(2023-02) Haïti : Demande de décaissement au titre de la facilité de crédit rapide - Communiqué de presse ; Rapport du personnel ; et Déclaration du directeur exécutif pour Haïti

HAITI IMF Country Report No. 23/80 February 2023 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 January 23, 2023, following discussions that ended on December 8, 2022, with the officials of Haiti on economic developments and policies underpinning the IMF arrangement under the Rapid Credit Facility. Based on information available at the time of these discussions, the staff report was completed on January 6, 2023. • A Debt Sustainability Analysis prepared by the staffs of the IMF and the World Bank. • A Statement by the Executive Director for Haiti. The documents listed below have been or will be separately 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. © 2023 International Monetary Fund PR23/12 IMF Executive Board Approves US$105 Million Food Shock Window to Haiti FOR IMMEDIATE RELEASE • The Executive Board of the International Monetary Fund (IMF) approved today a disbursement of SDR 81.9 million (US$105 million) to Haiti under the Food Shock Window of the Rapid Credit Facility. • While Haiti’s population was already suffering severe malnutrition and food insecurity before the war in Ukraine, especially its suffering has been compounded by the surge in food commodity prices Washington, DC – January 23, 2023: The Executive Board of the International Monetary Fund (IMF) approved today a disbursement of SDR 81.9 million (US$105 million) to Haiti under the Food Shock Window of the Rapid Credit Facility1to help Haiti address urgent balance of payment needs related to the global food crisis. Haiti has been hit hard by the global food price shock. Record price inflation has worsened Haiti’s fragility given the high pass through from global to domestic food prices and shortages in food supplies. With more than half the population already below the poverty line, Haiti faces a dire humanitarian crisis, with an expected financing gap in FY2023 of at least US$105 million (0.5 percent of GDP), assuming import compression and pending additional external financing from development partners. This shock compounds the hardships of an already highly fragile country—also suffering a public health emergency (cholera) and serious security risks. Following the Executive Board’s discussion, Ms. Antoinette Sayeh, Deputy Managing Director and Acting Chair, issued the following statement: “Haiti is facing a dire humanitarian crisis and was hit hard by the economic spillovers from Russia’s invasion of Ukraine. These spillovers included record price inflation that worsened Haiti’s fragility and compounded the suffering of Haiti’s population already affected by a severe malnutrition. Measures are being taken by the government to cushion the impact of the food price shocks on the population and to expand the social safety nets. “IMF emergency support under the food shock window of the Rapid Credit Facility will help fill the balance of payment gap and support those most affected by food price rises through feeding programs and cash and in-kind transfers to vulnerable households, waives school fees and other measures. 1 The Food Shock Window provides, for a period of a year, a new channel for emergency Fund financing to member countries that have urgent balance of payment needs due to acute food insecurity, a sharp increase in their food import bill, or a shock to their cereal exports. 2 “To address the crisis, budgetary resources will need to be allocated toward priority spending on food programs and to increase social assistance toward the most vulnerable. To ensure the appropriate use of emergency financing, which will be vital for catalyzing further donor support and mitigate risks to debt sustainability, the authorities should carefully control, track, record, and publish all spending related to the emergency response. Supported by close Fund engagement, they should undertake internal expenditure audits by all the line ministries involved in the use of emergency resources provided under the food shock window through the General Inspectorate of Finance and communicate these internal audits to the Supreme Audit Court in a timely way. “The combination of appropriate macroeconomic and structural policies under the Staff Monitored Program (SMP) provides additional safeguards for the Fund’s outstanding obligations. While providing adequate liquidity support to the financial sector, the central bank should reduce monetary financing of the deficit and limit foreign exchange interventions to smoothing volatility. “The SMP is also catalytic to donor support. A successful implementation of Haiti’s SMP would be key in the process of restoring macroeconomic stability and sustainability, strengthening the social safety net, and tackling governance weaknesses and corruption.” HAITI REQUEST FOR DISBURSEMENT UNDER THE RAPID CREDIT January 6, 2023 FACILITY EXECUTIVE SUMMARY Context. Haiti has been hit hard by the global food price shock. In September 2022, food inflation reached 44 percent, with rice inflation nearly 70 percent. With more than half the population already below the poverty line, Haiti faces a dire humanitarian crisis, with an expected financing gap in FY2023 of at least US$105 million (0.5 percent of GDP), assuming import compression and pending additional external financing from development partners. This shock compounds the hardships of an already highly fragile country—also suffering a public health emergency (cholera) and serious security risks. In line with global trends and also due to an escalation of violence, the macroeconomic situation has been more challenging relative to the outlook in June 2022, at the time of the approval of the Staff Monitored Program (SMP). That said, recent data suggest that the authorities are making meaningful efforts to overcome the