(2023-01) Haiti - First Review Under the Staff-Monitored Program

HAITI IMF Country Report No. 23/48 January 2023 FIRST REVIEW UNDER THE STAFF-MONITORED PROGRAM—PRESS RELEASE; AND STAFF REPORT In the context of the First Review Under the Staff-Monitored Program (SMP), the following documents have been released and are included in the package: • A Press Release • The Staff Report prepared by a staff team of the IMF for the Executive Board’s information following discussions that ended on December 8, with the officials of Haiti on economic developments and policies underpinning the First Review Under the Staff-Monitored Program. Based on information available at the time of these discussions, the staff report was completed on December 22. The documents listed below have been or will be separately released. 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 PR23/14 IMF Management Completed the First Review of the Staff Monitored Program with Haiti FOR IMMEDIATE RELEASE Staff Monitored Programs (SMPs) are informal arrangements between national authorities and IMF staff to monitor the authorities’ economic program. As such, they do not entail endorsement by the IMF Executive Board. SMP Staff reports are issued to the Board for information • Management of the International Monetary Fund (IMF) approved the first review of Haiti’s Staff-Monitored Program (SMP) on December 21, 2022. The SMP will help the government restore macroeconomic stability and lower inflation―a key goal given the burden of high inflation on the poor. • The SMP seeks to advance decisive governance reforms to enhance accountability. In particular, it emphasizes greater accountability through stronger public finance management, revenue administration, transparency, and anti-corruption measures. • The program comprises realistic measures suited to Haiti’s fragility to help the authorities build a track record of policy implementation. Washington, DC – January 23, 2023: Management of the International Monetary Fund (IMF) approved on December 21, 2022 the first review of Haiti’s Staff-Monitored Program (SMP). Discussions for the review took place during October-December, 20221. The SMP takes into account Haiti’s fragility and capacity constraints. It was designed to support the authorities’ economic policy objectives and build a track record of reform implementation. Haiti is mid-way through a SMP that has been an important anchor for Haitian policymakers, despite one of the most challenging economic environments in many years. Haiti is faced with many difficulties, which have been worsened by higher food and fuel prices stemming the war in Ukraine, which have increased its economy’s fragility. The external shocks and deterioration of the security situation have resulted in a macroeconomic outlook worse than at the time of the program’s approval by IMF management in June 2022. Despite the more difficult macroeconomic conditions and downside risks, recent data and progress on structural reforms suggest that the authorities are making meaningful efforts to ease the country’s multiple challenges. In this difficult context, the authorities have committed 1 The SMP was approved on June 17, 2022 and runs through May 31, 2023. 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. 2 to continue implementing policies that would begin to restore macroeconomic stability and growth, strengthen governance, and to provide relief to the most vulnerable households. The SMP has been instrumental in catalyzing forthcoming external financing and its implementation has been broadly satisfactory, despite obstacles in meeting quantitative targets due to a less favorable environment than initially anticipated. The Haitian authorities have adopted a budget for FY2023 that is consistent with agreed targets under the SMP and in the context of a medium-term budget. They ensured that a meaningful budget allocation is used to protect the most vulnerable and are implementing public financial management systems to monitor the use of public funds. The authorities are committed to reduce central bank financing of the deficit to levels consistent with low inflation and limit foreign exchange intervention to smoothing excess volatility. In line with the reforms under the SMP, the authorities took measures aimed at raising domestic revenues, approving in December a new tax code and following through with the adoption of the customs and tax administration reforms. In particular, the tax code—a primer in the country’s history—entails the rationalization and simplification of the personal income tax and corporate income tax, including through the broadening of the tax base and elimination of many exemptions. Progress on governance is key to ensure inclusive growth. The authorities have taken steps to strengthen accountability in the collection and use of public resources and have boosted the transparency of public procurement for emergency resources. They are working to bring AML/CFT laws up to international standards supported by Fund’s capacity development. IMF staff will continue to 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. The Fund will also continue to coordinate closely