(2022-07) Ayiti Pwogram ki Swiv pa Anplwaye yo - Kominikasyon ak Rapò Anplwaye yo

HAITI IMF Country Report No. 22/207 July 2022 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 this 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 in early-May 2022, with the officials of Haiti on economic developments and policies underpinning the IMF arrangement under the Staff-Monitored Program. Based on information available at the time of these discussions, the staff report was completed on June 8 and approved on June 17, 2022. The documents listed below have been or will be separately released: Letter of Intent sent to the IMF by the authorities of Haiti* Memorandum of Economic and Financial Policies by the authorities of Haiti* Technical Memorandum of Understanding* *Also included in 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. © 2022 International Monetary Fund PR22/235 IMF Management Approves a Staff-Monitored Program for Haiti FOR IMMEDIATE RELEASE Staff Monitored Programs (SMPs) are informal agreements between national authorities and IMF staff to monitor the authorities’ economic program. As such, they do not entail endorsement by the IMF Executive Board (with the exception of SMPs under the Heavily Indebted Poor Countries process). SMP staff reports are issued to the Board for information. • The Staff-Monitored Program (SMP) aims to help the government restore macroeconomic stability and lower inflation―a key goal given the heavy burden of high inflation on the poor. • Efforts to enhance governance in the public sector, mobilize domestic revenues, build capacity, and boost social spending are important elements of the SMP. • The program comprises realistic measures suited to Haiti’s fragility and, if implemented, could pave the way to an upper credit tranche IMF-supported program. Washington, DC – June 29, 2022: Management of the International Monetary Fund (IMF) has approved a Staff-Monitored Program (SMP) for Haiti after discussions from March-May, 2022. The SMP was approved on June 17, 2022 and runs through May 31, 2023. The SMP was designed by IMF staff and the Haitian authorities, keeping in mind Haiti’s fragility and capacity constraints while supporting the authorities’ economic policy objectives. With timely implementation of the program, the SMP would help the authorities establish a track record of policy implementation, possibly paving the way to an IMF-supported upper credit tranche program. SMPs are arrangements between country authorities and the IMF to monitor the implementation of the authorities’ economic program but are not accompanied by financial assistance. In recent years, Haiti has experienced a protracted political crisis and assassination of its president, lockdowns, the global pandemic, a surge in gang-related violence, and an earthquake. These shocks have weakened economic and institutional frameworks and adversely affected administrative capacity, while socioeconomic and security conditions have deteriorated to a distressing level. After three years of economic contraction, IMF staff expect growth to turn positive in FY2022, supported by an increase in investment, and to recover further to 1.4 percent the next year with continued flows of remittances amidst modest improvements in socio-political stability. In this difficult context, the authorities have committed to implementing policies that would begin to restore macroeconomic stability and growth, strengthen governance, and start to provide poverty relief. With a strong focus on governance, the SMP is geared to increasing accountability and raising ownership of the reform agenda across the country, placing 2 emphasis on strengthening public finance management, revenue administration, transparency, and anti-corruption measures. The SMP also aims to raise domestic revenues, which have collapsed in recent years under the strain of social unrest, collection problems, and the security crisis. The authorities have committed to implementing a series of administrative measures, including strengthening the use of the tax identification number and cleaning up taxpayers' portfolios, revise special tax regimes in a new Tax Code, including by eliminating some exemptions, and finalize and publish the new Tax Code, Customs Code and the Customs tariff. This will simplify the tax system, making it more transparent and thus less prone to governance abuses. Central bank financing of the fiscal deficit has fueled inflation, putting pressure on the exchange rate and leading to a vicious circle of higher fuel subsidy costs, further monetary financing of the deficit and higher inflation. The program thus aims to raise resources for productive spending and reduce monetary financing of the fiscal deficit to reduce inflation. This is critical for the population given the heavy burden placed on the poor from the high increase in prices. Fuel subsidies have been absorbing at least one third of domestic revenues and crowding out productive spending on investment, health and education. They are also highly inequitable, with over 90 percent of the benefits going to the top 10-20 percent of the income ladder in Haiti. In this light, the authorities plan to prepare the groundwork to eventually tackle this issue. As a first step, they launched in April several social programs under the Programme d’urgence targeted to the groups affected by earlier fuel price adjustments. The Haitian authorities will also strengthen the monetary policy framework and limit foreign exchange interventions to smooth excessive volatility to gradually eliminate the spread with the parallel market. Key steps are also planned to improve the financial regulatory framework and update regulations on anti-money laundering (AML/CFT) to meet international standards. Over the course of this SMP, IMF staff will work closely with the authorities to support implementation of their program and help them build public support. Indeed, most elements of the authorities’ program are underpinned by ongoing IMF