(2020-04) Ayiti Deman pou Dekèsman nan Fasilite Kredi Rapid la - Kominikasyon Laprès; Rapò Ekip la; ak Deklarasyon Direktè Egzekitif pou Ayiti

HAITI IMF Country Report No. 20/123 April 2020 REQUEST FOR DISBURSEMENT UNDER THE RAPID CREDIT FACILITY—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR HAITI In the context of the Request for Disbursement Under the Rapid Credit Facility, the following documents have been released and are included in this package: • A Press Release including a statement by the Chair of the Executive Board • The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on April 17, 2020, following discussions that ended on April 11, with the officials of Haiti on economic developments and policies underpinning the IMF disbursement under the Rapid Credit Facility. Based on information available at the time of these discussions, the staff report was completed on April 13, 2020. • A Debt Sustainability Analysis prepared by the staffs of the IMF and the International Development Association (IDA). • A Statement by the Executive Director for Haiti The documents listed below will be released. Letter of Intent sent to the IMF by the authorities of Haiti* *Also included in the Staff Report. 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. © 2020 International Monetary Fund PR20/171 IMF Executive Board Approves US$111.6 Million Disbursement to Haiti to Address the COVID-19 Pandemic FOR IMMEDIATE RELEASE • The IMF Executive Board approves the twentieth request for emergency financial assistance to help its member countries address the challenges posed by COVID-19. • The approval of the Board will make available US$111.6 million in emergency financing to help Haiti address the challenges posed by COVID-19. • IMF financing support provides resources to the authorities for essential health-related expenditures and income support to ease the impact of COVID-19 on the population. • To address the pandemic, Haiti’s government announced measures to support workers and households, including paying salaries and providing food and cash transfers to the public. Washington, DC – April 17, 2020 The Executive Board of the International Monetary Fund (IMF) approved a disbursement to Haiti under the Rapid Credit Facility (RCF) equivalent to SDR 81.9 million (US$111.6 million, 50 percent of quota) to help cover balance of payment needs stemming from the outbreak of the COVID-19 pandemic. The pandemic has worsened an already weak economic outlook for Haiti. An expected sharp drop in remittance flows, reduction in textile exports, and drop in FDI will put significant strain on the balance of payments. Additional direct health and social expenditures, together with a further drop in fiscal revenues will add to the fiscal deficit and financing needs. IMF support will help cover some of this need and allow the government to ease the impact on the population, such as paying salaries of some teachers and workers, providing cash transfers and food rations to households, and providing subsidies to the transport and sanitation sectors. Following the Executive Board discussion. Mr. Tao Zhang, Deputy Managing Director and acting Chair, made the following statement: “COVID-19 poses a major challenge for Haiti, a country in a fragile situation with very limited healthcare services, just emerging from two years of socio-political instability and worsening economic hardship. Measures are being taken by the government to stop the spread of the virus and to cushion the economic impact of the shock. “IMF emergency support under the Rapid Credit Facility will help fill the balance of payments gap and create fiscal space for essential health expenditures, income support to workers, and cash and in-kind transfers to households. “To address the crisis, scarce budgetary resources will need to be allocated to critical spending on disease containment and increased social assistance to the most vulnerable. To