with Haiti’s other development partners to leverage efforts in support of common objectives. SMP are only subject to formal IMF management review. HAITI FIRST REVIEW UNDER THE STAFF-MONITORED PROGRAM December 22, 2022 EXECUTIVE SUMMARY Context: Haiti is faced with many difficulties, which have been worsened by higher food and fuel prices stemming from Russia’s war in Ukraine. Because of this global shock and a deterioration of the domestic security situation, the economy has become even more fragile, and the macroeconomic situation and outlook are more challenging than in June 2022, when the Staff Monitored Program was approved by IMF Management. In line with global trends, growth has been weaker than expected and inflation higher. Despite the more difficult macroeconomic situation and downside risks, recent data and progress on structural reforms suggest that the authorities are making meaningful efforts to ease the country’s multiple challenges. Program implementation: The implementation under the SMP has been broadly satisfactory—despite obstacles in meeting quantitative targets (QTs) due to a less favorable environment—and it has been instrumental in catalyzing forthcoming external financing. The authorities met one end-June QT and missed three other targets. They met two of three continuous QTs on arrears. They also met the two recurrent structural benchmarks. Of the five end-September structural benchmarks, although none was met on time, four were completed with some delay. Staff proposes to reset one structural benchmark that was not completed as well as the end-December and end-March structural benchmarks, and to adjust QTs to reflect the less favorable environment. The review focused on identifying corrective actions to support program implementation. Policy recommendations: • Adopt a budget for FY2023 that is consistent with agreed targets under the SMP and in the context of a medium-term budget framework for FY2023–25. • Ensure a meaningful budget allocation to protect the most vulnerable and implement public financial management systems to monitor the use of public funds. • Reduce central bank financing of the deficit to levels consistent with low inflation and limit foreign exchange intervention to smoothing excess volatility. • Sustain recent efforts to boost revenue collection, including by following through with the adoption of the tax code and customs and tax administration reforms. • Address the Fund’s safeguards recommendations, including on strengthening the central bank ’s law and transitioning to International Financial Reporting Standards. 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 Bank of the Republic 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 ECONOMIC DEVELOPMENTS_________________________________________ 4 PROGRAM IMPLEMENTATION UNDER THE SMP______________________________________________ 5 OUTLOOK AND RISKS___________________________________________________________________________ 6 REACHING THE OBJECTIVES OF THE SMP _____________________________________________________ 7 A. Fiscal Policy ____________________________________________________________________________________ 8 B. Social Assistance _______________________________________________________________________________ 9 C. Monetary and Exchange Rate Policies ________________________________________________________ 11 D. Financial Sector Policies ______________________________________________________________________ 13 E. Governance and Safeguards __________________________________________________________________ 13 PROGRAM MONITORING______________________________________________________________________14 STAFF APPRAISAL______________________________________________________________________________15 FIGURES 1. Real Sector Developments, 2015–22 __________________________________________________________ 17 2. Fiscal Sector Developments, 2015–22 _________________________________________________________ 18 3. Monetary Sector Developments, 2015–22_____________________________________________________ 19 4. Financial Sector Indicators, 2015–22 __________________________________________________________ 20 5. External Sector Developments, 2015–22 ______________________________________________________ 21 6. Social Indicators_______________________________________________________________________________ 22 2 INTERNATIONAL MONETARY FUND HAITI TABLES 1. Selected Economic and Financial Indicators, FY2019–25 ______________________________________ 23 2a. Non-Financial Public Sector Operations, FY2019–25 (In millions of gourdes) ________________ 24 2b. Non-Financial Public Sector Operations, FY2019–25 (In percent of GDP) ____________________ 25 3. Summary Accounts of the Banking System, FY2019–25 _______________________________________ 26 4a. Balance of Payments, FY2019–25 (in millions of US$) ________________________________________ 27 4b. Balance of Payments, FY2019–25 (in percent of GDP)________________________________________ 28 5. External Financing Requirements and Sources, FY2019–25____________________________________ 29 6. Financial Soundness Indicators, June 2020 – March 2022 _____________________________________ 30 APPENDIX I. Letter of Intent_________________________________________________________________________________ 31 Attachment I. Memorandum on Economic and Financial Policies ______________________________ 34 Attachment II: Technical Memorandum of Understanding _____________________________________ 44 INTERNATIONAL MONETARY FUND 3 HAITI CONTEXT AND RECENT ECONOMIC DEVELOPMENTS 1. Haiti is at a critical juncture. It has been strongly impacted by the spillovers of Russia’s war in Ukraine, which heightened the economy’s fragility. While Haiti’s population was already experiencing malnutrition before the war in Ukraine, its suffering has been compounded by the surge in food prices, leading to acute hunger. 