technical assistance and capacity building. The Fund will also continue to coordinate closely with Haiti’s other development partners to leverage efforts in support of common objectives. The first review of the SMP is expected in September. Satisfactory performance under the SMP could lead to an IMF supported program under a multi-year arrangement that would require approval of the IMF’s Executive Board. SMP are only subject to formal IMF management review. HAITI STAFF-MONITORED PROGRAM June 17, 2022 EXECUTIVE SUMMARY Context: Since 2018, Haiti has experienced a protracted political crisis, repeated country lock-downs and civil unrest, an earthquake, the assassination of its president and a deep recession. Policymakers face economic imbalances, a surge in gang violence, worsening poverty conditions, and dire social challenges aggravated by years of political instability. Staff-monitored program (SMP). It is not feasible for Haiti to implement an upper credit tranche (UCT) Fund-supported program at this time due to the weakened policy frameworks and erosion in administrative capacity during the protracted cris is. The proposed SMP ending May 31, 2023 would help build capacity, support efforts to reduce inflation and raise growth, strengthen fiscal and monetary policy frameworks, address governance weaknesses and combat corruption, and take concrete steps to strengthen social assistance. A successful SMP is needed to build a track record of policy implementation that would improve Haiti’s prospects for a UCT program. SMP policy recommendations: • Adopt a FY2022 budget with measures consistent with agreed targets. • Reduce central bank financing of the deficit and limit foreign exchange (FX) intervention to smoothing excess volatility. • Mobilize revenues and strengthen public finance management (PFM), notably with higher tobacco, alcohol, and car excises, expansion and simplification of the tax base, and measures to strengthen expenditure management and controls. • Require a minimum budget allocation to the ministry of social affairs (MAST) and prepare an action plan to implement the national plan for social protection (PNPPS). • Strengthen the framework for monetary and exchange rate policies by clarifying the objectives and modalities for liquidity and foreign exchange rate operations. • Advance governance reforms with technical assistance (TA), including governance of the central bank, revenue administration, and public finance management. HAITI Approved By Patricia Alonso-Gamo (WHD); Wes McGrew and Andrea Schaechter (both SPR) CONTENTS Discussions took place remotely from Washington during a virtual mission from March 4–16, and continued until May 9, 2022. The team comprised Nicole Laframboise (head), Noah Ndela Ntsama, Rina Bhattacharya, Jean Francois Clevy, and Paola Aliperti (all WHD), Patrick Petit (FAD), Neil Shenai (SPR) pre-mission, and Gabriel Duvalsaint (local economist). Experts from FAD, FIN, LEG, and STA who are providing relevant technical assistance participated in some of the meetings. Langy Duverger (local office) and Grey Ramos (WHD) assisted the team with logistics and document preparation. Mr. Saraiva and Ms. Florestal (OED) participated in the discussions. BACKGROUND AND RECENT DEVELOPMENTS _____________________________________________________ 4 OUTLOOK AND RISKS ___________________________________________________________________________________ 5 STAFF-MONITORED PROGRAM _______________________________________________________________________ 6 A. Fiscal Framework and Short-Term Strategy__________________________________________________________ 6 B. Fuel Market Reform and Social Assistance ___________________________________________________________ 9 C. Monetary and Exchange Rate Policy_________________________________________________________________11 D. Financial Sector Policies ______________________________________________________________________________13 E. Governance_____________________________________________________________________________________________ 14 F. Climate Change and Poverty Reduction _____________________________________________________________ 14 G. Program Monitoring __________________________________________________________________________________15 STAFF APPRAISAL_______________________________________________________________________________________15 BOX 1. GDP Rebasing___________________________________________________________________________________________ 5 FIGURES 1. Real Sector Developments, 2015–22_________________________________________________________________20 2. Fiscal Sector Developments, 2015–22________________________________________________________________ 21 3. Monetary Sector Developments, 2015–22___________________________________________________________ 22 4. Financial Sector Indicators, 2015–21_________________________________________________________________23 5. External Sector Development, 2015–22______________________________________________________________ 24 6. Social Indicators _______________________________________________________________________________________ 25 2 INTERNATIONAL MONETARY FUND HAITI TABLES 1. Quantitative and Indicative Targets, June 2022–March 2023 ______________________________________18 2. Proposed Prior Actions for SMP______________________________________________________________________19 3. Proposed Structural Benchmarks for SMP___________________________________________________________ 19 4. Selected Economic and Financial Indicators, FY2019–25___________________________________________26 5a. Non-Financial Public Sector Operations, FY2019–25 (Millions of Gourdes)_____________________ 27 5b. Non-Financial Public Sector Operations, FY2019–25 (Percent of GDP)__________________________ 28 6. Summary Accounts of the Banking System, FY2019–25____________________________________________29 7a. Balance of Payments, FY2019–25 (Millions of US$)________________________________________________30 7b. Balance of Payments, FY2019–25 (Percent of