(2023-06) Haiti Second Review Under the Staff-Monitored Program - Press Release and Staff Report

HAITI IMF Country Report No. 23/230 June 2023 SECOND 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 April 28, 2023, 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 May 31, 2023. 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 PR23/213 IMF Management Completes the Second 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 on May 30, 2023 the second and final review of Haiti’s Staff-Monitored Program (SMP). The SMP has helped the government restore macroeconomic stability and strengthen governance and fiscal transparency. • The SMP has played an important role in advancing decisive governance reforms to enhance accountability through stronger public finance management, revenue administration, data provision, and anti-corruption measures. • The program has been designed to take into account Haiti’s fragility and capacity constraints and has helped the authorities build a track record of policy implementation. Washington, DC – June 15, 2023: Management of the International Monetary Fund (IMF) approved on May 30, 2023 the Second and Final review of the Staff-Monitored Program (SMP) which started in June 2022. The SMP was designed to support the authorities’ economic policy objectives and build a track record of reform implementation. In line with the Fund’s Strategy for Fragile and Conflict-Affected States, staff also coordinated closely with Haiti’s main development partners. Haiti faces a challenging macroeconomic outlook amid a humanitarian crisis. The country has been hit hard by economic spillovers from Russia’s invasion of Ukraine, with food price inflation triggering a hunger crisis. This global shock has been compounded by a dire security situation, which has heightened the economy’s fragility, hampered activity, and generated supply-side bottlenecks which have further fueled inflation. External shocks and the volatility of the security situation have resulted in a macroeconomic environment that has been worse than had been envisaged at the time of the program’s approval by IMF management in June 2022. Despite the more challenging domestic and external environment, the authorities have adopted important policy reforms, anchored by the SMP, and displayed a firm commitment throughout. The reforms cover governance and anti-corruption, tax and revenue administration, public finance management (including budget preparation and execution), central bank autonomy and governance, and anti-money laundering. Data provision has also improved during the course of the program. All these reforms have enhanced transparency 2 in public spending and in the financial sector and helped maintain macroeconomic stability. Despite the delicate political situation, thanks to a highly inclusive consultative process, the authorities have taken the necessary ownership and earned public support for the SMP through the high-level Program Monitoring Committee. The Haitian authorities had adopted a budget for FY2023 that is consistent with agreed targets under the SMP and in the context of a medium-term fiscal framework. Implementation of the budget has been to date consistent with the objective of the SMP of reducing monetary financing of the budget deficit to levels that staff assesses to be non-inflationary. The authorities are striving to ensure 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. In line with the reforms under the SMP, the authorities also took measures aimed at strengthening revenue administration and boosting revenue mobilization over time. These include the approval of a new tax code and tax procedures code, publication of all codes and tariffs related to customs, adoption of unique Tax Identification Numbers (TINs), publication of the TIN database and of the file of active taxpayers, and stronger oversight of the revenue agency since August 2022. Notably, 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, including through the broadening of the tax base and elimination of many exemptions. Thanks mainly to an improvement of revenue administration, customs revenue has reached a historic high in recent months, although from a low base. There has been significant progress on governance issues, and corruption and broader financial integrity risks need to continue to be effectively addressed. The authorities have taken measures to strengthen accountability in the use of public resources and have boosted the transparency of public procurement for emergency resources. The recent finalization of revisions to the Central Bank and to the AML/CFT legal frameworks are also critical for improving governance and transparency. They have also recently made a formal request for a Fund Governance Diagnostic, which is a very welcome development. The Haitian authorities have expressed interest in another SMP, which should help maintain macroeconomic stability and lock in and sustain recent approved reforms to further enhance economic resilience and governance. HAITI SECOND REVIEW UNDER THE STAFF-MONITORED May 31, 2023 PROGRAM EXECUTIVE SUMMARY Context. Haiti faces a challenging macroeconomic outlook amid a humanitarian crisis. The country has been hit hard by economic spillovers from Russia’s invasion of Ukraine, with food price inflation triggering a hunger crisis. This global shock has been compounded by a dire security situation, which has heightened the economy’s fragility, hampered activity, and generated supply-side bottlenecks which have further fueled inflation. Risks to the outlook are tilted to the downside. Program implementation. The implementation under the SMP has been broadly satisfactory. Despite