(2025-01) Haiti Staff-Monitored Program - Press Release and Staff Report

HAITI IMF Country Report No. 25/19 January 2025 STAFF-MONITORED PROGRAM—PRESS RELEASE AND STAFF REPORT In the context of the Staff-Monitored Program, the following documents have been released and are included in the package: • A Press Release • The Staff Report prepared by a staff team of the IMF for the Executive Board’s information following discussions that ended on December 16, 2024 with the officials of Haiti on economic developments and policies underpinning the Staff-Monitored Program. Based on information available at the time of these discussions, the staff report was completed on January 6, 2025. The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents. Copies of this report are available to the public from International Monetary Fund • Publication Services PO Box 92780 • Washington, D.C. 20090 Telephone: (202) 623-7430 • Fax: (202) 623-7201 E-mail: publications@imf.org Web: http://www.imf.org Price: $18.00 per printed copy International Monetary Fund Washington, D.C. © 2025 International Monetary Fund PR24/498 IMF Management Approves a New Staff Monitored-Program with Haiti FOR IMMEDIATE RELEASE Staff Monitored Programs (SMPs) are informal arrangements between national authorities and IMF staff to monitor the authorities’ economic program. As such, they do not entail endorsement by the IMF Executive Board. SMP Staff reports are issued to the Board for information. • Management of the International Monetary Fund (IMF) approved on December 20, 2024, a Staff-Monitored Program (SMP) with Haiti covering the period through December 2025. • This new 12-month SMP is expected to contribute to strengthen macroeconomic stability to support well-being of people and to enhance economic resilience and governance. It will anchor the government’s macroeconomic priorities for the year ahead. • Fund management also welcomes the authorities’ commitment to publish the forthcoming Governance Diagnostic Report. Washington, DC–December 21, 2024: Management of the International Monetary Fund (IMF) approved on December 20, 2024, a Staff-Monitored Program (SMP) with Haiti which runs through December 19, 2025. The new 12-month SMP was designed by the Haitian authorities and IMF staff, keeping in mind Haiti’s fragility and capacity constraints while supporting the authorities’ economic policy objectives. SMPs are arrangements between country authorities and the IMF to monitor the implementation of the authorities’ economic program and to establish a track record of policy implementation that could pave the way for financial assistance from the Fund under the Upper Credit Tranche (UCT). Haiti faces a multidimensional crisis, a political transition, with a challenging outlook. The country is beset by both global and country-specific shocks, which have heightened its fragility. In addition to causing terrible human suffering, escalating gang violence has blocked the flow of goods and services. These events have further fueled inflation and left half the population suffering acute food insecurity. The supply-side shock caused by the security crisis will continue to suppress growth and feed inflation unless the security outlook improves. The top priority is to continue to restore security. This is a prerequisite for macroeconomic stability and for allowing growth to materialize. Despite domestic and global difficulties, the authorities are firmly committed to negotiating a new SMP and have managed to contain somewhat the impact of the various shocks, thereby averting even worse macroeconomic outcomes. Net international reserves were valued at nearly US$1billion at the end of September 2024. Despite the political instability, Haiti’s two key economic institutions (Ministry of Economy and Finance and the Central Bank of Haiti) have remained continuously engaged 2 with the Fund. They have consistently attempted to adopt feasible measures to limit macroeconomic imbalances and ensure a reasonable level of economic activity in the country. They have also continued to provide data and information on previously agreed benchmarks, even when the previous SMP had lapsed. The SMP is an important anchor for signaling the authorities’ commitment to continue making progress toward macroeconomic stabilization and strengthen governance, and locking in macroeconomic gains accumulated over recent years, despite the many headwinds. Despite the delicate political context, and thanks to a highly inclusive consultative process, the authorities have been able to demonstrate full ownership and support for the SMP through the high-level Program Monitoring Committee (Comite du Suvie). The authorities have a narrow but important window of opportunity to implement reforms that can help Haiti build resilience and eventually restore its medium- and long-term potential. An urgent government priority is re-starting the mobilization of revenue, to support the country’s massive development needs and boost well-targeted spending. The measures under the new SMP should help achieve these goals. Continued strengthening of the social safety net is essential to cushion the impact of the shocks on the population and alleviate widespread poverty. The spending commitments previously indicated by the authorities using Food Shock Window resources should be audited in line with SMP commitments. The fiscal and monetary authorities’ commitment to keeping monetary financing of the deficit at zero is commendable and should continue. The FY2023 financial audit of the BRH is urgent and its eventual publication by June 2025 would be important for demonstrating transparency. The authorities’ careful pace of monetary tightening has been appropriate and consistent with the goal of fighting inflation. Advancing governance reforms is paramount to help Haiti exit from fragility, ensure inclusive growth and build trust with the private sector and development partners. In this vein, the authorities’ commitment to publish the Governance Diagnostic Report is commendable. It should provide a road map for reforms