2. Political uncertainty and the security crisis persist. Prime Minister Henry, who has faced several months of widespread protests, has pledged to hold elections as soon as it is safe to do so. Violence escalated sharply in recent months with internal displacement of thousands of Haitians. The security situation constrained economic activity, particularly during September and October, hampering efforts to control the recent cholera outbreak.1 The UN Security Council approved a sanction regime targeting gang leaders, followed by the Central Bank of Haiti’s instructions to financial institutions to support its implementation. 3. Against this backdrop and a deteriorating global outlook, macroeconomic conditions remain challenging. Real GDP likely contracted for the fourth consecutive year in FY2022, ending in September, by about -1.5 percent. Year-on-year inflation reached 38.7 percent in September 2022, driven by high international food and import prices, drought-related supply disruptions, and monetary financing of the budget deficit (Table 1). The non-financial public sector (NFPS) fiscal deficit (including grants) is estimated to have expanded slightly—to 2.2 percent of GDP relative to 1.5 percent envisaged at the time of the SMP approval. This was due to budget strains linked to the cost of petroleum product subsidies prior to the price increase in September. Despite the riots in September, recent data suggest that domestic revenue in FY2022 was 90 percent of the value expected in June (Tables 2a and 2b). 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 that aggravated the shortage of foreign exchange. Gross international reserves are still estimated at 4.6 months of projected imports, but net international reserves have declined, by some US$240 million since the end of FY2021. 4. The authorities have nonetheless demonstrated strong commitment under the SMP and have taken important policy measures. To tackle inflation and prevent further depreciation of the gourde, the Banque de la République 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 BRH has moved also to ease loan repayment obligations—extending them for three months for households and six months for corporates. The authorities have prepared a detailed strategy to tackle food insecurity and strengthen the social safety net, leveraging ongoing programs. 1 Protests were further inflamed by the government’s announcement on September 14 to raise fuel prices. The announcement was for the kerosene prices to rise from 353 HTG per gallon to 670 HTG and diesel prices from 352 HTG per gallon to 665 HTG―a level that would cover costs, margins, and statutory taxes. The price of gasoline was announced to be increased from 250 to 570 HTG per gallon―implying a subsidy of 60 HTG per gallon (about US$0.80 per gallon). These price increases were passed on to consumers at the pump in November. 4 INTERNATIONAL MONETARY FUND HAITI PROGRAM IMPLEMENTATION UNDER THE SMP 5. Program performance has been broadly satisfactory. Policies, supported by the SMP, have moved in the right direction, notably on the structural front. Progress has not been linear, however, with strong momentum until mid-September, slowing after a deterioration in the security situation, and picking up again in the second half of October. i. Quantitative and indicative targets. The authorities met one June quantitative target (net credit to the government) and missed three other targets, with one missed by a small margin (Appendix 1. Table 1). They met two of three continuous QTs on arrears, missing one on domestic arrears accumulation by a large amount, owing to a build-up of obligations to fuel companies. While data on spending on social programs remain preliminary, spending appears to be below the agreed target of HTG3 billion, owing to institutional bottlenecks. The deteriorating security situation delayed the rollout of excise tax increases, whose collection underperformed through the end of June. At the same time, the rise in world oil prices and weakening of the gourde led to higher-than-expected fuel subsidies and their corresponding tax expenditures. As a result, the authorities missed the end-June indicative target on government tax revenues by about 6 billion HTG (0.3 percent of GDP). ii. Structural benchmarks supported by capacity development. Although the September riots worsened the macroeconomic outlook, the authorities continued to be highly engaged with staff through the high-level