ensure the appropriate use of emergency financing, the authorities should prepare monthly budget execution reports on COVID-19 expenditures and undertake an ex-post financial and operational audit of COVID-related operations. While providing adequate liquidity support to the financial sector, the central bank should contain monetary financing of the deficit and limit foreign exchange interventions to smoothing volatility. “Expeditious donor support is needed to close the remaining balance of payments gap and ease the adjustment burden. The IMF intends to further support Haiti through a Staff Monitored Program to help start the process of restoring macroeconomic stability and sustainability, building a better social safety net, and tackling governance weaknesses and corruption.” For information on the emergency financing requests approved by the IMF Executive Board, please see a link to the IMF Lending Tracker: https://www.imf.org/en/Topics/imf-and covid19/COVID-Lending-Tracker For upcoming discussions on the emergency financing requests, please see a link to the calendar of the IMF Executive Board meetings: https://www.imf.org/external/NP/SEC/bc/eng/index.aspx HAITI REQUEST FOR DISBURSEMENT UNDER THE RAPID CREDIT April 13, 2020 FACILITY EXECUTIVE SUMMARY Context. From mid-2018 until early 2020, Haiti experienced political instability and intermittent social unrest that paralyzed the economy and impeded the implementation of economic policies. This protracted crisis placed severe strains on the population. Following the conclusion of the Article IV consultation in late January, the authorities began to take steps towards restoring economic stability and were preparing for discussions with staff on a potential Staff Monitored Program (SMP). Impact of COVID-19. From this difficult starting point, and with Haiti’s limited health services and high levels of poverty, the spread of COVID-19 could prove devastating for the country. Remittances represent over 34 percent of GDP and most textile exports are purchased by the U.S., so the global income shock is expected to have a sharp adverse impact on Haiti’s balance of payments. With demand and fiscal revenues forecast to drop, higher outlays on health expenditures and income support would add to a surge in the fiscal deficit. Request for RCF. Staff propose financing support of 50 percent of quota (SDR 81.9 million, about US$111.24 million) under the RCF ‘exogenous shock’ window. It is not feasible to implement an upper credit tranche-quality Fund-supported program at this time and the country meets the eligibility requirements for support under the RCF. The authorities have indicated commitment to implement policies aimed at progress towards achieving a stable and sustainable macroeconomic position consistent with strong and durable poverty reduction and growth. Policy issues. The authorities will boost spending to mitigate the impact of the COVID 19 pandemic on the population. A higher fiscal deficit will be financed by external budget support, RCF resources, and domestic borrowing. The authorities indicated a commitment to restoring macro stability, addressing fiscal imbalances over the medium term, and being proactive in their financial sector oversight. They intend to begin discussions for an SMP directly following the Board review of Haiti’s request for disbursement under the RCF. Staff supports the authorities’ request for a disbursement under the Rapid Credit Facility in the amount of SDR 81.9 million (50 percent of quota). HAITI Approved By Patricia Alonso Gamo and Jeromin Zettelmeyer Prepared By the Haiti team CONTENTS The team comprised Nicole Laframboise (head), Frederic Lambert, Ahmed Zorome, and Paola Aliperti (all WHD), Patrick Petit (FAD), and Chiara Fratto (SPR). Bruno Saraiva and Ketleen Florestal (OED) participated in the meetings. Discussions took place remotely in early April with central bank Governor Jean Baden Dubois, Minister