Haiti: Request for Disbursement Under the Rapid Credit Facility—Press Release; Staff Report; and Statement by the Executive Director for Haiti

Request for Disbursement Under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Haiti

Abstract

Request for Disbursement Under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Haiti

Context and Recent Developments

1. Haiti is facing a major shock in 2020 following an already difficult year in 2019. The country has experienced protracted political instability and sporadic social unrest since mid-2018 (see SM/19/283). Despite efforts by the monetary and fiscal authorities in FY2019, the fiscal deficit widened to 3.5 percent of GDP, domestic arrears surged, and public debt jumped by 8 percent of GDP.1 Parliament was dissolved and President Moise has been ruling by decree since mid-January. Some stability has returned with the appointment in early-March of a new prime minister—the fifth in three years—and minister of finance. The economic and human toll of the last two years has, however, been significant, with now almost 4 million people living with food insecurity (WFP, 2020). In this context, and with an already vulnerable population, the spread of COVID-19 is a potential catastrophe that could wreak havoc on already difficult living conditions.

Basic Sanitation, 2017 1/

(Percent of population using at least basic sanitation services)

Citation: IMF Staff Country Reports 2020, 123; 10.5089/9781513541549.002.A001

Sources: World Bank, WHO and IMF staff calculations.1/ Basic sanitation services as defined by the WHO and World Bank.

2. In recent weeks, the authorities have taken preliminary steps toward restoring macroeconomic stability. Since the Article IV staff report in January 2020 (text table 1), the authorities have taken preliminary steps to restore macroeconomic stability, including preparing a new budget framework for FY2020, restarting activity at the statistics agency, resuming publication of monetary statistics, and increasing the availability of fiscal and monetary data. While staff had begun preparations for discussions for a Staff-Monitored Program (SMP), the arrival of the COVID-19 shock has given rise to a need for emergency financing assistance. It is expected that preparations for an SMP will resume following Board approval of the RCF request (¶16).

Text Table 1.

Impact of COVID-19 on Balance of Payments 1/

(In millions of US$ on a fiscal year basis; unless otherwise indicated)

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Sources: Authorities’ data; and IMF staff estimates and projections.

The Article IV 2019 Consultation (SM/19/283) was concluded on January 24, 2020.

3. COVID-19 comes at a time of economic contraction and considerable macroeconomic imbalances. With the statistics institute closed from August 2019-March 2020, little data is available on output or inflation. Nonetheless, the output contraction is likely to have continued during the first six months of FY2020 given continuation of the political stalemate. Based on available fiscal and monetary data for the October 2019-January 2020 period, staff estimate that the fiscal deficit for the first half of FY2020 could reach 3.5 percent of GDP, compared to 1.0 percent of GDP recorded for the same period last year. The external current account deficit declined from 4.0 percent of GDP in FY2018 to 1.4 percent of GDP in FY2019, due mostly to import contraction and a rise in remittances to 35 percent of GDP. Gross international reserves were US$2.1 billion at end-2019 (5.7 months of imports), while the US$/HTG exchange rate was HTG98 at end-March, a depreciation of 5 percent since October 2019.

Impact of COVID-19 and Response

4. While Haiti has significant fiscal imbalances and deep-seated structural weaknesses, the COVID-19 pandemic has contributed to an urgent balance of payments need. With the arrival of this pandemic, Haiti will likely see a major hit to its external accounts, including: (i) a drop in remittances estimated at about US$557 million compared to the previous fiscal year, based on estimated elasticities—a key channel since remittances exceeded US$3 billion; (ii) a decline in textile exports to the U.S. of about US$178 million, or 2.0 percent of GDP and 17 percent of total goods exports; and (iii) a drop in foreign direct investment (FDI) of about 0.4 percent of GDP. On the fiscal front, the country would encounter: (iv) additional direct health, medical, security, and social expenditures to address the virus impact; and (v) an expected decline in fiscal revenues as a share of GDP by 0.6 percentage points, to a level 3.0 percent of GDP below the FY2016-FY2018 average. Real GDP is forecast to contract by 4.0 percent in FY2020 compared to a 1.2 percent drop in FY2019, due to the combined supply and demand shocks of COVID-19. While the fiscal and external sectors would benefit from the drop-in oil prices expected in 2020, these gains are mitigated by the depreciation in the exchange rate (see text chart). While there is always uncertainty regarding projections of the amount and timing of external assistance (¶7), this is expected to widen the balance of payments shortfall to an estimated US$338 million from US$190 million in FY2019. Compared to staff’s previous projections (SM/19/283), external financing needs for FY2020 are US$317 million larger (Text Table 1).