GDP) _______________________________________________31 8. External Financing Requirements and Sources, FY 2019–25 _______________________________________32 9. Financial Soundness Indicators, June 2020–December 2021 ______________________________________33 ANNEXES I. Recent Political History ________________________________________________________________________________34 II. Public Debt Sustainability Analysis ___________________________________________________________________36 III. External Sector Assessment __________________________________________________________________________57 APPENDICES I. Capacity Development Strategy_______________________________________________________________________62 II. Letter of Intent _________________________________________________________________________________________ 67 Attachment I. Memorandum on Economic and Financial Policies ___________________________________70 Attachment II. Technical Memorandum of Understanding ___________________________________________82 INTERNATIONAL MONETARY FUND 3 HAITI BACKGROUND AND RECENT DEVELOPMENTS 1. Since 2019, Haiti has been battered by multiple shocks that have taken a toll on the economy and population. The past few years have been marked by a protracted political crisis, 14 repeated lockdowns (Peyi-Lok), civil unrest, a president’s 10 assassination, the pandemic, and an earthquake, whose 6 direct costs were estimated at 11 percent of 2021 GDP 2 (World Bank). The security situation has deteriorated -2 significantly as gangs have expanded control over regions -6 and infrastructure, at times bringing economic activity to Economic Activity Indicator - ICAE 1/ (Fiscal year quarters, y/y growth, in percent) Construction Overall ICAE a halt. In this context, the economy contracted again in -10 FY2016Q3 FY2017Q1 FY2017Q3 FY2015Q1 FY2015Q3 FY2016Q1 FY2018Q1 FY2018Q3 FY2019Q1 FY2019Q3 FY2020Q1 FY2020Q3 FY2021Q1 FY2021Q3 FY2022Q1 2021, tax revenues fell further, monetary financing of the deficit was high and, together with supply disruptions, fueled inflation. Official external financing remained low due to the enduring political uncertainty. Confirmed cases of COVID-19, however, have remained relatively low since the pandemic started. Source: IHSI and IMF staff calculations. 1/ ICAE is a high frequency indicator (quarterly) of economic activity covering agriculture, industries and services. 2. The authorities have taken steps since mid-2021 to make the political transition more inclusive and address some governance concerns. Appointed by President Moïse just days before his assassination, Prime Minister Ariel Henry took office after a period of uncertainty and formed a new government in November that included eight members from opposition groups . He put into place his Accord politique pour une gouvernance apaisée signed with some opposition groups and civil society, and in early-2022 extended the term of the remaining one third of the Senate. Prime Minister Henry however faces challenges and one other political accord led by civil society (Accord de Montana) is still in play. The main objectives of both accords are to establish a transitional government and hold elections. There is no election timetable yet as the consensus appears to be that preparation is needed to ensure broad-based, legitimate elections. 3. Staff have remained engaged and the IMF has been the largest source of external financing since 2019. The Fund provided financial assistance without ex post conditionality to Haiti equivalent to about US$360 million in total since 2020, starting with a disbursement under the Rapid Credit Facility in April 2020 (SDR 81.9 million, equivalent to 50 percent of Haiti’s quota) as well as relief on debt service falling due to the IMF during 2020 and 2021 for a cumulative amount of about SDR 15 million under the Catastrophe Containment and Relief Trust (CCRT). Haiti also received about SDR 157 million under the general SDR allocation in 2021. An SMP agreed “ad referendum” in mid 2020 was not approved because of governance issues related to procurement. After the authorities took steps during 2021, supported by Fund technical assistance (TA), to strengthen basic governance safeguards in public procurement, among other things, it was agreed that SMP discussions could re start. 4 INTERNATIONAL MONETARY FUND HAITI OUTLOOK AND RISKS 4. The outlook is based on normative policy implementation under the SMP accompanied by an increase in international assistance. The baseline scenario assumes implementation of sound macro policies and select reforms under the SMP. While the authorities’ program aims to lay the groundwork for an eventual UCT arrangement, reform implementation after the SMP is assumed to be modest under the baseline given the uncertainties regarding policy commitment beyond 2023. Spillovers from the war in Ukraine will likely raise inflation and affect the balance of payments due to higher commodity and food prices, which will have a negative impact on the poor. • Growth is expected to pick up modestly to 0.3 percent in FY2022, supported by higher investment. Assuming some political stability and implementation of reforms, growth would reach 1.5 percent over the medium term with a moderately high supply of credit, facilitated by some improvement in the security situation, contributing to recovery. • Inflation is expected to rise further as higher fuel prices pass through other components of the CPI basket, but would moderate as inflationary financing of the fiscal deficit declines. Inflation is projected at 27.5 percent (y/y) at end-FY2022, falling to 14 percent by end-FY2023. • The current account is expected to be remain in surplus in FY2022 as political uncertainty, the security situation, and supply-side disruptions weigh on imports. It is projected to show a small deficit over the medium term, supported by steady remittance inflows, a modest resumption in exports, and higher official transfers in FY2022-FY2023 which together provide room for some import growth