(2019-04) Ayiti Konsèltasyon Atik IV 2019 - Kominike pou laprès; Rapò ekip la; ak Deklarasyon Direktè Egzekitif la pou Ayiti

HAITI IMF Country Report No. 20/121 April 2020 2019 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR HAITI Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2019 Article IV consultation with Haiti, the following documents have been released and are included in this package: • A Press Release summarizing the views of the Executive Board as expressed during its January 24, 2020 consideration of the staff report that concluded the Article IV consultation with Haiti. • The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration January 24, 2020, following discussions that ended on November 22, 2019 with the officials of Haiti on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on December 20, 2019. • An Informational Annex prepared by the IMF staff. • A Debt Sustainability Analysis prepared by the staffs of the IMF and the World Bank. • A Staff Statement updating information on recent developments. • A Statement by the Executive Director for Haiti. The documents listed below will be separately released. Selected Issues The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents. Copies of this report are available to the public from International Monetary Fund • Publication Services PO Box 92780 • Washington, D.C. 20090 Telephone: (202) 623-7430 • Fax: (202) 623-7201 E-mail: publications@imf.org Web: http://www.imf.org Price: $18.00 per printed copy International Monetary Fund Washington, D.C. © 2020 International Monetary Fund Press Release No. 20/21 FOR IMMEDIATE RELEASE January 28, 2020 International Monetary Fund 700 19th Street, NW Washington, D. C. 20431 USA IMF Executive Board Concludes 2019 Article IV Consultation with Haiti On January 24, 2020, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV 2019 consultation with Haiti.1 Since March 2019, Haiti has been experiencing a protracted political crisis and prolonged civil unrest that has at times shut down most economic activity in the country. The crisis has taken a toll on the economy and the already vulnerable population: inflation exceeded 20 percent year on-year in September, output is estimated to have contracted by an estimated 1.2 percent in fiscal year 2019 (ending September 30), and the exchange rate depreciated by 25 percent over the same period. As fiscal revenues have plummeted and the cost of energy subsidies increased, the fiscal deficit widened to 3.8 percent of GDP in FY2019 and domestic arrears rose sharply. The public debt-to-GDP ratio jumped from 40 percent to 47 percent over the fiscal year. The authorities are making considerable efforts to limit the deterioration. The ministry of finance is implementing measures to improve revenue collection and better control spending and, in November, signed a new agreement with the central bank to strengthen fiscal discipline and limit monetary financing of the government. The central bank has been adjusting its interest rates to contain inflation while at the same time trying to support the private sector through the recession. Absent sustained implementation of good policies and comprehensive reforms, the outlook remains grim. Under the baseline assumption of some political stabilization in 2020 without major political or economic reforms, growth would improve but remain negative this year and below 1.5 percent over the medium term. Inflation is expected to decline slightly before eventually falling to below 10 percent by 2025. Risks to the outlook are primarily on the downside but political stability could bring important upsides. A resolution of the current crisis, appointment of a new government committed and able to implement reforms, and return of support from the international community could lead to higher investment and potential growth. 1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. Executive Board Assessment 2 Executive Directors agreed with the thrust of the staff appraisal. They expressed concern about the socio-political crisis in Haiti and stressed the urgency of restoring political and macroeconomic stability, addressing poverty and inequality, and tackling corruption. They called on all stakeholders to work toward a broad-based national dialogue to address the country’s daunting challenges and realize the potential scope for much stronger and more inclusive growth. Directors encouraged continued close cooperation with donors and the Fund, including through technical assistance, and welcomed the Country Engagement Strategy as a basis for future Fund engagement. Directors stressed that severe fiscal constraints necessitate shifting scarce resources away from non-priority spending toward social programs and investment. They underscored the importance of limiting monetary financing of fiscal deficits and preparing a notional budget for FY2020. Directors encouraged the authorities to focus on measures to boost domestic revenues and reduce exemptions in the near term, while working to strengthen tax administration, prepare a resolution plan for budget arrears, and bolster public financial management. Directors commended the authorities for progress on the new national plan for social protection, and stressed the need