Program Monitoring Committee (Comité de Suivi), which met weekly. This Committee has enabled staff to work closely with the authorities and to provide implementation support. The authorities have taken broadly satisfactory steps on structural reforms, capacity building, and governance, meeting the two monthly and quarterly structural benchmarks (SB). The SB for end-June (completion and publication of the financial audit statements of the central bank) was met. The authorities completed four of the five end-September SBs with delay. For the remaining end-September SB, staff proposes to reset it as good progress is underway. Efforts related to one benchmark for end-December and one for end-March are also proceeding and staff proposes to reset them to end-March 2023 and end-April 2023, respectively. Overall, continuous ownership of the SMP has led to real progress in certain areas, notably in strengthening public finance institutions and governance: a. Public financial management (PFM). The FY2023 budget was adopted on December 19, 2022, together with a three-year medium-term framework with the NFPS as the anchor (end-September SB). Technical assistance support from the IMF Fiscal Affairs Department has been critical in providing operational and technical guidance and maintaining momentum. In addition, thanks to IMF support, the coverage of the Treasury Single Account has been expanded and completed in early November. b. PFM/Governance. The authorities re-convened the governing board of the agency Economic and Social Assistance Fund (FAES) and published the first quarterly report on its operations (end-June SB). FAES is an off-budget agency that implements social projects INTERNATIONAL MONETARY FUND 5 HAITI funded with external assistance and some domestic resources. Publication of the reports greatly enhances oversight and accountability, as indicated in earlier audits by the Supreme Audit Court. c. Governance. The authorities have been publishing, on a monthly basis, procurement contracts awarded, including the names of beneficial owners of bidders. With assistance from the IMF Legal Department experts, staff has been reviewing these reports and providing feedback to the authorities. Staff finds that this reform has helped raise the transparency of public procurement and better define the roles of the procurement agency (CNMP) and Supreme Audit Court. The central bank’s external audit, conducted by KPMG, was published. The central bank is revising the Central Bank law with assistance from the IMF Legal Department. A revised draft has been shared with staff in November and the authorities are working to finalize the draft in consultation with IMF staff to strengthen the independence of the central bank. The technical assistance program with the IMF, in coordination with EU assistance, to revise the AML/CFT legal framework (originally set for end-March 2023 SB) is under way. d. Tax and revenue administration. With important technical assistance support from the IMF’s Fiscal Affairs Department (FAD), the consultations on the draft Tax Code and Draft Tax Procedure Code have been completed as of early-September,2 a meeting to explain to stakeholders the amendments to the codes following their comments took place on December 15, and the codes were adopted by decree on December 19. The authorities produced the nomenclature on the Tax Identification Number (TIN) and national identification, which appear adequate based on preliminary review by FAD experts. In response to a protracted weakening in revenue and possible external pressure, senior management at the revenue agency was replaced; this was followed by an immediate jump in revenue collection in July-August. OUTLOOK AND RISKS 6. The near-term 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 macroeconomic policies and continued implementation of structural reforms. Staff 2 The new tax code, a primer in the country’s history, entails 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; rationalization of excises and small taxes and increases in their rates; the integration of local taxes, of the Investment Code and the Special Economic Zone Regime into the tax code as well as the tax procedure code. 6 INTERNATIONAL MONETARY FUND HAITI assesses a financing gap only in FY2023.3 Growth is projected at 0.3 percent in FY2023, 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 SPM 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 only to 0.8 percent of GDP in FY2023 as a result of the food price shock but would narrow further to 0.6 percent of GDP in the medium term. 7. 