and drive a small positive effect of reforms on productivity growth. • As a percent of GDP, the deficit of the nonfinancial public sector (NFPS) is expected to decline to 1.5 percent in FY2022 and widen to 2.3 percent in FY2023 before stabilizing at around 2.8 percent. The near-term fiscal stance is driven by financing availability and reflects assumption of continued administered fuel prices. Box 1. GDP Rebasing Haiti’s statistical institute (IHSI) released a rebased GDP series in October 2020. The new series was rebased to 2012 from the old base of 1987 and significantly improved the quality of national accounts data (Appendix I). It includes now an estimate of the informal sector, provides a more detailed breakdown of the services sector, and updates Haiti to the 2008 System of National Accounts. Nominal GDP in gourdes under the new series for 2019 (2012) was revised up by 65 (74) percent. Naturally this led to a large drop in all of the estimated fiscal and external ratios. On the other hand, it highlighted the urgent need for domestic resource mobilization and the low base of export revenues. 5. Haiti is exposed to a wide range of risks, primarily on the downside. Internal risks include a failure to implement policies under the proposed SMP, worsening governance and corruption problems, heightened political instability and resumption in social unrest, gang-related disruptions, natural disasters, and/or a surge in COVID cases. Externally, Haiti is vulnerable to higher than-anticipated world fuel prices and/or lower-than-expected remittance and external financing INTERNATIONAL MONETARY FUND 5 HAITI flows. On the upside, lower fuel prices over the medium term would reduce Haiti’s energy import bill. Without improved policies, progress mobilizing revenues, and strengthened governance, the medium-term outlook would be similar to the recent low or negative growth, high poverty equilibrium. Alternatively, improvements under the SMP could build some momentum for deeper, more comprehensive reforms under a UCT-supported program that could raise growth to higher levels in the medium term. 6. Near term reform should focus on realistic measures calibrated to Haiti’s fragility and that would build capacity. A key factor underpinning the repeated cycle of failed reform efforts has been programs that did not match Haiti’s fragility. Earlier analysis on the sources of fragility prepared in the context of the 2020 Country Engagement Strategy (CES) helped to inform the policy and capacity building priorities in the proposed SMP, which are aligned with the enhanced Fund strategy on fragile states.1 The authorities’ program aims to raise ownership of policies, including with an emphasis on transparency and governance measures. By lowering inflation, with its heavy toll on the poor, articulating anti-corruption measures, and providing some social assistance, the program could raise public support for reform, including of fuel prices, and empower policy-makers to stick with sound policies. That said, downside risks are significant given ubiquitous governance weaknesses and corruption vulnerabilities which are likely to influence implementation. Together with the unresolved political crisis and grave security conditions, risks to the program are very high. STAFF-MONITORED PROGRAM The proposed SMP would help strengthen fiscal and monetary policy frameworks, support efforts to reduce inflation and raise growth, address some governance weaknesses, take concrete steps to strengthen social assistance, and build administrative and institutional capacity. A. Fiscal Framework and Short-Term Strategy 7. Financing constraints and weak revenue mobilization drive the fiscal stance. With the goal of reducing inflationary financing of the deficit to restore macro stability, the fiscal stance is dictated mainly by the availability of financing. A tax-to-GDP ratio of only 5.8 percent in FY2022 and higher-than-expected domestic amortization of 0.8 percent of GDP has necessitated combined cuts in non-subsidy-related current spending and domestically-funded capital expenditures by 1.2 percent of GDP in order to contain gross fiscal financing needs . Fuel subsidy costs are expected to rise by about 0.5 percent of GDP in FY2022 due to higher world prices. While the non-subsidy spending cuts help lower the projected deficit to 1.5 percent of GDP in FY2022 from 2.4 percent of GDP in FY2021, it provides space to allocate funds equivalent to 0.15 percent of GDP on social programs to mitigate the impact of the December 2021 fuel price increases on vulnerable groups. The modest rise in revenue collection would allow domestically-funded capital spending to rise to 1.5 percent of GDP by FY2025 which should help support positive growth while stabilizing the deficit 1 Staff plan to extend the analysis in the original CES to deepen the understanding of the sources of fragility in Haiti, in consultation with the authorities, to better inform Fund policy and technical advice. An updated CES is expected before the end of the SMP. 6 INTERNATIONAL MONETARY FUND HAITI at about 2.8 percent of GDP in the medium-term. In the event of a shortfall in projected external budget support, the program includes adjustors on quantitative targets (QT, see ¶29). 