5. The government has moved quickly to respond to the appearance of COVID-19. The last country in the Americas to report a COVID-19 case (March 20), Haiti had already formulated a national response strategy—Plan de Préparation et de Réponse—for containment and treatment. The government moved to Phase 2 of the plan on March 20 launching a communication campaign to sensitize the population; declaring a state of emergency; instituting a curfew from 8pm to 5am; shutting all land and sea borders to persons (not freight); closing schools, factories, and places of worship; cancelling public gatherings of more than 10 people; and prohibiting any informal trading of medicines and food.

Fuel Prices and Revenue

Citation: IMF Staff Country Reports 2020, 123; 10.5089/9781513541549.002.A001

Sources: National Authorities and IMF staff calculations.

6. The central bank (BRH) and ministry of finance have taken steps to cushion the impact on the population. The BRH has moved to ease liquidity conditions in the financial system, including reducing the refinance and reference rates, lowering reserve requirements on domestic currency deposits, allowing 20 percent of treasury certificates held to count against reserves, easing loan repayment obligations for three months, and suspending fees in the interbank payment system. The government announced additional health care spending and transfers to support workers and households, including paying the salaries for one month of most teachers and professors, paying 50 percent of salaries of workers in the textile sector, providing cash transfers and food rations to households, and providing subsidies to the transport and sanitation sectors (Text Table 2). These measures are estimated at 1.6 percent of GDP.

Text Table 2.

Additional Expenditures Related to COVID-19

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Sources: Authorities’ data; and IMF staff estimates and projections.

7. The international community may offer additional budget support in the context of a Fund-supported program. International financial institutions (excluding the IMF) and the European Union together are expected to provide financing of about US$253 million in FY2020, mostly in the form of project grants. Of this amount, only US$17 million is in the form of budget support. Additional international support would be required to close the financing gap (Text Table 1) and would likely materialize in conjunction with implementation of a SMP. Details on bilateral support in the form of emergency financing were not yet available.

Outlook and Debt Sustainability

8. The economic outlook assumes political stability relative to recent times but fiscal and external stresses related to the global pandemic. In the absence of firm policy commitments under an SMP framework, the outlook assumes continued modest improvements in policy implementation aimed at restoring macro stability. The near term focus would be anchored by the government’s FY2020 notional budget as the organizing framework, guided by medium-term principles of debt sustainability. For FY2020, this includes a focus on closing the fiscal financing gap while making room for measures to counter the impact of COVID-19 on the population, containing inflation by limiting monetary financing of the deficit, allowing the exchange rate to adjust to market pressures, and enhancing rapidly the provision of social benefits—with the assistance of development partners. The latter aims to contain the spread of COVID-19 and deliver relief to the broader public from associated economic hardships.

9. Political instability in the first quarter of FY2020 and the COVID-19 impact in of the year will weigh on activity in 2020 and 2021. While there is no data on national accounts since September 2018 and no activity data since June 2019, staff project a further contraction in GDP by 4.0 percent in FY2020 before a rebound to 1.0 percent in FY2021. Central bank financing of the government for the whole fiscal year will remain under its current level of HTG 26.7 billion. Inflation is projected to rise to 23 percent (y/y) by September 2020, exacerbated by monetary financing of the deficit and supply constraints related to COVID-19. Without offsetting measures to increase domestic revenues or rationalize spending unrelated to the COVID-19 crisis, the fiscal deficit is projected to widen to 6.4 percent of GDP in FY2020. If sources of financing fall short, this would lead to a further accumulation of arrears of about 2.8 percent of GDP. The external current account deficit is forecast to decline to about 0.6 percent of GDP in FY2021 as oil import costs remain low and remittances recover.

10. Risks are varied and primarily on the downside. In addition to the risk of a deeper and more prolonged COVID-19 impact, significant internal risks include a failure to move forward with a comprehensive reform program and stronger governance, return to political instability and social unrest, and natural disasters. Externally, Haiti is vulnerable to a larger-than anticipated interruption in remittance flows. On the upside, continuing low fuel prices would relieve pressure from the government budget.

11. Haiti is assessed as having sustainable debt. The current DSA update (Annex I) and most recent DSA write-up (SM/19/283) assess public debt to be sustainable in the medium term as the debt-to-GDP ratio is projected to remain roughly flat over the next 5–10 years and there exists a feasible set of policy measures that would address the rising debt profile in the long-term. Haiti’s risk of debt distress is still assessed to be “high”, although the model-based risk rating for both external and overall public debt is “moderate.” An application of judgement was applied to raise the risk rating to “high” because of Haiti’s institutional fragilities, vulnerability to natural disasters, and high risk of debt distress in the long-term in the absence of adjustment in the outer years.