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. REACHING THE OBJECTIVES OF THE SMP 8. The overall objectives of the program remain achievable. Discussions focused on identifying corrective actions that will support program implementation and enable the authorities to meet the objectives of the SMP. First, the authorities are committed to sustain recent efforts on revenue collection to reach revenue targets and intensify efforts to implement reforms on revenue mobilization and social spending. Second, the authorities’ fuel price reform (while not part of program conditionality), needs to include mitigating measures that shield the most vulnerable while adopting gradual and automatic pricing mechanisms that limit the reemergence of fuel subsidies—and be supported by an enhanced communication strategy. Third, continued implementation of the monetary and exchange rate framework laid out in the SMP is key to releasing pressures on the markets and preserving Net International Reserves (NIR). Fourth, continuing to strengthen banking supervision by moving to risk-based supervision would also be key. Finally, further advancing reforms on governance would be critical for improving the efficiency and productivity of public resources and maintaining engagement with donors. 3 The authorities are requesting financial assistance under the Food Shock Window (FSW) of the Rapid Credit Facility (RCF). INTERNATIONAL MONETARY FUND 7 HAITI A. Fiscal Policy 9. The FY2023 budget, adopted on December 19, is consistent with the program objective of reducing the monetary financing of the deficit to lower inflation and help restore stability (MEFP, ¶9). The authorities maintain a floor on the primary balance of the NFPS (quantitative target) and target a deficit of 1.5 percent of GDP in FY2023, slightly below staff projections, despite very difficult economic conditions. New spending on food transfers is expected to reach 0.5 percent of GDP, funded by forthcoming external financing. The fuel price increase announced in September has been reflected in the prices at the pump starting in mid-November, as indicated by a recent communiqué by the Minister of Trade and Industry. As a result, net fuel revenues are estimated at 1.1 percent of GDP in FY2023 (vs. -1.5 percent in FY2022), assuming that prices at the pump would remain above their cost and that global oil prices moderate in line with WEO projections. 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 agreed to use these resources to limit the monetary financing of the deficit in FY2023 and to compensate those most affected by food price rises, including through their Programme d’urgence, which should be rolled out expeditiously. 4.0 5.0 Contributions to the Financing of the Fiscal Deficit Contributions to FY2023 Fiscal Deficit (Percent of GDP) BRH financing (Percent of GDP) 4.5 External financing 2.1 3.0 Other domestic financing 1.5 4.0 0.1 3.5 1.2 Fiscal deficit 2.0 3.0 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 -1.0 FY2022 fiscal Current Energy Capital Tax revenue Grants FY2023 fiscal FY2022 FY2023 deficit spending 1/ subsidies expenditure deficit Sources: National authorities and Fund staff calculations. 1/Non-energy transfers financed from resources from the requested Food Shock Window are estimated at about 0.5 percent of GDP in FY2023. 10. Recent efforts to boost revenue collection should be sustained. Weaker-than-expected revenue collections at end-June, prompted the implementation of administrative measures in August, including strengthening the control of invoices submitted for imported goods and replacing the management of the revenue agency. These measures raised domestic revenues to a monthly average of 6.4 billion gourdes, from an average of 2.2 billion gourdes in April-June to 3.4 billion gourdes in July-August. Despite the authorities’ commendable efforts, worsening security undermined the revenue agency’s capacity to collect taxes in September-October, as a result, monetary financing increased to 2.3 percent of GDP (49.5 billion gourdes)—0.1 percentage point larger than programmed in FY2022. The slippage does not undermine the SMP’s goal of reducing monetary deficit financing to a level consistent with low inflation, after taking into account imported 8 INTERNATIONAL MONETARY FUND HAITI inflation, as the revenue decline was accompanied by meaningful contractions in spending (non-energy sector transfers and public investment)—which, however, was not growth friendly. Staff encouraged the authorities to sustain the measures put in place in August—to help anchor monetary financing—and follow through with the implementation of the tax code (and the tax procedure code) and customs and tax administration reforms. 11. 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; worked toward consolidating in the Treasury Single Account (TSA) all bank accounts of the central budgetary units; and also prepared a medium-term budget framework, with the NFPS deficit as the main anchor that will be adopted together with FY2023 budget. These policy reform priorities are meant to simplify the tax and customs systems and enhance transparency, accountability, and audit capacity. The authorities are committed to advance further on the publication of: (i) TIN data and make its use compulsory for finance agencies (SB originally set for end-December), and (ii) customs codes and tariffs to help raise accountability and improve audit capacity (end-September SB). Larger payoffs from these reforms would materialize over the medium term since they require institutional changes at the revenue agency. 