to enhance governance and will require capacity development support not only from the Fund but also from development partners. A government-led strategy to continue to strengthen the economy’s resilience to multiple shocks requires the financial support of the international community. This assistance is indispensable to allow quality spending, over the short, medium, and long term. Without it, Haiti will continue to suffer large import compression. External assistance should take the form of grants. The authorities should avoid contracting non-concessional loans, to ensure consistency with the SMP commitments. Non-concessional loans would not only be against SMP commitment. It would also undermine debt sustainability. In line with the Fund Strategy for Fragile and Conflict-Affected States, IMF staff will also continue to coordinate closely with Haiti’s main development partners, particularly on governance and capacity development. HAITI STAFF-MONITORED PROGRAM January 6, 2025 EXECUTIVE SUMMARY Recent developments. Haiti is facing exceptionally challenging circumstances. The deteriorating security environment, which reached crisis proportions in the first few months of 2024, has continued to worsen, disrupting supply chains (particularly energy and basic services) and feeding inflationary pressures. In November 2024, Haiti's transitional Presidential Council designated Prime Minister Alix Didier Fils-Aimé to form a new government with a time-bound mandate through next elections. The government has a narrow but important window of opportunity to implement reforms that could help restore the country’s potential over the medium term. 2023 Staff Monitored-Program (SMP). Building on progress achieved under the 2022 SMP, a new SMP was negotiated in June 2023, covering the period June 30, 2023, through March 31, 2024, and extended by six months through September 2024. Despite meaningful initial progress, the IT incident at the Central Bank during summer 2023 had a far-worse impact than originally foreseen in undermining the timeliness of monetary data. The unfolding security crisis in the spring of 2024 led to further slippages. With the new government in place since mid-November 2024, the authorities and staff agreed to let the 2023 SMP lapse, rather than extend it further, and to start a new SMP with the FY2025 budget, anchoring new quantitative targets. Request for a new SMP. The authorities have requested a new 12-month SMP beginning in December 2024 through December 2025 (with two reviews and two test dates: December 2024 and June 2025). This newly proposed SMP is expected to have the overarching goal of supporting macroeconomic stability and enhancing governance, including by publishing the forthcoming Governance Diagnostic Report. In doing so, the SMP will support the government’s efforts to continue improving the timeliness and quality of data, with the ongoing support of the Fund’s capacity development, and to help strengthen domestic revenue mobilization to boost inclusive growth. Risks to the implementation of the SMP rest on the prevailing security and political environment. Policy Recommendations. • Implement the budget for FY2025 and keep the monetary financing of the budget to zero, consistent with the objective of price stability. Should a supplementary budget be passed, it would require consistency with the objectives and targets of the SMP. HAITI • Advance governance and anti-corruption reforms, including by publishing the governance diagnostic report and starting the implementation of the reforms. • Adopt measures to strengthen revenue collection, expenditure management and controls and increase budget allocations for social spending and for protecting the most vulnerable—and assess their impact. • Strengthen public finance reporting, transparency, and accountability in the use of public funds. • Continue to limit foreign exchange interventions to smoothing excess volatility and well signaled foreign reserve build-up. • Complete and publish the audit of the Central Bank for FY2023 by June 2025. • Provide more timely data to the Fund and enhance data transparency through timely publication of core economic data. 2 INTERNATIONAL MONETARY FUND HAITI Approved By Rodrigo Valdés and Peter Dohlman CONTENTS Policy discussions started in person in Washington DC during July 2-3, 2024, continued remotely during July 24-August 5, 2024, with several additional meetings throughout August and September remotely, during October 21-26, 2024, in Washington DC and concluded remotely during November 25- December 16. The team comprised Ms. Tumbarello (Head), Messrs. Huertas, Kaho, Passadore (all WHD), Messrs. Chociay (SPR), Barseghyan (STA), Sung, (FAD) and Messrs. Duvalsaint and Wata (Port-au-Prince office). Former team members included Messrs. Noah Ndela and Matz. Ms. Ojo provided excellent research assistance. Ms. Coquillat coordinated all work related to mission scheduling and document preparations. The mission met with Minister of Economy and Finance Alfred Fils Métellus, Central Bank Governor Ronald Gabriel, Minister of Planning and External Cooperation Ketleen Florestal, other senior government officials, members of the donor community, NGOs, and representatives of the private sector. Ms. Ludmilla Buteau Allien (OED advisor) participated to all policy and technical discussions. Mr. André Roncaglia (Executive Director), Messrs. Bruno Saraiva and Felipe Antunes (both Alternate Executive Directors) joined the policy meetings. CONTEXT AND RECENT DEVELOPMENTS ______________________________________________________5 OUTLOOK AND RISKS ___________________________________________________________________________ 7 POLICY DISCUSSION ON A NEW SMP __________________________________________________________ 9 A. Fiscal Policy ____________________________________________________________________________________ 9 B. Social Assistance ______________________________________________________________________________13 C. Enhancing Governance and Transparency_____________________________________________________14 D. Monetary and