domestic and global difficulties, the authorities have adopted important policy reforms, anchored by the SMP, and displayed a firm commitment throughout. The reforms cover governance and anti-corruption, tax and revenue administration, public finance management, including budget preparation and execution, and central bank independence. Data has also improved. All these have enhanced much-needed transparency in public spending and in the financial sector and helped maintain macroeconomic stability. Despite the delicate political landscape, and thanks to a highly inclusive consultative process, the authorities have taken the necessary ownership and earned public support for the SMP through the high-level Program Monitoring Committee (Comité de Suivi). The authorities met three of the four end-December 2022 periodic quantitative targets (QTs) and the indicative targets (IT) for end-December. They missed the end-December QT floor on budget allocation to the Ministry of Social Affairs and Labor (MAST) for social expenditure. The authorities also met four of the five ITs for end-March 2023 and missed by a narrow margin the IT floor on central government revenues, which was revised up at the time of the first review. The authorities also met the three continuous QTs—non-accumulation of both domestic and external arrears and no new contracting or guaranteeing by the public sector of non-concessional external debt. Despite some delays, all structural benchmarks were achieved. The two end-March 2023 structural benchmarks were not met but implemented with delay in April. The end-April 2023 structural benchmark and the monthly and quarterly structural benchmarks were all met. Next steps. The authorities have expressed interest in another SMP, which should help lock in and sustain recent approved reforms to further enhance economic resilience and governance. The new SMP will continue to be supported by Fund capacity development assistance. In line with the Fund Strategy for Fragile and Conflict-Affected States, staff will also continue to coordinate closely with Haiti’s main development partners. HAITI Approved By Patricia Alonso-Gamo and Peter Dohlman CONTENTS Discussions took place remotely during April 4-6 and in person in Washington during the week of the spring meetings (April 10-17), continued remotely thereafter, and were concluded on April 28. The team comprised Ms. Tumbarello (Head), Mr. Noah Ndela, Ms. Bhattacharya (all WHD), Ms. Osorio-Buitron (FAD) and Mr. Shenai (SPR) and Messrs. Duvalsaint and Wata (Port au-Prince office). Ms. Ojo (WHD) provided valuable research assistance and Ms. Coquillat (WHD) assisted with logistics and document preparations. Mr. Saraiva and Ms. Florestal (OED) joined the discussions. The team met with Mr. Michel Patrick Boisvert (Minister of Economy and Finance), Mr. Jean Baden Dubois (Governor of the Bank of the Republic of Haiti), Mr. Pierre Ricot Odney (Minister of Social Affairs and Labor), other senior officials, the private sector (civil society, association of industries, and banking association), and the international community through the process (WB, IADB, EU, UN, USAID, and WFP) to coordinate technical assistance and donor support. CONTEXT AND RECENT DEVELOPMENTS_______________________________________________________ 4 PROGRAM IMPLEMENTATION UNDER THE SMP ______________________________________________6 OUTLOOK AND RISKS ___________________________________________________________________________7 POLICY DISCUSSIONS ___________________________________________________________________________8 A. Fiscal Policy ____________________________________________________________________________________ 8 B. Monetary and Exchange Rate Policy___________________________________________________________11 C. Financial Sector _______________________________________________________________________________12 D. Governance ___________________________________________________________________________________13 STAFF APPRAISAL ____________________________________________________________________________ 14 FIGURES 1. Real Sector Developments, 2016–23 __________________________________________________________17 2. Fiscal Sector Developments, 2016–23 _________________________________________________________18 3. Monetary and Financial Sectors Developments, 2016–23______________________________________19 4. Financial Sector Indicators, 2016–22___________________________________________________________20 5. External Sector Developments, 2016–23_______________________________________________________21 6. Social Indicators _______________________________________________________________________________22 2 INTERNATIONAL MONETARY FUND HAITI TABLES 1. Selected Economic and Financial Indicators, 2020–28 _________________________________________23 2a. Non-Financial Public Sector Operations, 2020–28 (In millions of gourdes) ___________________24 2b. Non-Financial Public Sector Operations, 2020–28 (In percent of GDP) _______________________25 3a. Balance of Payments, 2020–28 (In millions of US$) ___________________________________________26 3b. Balance of Payments, 2020–28 (In percent of GDP) __________________________________________27 4. Summary Accounts of the Banking System, 2020–28__________________________________________28 5. External Financing Requirements and Sources, 2020–28 ______________________________________29 6. Financial Soundness Indicators, June 2020–December 2022___________________________________30 APPENDIX I. Letter of Intent _________________________________________________________________________________31 Attachment I. Technical Memorandum of Understanding ____________________________________36 INTERNATIONAL MONETARY FUND 3 HAITI CONTEXT AND RECENT DEVELOPMENTS 1. Haiti continues to face dire humanitarian and security crises. The country has been hit hard by the economic spillovers from Russia’s invasion of Ukraine, with food price inflation triggering a hunger crisis affecting over 50 percent of the population. To address Haiti’s balance of payments needs, the Fund approved in January 2023 US$110.6 million under the Food Shock Window (FSW) of the Rapid Credit Facility (RCF). The security situation remains very difficult, with gangs controlling large parts of the capital and key infrastructure, worsening widespread fuel shortages. The recent cholera outbreak has further aggravated the emergency. 