to advance its approval and focus on a limited number of cash transfer programs. Directors underscored the urgency of updating the anti-corruption policy priorities, including setting up the steering committee envisioned in the 2009 anti-corruption strategy. They also stressed the need to enforce the asset declaration system and conduct regular audits of state-owned enterprises and other public entities. Directors encouraged the authorities to allow the exchange rate to adjust in an orderly fashion. Looking ahead, they recommended setting a quantitative monetary target, and encouraged the monetary authorities to advance other institutional reforms. Directors supported the central bank’s efforts to continue deepening financial intermediation and inclusion, including via fintech. Directors emphasized that well-sequenced reform of the energy sector will be crucial for fiscal sustainability and higher growth and must be accompanied by clear communications and measures to offset the impact on vulnerable groups. They encouraged the authorities to overhaul the management and performance of EDH, work with stakeholders to reduce electricity costs, improve the reliability and efficiency of energy supply, and lower the related fiscal burden. Broader structural reforms are needed to improve the economy’s competitiveness, including efforts to streamline regulations, remove infrastructure bottlenecks, strengthen property rights, and enhance governance. Building resilience to natural disasters is also a priority. 2 At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summing ups can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm. Directors urged the authorities to take steps to improve the quality and timeliness of economic data, with the help of further Fund technical assistance. Haiti: Selected Economic and Financial Indicators 1 Nominal GDP (2018): US$9.7 billion GDP per capita (2018): $890 Population (2016): 10.847 million Percent of population below poverty line (2012): 58 Estimated Projections 2017 2018 2019 2020 2021 Output Real GDP growth (%) 1.2 1.5 -1.2 -0.4 0.9 Employment Unemployment (%) … … … … … Prices Inflation, (end of period) (%) 15.4 13.3 20.1 17.5 14.5 Central Government Finances (In percent of GDP; unless otherwise indicated) Revenue and grants 17.7 17.3 13.6 13.4 14.2 Domestic Revenue 14.0 13.0 10.8 10.0 11.1 Grants 3.7 4.3 2.8 3.4 3.0 Expenditures 17.5 19.0 16.1 15.6 16.2 Current expenditures 12.2 12.7 12.5 11.5 11.4 Capital expenditures 5.3 6.2 3.6 4.1 4.8 Overall balance of the nonfinancial public sector, incl. grants2-0.9 -2.9 -3.8 -3.4 -3.1 Total public sector debt 38.3 39.9 47.0 46.1 44.9 Money and Credit Broad money (% change) 12.9 13.7 18.9 18.6 17.0 Credit to private sector (% change) 4.5 12.5 9.9 14.6 17.0 3-month BRH bond interest rate (%) 12.0 12.0 22.0 19.4 16.4 Balance of Payments (In percent of GDP; unless otherwise indicated) External current account balance (incl. official grants) -1.0 -3.9 -2.0 -0.9 -1.1 External current account balance (excl. official grants) -5.6 -7.9 -4.8 -3.2 -4.1 Foreign direct investment (FDI) 4.5 1.1 0.9 0.9 1.3 Reserves (in months of imports of the following year) 4.4 4.7 4.9 4.8 4.8 External public debt 24.2 23.5 27.4 25.4 24. 2 Exchange Rate Real effective exchange rate (% change) (+ appreciation) 12.7 2.8 -10.8 … … Nominal GDP (millions of gourdes) 551,911 631,829 732,545 868,582 1,015,809 Nominal GDP (millions of U.S. dollars) 8,409 9,658 8,708 8,533 8,842 Sources: Ministry of Economy and Finance, Bank of the Republic of Haiti, World Bank, Fund staff estimates and projections. 1/ Fiscal years ending September 30. 2/ Includes transfers to the state-owned electricity company (EDH). HAITI STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION December 20, 2019 Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on January 24, 2020. The staff report reflects discussions with the Haiti authorities in November 2019 and is based on the information available as of December 20, 2019. It focuses on Haiti near and medium-term challenges and policy priorities and was prepared before COVID-19 became a global pandemic and resulted in unprecedented strains in global trade, commodity and financial markets. It, therefore, does not reflect the implications of these developments and related policy priorities. The outbreak has greatly amplified uncertainty and downside risks around the outlook. Staff is closely monitoring the situation and will continue to work on assessing its impact and the related policy response in Haiti and globally. KEY ISSUES • Context: Driven by popular frustration with high levels of corruption and inequality, Haiti has been experiencing a protracted political crisis and prolonged civil unrest. The crisis has taken a toll on the economy and an already vulnerable population: output contracted by an estimated 1.2 percent and the currency depreciated by 25 percent against the U.S. dollar during fiscal year 2019 while inflation exceeded 20 percent (y/y) in September. With activity weak, the external current account deficit is estimated to have shrunk to 2.0 percent of GDP while foreign capital inflows have dried up. The fiscal deficit worsened to 3.8 percent of GDP and domestic arrears rose. • Outlook and risks: The baseline