Exchange Rate Policy __________________________________________________________16 E. Financial Sector Resilience_____________________________________________________________________17 PROGRAM MONITORING _____________________________________________________________________ 19 STAFF APPRAISAL _____________________________________________________________________________ 20 FIGURES 1. Monitoring Economic Activity Through Satellite Data __________________________________________ 8 2. Revenue Performance, FY2019–24_____________________________________________________________10 3. Real Sector Developments, 2017–24 __________________________________________________________31 INTERNATIONAL MONETARY FUND 3 HAITI 4. Fiscal Sector Developments, 2016–24 _________________________________________________________ 32 5. Monetary and Financial Sectors Developments, 2017–24 _____________________________________ 33 6. External Sector Developments, 2017–24 _______________________________________________________ 34 TABLES 1. Food Shock Window: Spending Priorities Indicated by the Authorities ________________________ 12 2. Selected Economic and Financial Indicators, 2021–29 _________________________________________ 23 3a. Non-Financial Public Sector Operations, 2021–29 (In millions of gourdes) ___________________ 24 3b. Non-Financial Public Sector Operations, 2021–29 (In percent of GDP) _______________________ 25 4a. Balance of Payments, 2021–29 (In millions of US$) ___________________________________________ 26 4b. Balance of Payments, 2021–29 (In percent of GDP) __________________________________________ 27 5. Summary Accounts of the Banking System, 2021–29 __________________________________________ 28 6. External Financing Requirements and Sources, 2021–29 ______________________________________ 29 7. Financial Soundness Indicators, September 2021–June 2024 __________________________________ 30 ANNEXES I. Risk Assessment Matrix _________________________________________________________________________ 35 APPENDIX I. Letter of Intent _________________________________________________________________________________ 37 Attachment I. Memorandum of Economic and Financial Policies ___________________________ 39 Attachment II. Technical Memorandum of Understanding__________________________________ 47 4 INTERNATIONAL MONETARY FUND HAITI CONTEXT AND RECENT DEVELOPMENTS 1. Haiti is a fragile and conflict-affected state facing a political transition and multiple challenges. The severe deterioration of security of recent years has magnified the impact of additional shocks (the pandemic, spillovers of war in Ukraine, an earthquake, and political instability). The political and security situation deteriorated further in early 2024 and again at the start of November 2024, reaching crisis proportions. Gang violence has led to further displacement of thousands of people within and outside the country and a worsening brain drain. Gangs have attacked government buildings, police installations, and such key infrastructure as airports, roads, and ports. Schools in certain neighborhoods of Port-au-Prince have been forced to close at times and most residents of the capital are cut off from critical supplies of food and healthcare, prompting thousands to leave in recent weeks. In September 2024, the UN extended the Kenya-led Multinational Security Support Mission (MSS) through October 2025. The MSS has struggled to restore security as the authorities maintain that the Kenyan force is still too small relative to the originally expected numbers. The authorities have thus requested the MSS to be replaced by a UN peacekeeping mission that would have increased funding and personnel. 2. A Transitional Presidential Council was established in April 2024, with the support of CARICOM, serving as the country’s presidency until February 2026. A government led by Prime Minister Garry Conille in place between June 2024 and early November 2024 was tasked with restoring security, relaunching the economy, and paving the way for orderly general elections by February 2026 (the first since 2016). The government passed the FY2025 budget on time in September. Following the designation in early November by the Transitional Presidential Council of a new Prime Minister, Alix Didier Fils-Aimé, a new government was formed, with the goal of restoring security, tackling the humanitarian crisis, and still leading the country until February 2026. 3. Economic conditions remain difficult. Haiti has experienced six consecutive years of economic contraction, including growth of negative 4 percent in FY2024, reflecting disruptions in 60 production, exports, and flow of goods and services 50 in local markets. The supply-side shock caused by 40 the security crisis has heightened inflation pressures 30 and worsened the hunger crisis. Inflation 20 accelerated in February 2024, and stood at 25.3 10 Inflation (Percent) Overall CPI (year on year) Food CPI (year on year) 0 percent in October 2024. Latest data suggest that May-24 Jan-21 Jul-23 Nov-21 Feb-23 Aug-20 Dec-23 Apr-22 Mar-20 Oct-19 Oct-24 Jun-21 Sep-22 trade also decreased sharply in recent months (with exports dropping at an annual rate of 20 percent and imports 10 percent in FY2024). Remittances Sources: Haitian Institute of Statistics and Informatics (IHSI), and Bank of the Republic of Haiti. INTERNATIONAL MONETARY FUND 5 HAITI held up relative to recent historical averages but remained flat in October, relative to a high base. After the current account deficit widened in FY2023 to 3½ percent of GDP—owing mainly to a collapse in exports, especially textiles—preliminary BOP data point to a narrowing deficit in FY2024, mainly the result of import compression and higher remittances. Haiti: Trade and Remittances Data Amount (in millions of US dollars) Percentage change (average)FY23 FY24 FY24 vs average FY19-23 Period Fiscal year to date FY19-23 FY24 vs FY23 Exports October-September 1,085 956 767 -29 -20 Imports October-September 4,358 4,715 4,248 -3 -10 Net Remittances October-September 2,894 3,030 3,353 16 11 Latest available month Exports September 88 73 63 -29 -14 Imports September 327 406 330 1 -19 Net Remittances September 232 286 288 24 1 Sources: BRH and Fund staff estimates. 