2. Political uncertainty persists, albeit with one notable achievement. Prime Minister Henry signed on December 21, 2022, a new agreement with representatives of all political parties, the private sector, and NGOs. The agreement, “National Consensus for an Inclusive Transition and Transparent Elections,” includes a timetable for installing an elected government by February 2024; the establishment of a High Council for the Transition (set up in February), and soon of a Body for the control of government action to enhance the current government’s accountability (including through the oversight of the budget process); and measures to fight corruption. 3. Macroeconomic conditions remain challenging. In fiscal year 2022 (FY2022)1, real GDP contracted for the fourth consecutive year, by 1.7 percent (Table 1). Year-on-year inflation reached 48.3 percent in March 2023 as food prices surged 48 percent (year-on-year), driven by global commodity and supply-side disruptions (security and drought). Month on-month inflation, however, has declined Inflation (Percent) 60 50 40 30 20 10 Overall CPI (year on year) Food CPI (year on year) sharply, from near 11 percent in October to 0 Dec-17 Dec-20 Mar-17 Mar-20 Mar-23 Sep-18 Sep-21 Jun-19 Jun-22 1.7 percent in March, suggesting that inflation is decelerating. The deficit of the non-financial public sector (NFPS) narrowed by 0.4 of a percentage point to 2.1 percent of Sources: Haitian Institute of Statistics and Informatics (IHSI), and Bank of the Republic of Haiti. GDP in FY2022 (Table 2a and Table 2b). Still, this was 0.6 percentage point above the level expected when the SMP was approved in June 2022 and was attributable mainly to higher-than-expected fuel subsidies (until mid-September 2022). The current account balance shifted to a deficit of 2.3 percent of GDP (Table 3a and Table 3b), from a surplus of ½ percent in FY2021, owing mostly to a negative terms-of-trade shock (higher fuel and food import costs). The exchange rate (gourde vis-à-vis US dollar) continued to depreciate, reaching 154 at the end of March 2023, a 30½ percent depreciation from September 30, 2022. Fuel shortages and security issues continue to undermine economic activity, with credit growth decelerating to 2.5 percent (year-on-year) in the first quarter of 2023. 1 The fiscal year runs from October 1 to September 30. 4 INTERNATIONAL MONETARY FUND HAITI 4. Signs of resilience have emerged, and buffers have been rebuilt, although from a low base, suggesting that policies, aligned with Staff-Monitored Program (SMP), have helped the economy. Net international reserves (NIR) have picked up in recent months, reaching almost US$396 million in mid-April 2023 (US$110.6 Reserves Accumulation and Bilateral Exchange Rate million related to the FSW disbursement), up from just US$114 million at end-October 2022. Depreciation of the gourde This increase reflects recent FX purchases to rebuild external buffers, as well as valuation effects in the central bank’s FX portfolio. Remittances remained resilient in 2022 after surging in 2020-21 and were still higher than 0.018 0.015 0.012 0.009 0.006 0.003 0.000 NIR (millions of US dollar, right scale) US dollar per gourde 1,000 800 600 400 200 0 in the pre-Covid period (as a share of imports). Custom duties helped boost fiscal revenue by 50 percent in the first six months of FY2023, which also reflected improved revenue Apr-19 Aug-19 Dec-19 Apr-20 Aug-20 Dec-20 Apr-21 Aug-21 Dec-21 Apr-22 Aug-22 Dec-22 Sources: Bank of the Republic of Haiti and IMF staff estimates. *Apr. 27-23 administration and the government’s ability to collect taxes on fuel imports at the new regulated price. Monetary financing of the budget decreased considerably during October 2022-March 2023 (year-on-year)—in line with the SMP objectives—from an annual rate of 2½ percent of GDP to 1 percent. Monetary Financing of the Budget In percent of imports In percent of GDP (right scale) Remittances, 2018-22 4 12 25 6 25 (In percent of GDP) 10 5 20 20 3 8 4 15 15 2 3 6 10 10 2 4 1 5 5 1 2 0 0 0 0 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 0 2019 2020 2021 2022 2023 1/ Sources: Ministry of Finance (Tableau des Operations Financières de l’Etat—TOFE) Guatemala Honduras Nicaragua Dom. Rep. Haiti and IMF staff estimates. Sources: Bank of the Republic of Haiti, national authorities, and IMF staff calculations. 1/ October 2022-March 2023 data (first semester of FY2023), annualized. 