of Finance Michel Patrick Boisvert, other senior officials, and international development partners. Ms. Soungbe (WHD) assisted the team with logistics and contributed to the preparation of this report. CONTEXT AND RECENT DEVELOPMENTS ______________________________________________________3 IMPACT OF COVID-19 AND RESPONSE_________________________________________________________ 4 OUTLOOK AND DEBT SUSTAINABILITY ________________________________________________________ 5 POLICY UNDERTAKINGS ________________________________________________________________________ 6 MODALITIES OF SUPPORT UNDER THE RCF ___________________________________________________8 STAFF APPRAISAL _____________________________________________________________________________ 10 TABLES 1. Selected Economic and Financial Indicators, FY2018–25_______________________________________11 2a. Non-Financial Public Sector Operations, FY2018–25 (In millions of gourdes)_________________12 2b. Non-Financial Public Sector Operations, FY2018–25 (In percent of GDP) ____________________13 3. Summary Accounts of the Banking System, FY2018–25 _______________________________________14 4a. Balance of Payments, FY2018–25 (In millions of US$) ________________________________________15 4b. Balance of Payments, FY2018–25 (In percent of GDP) ________________________________________16 5. Indicators of Capacity to Repay the Fund (Existing and Proposed Credit), 2018/19–2026/27 __17 6. External Financing Requirements and Sources, FY2018–FY2025 _______________________________18 APPENDIX I. Letter of Intent _________________________________________________________________________________19 2 INTERNATIONAL MONETARY FUND 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 100 Moise has been ruling by decree since mid 80 January. Some stability has returned with the appointment in early-March of a new prime 60 minister—the fifth in three years—and minister of 40 finance. The economic and human toll of the last two years has, however, been significant, with now 20 almost 4 million people living with food insecurity 0 Basic Sanitation, 2017 1/ (Percent of population using at least basic sanitation services) (WFP, 2020). In this context, and with an already vulnerable population, the spread of COVID-19 is a Haiti Central America South America Caribbean small states potential catastrophe that could wreak havoc on already difficult living conditions. 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). 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. 1 The fiscal year end September 30. INTERNATIONAL MONETARY FUND 3 HAITI 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$317 million larger (Text Table 1). Text Table 1. Impact of COVID-19 on Balance of Payments 1/(In millions of US$ on a fiscal year basis; unless otherwise indicated) FY2020 SM/19/283 RCF request Difference Current account -75.2 -316.0 -240.7 Trade Balance -3,695.0 -3,175.9 519.1 of which textile exports 1,166.1 955.3 -210.8 of which tourism 292.3 258.0 -34.3 of which oil imports -1,065.6 -619.2 446.4 Remittances 3,231.7 2,485.2 -746.5 Capital and financial accounts 54.1 -21.6 -75.7 of which FDI 75.0 44.7 -30.3 Official Disbursements 214.0 253.1 39.1 Overall Balance -21.1 -337.8 -316.7 Financing 21.1 337.6 316.5 RCF 111.2 111.2 Other incl. decline in reserves 21.1 226.3 205.2 Sources: Authorities' data; and IMF staff estimates and projections. 1/ The Article IV 2019 Consultation (SM/19/283) was concluded on January 24, 2020. Text Table 2. Additional Expenditures Related to COVID-19MeasuresMillions of Share of HTG GDP (%) Goods and services Health-related expenditures 3,432.9 0.4 Security 1,000.0 0.1 Transfers (non-energy) Dry food rations 1,800.0 0.2 Transfers to poor families 4,000.0 0.5 Transfers to teachers 2,000.0 0.2 Transfers to textile workers 412.5 0.0 Other transfers 233.6 0.0 Capital expenditures (University hospital) 500.0 0.1 Total 13,379.0 1.6 Sources: Authorities' data; and IMF staff estimates and projections. 