Policy Undertakings

12. Discussions focused on immediate policies to contain COVID-19, protect and care for the population, and limit the economic deterioration. Staff encouraged the authorities to build on the draft “Politique Nationale de Protection et de Promotion Sociale” (PNPPS) to support their policy response to COVID-19. Looking forward, the authorities have committed to implement a reform program with the support of an SMP framework that will include policies to strengthen the fiscal and monetary policy frameworks, improve tax administration and public finance management, tackle governance weaknesses and corruption, and focus in particular on a few concrete measures to build a coherent social safety net and reform the energy sector (see ¶ 16).

13. The authorities have worked with staff to prepare a credible budget framework for FY2020. As there has been no budget law passed since 2017/18, this notional budget is needed to guide policies and manage cash needs in the absence of a sitting parliament to approve a budget law. New spending on health, social programs, and security is expected to reach 1.6 percent of GDP and Treasury-funded domestic public investment could rise by 0.5 percent of GDP, albeit from a low base in FY2019.2 Initial preparations for elections to be held in FY2021 will also add a further 0.5 percent of GDP in expenditures. The authorities do not plan to incur new arrears in 2020 and will prepare for discussions for an SMP by providing a stock-taking of existing budget arrears and proposing a plan for their restructuring. Of the gross financing needs of 6.4 percent of GDP, 21 percent would be met by external budget support from the IMF (1.3 percent of GDP, ¶19) while financing by the central bank would be limited to the level of HTG 26.7 billion reached in mid-March, or 3.1 percent of GDP. Text Table 3 presents the financing gap compared to staff’s last projections (SM/19/283).3 If budget support is not sufficient to cover the financing gap, efforts could be made to reduce capital expenditures on non-COVID-19 related investment and implement additional revenue measures (see ¶18, SM/19/283).

Text Table 3.

Non-financial Public Sector 1/

(In percent of GDP on a fiscal year basis)

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Sources: Authorities’ data; and IMF staff estimates and projections.

The Article IV 2019 Consultation (SM/19/283) was concluded on January 24, 2020.

Including grants.

14. In the short term, staff advised the BRH to contain monetary financing of the deficit and limit foreign exchange interventions to smoothing volatility. While the temporary easing of liquidity conditions is appropriate in the present circumstances, as noted above, staff expect the BRH to limit monetary financing of the deficit for the whole fiscal year to the level reached in March of HTG 27 billion (excluding the planned on-lending by the central bank to the government of RCF resources). This is more than double the HTG 10 billion agreed in the Pacte de Gouvernance Economique et Financière. The banking supervisor should heighten monitoring of financial soundness, enhance the frequency of dialogue with regulated entities, and prioritize discussions on business continuity planning and operational resilience. Banks should be encouraged to use existing buffers and work with affected borrowers to consider prudent loan restructuring. However, loan classification, provisioning rules, and other accounting requirements should not be relaxed.

15. It will be important to consider the implications of short-term emergency measures on the efficacy and integrity of economic institutions. For example, in recent months the authorities took decisions that could undermine laws and the efficiency of resource allocation down the road, including allowing the government to circumvent existing public procurement standards and reviving the state fuel import monopoly that had been disbanded. Under the current special circumstances, and given limited capacity and the need to promote sustainable reforms, staff stressed the importance of enforcing standard budget execution procedures and reporting regarding the spending chain, starting with COVID-19 expenditures. This would support the general improvement of standard budget procedures and also help the administration keep track, record, and publish monthly all expenditures incurred on an emergency basis so as to limit the risk of misuse of public funds. The authorities agreed to prepare monthly budget execution reports on all COVID-19 expenditures and also to undertake a thorough ex-post financial and operational audit of COVID-19-related operations. This would strengthen sustainable reforms of budget processes, provide assurances on the use of external financing, and help the authorities improve the operational efficiency of emergency responses in the future.

16. Efforts to strengthen the policy framework are expected to continue with the support of an SMP. The government’s program would focus on: (i) restoring macroeconomic stability and the seeds of growth and employment; (ii) building a better social safety net; and (iii) improving governance and combatting corruption. To reduce fiscal dominance and the negative feedback loop of monetary financing of the deficit on inflation and exchange rate depreciation, policies would aim to limit public sector deficits, including the significant fiscal losses related to the fuel sector and the public electricity company (EDH). On social policies, the SMP should support implementation of the new national plan PNPPS (not yet approved), continue to expand coverage of the social registry (SIMAST), establish an effective governance structure for social spending, and advance Fintech reforms to help distribute cash transfers and deepen financial inclusion. Finally, a key pillar of the program would include measures to strengthen implementation of the 2009 Anti-Corruption Strategy, advance governance reforms across the public service and the central bank, and support efforts to increase the transparency of public spending. With government ownership and buy-in across a broader set of stakeholders, an SMP-supported program is expected to unlock further donor support to help close the residual financing gap.