8. The modest mobilization of revenues together with moderately higher budget support over the next few years will create some space for more productive spending. The government announced in December 2021 they would resume the 1995 law allowing petroleum product prices to adjust regularly to changing world prices: kerosene and diesel prices rose from 163 and 169 HTG per gallon to 352 and 353 HTG, respectively―a level that at the time covered costs, margins, and statutory taxes―while the price of gasoline was raised by 25 percent from 201 to 250 HTG (US$2,50) per gallon. However, as the 1995 law did not include a price smoothing mechanism, subsequent large world price increases were not passed on. The authorities indicated they are not able to adjust prices for the foreseeable future given the additional hardship imposed on the population by higher imported food prices that, together with the difficult security situation, could fuel social unrest. Given the very high uncertainty surrounding the likelihood and timing of this reform, and to be prudent, the SMP baseline scenario does not assume any changes in fuel price policy henceforth. Contributions to the Financing of the Fiscal Deficit (Percent of GDP) BRH financing 3.0 4.0 2.5 Contributions to FY2022 Fiscal Deficit External financing 3.0 (Percent of GDP) Other domestic financing 2.0 Fiscal deficit 2.0 1.5 1.0 1.0 Reduce deficit Increase deficit 0.5 0.0 0.0 FY2021 fiscal Tax revenue Grants Energy Current New FY2022 fiscal -1.0 deficit increase subsidies spending capital deficit saving expenditure FY2021 FY2022 Source: National Authorities and IMF staff calculations. 9. Revenue mobilization is a key priority for FY2022. In addition to the gradual application of fuel excises (¶12), the authorities will increase excises on tobacco, alcohol and other goods―as proposed in a draft Tax Code to be finalized by September, and implement a series of administrative measures, including strengthening the use of the tax identification number (TIN) and cleaning up taxpayers' portfolios. The authorities emphasized that, given the narrow tax base consisting mainly of a few large taxpayers and imports transiting through the capital’s port and airport, raising revenue will depend on the security situation and longer-term efforts to broaden the tax base. While special regimes will be revised in the new Tax Code, including by eliminating some exemptions, a few existing incentives will likely be grandfathered and removing large scale exemptions on necessities will remain difficult. As such, there is limited short term revenue potential through removal of exemptions. INTERNATIONAL MONETARY FUND 7 HAITI 10. Monetary financing will be reduced to help lower inflation and restore macro stability. A lower deficit but higher domestic debt reimbursement in FY2022 leads to gross financing needs estimated at 2.9 percent of GDP in FY2022 compared to 3.4 percent of GDP in FY2021. With about 0.8 percent of GDP covered by domestic borrowing and project loans, BRH financing is estimated at about 2.2 percent of GDP, of which 0.7 percent of GDP will be fully sterilized by issuance of central bank bills or sales of foreign exchange (FX), if needed. This will ensure that BRH financing of the government in FY2022 is contained at 1.5 percent of GDP, the level consistent with staff estimates of non-inflationary monetary financing (assuming money grows at or less than the rate of nominal GDP over the medium-term). In FY2023 and later years, central bank financing is projected to stabilize around 2 percent of GDP, reflecting a prudent estimate of demand for BRH securities by domestic banks. In the event of an adverse shock, the authorities would need to take contingency measures, including mobilizing additional external support. Text Table 1. Haiti: Financing of the Fiscal Deficit FY2021 FY2022 (In billion HTG and percent of GDP) HTG bn % of GDP HTG bn % of GDP External financing -5,865 -0.3 -7,490 -0.3 Project loans 4,851 0.3 3,450 0.2 Amortization -10,716 -0.6 -10,940 -0.5 Domestic financing 46,821 2.8 40,752 1.9 BRH 49,839 2.9 46,533 2.2 Commercial bank deposits and T-Bills 3,751 0.2 12,275 0.6 Domestic suppliers 10,950 0.6 0 0.0 Domestic debt amortization -17,719 -1.0 -18,056 -0.8 Source: Authorities' data; and IMF staff estimates and projections. 11. Public debt is sustainable with “high risk of distress” and debt carrying capacity is rated “medium”. Although the GDP rebasing lowered by almost half the debt-to-GDP ratio, slightly higher primary deficits over the medium term, funded by a gradual increase in external concessional financing against the background of subdued export growth, brings the present value of public and publicly guaranteed external debt as a share of exports into the “high” range of debt distress thresholds in the joint IMF-World Bank DSA (Annex II). A low primary deficit, dampened by the real interest rate/growth differential, and slower exchange rate depreciation—driven by lower inflation in the medium term—contribute to improved debt dynamics. Debt carrying capacity is unchanged at “medium” and the debt outlook remains subject to important risks and vulnerabilities. 12. The authorities will start implementing structural fiscal reforms to raise revenues over the medium term (¶9). Drawing on past Fund TA, the authorities will start to tackle the structural decline in revenue collection. As structural benchmarks (SB) under the program, the authorities will proceed with stakeholder consultations on a new draft Tax Code (Code général des impôts) and Tax Procedure Code (Livre de procédure fiscale)—prepared with Fund TA—and finalize them (end September 2022 SB). Through the same consultation process, they will also finalize and publish the Customs Code and tariffs (end-September SB). These codes will simplify the tax system, making it more transparent and thus less prone to governance abuses. Given the imperative of expanding Haiti’s tax base, the authorities will also systematize the use of tax identification numbers among financial agencies, including the tax, customs and treasury departments (end-September SB). They plan other broader revenue administration reforms identified by TA experts, although payoffs are expected only in the longer-term since these involve the adoption of a medium-term reform plan aimed at modernizing both tax and customs agencies, strengthening the core tax and customs functions, and making intensive use of technology and data matching. 