4. Reserves buffers have been rebuilt to a 4 comfortable level. Gross international reserves rose to US$2.5 billion (5.7 months of imports) in 3 September 2024, owing mainly to strong 2 remittances, compared with US$2.3 billion at end 1 September 2023. Net international reserves (NIR) 0 reached almost US$1 billion in September 2024 or US$920 million after deducting the Food Shock -1 Window (FSW). The nominal exchange rate vis-à-vis Monetary Financing of the Budget (In percent of GDP) 2019 2020 2021 2022 2023 2024 the US dollar stabilized during January-November Sources: Ministry of Finance (Tableau des Operations Financières de l’Etat—TOFE) and IMF staff estimates. 2024. Monetary financing of the fiscal deficit was reduced to zero in FY2024. 5. Public debt is low, but debt risks are high given Haiti’s vast development needs and narrow revenue and export base (DSA, Article IV paragraph 20). The DSA still assesses Haiti’s risk of debt distress as high given its large exposure to natural disasters, its large development and Bilateral Exchange Rate Reserves Accumulation and Bilateral Exchange Rate (Gourde per US dollar) Depreciation of the gourde 155 150 Depreciation of the gourde 160 140 NIR (millions of US dollar, right scale) Gourde per US dollar 1,080 900 720 145 140 135 130 125 120 BRH reference exchange rate Estimated two-percent band (June-December 2023) Estimated two-percent band (January-November 2024) 120 100 80 540 360 180 115 11/29/2022 1/29/2023 3/29/2023 5/29/2023 7/29/2023 9/29/2023 11/29/2023 1/29/2024 3/29/2024 5/29/2024 7/29/2024 9/29/2024 11/29/2024 60 Sep-21 Dec-21 Mar-22 Jun-22 Sep-22 Dec-22 Mar-23 Jun-23 Sep-23 Dec-23 Mar-24 Jun-24 Sep-24 0 Sources: Bank of the Republic of Haiti and IMF staff estimates. Sources: Bank of the Republic of Haiti and IMF staff estimates. 6 INTERNATIONAL MONETARY FUND HAITI infrastructure needs, and its still-low potential growth. Despite these headwinds, debt is assessed as sustainable, but this assessment assumes the continued inflow of considerable grants. The trajectory and drivers of external and overall debt are unchanged relative to the 2024 Article IV consultation. External debt is estimated to have dropped sharply from 12.9 percent of GDP in FY2023 to 1.5 percent in FY2024, due to Venezuela debt relief. OUTLOOK AND RISKS 6. The macroeconomic outlook for Haiti remains clouded, with risks Haiti: Net International Reserves-2024 SMP Definition (In millions of US dollars, unless otherwise noted) Sep 2023 Dec 2023 Mar 2024 Jun 2024 Sep 2024 A. Gross International Reserves 2,353.0 2,586.7 2,427.9 2,449.8 2,525.2 Monetary gold 108.9 121.0 128.9 135.7 153.1 Holdings of foreign currency 23.8 42.2 27.4 44.5 37.5 Demand deposits abroad 377.7 542.4 475.2 470.9 444.2 Investments abroad 1,705.6 1,749.6 1,668.7 1,679.3 1,769.3 SDR holdings 1/ 109.9 103.9 100.4 92.4 93.2 Reserve Position in the Fund 1/ 27.0 27.6 27.2 27.0 27.9 B. Reserve Related Liabilities 251.1 249.7 488.1 453.1 306.6 Liabilities to the IMF 1/ 2/ 248.4 248.0 244.7 237.7 245.1 Short-term loans from private non-residents 0.0 0.0 242.9 213.4 60.2 Liabilities to IFIs 2.3 1.7 0.5 2.0 1.3 Certified checks in FX 0.3 0.3 0.3 0.3 0.3 C. FX Denominated Liabilities to Residents 1,814.2 1,744.1 1,296.6 1,327.0 1,263.4 Financial sector FX deposits in the central bank 1,266.0 1,196.0 1,263.7 1,294.5 1,231.0 Government FX deposit in transitory account (Venezuela debt) 515.2 515.2 0.0 0.0 0.0 Swaps with financial institutions 32.9 32.9 32.9 32.4 32.4 D. Other FX Liabilities 33.7 33.4 17.8 18.1 35.2 Off-balance sheet FX liabilities 15.0 15.0 15.0 15.0 15.0 Project accounts 17.5 18.3 2.7 3.0 20.2 Special accounts 1.2 0.1 0.1 0.1 0.1 E. Net International Reserves, 2024 SMP definition (A-B-C-D) 254.1 559.5 625.4 651.6 919.9 Sources: BRH, IFS, and IMF staff calculations. 1/ Based on IMF data. For the purposes of the 2024 SMP, between December 2024 and September 2025, the amounts in SDR will be converted to U.S. dollars using the exchange rate as of September 30, 2024 (1 US$=0.737261 SDR). 2/ For program purposes, all outstanding Haiti liabilities to the IMF are considered, including January 2023 Rapid Credit Facility (Food Shock Window), disbursed at a government account in the BRH, for an amount of SDR 81.9 million. tilted to the downside. Growth is expected to reach only 0.5 percent in FY2025 (relative to 1 percent in the recent 2024 Article IV consultation), partly reflected in the weaker-than-anticipated revenues (whose monthly frequency are a leading indicator of less frequent data on economic activity) partly due to disruption in economic production caused by escalating gang violence in the first quarter of the current fiscal year (October-December 2024) which led to the closure of the capital international airport. This, together with reduced trade flows, confirmed by satellite data (Figure 1), signals a far more moderate recovery. Medium-term growth is estimated at 1½ percent if the security situation improves, but further social and political turmoil could lead to continued disruption of economic activity. The fiscal deficit of the non-financial public sector (NFPS) is projected at about zero. Risks include intensified political instability, sustained gang-related economic disruption, a further spread of cholera, and a worsening food crisis. Externally, Haiti is vulnerable to volatile remittance flows, reduced external financing, and renewed surges in global food and energy prices. If these risks were to materialize, substantial monetary financing of the budget could resume, further undermining macroeconomic stability. Over the medium term, there is a risk of potential slowdown in remittances related to the uncertainty related to the expiration of Temporary Protected Status by the US as well as the uncertainty related to the future status of HOPE/HELP trade preferences. Debt is projected to increase gradually from 2026 onwards, due to limited sources of domestic