5. Despite multiple challenges, the authorities demonstrated a firm commitment under the SMP which provided a credible anchor for enhancing policymaking and have stayed actively engaged with Fund staff, which has spurred additional support. Since the disbursement of US$110.6 million under the FSW of the Rapid Credit Facility, the authorities’ engagement has strengthened through the high-level Program Monitoring Committee (Comité de Suivi)—which meets with IMF staff biweekly. Since the last review, the Fund has also continued actively supporting Haiti’s capacity development. The IMF Legal Department (LEG) conducted a CD mission on AML/CFT in late January and advised the authorities on the revision of the Central Bank law; the IMF Fiscal Affairs Department (FAD) and LEG delivered assistance on the consumer-pricing mechanism reform of the fuel subsidy regime, completed in April. The latter will allow changes in international fuel INTERNATIONAL MONETARY FUND 5 HAITI prices to be regularly passed on to consumers.2 This reform also features a smoothing mechanism to protect consumers by limiting the monthly variation of prices at the pump (through revisions of the current 1995 law).3 FAD and the Caribbean Regional Technical Assistance Centre (CARTAC) provided technical assistance (TA) on cash management to improve PFM systems; FAD also delivered TA on revenue administration to broaden the tax base and improve tax compliance; the IMF Statistics Department worked with the authorities to support the production of quarterly GDP data; and the Monetary and Capital Markets Department (MCM) delivered TA on the Central Bank Banking Chart of Accounts to align them with IFRS Standards. Finally, the SMP has helped facilitate the forthcoming budget support (€19.5 million) from the European Union, which was conditional, among other things, on the successful completion of the first and second reviews of the SMP. PROGRAM IMPLEMENTATION UNDER THE SMP 6. The overall SMP implementation has been broadly satisfactory. It has helped the authorities stabilize the macroeconomic situation and move ahead with key structural reforms. This despite a worsening global economic environment, elevated global food and fuel prices, a cholera epidemic, and a highly volatile security situation. • Quantitative and indicative targets (Appendix 1. Table 1). The authorities met three of the four end-December 2022 periodic quantitative targets (QTs)—the floor on the NIR of the central bank; the floor on the preliminary balance of the NFPS; and the ceiling on the net central bank credit to the NFPS— the indicative targets (IT) for end-December. But they missed the QT on budget allocation to the Ministry of Social Affairs and Labor (MAST). However, missing this target does not imply underperformance in targeted social spending, but rather the implementation of additional safeguards that somewhat slowed budget execution by MAST (which included a more detailed tracking system). They also met four of the five ITs for March 2023, including the budget allocation to MAST. They missed by a narrow margin, however, the floor on central government revenues, which was revised up at the time of the first review. The authorities also met the three continuous QTs—non-accumulation of both domestic and external arrears and no new contracting or guaranteeing by the public sector of non concessional external debt. • Structural benchmarks supported by capacity development (Appendix 1. Table 2). Despite some delays, all structural benchmarks were achieved. The two end-March 2023 structural benchmarks were not met but implemented with delay in April. The end-April 2023 structural benchmark and the monthly and quarterly structural benchmarks were all met. In spite of the multiple challenges, the authorities have continued implementing the structural reform agenda, supported by Fund CD, in the following areas: 2 The one-time increases in fuel prices were announced in September 2022 and passed on to consumers at the pump in November 2022 (First Review of the SMP, footnote 1, and ¶9). 3 The next steps entail ensuring consistency between the amendment law and the excise chapter of the new tax code. 6 INTERNATIONAL MONETARY FUND HAITI o Governance and Public Financial Management. Transparency of operations at the agency Economic and Social Assistance Fund FAES has improved. The authorities re-convened the governing board of FAES and prepared the quarterly report on its operations through March 2023 (quarterly structural benchmark). They also continue to publish, on a regular basis, all public procurement contracts, including information on the successful bidders (monthly structural benchmark). They have also expanded the Treasury Single account (TSA) and adopted a medium-term budget framework with the NFPS deficit as the main anchor. o Tax administration. The authorities issued a decree in late December making compulsory the use of the Taxpayer Identification Number (TIN) for all finance departments, with sanctions for fraudulent or non-use. This was followed by publication at the end of April 2023 of the TIN database and the file of active taxpayers (end-March 2023 structural benchmark). o Central bank law. The authorities have completed the benchmark on finalizing amendments to the central bank Law, which were ratified by the Board of Directors of the BRH at the end of April 2023 in line with Fund’s TA (end-March 2023 structural benchmark). Achieving this benchmark also marks a key milestone in implementing the recommendations of the 2019 Safeguards Assessment. o Anti-money laundering. The authorities have drafted a new AML/CFT Decree that is in greater alignment with Financial Action Task Force (FATF) international standards than the previous AML/CFT law and that was endorsed by the Council of Ministers (end-April structural benchmark). o Tax Policy and Custom Administration. The government has adopted of a new tax code, a primer that simplifies the tax system and eliminates many exemptions, and it is publishing all codes and tariffs related to customs. o Safeguards. The FY2021 financial audit of the BRH has been completed and its audited financial statements published. OUTLOOK AND RISKS 7. The macroeconomic