorities appointed, as the head of the anti-corruption unit (ULCC), a legal expert with a strong track record in previous high-profile functions in the legal system. On January 10, the anti-corruption unit issued a press release informing the rapid increase in compliance to the asset declaration by government officials and setting January 31st as the deadline to comply. Concurrently, the unit is moving forward with at least two high-profile investigations into fraudulent activities, the conclusions of which should be made public once it would not jeopardize its course. Also, this past week the ULCC organized an open-door day to promote a better understanding of its work and knowledge about what is considered acts of corruption.

The Central Bank continues to take steps towards reinvigorating financial markets, easing inflation pressures mainly from exchange rate volatility and maintaining an adequate level of international reserves. BRH officials are pursuing a stable macroeconomic environment, while addressing institutional weaknesses and the vast infrastructure gap to stimulate credit and growth. However, they also acknowledge that the tightening of monetary conditions in the last fiscal year may have impinged on credit in a context of already low credit growth and increased volatility of the exchange rate. Continuous disruptive conditions in the first three months of FY20 and ensuing decline in sales resulted in an increase in failure to service credit, threatening the profitability and stability of the financial system. In this context, with the combination of tighter monetary policy and plunging activity leading to a steadier exchange rate, the Central Bank decided to recalibrate its policy stance, while remaining cautious not to pose threats to price stability.

The Central Bank continues to see the exchange rate as a key policy indicator. The exchange rate severely affects residents’ purchasing power, including the most vulnerable, who depend on imports for most of their basic-good needs. The monetary authority remains attentive to tensions on the foreign exchange market that may need to be contained considering the strong pass-through of exchange rate fluctuations to inflation. Notwithstanding the Central Bank foreign exchange interventions during the past year, the net international reserves remained above 700 million US dollars and gross reserves still represent over 5 months of imports.

The authorities are also actively working on the implementation of the national financial inclusion strategy adopted in 2015. Fintech use is being promoted to boost financial intermediation. The recent launching of a web-based platform for economic agents to access the different costs of financial services is expected to foster competition. The National Financial Education Plan is expected to be adopted in the near term, with a view to stimulate financial inclusion through financial education.

Significant progress has also been achieved in addressing issues raised in the Fund’s safeguards assessment report. Haiti has received instrumental technical assistance for the legal and banking supervision aspects of IFRS compliance, as well as the drafting of modifications to the macro-prudential supervision framework. Relatedly, seven draft regulations have been shared with the banking sector for feedback before finalization and adoption. They cover capital requirements in relation to Basel II, internal control, governance, cross-ownership of capitals, as well as adequate level of equity shares of banks in non-financial institutions. The Central Bank will implement those measures and establish a risk-based supervision framework with the support of ongoing MCM TA.

With regards to AML/CFT, Haiti is working toward closing the gaps identified at the Fourth round of mutual evaluation undertaken in the summer of 2018. A comprehensive and risk-sensitive strategy has been adopted to address the absence of risk assessments, which is considered to have impeded achieving the international standards of effectiveness and technical compliance. The National Anti-Money Laundering Committee in collaboration with government officials and key stakeholders from the private sector are striving to fulfill all AML/CFT requirements for technical compliance of applicable legislation and regulations by the November 2020 progress report deadline. However, progress has been delayed because of the recent country lockdown and ensuing postponement of delivery of relevant TA by the World Bank.

To secure macroeconomic stability and put the economy back on the path of sustainable and inclusive growth, the adoption of a comprehensive recovery plan with wide-ranging domestic and external support is essential. In this regard, the IMF’s unwavering and active engagement with Haiti has a crucial role. Strong domestic resource mobilization remains critical and will decisively pursued but will not be enough to address the sources of fragility, as well as social and infrastructure needs. Like most LICs, Haiti is particularly vulnerable to sharp swings in commodity prices, natural disasters, and the unpredictability of external financing flows. Without resuming support from development partners, progress made towards meeting the SDGs, may irremediably be reversed with the current economic crisis. Predictable, timely and effective donor support is needed to implement a sustainable program of economic growth and stability with critical measures to mitigate anticipated short-term negative impact of structural reforms on the most vulnerable.

Strengthening social safety nets need to be at the core of any macroeconomic and structural program. Programs initiated during the past couple of years contributed to filling the significant gaps in social safety nets. However, they represented dispersed efforts without a sustainable source of financing. During the past year, with support from the international community, a central registry of beneficiaries has been constructed within the Ministry of Social Affairs and is expected to play an instrumental role in ensuring that the upcoming cash transfer program effectively targets the neediest and is not prone to abuses. In line with Fund’s guidance for work in countries in fragile situations, they see the creation of social safety nets to mitigate potential negative impact of reform measures as an essential prerequisite.

The authorities took note of the conclusion that Haiti was now assessed to be at moderate risk of debt distress but with a weak debt carrying capacity. They are hopeful that soon their efforts to mobilize domestic resources and implement targeted measures to reestablish macroeconomic stability will be supported by enough grant resources from international partners to take the path of sustainable and inclusive growth. In this regard, they are convinced that Fund’s strong signaling through its technical and financial engagement will be paramount.

Our authorities welcome the framing of the Fund’s engagement with countries in fragile situations in a medium-term perspective and stand ready to work with the Fund on Haiti’s Country Engagement Strategy (CES). The draft CES presented in Annex I of the staff report clearly points to the damage caused by fragmentation of initiatives and lack of coordination among development partners leading to inefficient delivery of goods and services and, most importantly, loss of policy ownership. The strategic focus on four areas is welcome, namely, macroeconomic stability, governance and transparency, social safety net, and energy. That said, one of the main benefits of a CES would be to facilitate a strong engagement of the Fund throughout episodes of increased fragility, avoiding counterproductive stop and go approaches. In addition, it would be important for the CES to address key issues, such as: (i) the profile of country team members and their level of experience and turnover rates; (ii) the streamlining and realistic timing and sequencing of conditionality, to ensure they are more in line with the country institutional capacity; and (iii) the finetuning of the modalities of TA delivery to ensure effective transmission of knowledge and avoid undermining domestic ownership of reform.

Stronger IMF engagement will signal to other technical and financial partners that Haiti is in a position to make progress in adjusting and reforming its economy and needs urgent support now. Ideal conditions rarely exist in countries with multiple sources of fragility. Failure to effectively engage with Haiti may tip the country over into deeper fragility, instability and poverty.