8 INTERNATIONAL MONETARY FUND HAITI 13. Public financial management (PFM) reforms are necessary to reduce the scope for misuse of public funds and strengthen the quality of spending. The government adopted a budget for FY2022 that is consistent with agreed targets under the SMP. The treasury single account (TSA) will be broadened to include all bank accounts of the central budgetary units, including emergency funds, thus improving controls and lowering borrowing costs (end-September SB). Foreign-financed resources should be brought into the TSA over the medium-term. The authorities will also prepare a medium-term budget framework (MTBF) for FY2023–2025, with the NFPS deficit target the main anchor (end-September SB). The MTBF, which will be an annex to the FY2023 budget, will strengthen management of public investment. Reforms on the TSA and MTBF will continue to be supported by Fund TA until at least September. Finally, in line with their commitment at the time of the RCF disbursement, the authorities published the audit on COVID-19 spending on June 9, 2022. Based on a preliminary review, the Superior Court of Accounts and Administrative Disputes (CSCCA) paints a very negative view of the government’s planning, management, and coordination of COVID-related spending, in particular flagging a lack of supporting documentation from the Ministry of Finance and other government agencies which impeded the Court’s ability to render a full opinion. Nonetheless, the audit quality was adequate, reflected the willingness of the government to expose its weaknesses, and highlighted PFM issues in need of improvement. The authorities should indicate what and when they intend to address the questions and recommend ations laid out by the Court and staff will review these issues at the time of the first review. 14. The authorities agreed to report transparently on the use of the SDR allocation. Prior to converting about half of their SDR allocation into freely usable currencies, the staff engaged with the authorities on best practices as laid out in the Fund Guidance Note. The BRH and Ministry of Finance signed a memorandum of understanding consistent with domestic legal and institutional frameworks, clarifying the obligations of each party arising from the use of the SDR allocation for fiscal purposes. The authorities agreed to report transparently on any future use of SDRs. B. Fuel Market Reform and Social Assistance 15. The authorities initiated reform of the fuel sector in late-2021. The fuel import monopoly granted to the government agency Bureau de Monétisation des Programmes d'Aide au Développement (BMPAD) was withdrawn last November, allowing imports to be allocated through a competitive bidding process managed by the Ministry of Economy and Finance (MEF). The premium over an internationally recognized price index determines the winning bid and any fuel distributor can import at or below the winning premium or obtain supply from the winning bidders. Fuel prices were raised in December but the authorities have not made adjustments since then. In addition to the reasons cited above (¶8), they said more time is needed for the compensating measures (see below ¶16) recently launched to take effect. They stated they intend to eventually eliminate fuel subsidies when conditions permit. 16. As noted above, measures are being implemented to mitigate the impact of December fuel price reforms on vulnerable groups. While the top income quintile absorbs over 90 percent of the fuel subsidy benefits, price increases affect the transport industry directly and lower income groups indirectly through higher food prices (World Bank). Resistance to reform from the transport INTERNATIONAL MONETARY FUND 9 HAITI sector has been strong. This time the authorities have been working with transport unions to design a support package, including identifying all eligible vehicles. They are allocating resources equivalent to 0.15 percent of GDP over the next four months to social benefits under the Programme d’urgence comprising the distribution of hot meals, expansion of the school canteen program, school bonds for 50,000 low-income parents, acquisition of 100 new school buses, and fuel vouchers for the vehicles registered on the main transport routes. The voucher system is expected to allow designated participants access to a certain number of gallons at discounted prices and will be managed in coordination with fuel distributors, who will in turn be reimbursed by the government. Some of the mitigating measures listed above may be continued after September. 17. Preparing the groundwork for fuel price reform should be a top priority of the government. Staff stressed that Haiti’s fuel price policy is inequitable and grossly inefficient. The highest income groups absorb most of the benefits while the subsidy costs have averaged between 2-3 percent of GDP annually since 2019. This crowds out productive spending on investment, health, education, and law and order, and results in a gross misallocation of scarce resources. Preparations should include communicating about the costs and tradeoffs, who benefits from subsidies, the new assistance programs to compensate the groups most affected, and the eventual strategy to exit the country from this no growth trap. The communication strategy should explain the eventual reform strategy, including adoption of a price smoothing formula that would gradually adjust prices to reduce the subsidy while protecting the public from sharp price swings. With domestic revenue collection at under 6 percent of GDP and development partners hesitating to provide budget support to fund wasteful spending on fuel subsidies, a viable medium-term fiscal and growth outlook for Haiti, including under a Fund-supported program, is difficult to envision without addressing this flaw. 18. The government will define the action plan to implement the new Politique Nationale de Protection et de Promotion Sociale (PNPPS). The system of social protection is fragmented by a large number of different programs, agencies, and international providers that together constitute a patchwork of social assistance with limited coverage and effectiveness, including due to the volatility of external funding (Country Report 20/122). Over time, the mandate of MAST was either duplicated or sidelined by extra-budgetary activities, including at the request of international donors who sought to limit governance risks in the execution of programs. Unfortunately, this undermined the government’s ownership of social policy, weakened capacity at the MAST, and resulted in disjointed strategy with weak outcomes relative to amounts spent. To address this, the government prepared the PNPPS with assistance from development partners and involving an inclusive national consultation process. They committed to preparing this year an action plan for its implementation. 