funding to finance the government's investment and social programs. The non-interest current account deficit remains the main driver of external debt dynamics, largely fueled by the deficit in goods and services, reflecting increased imports of foodstuffs as well as capital and intermediate goods as part of the investment drive. Total public debt path is projected to be driven mainly by the accumulation of foreign debt. 7. Despite these challenges, the government has a short but meaningful window of opportunity to sustain reforms that could help restore the country’s potential over the medium and long term. Normalization of the security situation would greatly improve the INTERNATIONAL MONETARY FUND 7 HAITI medium-term outlook. Official transfers could rise if countries in the region support the Kenya-led MSS with additional financing and if Haiti receives additional international support for reconstruction. If these were combined with the implementation of a strong anti-corruption strategy, it could bring back the FDI and talent that have left the country. Figure 1. Haiti: Monitoring Economic Activity Through Satellite Data Since the pandemic and with the intensification of criminal activity, trade flows have been disrupted, with import and export volumes, and the number of cargo and tanker ships on a clear downward trend. Average Daily Ship Arrivals 2.0 1.0 Daily Import and Export Volumes 10 1.2 0.9 1.8 Import volume Cargo ships 0.8 1.6 1.0 8 Export volume (right scale) Tanker ships (right scale) 0.7 1.4 0.8 0.6 6 1.2 0.5 0.6 1.0 0.4 4 0.4 0.8 0.3 2 0.6 0.2 0.2 0.1 0.4 0 0.0 12/1/2020 12/1/2021 12/1/2022 12/1/2023 12/1/2024 4/1/2020 8/1/2020 4/1/2021 8/1/2021 4/1/2022 8/1/2022 4/1/2023 8/1/2023 4/1/2024 8/1/2024 12/1/2020 12/1/2021 12/1/2022 12/1/2023 12/1/2024 4/1/2020 8/1/2020 4/1/2021 8/1/2021 4/1/2022 8/1/2022 4/1/2023 8/1/2023 4/1/2024 8/1/2024 Satellite data suggest that trade activity began to slow in December 2023 and fell dramatically beginning in March 2024, as inferred by the collapse in the number of oil tankers and cargo ships… …and it has not normalized yet. Sources: IMF Portwatch (daily data), IMF Swift Monitor, and FlightsRadar24. Left upper chart: the blue line is the arrivals at daily frequency of cargo ships, quarterly averaged. The red line is the arrivals at daily frequency of tanker ships, quarterly averaged. Right upper chart: daily import volumes quarterly averaged and daily exports volumes quarterly averaged. 8 INTERNATIONAL MONETARY FUND HAITI POLICY DISCUSSION ON A NEW SMP 8. Building on progress achieved under the 2022 SMP, the 2023 SMP was negotiated in June 2023. Despite meaningful initial progress, including the timely approval of the budget, the amendments to the financial intelligence unit (FIU) law, and improved provision and timely dissemination of finance ministry data, program slippages occurred on other fronts. As a result of the IT incident in mid-summer 2023, the timeliness of monetary data suffered and prevented the conclusion of the First Review in December 2023. The worsened insecurity led to further slippages, including a collapse in tax collection and delays in achieving some structural benchmarks and in providing data. The latter reflected reduced capacity in compiling statistics attributable to the lockdowns. With the new government in place since mid-November 2024, the authorities and staff agreed to let the 2023 SMP lapse, rather than extend it further, and to start a new SMP. 9. Given the new political leadership, this new proposed SMP—with a 12-month duration—offers the government an opportunity to anchor its reform agenda. This agenda is aimed at promoting growth and reducing poverty, enhancing the transparency and accountability of public spending, and improving governance, including through fighting corruption and timely provision and publication of economic data. Continued capacity development assistance will support these efforts and help strengthen domestic revenue mobilization with the goal of boosting inclusive growth. As discussions of this new SMP coincided with the Article IV consultation, staff advice on the program’s policy content has been guided by the still-relevant assessments in the Article IV report. The SMP seeks to establish a track record of policy implementation that paves the way for financial assistance from the Fund under the Upper Credit Tranche (UCT). 10. Improving governance and reducing corruption are paramount for rebuilding the trust of investors and development partners, given the low official development assistance (ODA) and foreign direct investment (FDI) flows of recent years. The authorities should publish the IMF governance diagnostic report, which specifies an action plan of prioritized reforms. The action plan could also guide the government’s dialogue with development partners. On monetary data, recent IMF recommendations on the reserve template should be implemented swiftly to enhance transparency. The audit of the central bank for FY2023 (ending September) should be finalized no later than June 30, 2025. Strengthening the governance and accountability arrangements in reserves management would also be key to enhance the transparency of central bank operations. This newly proposed SMP is expected to catalyze development partner support together with the forthcoming Rapid Crisis Impact Assessment (RCIA) prepared in partnership with the government of Haiti by the World Bank, the InterAmerican Development Bank, the European Union, and the United Nations. A. Fiscal Policy An urgent government priority is to re-start revenue mobilization to support large development needs and increase well-targeted spending. Although social spending has picked up in recent months, tax revenue is struggling to recover. Increasing the transparency of public spending and enhancing the INTERNATIONAL MONETARY FUND 9 HAITI technical cooperation between tax and custom administration offices (DGI and AGD) is critical for strengthening revenue mobilization. Haiti: Latest Fiscal Developments Jan Feb March April May June July Aug Sept Oct