outlook for Haiti remains very challenging. Growth is expected to be almost muted at 0.1 percent in FY2023 (slightly lower than 0.3 percent projected at the time of the First Review), in line with the deceleration in credit growth, owing mainly to the security crisis. It is expected to reach 1½ percent over the medium term, depending on continued implementation of structural reforms and an improved security situation. Inflation is expected to moderate gradually–to about 30 percent at the end of this fiscal year–as the impact of lower monetary financing of the fiscal deficit takes effect and world market prices for food and fuel stabilize. Inflation is then forecast to ease further over the medium term, assuming adequate macroeconomic policies. The fiscal deficit of the NFPS is projected at 1.8 percent of GDP in FY2023—0.3 percentage points below that envisaged at the time of the SMP approval—because of lower fuel subsidies and higher customs INTERNATIONAL MONETARY FUND 7 HAITI revenues. The fiscal deficit would expand slightly to about 2.2-2½ percent of GDP over the medium term, led primarily by capital spending. External debt indicators are expected to declined relative to the First Review as fiscal deficits are lower than envisaged at the time of the First Review, resulting also in a lower monetary financing of the deficit. The current account deficit is expected to narrow to 0.8 percent of GDP in FY2023, and further to 0.6 percent over the medium term, assuming imports compression and as import prices stabilize. 8. The outlook is subject to multiple risks, including security, and it is tilted mainly to the downside. Domestic risks include intensified political instability, gang-related disruptions to economic activity, a further spread of cholera, a worsening of the hunger crisis, and extreme natural disasters. Externally, Haiti is vulnerable to volatile remittance flows, lower-than-expected external financing, and renewed surges in global food and energy prices. Normalization of the security situation (not envisaged in our baseline) would greatly improve the medium-term outlook. The projected path of public debt is sustainable, although consistent with a high risk of debt distress and the debt-carrying capacity is assessed as medium, as ascertained in the most recent DSA (see EBS/23/4). POLICY DISCUSSIONS A. Fiscal Policy 9. Background. During the first half of FY2023, domestic revenue was much stronger than in previous years, rising by 48 percent, owing mainly to custom duties and reflecting strong improvement in revenue administration and the government’s ability to collect taxes on fuel imports at the new regulated price. Domestic revenue had a weak start, as a result of the paralysis of the economy in September/October, attributable to the temporary loss of access to the main fuel terminal (Varreux), Haiti: Execution of Social Spending which reduced tax collection in October 2022. In nominal term, revenue recovered to its historical high as activity resumed. Average monthly revenue exceeded 17 billion gourdes in the second quarter of FY2023, relative to a monthly average of 11 billion gourdes during the year-earlier quarter. Nominal spending grew 18 percent (year-on-year) in the first semester of FY2023, led mainly by capital spending (25 percent), including to strengthen national police. The increase in current spending was more subdued (13 percent), with energy transfers (including fuel and 8 INTERNATIONAL MONETARY FUND HAITI electricity) cut in half,4 as the fuel price adjustment has cut fuel subsidies to zero. During the first semester of FY2023, social spending totaled 0.65 percent of GDP, slightly higher than the year earlier period (0.62 percent of GDP). In nominal terms, total social spending surged 50 percent year on-year, reaching 20.3 billion gourdes. The higher level of spending is primarily domestically financed. Monetary financing of the budget stood at 1 percent of GDP, based on annualized data using the outturn for the first semester. 10. Spending related to the FSW. Resources related to the FSW had not been spent as of April 30, 2023 and were kept as reserves at the central bank. This reflected the authorities’ commitment to following proper procurement processes as well as the need to respect the safeguards agreed under the RCF. Staff has given the authorities a template to facilitate the reporting of forthcoming spending under the FSW, in line with FAD-suggested best practice, to enhance transparency and accountability in the use of public spending. 11. Implementation of the 2023 budget is consistent with the SMP goals of reducing monetary financing of the deficit and in-line with staff’s earlier projections. The overall government balance is projected at 1.9 percent of GDP in FY2023 (2 percent at the time of the First Review). Monetary financing is expected to reach 1.4 percent of GDP at the end of the fiscal year, given seasonality in spending, far below the 2.3 percent in FY2022. Total domestic tax revenue is expected to climb to 6.4 percent in 2023, from 5.3 percent of GDP in 2022, broadly in line with the first Review. The higher tax revenue owes to higher customs revenue, given the recent revenue administration reforms, and the fuel price adjustment—projected to yield 0.9 percent of GDP from taxes on fuel imports. As for expenditures, current spending and domestically financed capital spending are projected to rise by 1.2 percentage point of GDP relative to 2022.5 With global oil prices moderating, fuel subsidies will remain at zero for the rest of the fiscal year, and transfers to the electricity company will total 0.4 percent of GDP, consistent with historical patterns. The medium-term fiscal deficit is projected to slightly widen to an average of 2.1 percent of GDP, driven by a slight increase in capital spending to support infrastructure needs. 