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; 4 INTERNATIONAL MONETARY FUND HAITI 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. 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 2700 1800 900 0 -900 -1800 Fuel Prices and Revenue Net revenue Gasoline retail price (HTG/gallon) (RHS) Gasoline price without subsidy (RHS) 500 470 440 410 380 350 320 290 260 230 200 liquidity conditions in the financial system, including reducing the refinance and reference rates, lowering reserve requirements on domestic currency -2700 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Sep-20 Mar-21 Sep-21 170 deposits, allowing 20 percent of treasury certificates Sources: National Authorities and IMF staff calculations. 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. 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. INTERNATIONAL MONETARY FUND 5 HAITI 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 6 INTERNATIONAL MONETARY FUND HAITI 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 per cent 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) FY2019 FY2020 SM/19/283 RCF request Difference Revenue and grants 12.1 13.4 12.4 -1.0 Revenue 10.8 10.0 10.2 0.2 Grants 1.4 3.4 2.2 -1.2 Total expenditures 14.5 15.6 17.5 1.9 of which: COVID-19 related NA NA 1.6 1.6 Transfers (energy) 2.4 2.4 1.4 -1.0 Elections NA NA 0.5 0.5 Other 12.1 13.2 14.1 0.9 Central government balance 2/ -2.4 -2.2 -5.2 -3.0 Transfers to EDH -1.1 -1.2 -1.2 0.0 Overall balance incl. grants -3.5 -3.4 -6.4 -3.0 Financing 3.5 3.4 3.6 0.2 Financing gap 0.0 0.0 2.8 2.8 Additional financing NA NA 1.3 1.3 RCF 1.3 1.3 To be determined Other donors Remaining financing gap NA NA 1.5 1.5 Sources: Authorities' data; and IMF staff estimates and projections. 1/ The Article IV 2019 Consultation (SM/19/283) was concluded on January 24, 2020. 2/ 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, 2 Other domestically funded public investment could also rise by 0.2 percent of GDP. 3 There was a massive drop in revenue collection in FY2019 (see ¶4). From this low base, the revenue/GDP forecast now for FY2020 is slightly higher than in SM/19/283 due primarily to a lower nominal GDP denominator. INTERNATIONAL MONETARY FUND 7 HAITI 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 8 INTERNATIONAL MONETARY FUND 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. 19. The RCF disbursement will be disbursed to the central bank and is expected to be on lent to the government for budget support. This will help the government finance its response to the COVID-19 crisis, including purchases of medical supplies and cash transfers to the most vulnerable households. The proposed access of 50 percent of quota, equivalent to 1.3 percent of GDP, is not sufficient to cover the full fiscal financing gap of 2.8 percent of GDP. The authorities are seeking further support to cover the remaining fiscal financing need of US$129 million, or 1.5 per cent of GDP (Text table 3). The remainder of the fiscal financing gap would need to be covered by additional revenue measures and issuance of T-bills. In their Letter of Intent, the authorities confirm that they have a established a Memorandum of Understanding between the ministry of economy and finance (MEF) and the central bank (BRH) agreeing to the terms of the on-lending arrangement, and clarifying their respective roles and responsibilities for timely servicing of the financial obligations to the IMF. 20. The authorities have indicated their intention to cooperate with the Fund and pursue economic policies appropriate for addressing the impact of COVID-19. As noted above, Haiti is expected to undertake discussions for a six month SMP arrangement in the coming weeks with the goal of advancing after that to a comprehensive upper credit tranche-quality economic reform program aimed at lifting Haiti out of fragility and on a path toward stronger growth, employment and poverty reduction. The authorities have also requested debt relief under the Catastrophe and Containment Relief Trust (CCRT). Under the new “tranching” approach, the Fund will provide CCRT debt service relief for a period of up to six months from the date of the request (from April 14 until October 13, 2020), or for as much as is possible from available resources. 