Modalities of Support Under the RCF

17. Staff propose to provide support of 50 percent of quota (SDR 81.9 million) under the RCF under the exogenous shock window. Haiti meets the eligibility requirements for support under the RCF. It faces an urgent balance of payments need, which, if not addressed would result in immediate and severe economic and humanitarian disruption. It is not feasible to implement an upper credit tranche (UCT)-quality Fund-supported program due to the recent history of political instability and social disruption which has resulted in an erosion in administrative capacity and weakening in policy frameworks. In addition, there is a high degree of uncertainty regarding the duration and scale of the COVID-19 impact, practical difficulties related to the no-travel environment, including in Haiti, and the need for more comprehensive policy discussions, including with non-government stakeholders, to advance to a UCT level program under an ECF.

18. Staff considers access of 50 percent of quota under the RCF to be appropriate. Haiti does not currently have an IMF arrangement and has outstanding debt to the IMF of SDR 54.6 million, or 33 percent of quota (March 2020). Access of 50 percent of quota is within the applicable access limits under the PRGT. As noted above, Haiti is assessed as having sustainable debt and capacity to repay the Fund (Table 5) at that level of access. A disbursement of 50 percent of quota would be appropriate given the government’s stated commitment to pursue policies to help stabilize the economy and the balance of payments need at this time. The amount would represent about 34 percent and 47 percent of the additional external and fiscal financing gaps, respectively. The remaining external financing needs not covered by the RCF would need to be filled by other donors and some international reserve drawdown (Table 1, Text table 1). Should the balance of payments need widen significantly in the coming months, the authorities might consider requesting another disbursement under the RCF, provided they had built a solid policy track record under the SMP and met the other eligibility requirements for support under the RCF.

Table 1.

Haiti: Selected Economic and Financial Indicators, FY2018–25 1

(Fiscal year ending September 30)

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Sources: Ministry of Economy and Finance; Bank of the Republic of Haiti; World Bank; Fund staff estimates and projections.

Includes transfers to the state-owned electricity company (EDH).

In percent of exports of goods and nonfactor services. Includes debt relief.

Table 2a.

Haiti: Non-Financial Public Sector Operations, FY2018–25

(Fiscal year ending September 30; In millions of gourdes)

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Sources: Ministry of Finance and Economy; and Fund staff estimates and projections.

Includes previously-programmed multilateral budget support that could be delayed.

Commitment basis, except for domestically financed spending, which is reported on the basis of project account replenishments.

Comprises payments on behalf of EDH for electricity generation, tax payments remitted to EDH and transfers to fuel distributors to maintain pump Reform of the energy sector is assumed in the outer years.

Amounts already include the RCF financing for FY2020 and the full two-year debt-relief under the CCRT.

Includes the net change in the stock of government securities held by non-banks, of checks that are not yet cashed, of supplier credits and of domestic arrears.

Table 2b.

Haiti: Non-Financial Public Sector Operations, FY2018–25

(Fiscal year ending September 30; percent of GDP)

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Sources: Ministry of Finance and Economy; and Fund staff estimates and projections.

Includes previously-programmed multilateral budget support that could be delayed.

Commitment basis, except for domestically financed spending, which is reported on the basis of project account replenishments.

Comprises payments on behalf of EDH for electricity generation, tax payments remitted to EDH and transfers to fuel distributors to maintain pump prices. Reform of the energy sector is assumed in the outer years.

Amounts already include the RCF financing for FY2020 and the full two-year debt-relief under the CCRT.

Includes the net change in the stock of government securities held by non-banks, of checks that are not yet cashed, of supplier credits and of domestic arrears.

Table 3.

Haiti: Summary Accounts of the Banking System, FY2018–25

(Fiscal year ending September 30; In millions of gourdes, unless otherwise indicated)

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Sources: Bank of the Republic of Haiti; and Fund staff estimates and projections.

Program definition. Excludes commercial bank forex deposits, letters of credit, guarantees, earmarked project accounts and US$ denominated bank reserves. The SDR allocation is not netted out of NIR.

Table 4a.

Haiti: Balance of Payments, FY2018–25

(In millions of US$ on a fiscal year basis; unless otherwise indicated)

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Sources: Bank of the Republic of Haiti; and Fund staff estimates and projections.

Includes previously-programmed multilateral budget support that could be delayed.

Change in net foreign assets of commercial banks.

Includes debt to Venezuela for oil shipments already paid by the GOH in local currency but not yet cleared in U.S. dollars.

Includes gold.

Includes arrears on oil imports.