12. To mitigate fiscal risks, the authorities and staff have formulated a contingency plan. Since the scope for raising revenue could be limited in the near-term, shortfalls in revenue or external budget support need to be offset by cutting back on planned increases in current and capital spending in FY2023, while preserving social spending targeted to the most vulnerable. The authorities agreed to avoid running domestic arrears to finance shortfalls, clear existing domestic arrears, and preserve FX reserves at the current adequate level. 13. 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, 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 communicate publicly any future conversion of their SDR allocation into freely usable currencies on the BRH or MEF websites. B. Social Assistance 14. Fuel price reforms should include mitigating measures to protect the most vulnerable in conjunction with a gradual and well-communicated approach. As discussed at the time of the SMP approval, fuel subsidy reform is essential to ensure medium-term fiscal sustainability. Given the political and social implications, the authorities are taking the lead both in terms of the modalities and timing of the reform. The September ad hoc increases in fuel prices have eliminated fuel subsidies for now, but a comprehensive and transparent policy framework for future price adjustments still needs to be laid out. Thus, while the SMP does not include conditions on the INTERNATIONAL MONETARY FUND 9 HAITI specific timing of the reform, staff continues to underscore its importance, as well as reiterate key good practices, such as the adoption of an automatic pricing mechanism, including that price adjustments should be predictable and take place regularly to reflect global market prices changes, and include a smoothing mechanism (to help dampen volatility). Upward price increases should be accompanied with mitigating measures to protect the most vulnerable and good policy principles. Staff and the authorities agreed that an elaborated communication policy would greatly help the authorities’ reform strategy. Establishing a regulatory framework for the petroleum products sector and strengthening related regulatory institutions should remain amongst the authorities’ reform priorities. 15. The authorities are taking steps to cushion the impact of the shocks on the population. The Ministry of Social Affairs and Labor (MAST) and the Ministry of Economy and Finance have prepared a detailed strategy to tackle food insecurity and strengthen the social safety (see text Table 1), also leveraging ongoing programs. The plan aims to expand programs that improve living conditions and enhance social inclusion, focusing on the most vulnerable groups (children, pregnant women, the disabled, and the elderly). The Ministry of Finance is planning to support workers in the textile sector 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 wave school fees and are considering leveraging digital tools for cash transfers, thanks to support from the Word Bank and the Inter-American Development Bank. These measures are in line with Fund advice. Staff welcomed the emphasis on improving the social safety net by increasing social programs—particularly in poorer regions—in line with absorption capacity, while stressing that additional coverage is critical given the widespread poverty. 16. The authorities have increased the transparency of the FAES as a program objective. The governing board of the agency FAES was re-convened, and the authorities published the first quarterly report on its operations. But the report lacked detail and did not follow accounting standards. Staff indicated that significant improvements were needed for subsequent reports (quarterly SB) and shared a template of financial statements for public institutions as an example. The authorities agreed to improve FAES quarterly reports going forward and to communicate on proceedings for future governing board meetings. 17. Missing the floor on social spending reflects structural problems and underscores the need to build a coherent and adequate social safety net. As noted above, the authorities missed the quantitative target on social spending that allocated resources equivalent to 0.15 percent of GDP to social benefits, including under the Programme d’urgence. This illustrates the fragmented social programs and agencies (IMF 2020) and underscores the need to centralize social spending design and execution under the Ministry of Social Affairs and Labor. With respect to the quantitative target, the authorities have taken steps to improve the execution of programs, including on procurements and absorption capacity. Staff urged the authorities to: • implement the governance structure envisaged in the National Policy for Social Protection and Promotion (PNPPS), approved in 2020 but not yet implemented, and 10 INTERNATIONAL MONETARY FUND HAITI • working with IFIs and the Système Informatique du Ministère des Affaires Sociales et du Travail (SIMAST), elaborate by March 2023 an action plan to implement the PNPPS, which includes at least one universal benefit registered in the FY2023 budget and expands the World Bank-supported Projet de Protection Sociale Adaptative pour une Résilience Accrue (PSARA)―targeting households with pregnant women, children under five, and persons with