12. Efforts to boost revenue have been successful and collection should be sustained. Weaker-than-expected revenue collection at the start of the SMP at end-June 2022 prompted the implementation of administrative measures in August. These included strengthening the control of invoices submitted for imported goods and replacing the management of the revenue agency. These measures helped the authorities meet the indicative target on the floor of central government fiscal revenue for December. Staff welcomed this development and encouraged the authorities to sustain efforts to strengthen revenue mobilization—to help anchor monetary financing and finance large social and infrastructure needs and work toward the implementation of the tax code of customs reforms (approved by the Council of Ministries in December 2022 as part of the SMP’s structural agenda) and of tax administration. To this end, the authorities have requested TA from the 4 Budget presentation and reporting improved substantially for FY2023 and clearly indicate electricity subsidies. 5Foreign financed capital spending is fully financed by grant revenues. INTERNATIONAL MONETARY FUND 9 HAITI Fund to help implement the tax code, which will become operational in October 2024 as well as TA on custom administration.6 13. Meaningful progress has been achieved on PFM, with respect to enhancing the transparency of public spending and public finance reporting and accountability, and efforts should continue. Since March 2023, the authorities have provided far more detailed monthly data on budget execution (including spending on wages, goods and services, and capital investment by ministry and by project) and published (on Contribution of Energy Subsidies to the Fiscal Balance the web site of the Direction General du Budget, MEF) detailed budget execution by line ministries. They are also committed to sharing more detailed quarterly financial statements for the FAES, following PFM best practices provided by the FAD. The 6 (Percent of GDP) 4 2 0 -2 100 75 50 25 authorities have made progress in seeking to consolidate the Treasury Single Account (TSA) (structural benchmark). They have also -4 0 2015 2016 2017 2018 2019 2020 2021 2022 2023 (P) Fiscal balance excluding energy subsidies Energy subsidies Fiscal balance Global oil prices, US dollar per gallon (right scale) prepared a medium-term budget framework (MTBF), with the NFPS deficit as the main anchor, adopted together with the FY2023 Sources: World economic outlook (WEO) and IMF staff projections. Figures for 2023 correspond to projections. budget. Going forward, the MTBF should be prepared using a top-down approach to set expenditure ceilings that will guide budget preparation at the line ministry level. Building on this reform, each key line ministry should prepare a medium-term expenditure framework (MTEF), using its defined expenditure ceilings. This reform would help ensure that the budget of line ministries conforms with the one reported by the ministry of finance, thus fostering also accountability of line ministries and consistency between data on budget execution and the budget document. 14. The authorities are working towards strengthening the social safety net and efforts should continue. 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 authorities started reviewing the retail price-setting mechanism, as the September fuel price increases have eliminated fuel subsidies only temporarily, and a comprehensive and transparent policy framework for future price adjustments needs to be implemented. The forthcoming fuel price reforms should include mitigating measures to protect the most vulnerable in conjunction with a gradual and well-communicated approach. 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. The authorities are taking steps to cushion the impact of the shocks on the population. 6 The authorities are also receiving support from the World Bank on customs, which entails a stock-taking exercise of customs procedures and practices, working with customs administration and sector stakeholders, under the Advisory institutions. Services and Analytics umbrella activities. Staff is closely coordinating to ensure synergies between the two 10 INTERNATIONAL MONETARY FUND HAITI The authorities have prepared a detailed strategy to tackle food insecurity and strengthen the social safety (see text Table1 and ¶15 of IMF Country Report No. 23/48 and ¶8 of IMF Country Report No. 23/80), 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, women, and old-age group). B. Monetary and Exchange Rate Policy 15. Background. Monetary financing of the budget has decreased since the start of the SMP (text chart in ¶4), which enhances the credibility of the monetary policy framework. On the exchange rate front, recent data suggest that the authorities’ interventions in the foreign exchange (FX) market are mainly to rebuild NIR. The authorities also began to unwind some FX surrender requirements (per Circular 114.3), a positive step in line with staff recommendations. And they have requested technical assistance on FX market operations, aiming at eliminating the foreign exchange parallel market.7 16. To strengthen the monetary and exchange rate frameworks, staff continued to recommend: (i) greater exchange rate flexibility, (ii) a ceiling on credit to the NFPS as the main anchor to limit monetary financing of the deficit to 1½ percent of GDP, and (iii) short-term liquidity-absorbing operations at a fixed rate (policy rate) and full allotment. Staff recommended a further increase in short-term interest rates to initiate disinflation, given the large negative real rate of about 15 percent. While the interest rate transmission to inflation is weak, there is little room to tighten direct instruments further as reserve requirements are already at 50 percent. 