scenario assumes some stabilization in the political situation by early-2020 but no major political or economic reforms. This would allow growth to recover only gradually and in the absence of sustained implementation of good policies and structural reforms, potential growth would remain low at about 1.4 percent over the medium term. Downside risks, both domestic and external, remain elevated. A prolongation of political instability, extreme natural disaster, drop in remittances, and/or a contraction in exports because of trade tensions would worsen the outlook, particularly given the absence of buffers and fragile social conditions. On the other hand, political resolution and an appointed government able to implement fundamental reforms could attract international support and lead to higher investment and potential growth. • Main policy recommendations: The challenge is to stabilize the macroeconomic situation in an unstable political context. Staff encourage the authorities to continue their efforts to contain the fiscal deficit and its monetary financing by the central HAITI bank. Improving domestic revenue collection and redirecting current spending would help create space for much needed social and capital expenditures. Together with steps to strengthen the central bank’s autonomy and legal framework, this would help reduce fiscal dominance. Other policy priorities include strengthening the social safety net, medium-term energy sector reform, and steps to tackle corruption and improve governance. Capacity development, enhanced cooperation with other development partners, and outreach with non-government stakeholders in Haiti would help raise ownership and support the implementation of staff’s main recommendations. 2 INTERNATIONAL MONETARY FUND HAITI Approved By Patricia Alonso-Gamo (WHD) and Jeromin Zettelmeyer (SPR) CONTENTS Discussions were held in Washington, D.C. and in Haiti during November 8-22, 2019. The IMF team comprised Nicole Laframboise (head), Frederic Lambert, Rand Ghayad, Paola Aliperti (all WHD), Matthieu Bellon (FAD), and Chiara Fratto (SPR). Ahmed Zorome (Resident Representative) and Gabriel Duvalsaint (local economist) assisted the team and participated in discussions in Haiti. Patricia Alonso-Gamo (WHD) joined the concluding meeting. Mr. Saraiva, Ms. Florestal, and Mr. Pierre (OED) also participated in the meetings. The IMF team met with central bank Governor Dubois and Minister of Finance Jouthe, and with senior officials, representatives of the private sector, civil society, other IFIs, and academics. Madina Toshmuhamedova (WHD) assisted the team with logistics and contributed to the preparation of this report. BACKGROUND—THE CHALLENGES OF A FRAGILE STATE_____________________________________5 RECENT DEVELOPMENTS _______________________________________________________________________ 6 OUTLOOK AND RISKS ___________________________________________________________________________ 8 POLICY DISCUSSIONS—MACROECONOMIC STABILITY _____________________________________ 10 A. Fiscal Policy ___________________________________________________________________________________10 B. Monetary, Exchange Rate, and Financial Sector Policies _______________________________________12 C. Governance and Transparency ________________________________________________________________14 D. The Social Safety Net _________________________________________________________________________15 E. Reform of the Energy Sector __________________________________________________________________16 F. Statistical Issues _______________________________________________________________________________18 STAFF APPRAISAL _____________________________________________________________________________ 18 BOXES 1. Fund Relations and Policies Since the 2018 SMP _______________________________________________ 6 2. Near-term Measures to Restore Macroeconomic Stability_____________________________________12 3. The Fiscal Cost of Energy Subsidies ___________________________________________________________17 FIGURES 1. Real Sector Developments, 2013–19 __________________________________________________________21 2. Fiscal Sector Developments, 2013–19 _________________________________________________________22 3. Monetary Sector Developments, 2013–19_____________________________________________________23 4. External Sector Development, 2013–19________________________________________________________24 5. Social Indicators _______________________________________________________________________________25 INTERNATIONAL MONETARY FUND 3 HAITI TABLES 1. Selected Economic and Financial Indicators, FY2017–24_______________________________________26 2a. Non-Financial Public Sector Operations, FY2017–24 (in millions of gourdes)_________________27 2b. Non-Financial Public Sector Operations, FY2017–24 (in percent of GDP)_____________________28 3. Summary Accounts of the Banking System, FY2017–24 _______________________________________29 4a. Balance of Payments, FY2017–24 (in millions of US$) ________________________________________30 4b. Balance of Payments, FY2017–24 (in percent of GDP) ________________________________________31 5. Financial Soundness Indicators, June 2017–June 2019_________________________________________32 ANNEXES