multiple challenges facing the country and the First Review of the SMP was approved by IMF Management on December 21, 2022. Food Shock Window Request. The Haitian authorities have requested support—under the Rapid Credit Facility (RCF) through the Food Shock Window (FSW)—to address urgent balance of payments (BOP) needs attributable to acute food insecurity and higher food import costs that exceed the last five-year average. These needs, if not addressed, could result in an immediate and severe economic disruption. Staff supports this request, with access proposed at SDR 81.9 million (about US$105 million), equivalent to 50 percent of quota, or to the estimated BOP gap in FY2023. Safeguards and risk mitigation. To ensure transparency and accountability in the spending of emergency resources for the most vulnerable households, and to protect against misappropriation, the authorities have committed to carefully control, track, record, and publish all spending related to the emergency response. They have also committed to conduct internal expenditure audits by all the line ministries involved in the use of emergency resources provided under the Food Shock Window through the General Inspectorate of Finance and to communicate the internal audits to the Supreme Audit Court (la Cour Superieure des Comptes et du Contentieux Administratif or CSCCA) in a timely way. The CSCCA will conduct compliance audits related to the authorities’ measures to address food insecurity measures bi-annually and publish the audit findings. The authorities published on June 9, 2022, the financial and operational HAITI audit on COVID-related spending agreed under the 2020 RCF arrangement, with the auditor flagging the lack of supporting documentation that impeded the rendering of a full audit opinion. Nonetheless, the audit quality was adequate, reflecting the willingness of the government to expose weaknesses and highlighting PFM issues needing improvement. In this context, the authorities’ commitment to continuing to advance governance and anticorruption reforms in the context of the SMP has been encouraging. The recent consolidation of central budgetary units into one Treasury Single Account (TSA) at the central bank, with the Fund’s technical assistance, will help improve control and reporting of resources. The authorities also agreed to continue implementing the 2019 safeguards assessment recommendations. Economic policies. The authorities conveyed in their Letter of Intent (LOI) their strong commitment to advancing policies that will ensure continued macroeconomic stability. The authorities have adopted a detailed strategy for enhancing social safety nets. The authorities will use emergency financing to support spending allocated in the budget for mitigating the impact of the food price shock on the population. Measures, among others, include: the increase in cash transfers and food rations for poor households; begin school feeding programs and provide hot meals for vulnerable households and community restaurants; and waive school fees. 2 INTERNATIONAL MONETARY FUND HAITI Approved By Patricia Alonso-Gamo (WHD) and Andrea Schaechter (SPR) CONTENTS Discussions began in person during the week of the Annual meetings (October 10-15), continued with weekly virtual meetings in November, and concluded from Washington during a remote mission during December 1-8, 2022. The team comprised Ms. Tumbarello (Head), Mr. Noah Ndela, Mses. Bhattacharya and Aliperti (all WHD), Ms. Osorio-Buitron (FAD), Mr. Shenai (SPR), and Messrs. Duvalsaint and Wata (Port-au-Prince office). Ms. Coquillat (WHD) assisted with logistics and document preparation. Mr. Saraiva and Ms. Florestal (OED) joined the discussions. The team met with Mr. Michel Patrick Boisvert (Minister of Finance), Mr. Jean Baden Dubois (Governor of the Central Bank of Haiti, BRH), Mr. Pierre Ricot Odney (Minister of Social Affairs and Labor), other senior officials, and throughout the process with the international community. CONTEXT AND RECENT DEVELOPMENTS ______________________________________________________5 IMPACT OF FOOD PRICE SHOCK _______________________________________________________________6 OUTLOOK, RISKS, AND DEBT SUSTAINABILITY _______________________________________________7 POLICY DISCUSSIONS __________________________________________________________________________8 MODALITIES OF FINANCIAL SUPPORT, SAFEGUARDS, AND CAPACITY TO REPAY ________ 13 STAFF APPRAISAL ____________________________________________________________________________ 15 BOX 1. Impact of the Global Food Crisis on Haiti’s Balance of Payments _______________________________ 7 FIGURE 1. Food Prices and Social Indicators______________________________________________________________16 TABLES 1. Selected Economic and Financial Indicators, FY2019–25_______________________________________17 2a. Non-Financial Public Sector Operations, FY2019–25 (In millions of gourdes)_________________18 2b. Non-Financial Public Sector Operations, FY2019–25 (In percent of GDP) ____________________19 3. Summary Accounts of the Banking System, FY2019–25 _______________________________________20 4a. Balance of Payments, FY2019–25 (in millions of US$) ________________________________________21 4b. Balance of Payments, FY2019–25 (in percent of GDP) ________________________________________22 INTERNATIONAL MONETARY FUND 3 HAITI 5. Indicators of Capacity to Repay the Fund (Existing and Proposed Credit), FY2019-27 _________23 6. External Financing Requirements and Sources, FY2019–25 ____________________________________24 7. Financial Soundness Indicators, June 2020 – March 2022 _____________________________________25 ANNEX I. Social Safety Net _______________________________________________________________________________26 APPENDIX I. letter of Intent _________________________________________________________________________________26 4 INTERNATIONAL MONETARY FUND HAITI CONTEXT AND RECENT DEVELOPMENTS 1. Haiti is facing a dire humanitarian crisis. The country was hit hard by the economic spillovers of Russia’s invasion of Ukraine. These spillovers included record price inflation that worsened Haiti’s fragility given the high pass through from global to domestic food prices and shortages in food supplies. While Haiti’s population was already suffering severe malnutrition and food insecurity before the war in Ukraine, especially children—with at least half the population assessed by the World Bank to be living below the poverty line—its suffering has been compounded by the surge in food commodity prices. As more than half of household consumption spending is on food, inflation is causing a hunger crisis. 