FY2023 FY2024 (percentage change, year-on-year) In percent of GDP In millions of gourdes In percent of GDP In millions of gourdes Revenue 0.8 -14.0 -72.8 3.9 -24.7 -6.9 14.0 -1.9 -12.6 -6.5 6.2 172,346 4.8 167,118 Domestic taxes -4.6 -17.5 -75.9 0.9 -22.7 -2.5 21.1 1.0 -12.1 -2.1 4.0 111,881 3.1 106,579 Customs duties 11.9 -6.1 -67.4 7.5 -29.1 -14.2 4.4 -3.9 -13.0 -15.1 2.1 60,103 1.7 60,246 Expenditure 19.7 -3.3 -52.4 20.7 -18.6 -5.2 6.1 -14.0 -7.9 13.8 5.1 141,847 4.1 140,724 Current expenditure 18.1 -2.5 -31.7 16.1 -18.0 -16.0 8.0 -18.9 6.8 13.8 4.7 130,274 3.8 132,799 Capital expenditure 222.6 -23.0 -97.3 509.2 -86.6 670.6 -63.3 330.5 -50.2 0.0 0.6 16,782 0.2 7,925 Memorandum items Share of custom duties as a percent of total revenues 36.6 32.9 43.7 33.9 34.4 35.3 35.3 37.7 38.0 30.8 Share of current expenditure as a percent of total expenditure 97.8 97.0 98.2 95.3 99.9 87.2 99.1 92.9 86.0 100.0 Sources: Ministry of Economy and Finance (MEF) and Fund staff estimates. 11. Revenue. Fiscal revenues collapsed by 73 percent year-on-year (y/y) in March 2024, reflecting the economic paralysis caused by the security crisis; they have yet to recover. As of October, revenues were still 6.5 percent below their 2023 level (y/y), although changes (especially customs) reflect an exceptionally high base in 2023 (Figure 2). These difficulties were further compounded by a strike at the tax collection authority (DGI) during September-November, motivated by requests for higher medical benefits and salaries and for a change in the management of DGI, owing to corruption concerns. Figure 2. Haiti: Revenue Performance, FY2019–24 Total Tax Revenue 100 2019 2021 2022 80 2023 2024 60 40 20 0 Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Customs Duties 140 2019 120 2021 2022 100 2023 80 2024 60 40 20 0 Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Total Domestic Internal Taxes 2019 100 2021 2022 80 2023 2024 60 40 20 0 Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Total Tax Revenue (Annual percentage change) 170 157 145 FY2023 FY2024 120 95 70 39 16 14 45 20 -5 4 1 -14 -2 -13 -30 -7 -55 -73 -25 -80 Oct Nov Dec Jan Feb Mar Apr May June July Aug Sep Sources: Ministry of Finance (Tableau des opérations financières de l'Etat) and IMF staff calculations. Sources: Ministry of Economy and Finance and IMF staff calculations. As for the top charts and lower left chart: cumulative values, September 2019= 100, nominal GDP discounted. 10 INTERNATIONAL MONETARY FUND HAITI 12. Spending. In FY2023, spending fell by 1.9 percent of GDP, thanks to a large drop in fuel subsidies.1 Other current expenditures were contained (relative to inflation), with nominal wages and salaries rising at an annual rate of 17 percent and goods and services by 20 percent—and declining as a percent of GDP. Lockdowns triggered by gang violence also hampered the authorities’ spending ability in FY2024. But public spending rebounded sharply in October, rising by 13.8 percent year-on-year, after several months of steady decline. The recovery reflected an active execution of expenditures under the revised FY2024 and FY2025 budgets. Social spending was equivalent to 1.3 percent of GDP in FY2023, below the previous year (1½ percent in FY2022) as a result of the deteriorating security situation’s impact on implementation. Until July 2024, spending on food security related to the government’s previous FSW spending had been limited (about 3 billion gourdes, 20 percent of total FSW disbursements). Criminal activity, lockdowns, and the ongoing political transition kept the previous government from targeting spending at the more vulnerable (e.g., children unable to attend schools regularly owing to gang activity and displacements). Latest data provided in December indicates that the authorities spent an additional 6.4 billion gourdes in FY2024 (Table 1 below) relative to 9.1 billion authorized to spent (as reported in the 2024 Article IV staff report, Table 1 page 20). Audits of the spending associated with the FSW will constitute two structural benchmarks (structural benchmarks 4 and 5 in Attachment 1, Table 2) in the newly proposed SMP. 13. Implementation of the FY2025 budget. The FY2025 budget is balanced, aligned with staff projections. It is consistent with the SMP’s goal of maintaining monetary financing at zero while effectively executing social spending for the country’s vulnerable households. The relatively faster increase in expenditure in October suggests that the overall fiscal deficit for FY2025 may be larger than expected. Shortfalls in revenue or external project grants need to be offset by limiting increases in current and capital spending in FY2025, while preserving social spending on the most vulnerable. The authorities agreed to avoid accumulating domestic arrears to finance shortfalls and to avoid resuming monetary financing of fiscal deficits. Should a supplementary budget required due to 1 The reduction in fuel subsidies for FY2023 is mainly due to the authorities' decision in September 2022 to significantly increase fuel prices (gasoline by 128 percent, diesel by 90 percent, and kerosene by 89 percent), even though, in July 2023, they moderately reduced prices (gasoline by 2 percent, diesel by 7 percent, and kerosene by 8 percent) to reflect declining international prices. INTERNATIONAL MONETARY FUND 11 HAITI evolving circumstances, it would need to be discussed with IMF staff to ensure close alignment with the SMP. Table 1. Haiti: Food Shock Window. Spending Priorities Indicated by the Authorities (In millions of gourdes) Spent Institution Purpose Measure Original allocation 1/ FY2023 FY2024 Reactivation of community restaurants 2,000 169 and mobile canteens Food security Distribution of food to vulnerable households 500 1,134 259 Fonds d'Assistance (paniers de solidarité ) Economique et Social (FAES) Cash transfer to vulnerable households 2,500 558 Cash distribution to vulnerable population Cash to workers in subcontracting industries 1,500 1,113 586 Ministry of National Cash transfer to vulnerable Education and Vocational households to encourage school Support to parents 7,500 442 4,864 Training attendance Ministry of Trade and Grants/subsidies to public transportation driversFuel cards for drivers 1,600 400 - Industry Ministry of Women's Affairs and Women's Feeding Women in Detention - - 2 Rights Total 15,600 3,089 6,438 Source: Ministry of Economy and Finance. 