21. The authorities have committed to continue implementing the recommendations from the last safeguards assessment of the BRH, completed in August 2019. Indeed, as prior actions for disbursement under the RCF, the BRH implemented the following two key recommendations from the Assessment on April 10, 2020: (i) completed the financial audit and published the audited financial statements for the year ended September 30, 2019; and (ii) adopted a Board decision to strengthen the governance and accountability arrangements for foreign reserve management in line with IMF recommendations by revising the composition of the Investment Committee (IC) and INTERNATIONAL MONETARY FUND 9 HAITI amending its charter, establishing strict segregation of responsibilities between the director and staff members within the Foreign Portfolio Department, and establishing a dedicated risk management function. The authorities will continue to provide IMF staff with the required audit reports of the central bank, authorize the external auditors of the central bank to hold discussions with staff. In addition, they intend to follow through on other recommendations from the safeguards assessment in the context of the upcoming SMP. 22. Risks to Haiti’s capacity to repay are moderate, but may be mitigated by the authorities’ intention of committing to policy reforms under an SMP and later UCT-level program. The authorities have expressed interest in a continued close dialogue with the Fund and, as noted in the Letter of Intent, have committed to achieving macro stability and undertaking reforms to strengthen governance, raise employment and growth, and reduce poverty (Box 1). Progress in these areas will help mobilize sizeable external concessional funding and grants that would help ease financing constraints and mitigate risks on capacity to pay (Table 5). STAFF APPRAISAL 23. Haiti faces high risks related to the COVID-19 epidemic as well as monumental policy challenges. Weakened by eighteen months of political instability and intermittent social unrest, the Haitian economy has zero buffers to withstand the current crisis. Monetary financing of the fiscal deficit has grown by one third over the past three months, leading to an acceleration of inflation and further depreciation of the gourde. Without decisive external support, this situation would be unsustainable. 24. Staff support Haiti’s request for financial assistance under the RCF. The authorities have indicated commitment to implement policies that will make progress towards achieving a stable and sustainable macroeconomic position consistent with strong and durable poverty reduction and growth, to be supported by a subsequent SMP. The Fund’s financial assistance under the RCF is expected to be used for budget support to fund the authorities’ response to the crisis, including health and social spending, and will cover a sizeable share of the fiscal financing gap, complemented by the assistance of other development partners. The proposed disbursement of 50 percent of quota would not impair Haiti’s debt sustainability or capacity to repay the Fund. 25. Staff urge the authorities to carefully track, record, and publish all expenditures related to the emergency response. Accurate and transparent recording and accountability with respect to the allocation of financing assistance would be important to build public confidence. In this regard, staff welcome the authorities’ commitment to continue to advance governance and anti corruption reforms and to move forward with a more comprehensive economic reform strategy. In particular, their proposal to report monthly on COVID-19 expenditures and undertake an ex-post COVID-19 financial and operational audit of the expenditure response is encouraging. This would help strengthen public financial management transparency and accountability while contributing to building capacity on the efficiency of the government’s social spending and emergency response. 