2. The food price shock comes at a difficult juncture. Acute Food Insecurity Situation Source: Integrated Food Security Classification (IPC). • Political uncertainty persists. Prime Minister Henry, who has faced several months of increasingly violent protests, has pledged to hold elections as soon as it is safe to do so. Violence has escalated sharply in recent months with a surge of internal displacement of thousands of Haitians. Protests were further inflamed by the announcement of fuel price increases on September 14. Armed gangs have grown in power over the last year and have increased their control of the capital, blocking access to the main fuel terminal of Varreux and paralyzing most of the activities until end of October, aggravating widespread fuel shortages, forcing temporary hospital and school closures, disrupting food and water distribution, and further hampering efforts to control the recent cholera outbreak. With the police regaining control of the fuel terminal beginning of November, fuel distribution has resumed, and economic activity has slowly restarted. The UN Security Council unanimously approved a sanction regime targeting gang leaders and those who finance them, followed by the Central Bank of Haiti’s instructions to financial institutions, issued in November, to support its implementation. • Macroeconomic conditions. Real GDP likely contracted for the fourth consecutive year in fiscal year 2022, ending in September, at about -1.5 percent. Inflation reached 38.7 percent (y/y) in September 2022, driven by high international food and import prices, drought-related supply disruptions, and monetary financing of the budget deficit (Table 1). To tackle inflation and prevent further depreciation of the gourde, the Banque de la Republique d’Haïti (BRH) raised short-term interest rates to 11.5 percent in August (from 10 percent since March 2020); boosted mandatory reserve requirements on liabilities, in US dollar terms, to 53 percent; and increased interest rates on credit lines. The non-financial public sector (NFPS) fiscal deficit for FY2022 (including grants) is estimated at 2.2 percent of GDP, about 0.7 percent of GDP larger than projected at the time of the SMP approval in June 2022, reflecting higher costs of petroleum INTERNATIONAL MONETARY FUND 5 HAITI product subsidies, before the price increase in September. Despite the riots in September, domestic revenues held up relatively well for the overall year and reached about 90 percent of the value expected in June. The current account deficit is estimated at 2.4 percent of GDP in FY2022. The gourde and the foreign exchange market came under pressure in the summer, partly because of a temporary slowing in remittance inflows, which aggravated the shortage of foreign exchange. Gross international reserves are still estimated at 4.6 months of projected imports, but net international reserves have been declining, by about US$240 million since the end of FY2021. IMPACT OF FOOD PRICE SHOCK 3. The impact of the global shock on food prices has been broad based. Food inflation reached nearly 44 percent (y/y) in September 2022 and 8 percent (m/m), with rice and milk powder surging to 70 and 60 percent (y/y). The war in Ukraine has worsened a difficult situation by causing record inflation on imported products (52 percent y/y in September), increasing costs for fertilizers, and shortages in food supplies, particularly cereals. Substantial risks weigh on the outlook for international prices for rice, widely consumed in Haiti and mostly imported. Moreover, pressures remain on the supply side. The decline in cereal production is highly likely to continue into 2023 and lack of availability and access to food could become even more serious (Figure 1). 4. The food price shock has contributed to an urgent balance-of payments need in FY2023. With elevated food prices and a humanitarian crisis unfolding, Haiti is expected to see a large rise in its import bill in FY2023 (Box 1). This will widen the current account deficit relative to the projections in the June 2022 SMP, resulting in a balance of payments financing gap of at least US$105 million (Text Table 1), although projections are subject to substantial uncertainty. The key assumptions behind these estimates are: • lower remittance flows, a key channel to smooth consumption, lowered foreign Text Table 1. Haiti: Recent Developments in the Balance of Payments 1/ otherwise indicated) (In millions of US$ on a fiscal year basis; unless SMP approval RCF request Difference FY2022-23 Current account -108 -199 -91 Trade Balance -4,796 -4523 272 of which textile exports 1,218 1259 41 of which oil imports -1,156 -1009 147 of which food imports -901 -949 -48 Remittances 3,835 3216 -619 Capital and financial accounts 138 126 -12 of which FDI 85 97 12 Official Disbursements 500 610 110 Overall Balance 30 -73 -103 Financing 21 73 52 RCF 105 105 Other incl. decline in reserves -30 -32 -2 Sources: Authorities' data; and Fund staff estimates and projections. 