17. The BRH should continue to limit its interventions in the FX market to smoothing excessive exchange rate volatility. Staff recommended that the BRH: (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 an FX market intervention rule; and (iii) complete the revision of banks’ net open position (NOP) limits. 7 The BRH published the daily reference exchange rate (taux de référence), a weighted average between the interbank rate or marche bancaire (60 percent), and the informal rate or marche informel (40 percent). In addition to the informal rate reported by the BRH, a parallel market rate is obtained from informal surveys data. INTERNATIONAL MONETARY FUND 11 HAITI These reforms will deepen the foreign exchange market and help the government formalize the FX market as well. Staff also urged the authorities to maintain their commitments not to introduce exchange restrictions or multiple currency practices. Staff received requested information on the unwinding of FX surrender requirement measures (under Circular 114.3). Net Foreign Assets and Net International Reserves of the (Millions of US dollars) Exchange Rate and ForeignExchange Intervention Central Bank 2,500 80 180 Net foreign assets (NFA) Net central bank FX intervention, US$ million (+ are FX sales; - are FX purchases) Net international reserves (NIR) 60 BRH reference rate (right scale) 160 2,000 Parallel exchange rate (right scale) 40 140 Interbank market exchange rate (right scale) 1,500 20 120 0 866 931 938 1,000 774 732 677 100 -20 452 396 80 500 -40 90 -60 60 0 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22 Jan-23 Apr-23 2015 2016 2017 2018 2019 2020 2021 2022 2023 1/ Sources: Bank of the Republic of Haiti and Fund staff estimates. 1/ For 2023, NFA refers to February 2023 and NIR refers to mid-April 2023 data. Sources: Bank of the Republic of Haiti and IMF staff estimates. C. Financial Sector 18. Background. The BRH is advancing reforms to increase financial inclusion and support growth. It has been strengthening banking supervision, with Fund assistance, to upgrade the regulatory framework and move to risk-based supervision. More information is needed for a full fledged assessment of risks faced by the financial sector, including for small non-bank financial institutions that have been growing fast. 19. Reform efforts will need 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, an important step toward risk-based supervision. The adoption of regulations on risk concentration, classification, and provisioning of credits—and a new chart of accounts for financial institutions—are being finalized. Staff commends recent progress and urges the BRH to finalize pending regulation and to continue working to establish risk-based supervision, supported by TA. • Digital money. BRH has benefited from the Fund’s technical assistance in analyzing key issues related to a central bank digital currency. The BRH conveyed that it does not intend to implement the CBDC at the moment, but stressed the importance of putting a placeholder in the central bank framework, in anticipation of future implementation, as legal frameworks are not frequently revised in Haiti. Staff strongly recommended that the BRH considers all aspects of the project’s desirability and feasibility, including a robust evaluation of costs and risks, before proceeding. Haiti still needs to improve the regulatory framework and/or update the national payment system to facilitate mobile payments and operators. Modernization efforts should 12 INTERNATIONAL MONETARY FUND HAITI include migration toward new international messaging standards that support interoperability and financial integrity. • Anti-money laundering. The authorities have upgraded the AML/CFT framework with the technical support of the IMF Legal Department to ensure greater alignment with the international standards of the Financial Action Task Force (FATF); and they approved in April the new AML/CFT Decree. The revised AML/CFT framework should allow Haiti to address a key item on the FATF action plan. The authorities are working with staff to address other steps necessary to exit FATF grey list and ease potential pressures on correspondent banking relationships, including completing sectoral risk assessments, implementing a risk-based supervision regime for financial institutions and designated non-financial businesses and professions, and ensuring transparency of basic and beneficial ownership information on legal persons. The authorities should also review regulations recently published by the BRH to ensure consistency with the new AML/CFT decree. In addition, the authorities are making progress in amending the Financial Intelligence Unit (FIU) law (Unité Centrale de Renseignements Financiers—UCREF),8including to ensure UCREF’s operational autonomy. LEG has also provided TA in this area. The IMF Legal Department stands ready to support the authorities on this endeavor. 