10 INTERNATIONAL MONETARY FUND HAITI Table 1. Haiti: Selected Economic and Financial Indicators, FY2018–25 1(Fiscal year ending September 30) Nominal GDP (2018): US$9.7 billion GDP per capita (2018): $890Population (2016): 10.847 million Percent of population below poverty line (2012): 58 FY2018 FY2019 FY2020 FY2021 FY2022 FY2023 FY2024 FY2025 Est. Proj. Proj. Proj. Proj. Proj. Proj. (Change over previous year; unless otherwise indicated) National income and prices GDP at constant prices 1.5 -1.2 -4.0 1.2 1.0 1.1 1.2 1.4 GDP deflator 12.8 17.3 22.2 21.3 18.3 15.3 12.9 10.9 Consumer prices (period average) 12.9 17.3 22.2 21.3 18.3 15.3 12.9 10.9 Consumer prices (end-of-period) 13.3 20.1 23.0 20.0 17.0 14.0 12.0 10.0 External Sector Exports (goods, valued in U.S. dollars, f.o.b.) 8.8 11.4 -15.2 1.8 2.6 2.7 3.4 3.0 Imports (goods, valued in U.S. dollars, f.o.b.) 24.0 -6.4 -14.8 1.8 3.9 2.4 2.4 2.4 Remittances (valued in U.S. dollars) 21.1 8.5 -18.3 12.7 7.3 -3.0 -2.8 -0.9 Real effective exchange rate (eop; + appreciation) 2.8 -10.7 … … … … … … Money and credit (valued in gourdes) Credit to private sector (in U.S. dollars and gourdes) 12.5 22.6 13.3 22.8 19.5 16.6 14.2 12.4 Base money (currency in circulation and gourde deposits) 25.8 21.3 17.3 21.8 19.5 16.6 14.2 11.9 Broad money (excl. foreign currency deposits) 13.7 22.0 16.8 22.1 19.5 16.6 14.2 11.9 (In percent of GDP; unless otherwise indicated) Central government Overall balance (including grants) -1.7 -2.4 -5.2 -2.9 -2.8 -2.4 -2.5 -2.6 Domestic revenue 13.0 10.8 10.2 11.4 12.9 13.4 14.0 14.4 Grants 4.3 1.4 2.2 3.8 3.0 3.8 4.6 4.9 Expenditures 19.0 14.5 17.5 18.0 18.7 19.6 21.2 21.8 Current expenditures 12.7 12.4 13.3 12.8 13.6 13.3 13.3 13.1 Capital expenditures 6.2 2.1 4.2 5.2 5.1 6.3 7.9 8.7 Overall balance of the nonfinancial public sector 1/ -2.9 -3.5 -6.4 -4.0 -3.9 -3.5 -3.6 -3.7 Savings and investment Gross investment 29.0 30.8 27.4 27.5 28.0 29.0 30.0 30.4 Of which: public investment 6.2 2.1 4.2 5.2 5.1 6.3 7.9 8.7 Gross national savings 25.1 29.4 23.7 26.9 27.6 27.6 28.0 27.8 Of which: central government savings 0.7 0.9 2.0 2.7 3.2 3.3 3.2 3.3 External current account balance (incl. official grants) -3.9 -1.4 -3.7 -0.6 -0.4 -1.4 -2.0 -2.6 External current account balance (excl. official grants) -7.9 -3.5 -5.8 -4.4 -3.5 -5.1 -6.6 -7.5 Net fuel exports -10.1 -12.8 -7.2 -7.5 -7.9 -8.1 -8.3 -8.3 Public debt External public debt (medium and long-term, eop) 23.5 27.4 28.0 25.8 23.8 22.9 22.5 22.4 Total public sector debt (end-of-period) 39.9 47.7 51.9 49.9 48.6 47.3 46.8 46.6 External public debt service 2/ 6.1 7.3 9.2 9.0 8.8 8.6 8.3 8.6 Memorandum items: (In millions of dollars, unless otherwise indicated) Overall balance of payments -39 -190 -338 13 100 105 82 60 Net international reserves (program definition) 677 644 268 279 368 430 469 488 Gross international reserves 2,086 2,100 1,872 1,885 1,977 2,069 2,140 2,190 In months of imports of the following year 4.8 5.7 4.8 4.7 4.8 4.9 4.9 4.9 Nominal GDP (millions of gourdes) 631,829 732,545 859,287 1,054,976 1,260,768 1,470,033 1,679,466 1,888,510 Nominal GDP (millions of U.S. dollars) 9,658 8,708 8,601 8,875 9,196 9,531 9,879 10,258 Output gap (% of potential) 0.0 -1.4 -5.5 -4.4 -3.5 -2.5 -1.3 0.0 Sources: Ministry of Economy and Finance; Bank of the Republic of Haiti; World Bank; Fund staff estimates and projections. 1/ Includes transfers to the state-owned electricity company (EDH). 