1/ Allocated under the FY23 budget. 14. Policy priorities to enhance revenues. The authorities should sustain their efforts to mobilize domestic revenue (structural benchmarks 7 and 8 in Attachment 1, Table 2). In particular, they should: • Establish an administrative and technical cooperation protocol between the Directorate of General Taxes (DGI) and General Administration of Customs (AGD); and • Launch and implement the digitalization of tax declarations and payments through all commercial banks for the large taxpayers registered at the DGI. 12 INTERNATIONAL MONETARY FUND HAITI 15. All of these are structural benchmarks under the newly proposed SMP and are important for raising tax revenue as they will broaden the tax base and enhance the transparency of collection through digitalization. Staff strongly urged the authorities to continue strengthening domestic revenue mobilization to avoid resuming monetary financing of the budget. While such financing has lately been lower than expected, this has reflected reduced spending, which owes to the security threats preventing full execution. But such expenditure levels are neither sustainable nor preferable given the economy’s fragility and widespread poverty. As security stabilizes and spending capacity rises, higher revenue mobilization will be essential to finance large investment needs. Staff underscored the importance of sustaining reforms to enhance digitalization, transparency, and accountability in tax revenue collection and use of public funds. 16. The SMP will help the authorities adopt the spending reforms needed for Haiti to exit fragility. With the country facing huge development challenges, investment opportunities are considerable. Tapping them will require improving the quality of public spending (in health and education), investing in resilient infrastructure (physical and digital), and investing in human capital. Unequal access to education could be addressed through targeted social spending, conditional cash transfers that encourage girls’ access to education, and child allowances (including to reduce the dropout rate of girls). To improve the quality of public spending, Haiti needs to adopt investment practices that maximize value for the money in line with the Fund’s technical assistance Public Investment Management Assessment (PIMA) 2022 recommendations. This requires that projects be evaluated before being included in the budget and that completion of ongoing projects be prioritized. It would also require strengthening the medium-term fiscal framework (preparation of baseline projections, and the determination of fiscal space for new initiatives before progressively), before progressively involving line ministries in identifying priority projects and their implementation timeframe to aim for a multiyear budget framework. Developing a multiyear budget framework should also help, politically sequence high spending demands arising from large development needs. In addition, it would require reinstating the financial controller’s prerogatives about a priori control of public investment spending. This entails adopting a budgetary control guide and a renovated expenditure execution manual, as well as improving treasury cash management, with the help of technical assistance. B. Social Assistance 17. Efforts to strengthen social safety nets have advanced and should continue. On September 9, 2023, the government—in seeking to mitigate the impact of fuel price adjustments and better target subsidies—began distributing long-awaited fuel cards to low-income workers in the transportation sector. Fuel cards are provided to individuals who own a registered public transport vehicle, which must be designated for either passenger or goods transport. To date, approximately 3,800 fuel cards have been distributed nationwide. However, insecurity has hindered the authorities’ ability to interact with drivers and to collect data, limiting the registration of additional transport vehicles. These were accompanied by cash transfers (checks) to the most vulnerable as identified in the SIMAST database, which the World Bank and WFP have helped maintain and expand. INTERNATIONAL MONETARY FUND 13 HAITI 18. Progress in reducing fuel subsidies has been essential for ensuring medium-term fiscal sustainability. Given Haiti’s limited fiscal space, reducing these subsidies have also allowed (and will continue to do so) the authorities to reallocate funds to more urgent priorities, such as social assistance programs that target the most vulnerable populations. Given the political and social implications, the authorities have employed a cautious home-grown approach, both in terms of the modalities and timing of the reform, guided by sound policy principles. They have reviewed the retail price-setting mechanism, as part of a draft amendment of the 1995 Law, to allow changes in international fuel prices and exchange rates to be partly passed on to consumers, with a smoothing mechanism that would distribute international price and exchange rate volatility between consumers and the budge and that would cap the monthly variation of retail prices. The authorities are considering a reform of this mechanism in due course. This would protect the budget from substantial international price volatility, improve public finance management, and encourage the efficient consumption of fuel products. The smoothing will generate subsidies in some periods (when oil prices rise) and savings in others (when oil prices drop) but smaller than without smoothing. Staff emphasized the importance of an effective communication policy to facilitate the implementation of the reforms. Among the authorities’ reform priorities should be the establishment of a regulatory framework