1/ The 2022 Staff Monitored Program (SMP) was approved in June 2022. exchange income making even more difficult for households to pay higher food prices; • exports will remain subdued, partly because of a 2 percent of GDP decline in textile exports; • weak Foreign Direct Investment (FDI), at still 0.4 percent of GDP in FY2023; • import compression pending additional forthcoming external financing; and 6 INTERNATIONAL MONETARY FUND HAITI • declining Net International Reserves (NIR). The fiscal deficit also contributes to sizable BOP needs, including because critical current public sector spending has a large import component. On the fiscal front, the emergency financing would be used to support poor households through cash transfers and dry food rations (Text Table 2). Text Table 2. Haiti: Additional Expenditures Related to Food Price Shock Measures Millions of Share of HTG GDP (%) Transfers (non-energy) Dry food rations 3,707 0.14 Transfers to poor families 8,237 0.31 Transfers to teachers 0 0.00 Transfers to textile workers 0 0.00 Other transfers 481 0.02 Capital expenditures (University hospital) 0 0.00 Total 12,425 0.47 Sources: Authorities' data; and Fund staff estimates and projections. Box 1. Impact of the Global Food Crisis on Haiti’s Balance of Payments Haiti’s import bill surged amid higher global food and commodity prices. During FY2020-22, the import 1,100 150 Import Bill bill, in dollar terms, expanded nearly 40 percent—from about 1,000 140 $3.7 billion in FY2020 to some $5.1 billion in FY2022, of which 900 130 nearly half is for fossil fuels and food. During this period, the US$ millions 800 120 Food imports fossil fuel bill grew 44 percent and the food import bill 40 700 110 Fossil fuel imports percent, with the latter increasing in line with the surge in food 600 100 Commodity food price prices (chart). index (2020=100), RHS 500 90 400 80 Haiti’s emergency economic situation is closely linked with 2020 2021 2022 (E) 2023 (P) 2024 (P) 2025 (P) Sources: BRH, Word Economic Outlook and Fund staff estimates the global food shock. Haiti has an urgent BOP need associated with acute food insecurity that is inflicting serious economic and projections from 2022 onwards. disruption on the country. The World Food Programme and Food and Agriculture Organization rank Haiti at a catastrophic level on the Integrated Food Security Phase Classification index.1Food insecurity is particularly acute among the most vulnerable and poorest citizens. Services exports—mainly tourism revenues—are at only 20 percent of pre-pandemic levels and are not expected to recover until the current food and security situations improve. Balance of payments support from the RCF at 50 percent of quota will be critical given Haiti’s limited net external buffers. Although gross foreign exchange reserves remain sufficient to cover nearly five months of imports, net international reserves of the BRH have been declining as a result of rising external liabilities to banks. Haiti could be exposed to external sustainability risks if it is unable to roll over its reserve-related liabilities. The BRH will limit its foreign exchange intervention only to smoothing excess volatility (LOI ¶8). Fund engagement via the SMP is likely to catalyze donor funds, further helping the authorities close their BOP gap within a year. __________________________________ 1/ See (United Nations, 2022). OUTLOOK, RISKS, AND DEBT SUSTAINABILITY 5. The outlook remains challenging. The economy is expected to recover slowly, assuming an improvement in security, and inflation to decline over the medium term, contingent upon adequate INTERNATIONAL MONETARY FUND 7 HAITI macroeconomic policies and continued implementation of structural reforms. Staff assesses a financing gap only in FY2023. Growth is projected to turn positive in FY2023 at 0.3 percent, but weaker than 1.4 percent forecast at the time of the SMP approval in June 2022, reflecting mainly the downward revision of the global outlook. A marginal recovery would be driven by a modest security improvement and a small pick-up in key sectors, particularly agriculture (after the recent drought that has lowered harvests); and reach 1.5 percent over the medium term. After surging in 2022, inflation would decline to 21 percent by end-FY2023. A worsening security situation and fuel price increases would keep inflationary pressures high in the first quarter of FY2023, but inflation would moderate gradually as the impact of lower monetary financing of the fiscal deficit comes into effect and world market prices for food and fuel stabilize. The fiscal deficit of the NFPS is projected at 2 percent of GDP in FY2023, 0.3 percentage point lower than envisaged at the time of the SMP approval. Spending would increase due to higher outlays on transfers to provide food to vulnerable households and health expenditure to address the cholera outbreak. The deficit would increase slightly to around 2.7-2.8 percent of GDP over the medium term, driven primarily by capital spending. The current account deficit is expected to narrow to 0.8 percent of GDP in FY2023 as a result of the food price shock and would narrow further to 0.6 percent of GDP in the medium term. 6. The balance of risks is tilted to the downside. Domestic risks include intensified political instability, gang-related disruptions to activity, public health emergency (further spreading of cholera), and natural disasters. Externally, Haiti is vulnerable to volatile remittance flows, lower-than expected external financing as well as renewed surges in global food and energy prices. However, the reduction in fuel subsidies is expected to provide some fiscal relief. Should the authorities move to regular adjustments that follow global market conditions, the fiscal outlook would improve, permitting higher public investment and raising growth, while reducing pressures on the public finances. Further normalization of the security situation would also improve the outlook. 