2/ In percent of exports of goods and nonfactor services. Includes debt relief. INTERNATIONAL MONETARY FUND 11 HAITI Table 2a. Haiti: Non-Financial Public Sector Operations, FY2018–25 (Fiscal year ending September 30; In millions of gourdes) FY2018 FY2019 FY2020 FY2021 FY2022 FY2023 FY2024 FY2025 Est. Proj. Proj. Proj. Proj. Proj. Proj. Total revenue and grants 109,107 88,998 106,170 159,930 200,379 252,891 313,700 363,480 Domestic revenue 82,089 79,071 87,630 120,110 162,359 197,462 235,839 271,049 Domestic taxes 56,858 53,299 60,422 84,314 117,059 145,231 175,158 198,849 Customs duties 22,533 20,098 20,850 29,539 37,823 44,101 50,384 60,432 Of which: fuel taxes 2,884 52 0 0 0 0 0 0 Other current revenue 2,698 5,674 6,357 6,257 7,478 8,131 10,297 11,767 Of which: FNE 2,105 2,068 2,320 2,848 3,404 3,969 4,535 5,099 Of which: FER 245 169 199 244 291 487 724 1,003 Grants 27,018 9,927 18,541 39,820 38,020 55,428 77,860 92,431 Budget support 1/ 3,467 0 1,681 10,084 2,330 11,264 12,553 13,756 Project grants 23,551 9,927 16,860 29,736 35,690 44,164 65,308 78,675 Total expenditure 2/ 119,965 106,345 150,533 190,020 235,607 287,959 356,374 412,458 Current expenditure 80,516 90,896 114,627 135,513 171,762 195,002 223,292 247,379 Wages and salaries 37,645 40,280 45,774 58,024 71,864 83,792 95,730 107,645 Goods and services 25,312 23,022 32,905 37,979 44,127 51,451 58,781 66,098 Interest payments 1,936 3,398 2,662 3,933 4,612 5,125 6,044 7,194 External 1,300 1,702 1,748 2,440 2,707 2,881 3,432 4,200 Domestic 635 1,696 915 1,493 1,905 2,244 2,612 2,994 Transfers and subsidies 15,623 24,195 33,286 35,577 51,159 54,634 62,737 66,442 Nonenergy sector 11,381 6,766 21,130 15,825 19,164 22,639 26,200 29,838 Energy sector 3/ 4,243 17,430 12,156 19,753 31,996 31,996 36,537 36,604 Capital expenditure 39,449 15,449 35,905 54,507 63,844 92,957 133,082 165,079 Domestically financed 15,460 5,264 12,302 19,421 23,013 28,743 39,723 48,634 Foreign-financed 23,988 10,186 23,604 35,085 40,831 64,215 93,359 116,445 Central government balance including grants -10,858 -17,347 -44,362 -30,089 -35,228 -35,069 -42,674 -48,978 Excluding grants -37,877 -27,274 -62,903 -69,909 -73,247 -90,497 -120,535 -141,409 Excluding grants and externally financed projects -13,888 -17,089 -39,299 -34,824 -32,416 -26,282 -27,176 -24,964 Other transfers to EDH -7,419 -8,094 -10,290 -11,605 -13,868 -16,758 -18,474 -20,018 Primary balance of NFPS, including grants -16,341 -22,044 -51,990 -37,761 -44,484 -46,702 -55,104 -61,802 Overall balance of NFPS, including grants -18,277 -25,442 -54,652 -41,694 -49,096 -51,827 -61,148 -68,996 Adjustment (unsettled payment obligations) 16,764 0 0 0 0 0 0 0 Financing gap 12,893 0 0 0 0 0 Financing, NFPS 35,041 25,442 41,759 41,694 49,096 51,827 61,148 68,996 External net financing -3,379 -2,836 -2,353 -6,890 -9,084 3,926 9,257 15,088 Loans (net) -3,379 -6,790 -2,353 -5,773 -7,795 5,376 10,855 16,819 Disbursements 1,799 259 6,744 5,349 5,141 20,051 28,051 37,770 Amortization -5,178 -7,049 -9,097 -11,122 -12,936 -14,675 -17,196 -20,951 Arrears (net) 0 3,954 0 -1,117 -1,289 -1,450 -1,598 -1,731 Internal net financing 38,420 28,278 44,112 48,584 58,180 47,901 51,891 53,908 Banking system 34,590 14,665 54,231 63,942 68,814 58,385 59,566 61,583 BRH 4/ 24,318 9,591 37,114 12,251 14,640 17,070 19,502 21,930 Commercial banks 10,272 5,074 17,117 51,691 54,174 41,315 40,064 39,653 Nonbank financing 5/ 3,831 13,613 -10,119 -15,358 -10,634 -10,484 -7,675 -7,675 Of which: domestic arrears 0 23,376 0 -4,675 -4,675 -4,675 -4,675 -4,675 Memorandum items Total costs of EDH to public sector 11,662 12,550 15,543 18,075 20,338 23,228 25,011 26,622 Forgone fuel taxes and fuel direct subsidies 17,222 45,728 31,277 44,702 72,279 87,537 106,301 119,612 Health, education and agriculture spending 20,744 18,314 17,186 24,264 30,258 36,751 43,666 50,990 Nominal GDP 631,829 732,545 859,287 1,054,976 1,260,768 1,470,033 1,679,466 1,888,510 Sources: Ministry of Finance and Economy; and Fund staff estimates and projections. 