for the petroleum-products sector and strengthened related regulatory institutions. Introducing a simple smoothing mechanism would reduce the volatility of fuel net retail prices and revenues. And since the proposed pricing mechanism caps monthly price changes, the population will be spared ad hoc and sudden discretionary price adjustments—which could enhance social stability. Fuel Prices and Net Revenues Contribution of Energy Subsidies to the Fiscal Balance 8,000 700 (Percent of GDP) 8 Fiscal balance excluding energy subsidies Energy subsidies 6 Fiscal balance Global oil prices, US dollar per gallon (right scale) 4 2 0 -2 -4 100 75 50 25 0 6,000 4,000 2,000 0 -2,000 -4,000 -6,000 -8,000 Net fuel revenue = fuel taxes minus fuel subsidies (millions of gourdes) Price differential= cost price minus regulated price (gourde per gallon) (right scale) 500 300 100 -100 -300 -500 -700 2016 2017 2018 2019 2020 2021 2022 2023 2024 Sources: World Economic Outlook (WEO) and IMF staff estimates. Jan-18 Sep-18 May-19 Jan-20 Sep-20 May-21 Jan-22 Sep-22 May-23 Jan-24 Sep-24 Source: MEF and IMF staff estimates. C. Enhancing Governance and Transparency 19. Advance governance reforms are paramount for helping Haiti to end its fragility. The authorities reiterated their commitment to fight corruption and strengthen governance as a centerpiece of their action plan. Once the Fund-supported governance diagnostic assessment is finalized (with the authorities’ comments), the report should be published promptly (an end February structural benchmark). Similarly, the authorities’ continued commitment will be critical to ensuring implementation of priority recommendations identified in the Governance Diagnostic Report. The recommended priority recommendations focus on the establishing accountability for the most serious organized crime, corruption, and related money-laundering offences, strengthening governance, and reducing corruption vulnerabilities in the core state functions. The 14 INTERNATIONAL MONETARY FUND HAITI implementation of the focused number of priority recommendations proposed in the Governance Diagnostic should provide a road map for reforms to enhance governance. The implementation of the plan will require CD not only from the Fund but also from development partners. Improving governance is critical for rebuilding the trust of investors and development partners, given the low levels of FDI and ODA of recent years. 20. Public financial management (PFM) reforms should continue to enhance public finance reporting, transparency, and accountability. The authorities have been providing more detailed monthly data on budget execution (including spending on wages, goods and services, and capital investment by ministry and by project) and publishing (on the website of the Direction Générale du Budget, MEF) budget execution details. They have also continued to provide the Fund more detailed quarterly financial statements for the Fund for Economic and Social Assistance (FAES). As laid out in the SMP, the authorities will publish quarterly reports, with one quarter lag, on the operations and financial status of FAES, including regular reports from its quarterly meetings of the Board of Directors (end-December continuous structural benchmark). They will also publish all new public procurement contracts, including beneficial ownership information on contracts awarded to successful bidders, within 45 days of the contract’s award (end-December 2024 continuous structural benchmark) to increase the transparency of public spending. Three benchmarks are related to spending commitments identified by the authorities related to the FSW, which would further strengthen internal and external audits. The additional PFM recommendation (paragraph 26 of the Article IV staff report) remains valid (including limiting the volume of unspecified spending in the budget). 21. Recommendations by staff in the context of the recent tailored safeguard monitoring mission of March 2024 should be implemented urgently. Strengthening the governance and accountability arrangements in reserves management would also be key for enhancing the transparency of central bank operations. The BRH should commit to undertaking (in close consultation with staff and through Fund CD) an external comprehensive review of reserves management practices to address current shortcomings and align with leading practices for central banks on aspects related to, inter alia: (i) governance; (ii) policy/guidelines/strategic asset allocation; and (iii) portfolio composition. The review should establish a roadmap to guide the BRH through a transition in the medium term. The BRH should undergo an external assessment of its portfolio to determine: (i) the actual level of liquidity (considering the nature and quality of the assets); and (ii) the alternatives that may be available to the BRH, in the short term, to effectively transition to a reserve portfolio more aligned with the principles of liquidity and security. In order to address the shortcomings highlighted in the 2016 and 2019 safeguards assessments and the 2015 MCM Technical Assistance over the investment policy and guidelines as well as the strategic asset allocation, the SMP introduces a structural benchmark which entails a medium-term plan for improving the composition of the investment portfolio, its new strategic asset allocation, updated investment policy, and updated investment guidelines (structural benchmark, end June 2025). 22. Staff discussed issues related to the 2021 SDR allocation. The authorities conveyed that after the 2021 SDR allocation, part of the SDRs was converted into US dollars to service the INTERNATIONAL MONETARY FUND 15 HAITI government’s external obligations. Since then, SDR holdings have been used to pay obligations to the IMF. All transfers of SDR resources to the Haitian government are usually made in gourde equivalent and are subject to a memorandum of understanding and/or retrocession agreement, depending on the nature of these transfers. Staff emphasized the importance of maintaining strong instituti