19. The authorities aim to integrate, expand, and better coordinate social programs in line with the PNPPS. Under the SMP, the authorities have identified on-budget all public spending on social programs, including those executed by the off-budget Fonds d'Assistance Economique et Social (FAES). In that way, the program supports the aim of centralizing the design and implementation of social policy at the MAST over the medium-term. It also includes as a QT a floor for budget allocations for social spending purposes based on currently identified programs. This should support capacity building, ownership, and the effectiveness of Haiti’s overall strategy under the PNPPS. In the 10 INTERNATIONAL MONETARY FUND HAITI short term, other agencies will remain involved to support implementation of programs, including notably to expand the SIMAST database of beneficiaries used to identify target populations, a program supported by the WFP and World Bank, and to finance monetary transfers and support measures under the programs Klere Chimen and at the Bureau du secrétaire d’état à l’inclusion des personnes handicapées (BSEIPH), both projects supported by the World Bank. 20. Greater coordination under the MAST will involve increasing the transparency of operations at FAES. Launched primarily to coordinate external aid on social and education projects, it has become an execution agency of other ministries’ domestic resources with limited to no oversight or accountability. Its governing board has not convened for years and its resources and programs have not been subject to documentation or public review since the Petrocaribe audit. As a benchmark under the SMP, the authorities will provide quarterly and annual financial statements of FAES and the board will re-convene before June 2022 and meet regularly thereafter (quarterly SB). All domestically funded social program resources would also be transferred back to the MAST in the 2023 budget (end-September SB) and all externally funded resources of the FAES should be included in the budget in the medium term. C. Monetary and Exchange Rate Policy 21. The BRH will take steps to strengthen the monetary policy framework in a context of a more flexible exchange rate regime. Monetary policy has been passive in a context of fiscal dominance. The interest rate channel is weak, real interest rates are negative, and required reserve ratios relatively high. To anchor monetary policy, the BRH committed to: (i) adopting a ceiling on credit to the NFPS as the main anchor to limit monetary financing of the deficit to 1.5 percent of GDP in FY2022 and about 2.0 percent of GDP thereafter; and (ii) conducting short term liquidity operations at a fixed rate with full allotment, including at seven-days, to manage excess liquidity in the banking system and strengthen the policy transmission. As the ceiling for BRH financing to the government does not include an adjustor for shortfalls in external budget support (¶29), the authorities will need to raise financing from other domestic sources or externally on concessional terms to cover any shortfall in external budget support. Any monetary financing above the level agreed under the SMP framework (1.5 percent of GDP in FY2022 and 2.0 percent of GDP thereafter) would be sterilized, including through FX interventions if necessary. To ensure that fiscal dominance is reduced, staff recommended revising the Pacte between the ministry of finance and BRH to reflect the targets agreed under the program. Overall, this approach would help the BRH resist pressures to finance the government excessively or intervene in the FX market unduly. 22. The authorities are working on deepening the financial markets. The BRH has initiated reforms to deepen the government securities market; develop the inter -bank money market with new facilities, including overnight lending facilities, open market operations, repos, and reverse repos; and enhance domestic savings instruments. Deepening the securities market will provide an alternative source of funding to the treasury and a more effective conduit for monetary policy. While new money market facilities could help the BRH manage liquidity conditions, staff consider that the design and use of these instruments, such as collateral policies and liquidity forecasts, would benefit from in-depth discussion with Fund TA experts to ensure that they do not: (i) undermine the INTERNATIONAL MONETARY FUND 11 HAITI incentives for banks to manage their risks; (ii) expose the central bank balance sheet to credit, market and liquidity risks; and (iii) create impediments to the functioning of the money market. While the authorities agreed to continue implementing TA recommendations on strengthening the quality of monetary statistics, staff stressed that more timely transmission of monetary data will be necessary for program monitoring. 