1/ Includes previously-programmed multilateral budget support that could be delayed. 2/ Commitment basis, except for domestically financed spending, which is reported on the basis of project account replenishments. 3/ Comprises payments on behalf of EDH for electricity generation, tax payments remitted to EDH and transfers to fuel distributors to maintain pump i Reform of the energy sector is assumed in the outer years. 4/ Amounts already include the RCF financing for FY2020 and the full two-year debt-relief under the CCRT. 5/ 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. 12 INTERNATIONAL MONETARY FUND HAITI Table 2b. Haiti: Non-Financial Public Sector Operations, FY2018–25 (Fiscal year ending September 30; percent of GDP) FY2018 FY2019 FY2020 FY2021 FY2022 FY2023 FY2024 FY2025 Est. Proj. Proj. Proj. Proj. Proj. Proj. Total revenue and grants 17.3 12.1 12.4 15.2 15.9 17.2 18.7 19.2 Domestic revenue 13.0 10.8 10.2 11.4 12.9 13.4 14.0 14.4 Domestic taxes 9.0 7.3 7.0 8.0 9.3 9.9 10.4 10.5 Customs duties 3.6 2.7 2.4 2.8 3.0 3.0 3.0 3.2 Of which: fuel taxes 0.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other current revenue 0.4 0.8 0.7 0.6 0.6 0.6 0.6 0.6 Of which: FNE 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 Of which: FER 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 Grants 4.3 1.4 2.2 3.8 3.0 3.8 4.6 4.9 Budget support 1/ 0.5 0.0 0.2 1.0 0.2 0.8 0.7 0.7 Project grants 3.7 1.4 2.0 2.8 2.8 3.0 3.9 4.2 Total expenditure 2/ 19.0 14.5 17.5 18.0 18.7 19.6 21.2 21.8 Current expenditure 12.7 12.4 13.3 12.8 13.6 13.3 13.3 13.1 Wages and salaries 6.0 5.5 5.3 5.5 5.7 5.7 5.7 5.7 Goods and services 4.0 3.1 3.8 3.6 3.5 3.5 3.5 3.5 Interest payments 0.3 0.5 0.3 0.4 0.4 0.3 0.4 0.4 External 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 Domestic 0.1 0.2 0.1 0.1 0.2 0.2 0.2 0.2 Transfers and subsidies 2.5 3.3 3.9 3.4 4.1 3.7 3.7 3.5 Non-energy sector 1.8 0.9 2.5 1.5 1.5 1.5 1.6 1.6 Energy sector 3/ 0.7 2.4 1.4 1.9 2.5 2.2 2.2 1.9 Capital expenditure 6.2 2.1 4.2 5.2 5.1 6.3 7.9 8.7 Domestically financed 2.4 0.7 1.4 1.8 1.8 2.0 2.4 2.6 Foreign-financed 3.8 1.4 2.7 3.3 3.2 4.4 5.6 6.2 Central government balance including grants -1.7 -2.4 -5.2 -2.9 -2.8 -2.4 -2.5 -2.6 Excluding grants -6.0 -3.7 -7.3 -6.6 -5.8 -6.2 -7.2 -7.5 Excluding grants and externally financed projects -2.2 -2.3 -4.6 -3.3 -2.6 -1.8 -1.6 -1.3 Other transfers to EDH -1.2 -1.1 -1.2 -1.1 -1.1 -1.1 -1.1 -1.1 Primary balance of NFPS, including grants -2.6 -3.0 -6.1 -3.6 -3.5 -3.2 -3.3 -3.3 Overall balance of NFPS, including grants -2.9 -3.5 -6.4 -4.0 -3.9 -3.5 -3.6 -3.7 Adjustment (unsettled payment obligations) 2.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Financing gap 1.5 0.0 0.0 0.0 0.0 0.0 Financing, NFPS 5.5 3.5 4.9 4.0 3.9 3.5 3.6 3.7 External net financing -0.5 -0.4 -0.3 -0.7 -0.7 0.3 0.6 0.8 Loans (net) -0.5 -0.9 -0.3 -0.5 -0.6 0.4 0.6 0.9 Disbursements 0.3 0.0 0.8 0.5 0.4 1.4 1.7 2.0 Amortization -0.8 -1.0 -1.1 -1.1 -1.0 -1.0 -1.0 -1.1 Arrears (net) 0.0 0.5 0.0 -0.1 -0.1 -0.1 -0.1 -0.1 Internal net financing 6.1 3.9 5.1 4.6 4.6 3.3 3.1 2.9 Banking system 5.5 2.0 6.3 6.1 5.5 4.0 3.5 3.3 BRH 4/ 3.8 1.3 4.3 1.2 1.2 1.2 1.2 1.2 Commercial banks 1.6 0.7 2.0 4.9 4.3 2.8 2.4 2.1 Nonbank financing 5/ 0.6 1.9 -1.2 -1.5 -0.8 -0.7 -0.5 -0.4 Of which: domestic arrears 0.0 3.2 0.0 -0.4 -0.4 -0.3 -0.3 -0.2 Memorandum items Total costs of EDH to public sector 1.8 1.7 1.8 1.7 1.6 1.6 1.5 1.4 Forgone fuel taxes and fuel direct subsidies 2.7 6.2 3.6 4.2 5.7 6.0 6.3 6.3 Health, education and agriculture spending 3.3 2.5 2.0 2.3 2.4 2.5 2.6 2.7 Nominal GDP (millions of gourdes) 631,829 724,757 859,287 1,054,976 1,260,768 1,470,033 1,679,466 1,888,510 Sources: Ministry of Finance and Economy; and Fund staff estimates and projections. 1/ Includes previously-programmed multilateral budget support that could be delayed. 2/ Commitment basis, except for domestically financed spending, which is reported