7. Public debt is sustainable with “high risk of distress” and debt carrying capacity is rated “medium.” The DSA (See DSA Supplement) updates the analysis conducted at the time of the SMP approval in June 2022, with the overall analysis remaining largely unchanged. More broadly, 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. Debt carrying capacity is unchanged at “medium” and the debt outlook remains subject to risks. POLICY DISCUSSIONS Discussions focused on the immediate policies to contain the food price shock and protect the poor. 8. The authorities are taking steps to cushion the impact of the shocks on the population. The Ministry of Social Affairs and Labor and the Ministry of Economy and Finance have prepared a very detailed strategy to tackle food insecurity and strengthen the social safety (see text Table 3), also leveraging ongoing programs. The plan aims to expand programs that improve living 8 INTERNATIONAL MONETARY FUND HAITI conditions and enhance social inclusion, focusing on the most vulnerable groups (children, pregnant women, the disabled, and the elderly). The BRH has moved to ease loan repayment obligations— extending them for three months for households and six months for corporates. The ministry of finance is planning to support workers in several sectors (including textile) and to increase cash transfers and food rations for households. The authorities have begun making cash transfers to about 50,000 of the most vulnerable households. They have also begun school feeding programs and providing hot meals for vulnerable households and community restaurants. They also plan to waive school fees. They are considering leveraging digital tools for cash transfers, thanks to support from the Word Bank and Inter-American Development Bank. Staff welcome these measures which are in line with Fund advice. Text Table 3. Haiti: Measures to Support Vulnerable Households in FY2023Executing party Financing Measure Purpose Scope250 community restaurants with (300 meals/day) Expansion of social assistance 100,000 dry rations (per month) programs for vulnerable Food security Hot meals (mobile canteens) households Subsidies to industrial park workers for food and transportation Ministry of Social Affairs Budget Temporary job creation for the Creation of more than 57,000 temporary jobs in and Labor unemployed (prioritization of Food security agriculture, environment, and public sectors (MAST) vulnerable households) country-wide 25,000 parents, each receiving an allowance of School feeding program (food HTG 10,000 Food security and transportation support) HTG 375,000,000 subsidy to transportation company for the purchase of 50 new buses Public transit subsidy program Social safety net Fuel for registered buses for registered buses Youth vocational training programs in high-growth Social safety net 5,000 young people country wide sectors Ministry of Social Affairs Support artisans and small and Labor businesses, and reinforce their 5,000 artisans receiving an allowance of HTG Social safety net (MAST) value chains and production 5,000 for two months capacity Socio-cultural and sports-based Budget activities for youth in vulnerable Social safety net 100 projects neighborhoods Register more than 200,000 new Six cash transfer cycles, each reaching 50,000 Social safety net Ministry of Budget, WB, households wide Economy and IDB, USAID, Enhance the current digital Finance (MEF) WFP Social safety net payment system to facilitate households in SIMAST country money transfers Sources: Ministry of Economy and Finance and Ministry of Social Affairs and Labor. INTERNATIONAL MONETARY FUND 9 HAITI 9. To monitor implementation of these 1.4 1.2 programs and strengthen transparency and 1 0.8 accountability, the authorities committed to 0.6 follow PFM guidelines, in line with recent 0.4 0.2 technical assistance from the Fund. In particular, 0 -0.2 all spending related to the new resources, including -0.4 -0.6 social spending, are included in the budget and the associated financing recorded in the Treasury Single Account at the central bank, while abiding by proper procurement procedures. Strengthening the social safety net will continue to be supported Estimates of Fiscal Space Under Different Fuel Price Adjustment Scenarios (Percent of GDP) 2022 2023 2024 2025 2026 2027 2028 2029 2030 No price adjustment Global oil prices decline and maximum adjustment of 5% at the pump monthly Global oil prices decline and maximum adjustment of 3% at the pump monthly Global oil prices increase and maximum adjustment of 5% at the pump monthly Global oil prices increase and maximum adjustment of 3% at the pump monthly Sources: Ministry of Finance, GAS and Fund staff estimates and projections. by financing from development partners (Annex I). Additional efforts to enhance transparency by the authorities include continued regular publication of the financial operations of the Economic and Social Assistance Fund (FAES), using a template of financial statements for public institutions, a key objective of the SMP program. Similarly, the authorities plan an institutional reform as part of the national policy for social protection and promotion (PNPPS), which will centralize social spending initiatives and their execution under the ministry of social affairs and labor, in line with IMF recommendations (IMF 2020), with a view to enhancing transparency. In particular, the authorities aim to enhance their collaboration with the UN World Food Program (WFP) and expand the partial registry, called SIMAST (national vulnerability database, in which about 420,000 Haitian poor households, or 2,500,000 people, are registered). Staff will continue to engage with other development partners, such as the EU, IADB, the UN WFP, and the World Bank, in order to support the government in effectively and transparently deploying the measures to protect the most vulnerable. 