23. The BRH should limit interventions in the FX market to smoothing excessive volatility of the exchange rate. Haiti’s external position is assessed to be broadly in line with medium-term fundamentals and desired macroeconomic policies (Annex III). Since the sharp appreciation in the gourde/dollar rate in the second half of 2020, the BRH has managed an orderly exchange rate adjustment, intervening to calm market pressures when there were large current account transactions while using prudential measures, including reserve requirements, to limit banks’ vulnerability to FX liquidity risk. After narrowing from an estimated 25 percent in March 2021 to about 4 percent at end-2021, the parallel market premium widened to an estimated 12 percent by end-March. Under the SMP, the BRH will adopt a floor on net international reserves (NIR) and committed to limiting FX interventions to smoothing volatility, thereby allowing the exchange rate to serve primarily as a shock absorber.2 The authorities agreed that an FX market intervention rule, with pre-defined targets, could enhance the transparency of interventions and encourage banks to manage their liquidity in a more forward-looking way. 2500 80 130 60 120 NFA and NIR of BRH BRH reference rate (RHS) Exchange Rate and FX Intervention NFA NIR 2000 Parallel EXR (RHS) (US$ million) Net central bank FX sales, US$ million 40 110 Interbank market EXR (RHS) 1500 20 100 0 90 866 931 938 1000 774 732 677 -20 80 452 492 500 -40 70 -60 60 Aug-20 Aug-21 Jun-20 Jun-21 Dec-20 Dec-21 Apr-21 Oct-20 Oct-21 Feb-21 Feb-22 *Apr-28-22 0 2015 2016 2017 2018 2019 2020 2021 2022 (P) Source: BRH and IMF staff calculations. 24. The authorities concurred with staff on reforms needed to strengthen the functioning of the FX market. In consultation with IMF experts, the BRH stated it would prepare a roadmap of FX market reforms under the SMP to: (i) put in place appropriate mechanisms for FX interventions such as well-designed weekly FX auctions in lieu of the foreign exchange allocation system;3(ii) 2 Consistent with the proposed adjustor on the fiscal targets, the NIR ta rget would be adjusted only in the event of a shortfall in external budget support. 3 BRH interventions on FX market are based on foreign exchange allocation techniques, used to provide FX for strategic imports, such as oil or food, when FX reserves are scarce, with BRH reference rate a weighted average of the interbank market rate (60 percent) and the informal market rate (40 percent). 12 INTERNATIONAL MONETARY FUND HAITI review limits on banks' net open FX positions; and (iii) revise FX regulations and phasing out FX surrender requirements over the medium term, including those introduced by Circular 114-2.4 This roadmap would facilitate the management of a market-determined flexible exchange rate and help gradually eliminate the spread with the parallel market while promoting external competitiveness. Staff are examining if the FX regulations give rise to exchange restrictions or multiple currency practices (MCPs). The authorities have committed to not impose or intensify restrictions on the making of payments and transfers for current international transactions, and not introduce or modify MCPs. D. Financial Sector Policies 25. While reforms to increase financial inclusion and growth are advancing, monitoring of banks’ financial situation remains crucial. As noted earlier, the banking sector remains small relative to the economy and the population is largely unbanked. However, small non-bank financial institutions have been expanding and the BRH has been strengthening supervision of this sector, including with the assistance of Fund TA to upgrade the regulatory framework and move to risk based supervision. Measures taken to support the sector at the beginning of the COVID-19 pandemic, now removed, contributed to supporting banks’ portfolios together with a moderate accumulation of government securities. Over the next twelve months, the authorities’ program has three key components: • Banking supervision. On January 13, the BRH adopted seven new draft banking regulations— prepared with the IMF expert on risk-based banking supervision—covering consolidated supervision, licensing rules, authorizations of changes in the status of financial institutions, minimum capital requirements, reporting obligations of financial institutions, and IT Security. Three additional draft regulations related to credit classification and provisioning, credit risk concentration, and institutions’ charts of account are expected after consultations with stakeholders. The BRH has committed to implementing these new regulations while continuing to establish a risk-based supervision framework. • Digital money. The development of fintech offers potential for increasing financial inclusion and growth, but requires an upgrade of the regulatory framework which is bank-centric and lacks an updated national payment system. Mobile money operators need to partner with a supervised bank to offer their services but are not subject to specific guidelines. The BRH is receiving support from specialized firms and has requested Fund assistance to provide guidance on the ongoing exploration of a retail central bank digital currency (CBDC). Staff stressed that a cautious approach is needed given the need for strong internal oversight which is not fully established at the BRH. The authorities will also work on modernizing the migration to new international 4 The BRH issued Circular 114-2 in September 2020 mandating banks and money transfer companies: (i) exchange dollar remittances into gourdes for persons not holding US dollar bank accounts; (ii) convert all dollar remittances into gourdes at the BRH reference rate, a less favorable rate; and (iii) for money transfer companies, to sell 30 percent of FX purchased to the BRH and 40 percent to banks―which themselves were/are not allowed to keep a net open FX position above 0.5 percent of equity. INTERNATIONAL MONETARY FUND 13 HAITI messaging standards that would promote interoperability and financial integrity, and new laws to protect privacy and fight cyber-crime. • Anti-money laundering (AML/CFT). The Caribbean Financial Action Task Force’s identified widespread deficiencies in Haiti’s AML/CFT framework, and the Financial Action Task Force (FATF) added Haiti to its grey list as a jurisdiction under increased monitoring. Staff and the authorities agreed on the urgent need to revise the law against regarding AML/CFT. With TA from the IMF, the BRH will bring it into compliance with FATF international standards f