disabilities―to at least one other department (province). Executing party Financing Measure Purpose Scope250 community restaurants with (300 meals/day) Text Table 1. Haiti: Measures to Support Vulnerable Households in FY2023 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. C. Monetary and Exchange Rate Policies 18. The monetary policy framework has been strengthened and efforts should continue to INTERNATIONAL MONETARY FUND 11 HAITI enhance exchange rate flexibility. Monetary performance at end-June has been looser than programmed, owing mainly to lower-than-programmed liquidity absorption. The BRH met the ceiling on credit to government at the end of June, but the gourde and the foreign exchange (FX) market came under pressure in the summer, in part because of a slowdown in remittance inflows that aggravated the shortage of FX. The BRH acted in August to provide dollars and absorb gourde liquidity. Staff and the authorities agreed that the framework laid out in the SMP remains relevant. This includes greater exchange rate flexibility, a ceiling on credit to the NFPS as the main anchor to limit monetary financing of the deficit to 1.5 percent of GDP, and 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 policy transmission. Staff urged the authorities to raise short-term rates further to spur disinflation, given the large negative real rate at about 15 percent and the cost of inflation for the poor. The authorities reiterated that they stand ready to increase the short-term rate further to stem inflationary pressures but are also taking into account the fallout on an economy that has contracted for the fourth consecutive year and the asymmetric effect of rate hikes on lending and deposit rates. net central bank FX intervention, USS million Reserves (NIR) of the Central Bank (BRH) 80 160 2,500 60 (+ are FX sales; - are FX purchases) Exchange Rate and FX Intervention Net Foreign Assets (NFA) and Net International 140 (US$ million) BRH reference rate (RHS) 2,000 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: BRH and Fund staff calculations. 19. The BRH should continue to limit its interventions in the FX market to smoothing excessive or volatile exchange rate fluctuations. The gourde downswing resulted in an increase in the volume of FX interventions, adding pressure to NIR. The BRH managed the exchange rate adjustment gradually using prudential measures, including interest rate increases and reserve requirements. With respect to the QT on the NIR, staff urged the authorities to boost NIR (QT), including through less FX sales while ensuring the exchange rate remains primarily an external shock absorber and reserves are preserved. The unwinding of FX surrender requirements with Circular 114.3 is a positive step. In consultation with the IMF’s Monetary and Capital Market Department (MCM), the BRH considers to: (i) put in place an appropriate mechanism for FX interventions, such as well-designed weekly FX auctions, in lieu of the FX allocation system, (ii) advance its ongoing work on a FX market intervention rule, and (iii) complete the revision of banks’ net open positions (NOP) limits. Staff and the authorities agreed that advancing these reforms would enhance the 12 INTERNATIONAL MONETARY FUND HAITI transparency of interventions and encourage banks to improve their liquidity management in a more forward-looking manner. D. Financial Sector Policies 20. The BRH has advanced on reforms to improve payment systems. With Fund’s technical assistance, the BRH has been strengthening banking supervision to upgrade the regulatory framework and move to risk-based supervision. Reform efforts on the financial sector focus on: • Banking supervision. The BRH has reinforced human capital through external hiring and training of supervisors. It finalized the pre-draft of risk assessment grids and the rating matrix for financial institutions, a step toward risk-based supervision. The authorities are finalizing new regulations on risk concentration, classification, and provisioning of credits, as well as the new chart of accounts for financial institutions. Staff commended recent progress and urged the BRH to continue its work to establish risk-based supervision supported by TA. • Digital money. The BRH has benefited from IMF technical assistance in analyzing key issues related to a central bank digital currency. Staff strongly recommended that the BRH consider all aspects of the project’s desirability and feasibility, including a robust evaluation of costs and risks, before proceeding to the prototype phase. Furthermore, Haiti lacks the regulatory framework and/or updated national payment system needed to facilitate mobile payments and operators. Modernization efforts should include migration toward new international messaging standards, which would support interoperability and financial integrity. • Anti-money laundering. An interim technical assistance report by the IMF Legal Department and detailed comments on the draft AML/CFT bill was produced in late November 2022, with a follow-up mission expected early next year to agree on key amendments and reforms. Given widespread deficiencies in the legal framework and