20. The authorities are committed to the prudent use of Haiti’s SDR holdings and to transparent reporting on Haiti’s use of its SDR allocation. Haiti converted about half the SDR holdings it received from the 2021 SDR allocation to freely usable currencies, which it subsequently used to pay for priority fiscal spending. Staff emphasized the importance of maintaining institutional frameworks governing the fiscal use of the SDR allocation—including on the repayment terms between the finance ministry and central bank—and on transparency measures for SDR-related spending. The authorities also agreed to communicate publicly on the BRH or MEF websites any future conversion of their SDR allocation into freely usable currencies and to engage staff on future SDR conversions. D. Governance 21. The authorities have made solid progress on governance and further efforts are needed. The authorities have published public procurement contracts, including the publication of tenders, contracts, and the beneficial owners of successful bidders (monthly SB). To monitor the implementation of social programs, the authorities are committed to follow good PFM practices, in line with recent technical assistance from the IMF. They introduced all social expenditure 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. The authorities have requested an IMF Governance Diagnostic CD which should help them identify the next priorities for 8 The financial intelligence units globally are tasked with receiving suspicious transaction reports from both financial institutions and non-financial institutions in cases where these institutions suspect they are dealing with proceeds of crimes. The FIU analyzes the information and together with other data sources produces intelligence reports that are sent to law enforcement to launch investigations. They are effectively the bridge between the financial sector and the law enforcement community. INTERNATIONAL MONETARY FUND 13 HAITI governance and anti-corruption reforms. The revision of to the AML/CFT legal framework is also an important step forward to address the FATF recommendations and fight corruption. 22. The authorities committed in January 2023 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 started publishing comprehensive monthly reports on the execution of the budget (on the Direction General du Budget, MEF), 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 an accurate and transparent recording of how these resources are spent is important for catalyzing further donor support. Staff will work closely with the authorities to monitor the implementation of these safeguards. 23. With a view to strengthen its governance and operations, the BRH had made further efforts to implement some of the overdue 2019 safeguards recommendations and staff urges the authorities to implement the pending ones. The BRH recently approved drafting amendments to its organic act (end-March 2023 structural benchmark) which, once passed, will strengthen its governance arrangements and autonomy as well as clarify its mandate. The 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 these recommendations. STAFF APPRAISAL 24. Haiti faces humanitarian and security crises, with a challenging macroeconomic outlook and risks tilted to the downside. The country has been hit hard by the economic spillovers from Russia’s invasion of Ukraine, with food price inflation triggering a hunger crisis. This global shock has been compounded by political instability and a dire security situation, which has heightened the economy’s fragility and further fueled inflation. Risks to the outlook include intensified political instability, a worsening of the security conditions constraining further business activity, further spread of cholera, and natural disasters. 25. Despite domestic and global difficulties, the authorities have adopted important policy reforms over the last year, anchored by the SMP, and displayed a firm commitment throughout. These include reforms on governance and anti-corruption, tax and revenue administration, budget preparation and execution, and central bank independence. Data and statistics have also greatly improved. All these have enhanced much-needed transparency in public spending and in the financial sector and helped maintain macroeconomic stability. Still, the paralysis of economic activity in September/October, owing to the escalation of gang violence, has led to temporary macro slippages. Despite the delicate political landscape, and thanks to a highly inclusive 14 INTERNATIONAL MONETARY FUND HAITI consultative process, the authorities built the necessary ownership and public support for the SMP (including through public consultations when warranted) through the high-level Program Monitoring Committee (Comité de Suivi). 26. The recent fiscal reforms are encouraging and should continue to allow Haiti to finance its large development needs. The authorities have taken crucial measures to strengthen revenue administration and boost revenue mobilization over time. These include the approval of a new tax code and tax procedures code, publication of all codes and tariffs related to customs, adoption of unique Tax Identification Numbers (TINs), publication of the TIN database and of the file of active taxpayers, and stronger oversight of the revenue agency since August 2022. Thanks mainly to an improvement of revenue administration, customs revenue has reached a historic high in recent months, although from a low base. 27. Staff welcomes the recent progress made in reducing governance vulnerabilities, but corruption and broader financial integrity risks need to continue to be effectively addressed. Governance and anti-corruption measures were key components of reforms under the SMP. The authorities have acted to strengthen accountability in the use of public resources and have boosted the transparency of public procurement for emergency resources. The recent finalization of revisions to the Central Bank Law and to the AML/CFT legal framework are also critical for improving governance and transparency. Sustaining progress on reforms to strengthen gove