10. The authorities made efforts to sustain revenue collection and should continue to do so. Recent reforms include amendments to the tax code and tax procedure code.1 Next steps would entail following through with implementation the tax code (and the tax procedure code) and customs and tax administration reforms. At the end of June 2022, weaker-than-expected revenue collection prompted the implementation of administrative measures, including replacing management at the revenue agency. These measures boosted domestic revenues to a monthly average of 6.4 billion gourdes, from average of 2.2 billion gourdes in April-June—and to 3.4 billion gourdes in July-August. Despite the authorities’ meaningful efforts, worsening security undermined the revenue agency’s capacity to collect taxes in September-October. Relative to the June 2022 outlook, staff estimated a shortfall of 5 billion gourdes in domestic revenue in FY2022. As a result, monetary financing increased to 2.3 percent of GDP (49.5 billion gourdes)—0.1 percent more than expected. 1 The new tax code, a primer in the country’s history, and the associated procedure code (structural benchmark completed under the SMP) entail the rationalization and simplification of the personal income tax and corporate income tax and broadening their bases by eliminating many exemptions; a new tax system for small businesses; Code and the Special Economic Zone Regime into the tax code. rationalization of excises and small taxes and increase in their rates; the integration of local taxes, of the Investment 10 INTERNATIONAL MONETARY FUND 11. The authorities have approved a credible budget framework for FY2023 and over the medium term. The 2023 budget, approved on December 19, aims for a budget deficit of about 1.5 percent of GDP, slightly lower the one projected by staff of 2 percent of GDP. The fuel price rise announced in September was reflected in prices at the pump in November, but fuel imports fell HAITI Text Table 4. Haiti: FSW and Reallocation of Fuel Subsidies Toward Priority Spending FY2022 FY2023 (In billions of gourdes and percent of GDP) HTG bn % of GDP HTG bn % of GDP Energy 38,886 1.8 10,506 0.4 EDH 7,644 0.4 10,506 0.4 Fuel (net subsides) 31,242 1.5 0 0.0 Non-Energy 5,820 0.3 48,034 1.7 Re-allocation from fuel subsidies 0 0.0 33,480 1.2 IMF FSW loan 0 0.0 12,379 0.4 Other (including social spending) 5,820 0.3 2,174 0.1 Source: Authorities' data; and IMF staff estimates and projections. sharply because of the security situation. As a result, net fuel revenues are projected at 1.1 percent of GDP in FY2023 (vs. -1.5 percent in FY2022). This assumes that prices at the pump remain near their cost and global oil prices moderate in line with WEO projections (Text Tables 4-5 and Chart). The additional budget space is expected to raise non-fuel transfers to 1.2 percent of GDP and pro-growth capital spending to 3.5 percent of GDP (1.4 percent domestically funded). The authorities intend to use the freed-up resources to compensate those most affected by food price rises, including through their Programme d’urgence, which they aim to roll out soon. FY2022 FY2023 % change Text Table 5. Haiti: Impact of Fuel Price Adjustments Prices (HTG/gallon) Formula-cost price (weighted average) 559 605 8.3 Gasoline 594 616 3.6 Gazoil 548 642 17.3 Kerosene 519 583 12.4 Price at the pump (weighted average) 291 621 113.2 Gasoline 250 570 128.0 Gazoil 353 670 89.8 Kerosene 352 665 88.9 Fuel budget impact (% GDP) Subsidies 2.9 0.1 (Forgone) Taxes 1.5 1.1 Net tax collection -1.5 1.1 Memorandum items: World oil price (USD/gallon) 94.6 81.5 -13.9 Exchange rate (HTG/USD) 107 117.1 9.3 Sources: Authorities' data and Fund Staff estimates and projections. 5.0 4.0 Contributions to FY2023 Fiscal Deficit Contributions to the Financing of the Fiscal Deficit (Percent of GDP) 4.5 (Percent of GDP) BRH financing 2.1 External financing 1.5 4.0 3.0 Other domestic financing 0.1 3.5 1.2 3.0 Fiscal deficit 2.0 2.5 2.2 2.0 0.2 2.0 1.0 1.5 1.0 0.0 Reduce deficit Increase deficit 0.5 0.0 FY2022 fiscal Current Energy Capital Tax revenue Grants FY2023 fiscal -1.0 deficit spending 1/ subsidies expenditure deficit FY2022 FY2023 1/ Non-energy transfers financed from resources from the requested Food Shock Window are estimated at about 0.5 percent of GDP in FY2023. Sources: National authorities and Fund staff calculations. INTERNATIONAL MONETARY FUND 11 HAITI 12. Meaningful progress has been achieved on revenue mobilization and on PFM to increase the transparency of public spending and improve the quality of spending. The authorities finalized the new customs tariffs with help from Fund technical assistance which will be published later in December. Work toward consolidating in the Treasury Single Account (TSA) all bank accounts of the central budgetary units has been also completed and the medium-term budget framework, with the non-financial public sector (NFPS) deficit as the main anchor, was approved on December 19. These policy reform priorities are meant to simplify the tax and customs systems and enhance transparency, accountability, and audit capacity. 13. The authorities had already taken steps to strengthen monetary and exchange policy frameworks and staff urged them to continue these important efforts. Central bank lending to the non-financial public-sector (NFPS) was below the end-June target, although has increased in September as the revenue collection was under Text Table 6. Haiti: Financing of the Fiscal Deficit FY2022 FY2023 (In billions of gourdes and percent of GDP) HTG bn % of GDP HTG bn % of GDP External financing -5,822 -0.3 -11,110 -0.4 Project loans 3,450 0.2 0 0.0 Amortization -9,272 -0.4 -11,110 -0.4 Domestic financing 63,240 3.0 68,678 2.4 BRH 49,515 2.3 45,803 1.6 IMF FSW loan 0 0.0 12,379 0.4 Commercial bank deposits and T-Bills 15,950 0.7 10,496 0.4 Domestic suppliers 10,950 0.5 0 0.0 Domestic debt amortization -13,175 -0.6 0 0.0 Source: Authorities' data; and IMF staff estimates and projections. strain. The authorities