potential correspondent banking relationship pressures, revision of the AML/CFT law should be approved by the Council of Ministers by April 2023 (SB). Progress in meeting the requirements of its Action Plan under the FATF’s International Co-operation Review Group (ICRG) is essential to prevent negatively impact on correspondent banking relationships and remittance flows. E. Governance and Safeguards 21. The authorities have made solid progress on governance, but further efforts are needed. Since the adoption of November 2021 decree on the transparency requirements, the authorities have published public procurement contracts, including the publication of tenders, contracts, and the beneficial owners of successful bidders (monthly SB). They committed to strictly enforce these governance arrangements to procurement contracts awarded on the spending of emergency resources. Staff followed through the implementation of this continuous SB. To monitor the implementation of social programs, the authorities committed to follow good PFM practices, in line with recent technical assistance from the IMF. They agreed to introduce all social expenditure INTERNATIONAL MONETARY FUND 13 HAITI into the budget and all associated financing in the Single Treasury Account at the central bank, in compliance with procurement, execution, and expenditure control procedures. Moreover, they agreed to strengthen transparency and audit capacity in the spending of emergency resources for the most vulnerable households to ensure accountability. To this end, they have activated budgetary mechanisms to carefully monitor, record, and publish all expenditure related to the emergency response and will publish comprehensive monthly reports on the execution of the budget, no later than 45 days after the end of each month, while carrying out internal audits of expenditure by all the ministries concerned with the requested use of the emergency resources provided in the framework of the IMF Food Shock Window. Staff welcomed these measures and stressed that adequate transparency and recording of funding allocation is essential to catalyze further donor support. Finally, staff urged the authorities to finalize the reform of the anti-corruption laws to ensure effective implementation and compliance with the United Nations Convention against Corruption and international best practices. 22. With a view to strengthen its governance and operations, the BRH should resume its efforts to implement the remaining overdue 2019 safeguards recommendations. Some recommendations have been implemented, including the publication of the FY 2021 financial statements (end-June 2022 structural benchmark). 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 for IMF staff’s review (end-September 2022 structural benchmark). While these would improve the Act in some respects, some areas, including on governance arrangements, mandate, and autonomy safeguards, need further strengthening. Moreover, other priority recommendations, such as the adoption of International Financial Reporting Standards and 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 the recommendations. PROGRAM MONITORING 23. Quantitative targets. Staff proposes to revise the December 2022 quantitative targets (QTs) and March 2023 indicative targets on the NFPS primary balance floor; the NIR floor, BRH net credit to the NFPS ceiling; and a floor on budget allocations to the Ministry of Social Affairs and Labor (the key agency delivering social assistance) to reflect the more adverse economic environment (Appendix 1, Table 1). The continuous QTs will remain in place and consist of a zero ceiling on: non concessional borrowing (below 35 percent grant element), domestic arrears accumulation, and external arrears accumulation. Staff proposes to slightly lower the indicative target on central government tax revenue, consistent with the improved fiscal outlook (¶9). Given the deterioration of the global outlook and Haiti’s fragility, this will permit some flexibility to support the authorities’ spending capacity, while ensuring they continue to meet the original objectives set out in the SMP. 14 INTERNATIONAL MONETARY FUND HAITI 24. Adjustors. The QTs continue to include an asymmetric adjustor on the NFPS primary balance and NIR for shortfalls in external budget support. More specifically, if a shortfall in budget support grants arises, the floors on both the primary balance and NIR target would be reduced by the amount of the shortfall. As the ceiling on BRH financing to the government would not change, the government would need to raise financing from domestic sources or use concessional external financing to cover the lower primary balance. If external budget support grants are above projections, the primary balance and NIR floors would not change. This would permit the government to spend the excess, which is justified by the need to increase spending and Haiti’s debt sustainability. The program started in June 2022 and ends May 31, 2023, with test dates being the ends of June 2022 and December 2022. Provision of timely data for program monitoring has improved and the team will emphasize that efforts should conti