committed to limiting monetary financing to 1.5 percent of GDP—in FY2023 which staff assesses as non-inflationary. Any excess reserves will be sterilized by liquidity absorption. A further increase in short-term interest rates would help to initiate disinflation, given the large negative real rate (about 15 percent). Additional financing needs in FY2023 could be covered by domestic borrowing since public debt is sustainable (Text Table 6). The BRH will limit its foreign exchange intervention only to smoothing excess volatility (LOI ¶8). Exchange Rate and FX Intervention Net Foreign Assets (NFA) and Net International net central bank FX intervention, USS million Reserves (NIR) of the Central Bank (BRH) 2,500 80 160 60 (+ are FX sales; - are FX purchases) 140 (US$ million) 2,000 BRH reference rate (RHS) NFA 40 Parallel EXR (RHS) NIR 120 20 1,500 0 Interbank market EXR (RHS) 866 931 938 100 1,000 774 732 677 -20 452 80 500 -40 142 203 -60 60 Mar-21 Mar-22 *Dec. 6-22 Jun-20 Jun-21 Jun-22 Sep-20 Sep-21 Sep-22 Dec-20 Dec-21 0 2015 2016 2017 2018 2019 2020 2021 2022 2023 (E) (P) Sources: BHR and Fund staff calculations. 12 INTERNATIONAL MONETARY FUND HAITI 14. The BRH is advancing reforms to enhance supervision and strengthen the AML/CFT framework. With technical assistance, the BRH has been strengthening banking supervision to upgrade the regulatory framework and move to risk-based supervision. The BRH has also heightened risk-based supervision and advanced reforms on anti-money laundering by issuing in November detailed instruction to financial institutions to support the implementation of a sanction regime against gangs and criminal activities. The authorities should accelerate progress in addressing the items on the FATF recommendations in order to meet the deadlines of the action plan. The BRH is working to address the deficiencies in AML/CFT preventative measures applicable to entities under its supervision. MODALITIES OF FINANCIAL SUPPORT, SAFEGUARDS, AND CAPACITY TO REPAY 15. Haiti qualifies for emergency financing under the new Food Shock Window (FSW) of the RCF. The authorities have requested access under the RCF of 50 percent of quota (SDR 81.9 million) through the new FSW.2 Haiti has an urgent BOP need, attributable to acute food insecurity and increase in food import costs that exceed a certain threshold equivalent in the case of Haiti to the last five-year average. If not addressed, the external payments need will seriously disrupt the economy and aggravate the current humanitarian crisis. 3 Haiti is unable to implement an Upper Credit-Tranche (UCT)-quality program, owing to its limited implementation capacity. The proposed access is within the applicable overall access limits under the PRGT and the sub-limits under emergency financing instruments. The financing under the FSW 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 food price shock, including through purchases of food and cash transfers to the most vulnerable households. In their LOI, the authorities confirm that they have established a Memorandum of Understanding between the ministry of economy and finance and the central bank 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 Fund. They indicate also their commitment to cooperate with the Fund and to pursue economic policies supporting macro stability, in line with the current SMP. 16. Haiti’s capacity to repay its obligation to the Fund is adequate, but subject to risks. Haiti’s debt is considered sustainable, although at high risk of debt distress (See DSA Supplement). The Fund’s exposure to Haiti will increase to 115.2 percent of quota or 1.1 percent of GDP and future debt service to the Fund is expected to reach 2.6 percent of exports of goods and services 2 See IMF Policy Paper No. 2022/042 “Proposal for a Food Shock Window Under the Rapid Financing Instrument and Rapid Credit Facility” for standard qualification criteria. A requesting member must fulfil at least one of the food shock impact criteria, i.e., it needs to experience an urgent BOP need associated with: (i) a situation of acute food insecurity or an increase in food/fertilizer costs exceeding a certain threshold or (ii) cereal export shortfall exceeding a certain threshold. Haiti qualifies based on (i). 3 The lack of additional financing gap beyond the amount of the FSW is achieved through import compression, pending additional external financing in the pipeline. INTERNATIONAL MONETARY FUND 13 HAITI and almost 2 percent of gross international reserves, which are higher than PRGT comparators. The country’s high fragility and institutional weakness, as well as high risk of debt distress, add to risks. However, risks are expected to be mitigated by the authorities’ strong commitment to maintaining a close engagement with the Fund, as demonstrated by weekly meetings and by pursuing structural reforms in line with Fund’s advice, their commitment to continuing achieving macro stability and undertaking reforms to strengthen governance. 17. Risk mitigation and safeguards. The authorities initiated several additional measures to ensure transparency and accountability in spending emergency resources on the most vulnerable households. They committed 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, is important for catalyzing further donor support (e.g., expected budget support from the EU). The authorities’ commitment to continuing to advance governance and anticorruption reforms in the context of the SMP has been encouraging. They have, for example, completed publication of the financial and operational audit on COVID-related spending, which was agreed at the time of the previous RCF disbursement, even if it exposed the government to the need of further improve PFM systems. Moreover, governance and PFM reforms have proceeded steadily. These include publication of all public procurement contracts awarded since November 2021— including regular (monthly) information on the beneficiaries of the successful bidders and the consolidation into one Single Treasury Account at the BRH (including central budgetary units, thanks to FAD technical assistance). To further strengthen PFM and mitigate fraud and corruption risks, the authorities will enforce compliance with proper expenditure execution procedures and controls; publish related comprehensive monthly budget execution reports, no later than 45 days after the end of each month; and conduct internal expenditure audits by all the line ministries involved in the use of emergency resources provided under the Food Shock Window through the General Inspectorate of Finance. They will ensure that these internal expenditure audits will be communicated to the Supreme Audit Court (La Cour Superieure des Comptes et du Contentieux Administratif or CSCCA) in a timely manner. They will also provide adequate resources to the CSCCA to conduct compliance audits related to these measures on a bi-annual basis, starting for the period July-December 2022. These compliance audits are to be completed and published within six months of the end of the audit period (LOI ¶5). The authorities committed to provide staff access to its central bank’s most recently completed external audit reports and authorize its external auditors to hold discussions with staff. 18. The authorities will continue to move forward in implementing the 2019 safeguards assessment recommendations. The central bank external audit, conducted by KPMG, was completed and published on June 30, 2022. The BRH also progressed towards an agreement with the MEF on consolidating government debt and the internal audit function plans to verify program monetary data at program test dates, as recommended. The BRH also recently submitted drafting amendments to its organic act. While these would improve the Act in some respects, some areas, including on governance arrangements, mandate, and autonomy safeguards, need further strengthening. Work on these amendments is continuing in consultation with IMF staff. Other priority recommendations, such as the adoption of International Financial Reporting Standards and 14 INTERNATIONAL MONETARY FUND HAITI development of a medium-term plan to phase-out BRH’s involvement in development activities, as well as the alignment of the foreign investment strategy with best practices, remain in progress. Staff will continue to monitor the implementation of recommendations. STAFF APPRAISAL 19. Staff supports the authorities’ request for Fund emergency financing of 50 percent of quota under the Food Shock Window under the Rapid Credit Facility. Staff assesses that Haiti qualifies for support as it faces an urgent balance of payments need that, if not addressed, would cause severe economic disruption. Staff considers the proposed access to be appropriate, given Haiti’s large and urgent financing needs of at least US$105 million in FY2023, its debt sustainability, its adequate capacity to repay the Fund at the proposed level of access, given the strength of the authorities’ policies under the SMP. Haiti’s urgent BOP need is attributed to acute food insecurity and to an increase in food import costs that exceed a certain threshold (equivalent, in Haiti’s case, to the last five-year average). The proposed disbursement would provide critical and timely support to help the government finance its response to the food price shock, including through purchases of food and cash transfers to the most vulnerable households, while acting as a catalyst to official multilateral and bilateral financial assistance. Staff considers that the authorities’ commitments in their Letter of Intent (see appendix) are appropriate to ensure macroeconomic stability. 20. The authorities are committed to advancing policies that will ensure continued macroeconomic stability and support the poor and have shared a detailed strategy to enhance social safety nets. They remain in close consultation with staff to implement policies under the SMP that will promote macroeconomic and financial stability, foster domestic resource mobilization, and ensure continued donor support—with the aim of paving the way for an eventual full-fledged Fund Upper-Credit-Tranche (UCT)-quality program. The authorities’ LOI makes it clear that the emergency financing will be used to support spending allocated in the budget on food and cash transfers in order to mitigate the impact of the food price shock on the population. INTERNATIONAL MONETARY FUND 15 HAITI Figure 1. Haiti: Food Prices and Social Indicators Inflation, largely imported, accelerated in 2022… …and import volume of rice from the US dropped.... 55 Contribution to Inflation 50 (y/y growth) 550,000 Others US Rice Exports to Haiti 45 Housing, water, electricity (In metric tons) 500,000 Food and non-alcoholic beverages 40 CPI - local products CPI - imported products 35 450,000 30 400,000 Overall CPI 25 350,000 20 15 300,000 10 250,000 5 0 200,000 Nov-21 Aug-20 Mar-20 Jun-21 Sep-22 Jan-21 Apr-22 Oct-19 150,000 2013 2021 2001 2003 2005 2007 2009 2011 2015 2017 2019 …together with domestic production of cereal.The absolute number of people undernourished has reached 5.6 Number of People Undernourished historic highs… 700,000 Cereals, Total Production (In millions, three-year average) 5.4 (In tonnes) 650,000 5.2 600,000 5 550,000 4.8 500,000 4.6 450,000 4.4 400,000 4.2 2009-11 2015-17 2001-03 2003-05 2005-07 2007-09 2011-13 2013-15 2017-19 2019-21 350,000 2010 2012 2014 2016 2018 2020 …and has reversed the meager progress in reducing Security problems has led to displacement of thousands of 100 40,000 150,000 poverty. people. Poverty Rates 1/ Total Displaced Persons by Violence 2/ (In percent) (Number of people) 125,000 Haiti Kosovo 80 Papua New Guinea Burundi (RHS) 30,000 Lebanon (RHS) 100,000 60 20,000 75,000 40 50,000 10,000 20 International poverty rate ($2.15 in 2017 PPP)