I. Country Engagement Strategy _________________________________________________________________33 II. Risk Assessment Matrix________________________________________________________________________35 III. External Sector Assessment ___________________________________________________________________37 IV. Proposals for Governance Reform ____________________________________________________________42 V. Capacity Development Strategy_______________________________________________________________48 4 INTERNATIONAL MONETARY FUND HAITI BACKGROUND—THE CHALLENGES OF A FRAGILE STATE 1. Haiti’s recent history is marked by political instability, weak governance and widespread corruption. There have been 18 presidents and four coups d’état since the Duvalier dictatorship ended in 1986. Because of political instability and weak institutions, sustained implementation of policies has proved challenging. Since it disbanded its army in 1995, Haiti has relied heavily on UN peacekeeping forces to maintain order and train the police force, although the UN presence was downsized in October—as planned—to a smaller, mostly administrative office. The government recently moved to reconstitute its own military. 2. Poverty is widespread and inequality high. Over 58 percent of the population live below the national poverty line (US$2.41/day) and real per capita income has stagnated since 2015 at around US$870 (2018). Other indicators of human development remain at distressing levels, with life expectancy at 63 years, literacy at 62 percent, and only about 63 percent of the population with access to safe water (2015). As of 2012, about half of the country’s income share was held by the top 20 percent and the lack of opportunity to improve living conditions has driven rising social discontent. The recent crisis has placed severe strains on the population given the burden of high inflation on the poor and shortages of basic goods and services 3. Natural disasters are frequent and environmental degradation contributes to fragility. Some 82 natural disasters hit Haiti during 1990-2017, including a devastating earthquake in 2010. Weak infrastructure, anarchic urban development, and deforestation aggravate the country’s vulnerability to earthquakes and hurricanes. Environmental degradation hinders social and economic development, including causing lower agriculture yields, water pollution, and health epidemics. 4. Productivity growth and capital accumulation are low, and barriers to entry high. A low level of human capital, limited electricity supply, weak regulations, and an under-developed financial system have hindered private investment. Annual GDP growth averaged 1.4 percent from FY2015 through FY2018, near the rate of population growth and slightly below the average of 1.5 percent from 1996-2017.1 Private sector resources and capital are highly concentrated among a relatively small but powerful group—much acquired during the Duvalier era through monopoly rights and exclusive import licenses.2 5. There are growth opportunities to be explored. Economic growth could come from several sectors, including construction, agriculture, environmental remediation, tourism, mining, telecom, light manufacturing, alternative energy, and services. Community-based social structures are strong, and the Haitian diaspora presents a potential source of skills, resources and positive 1 In this report, annual data refer to the fiscal year ending September 30th. 2 World Bank Group, “Haiti: Towards a New Narrative,” Systematic Country Diagnostic, May 2015. INTERNATIONAL MONETARY FUND 5 HAITI influence. To develop this potential, however, some degree of political stability and policy continuity are needed. RECENT DEVELOPMENTS 6. Economic conditions have deteriorated significantly over the past year. Following the 2018 Staff Monitored Program (SMP), staff responded to the authorities’ request for support and agreed ad referendum on a program in March 2019 (Box 1). However, this could not proceed after the resignation of Prime Minister Céant and failure to ratify a replacement; subsequent attempts have also been unsuccessful. The political crisis has many elements, but poverty, inequality, and corruption—most recently the misuse of public funds under the Petrocaribe program—appear to be fueling unrest. The political crisis has prevented the government from passing budget laws for FY2019 and FY2020, impaired policy reforms, and adversely affected revenue collection and public spending. Output is estimated to have contracted by 1.2 percent in FY2019 while supply shortages and currency depreciation helped push inflation above 20 percent (y/y). External financial support has collapsed, with zero budget support in FY2019 and delayed project loans. Box 1. Fund Relations and Policies Since the 2018 SMP • A series of on-off Fund-supported programs since 2015 led to repeated delays of Article IV consultations. The Extended Credit Facility (ECF) arrangement approved in May 2015 terminated without completion of the first review. In November 2016, in the aftermath of Hurricane Matthew, the IMF approved SDR 30.715 million under the Rapid Credit Facility (RCF). An SMP agreed in 2018 aimed to pave the way for a possible upper credit tranche arrangement. • The 2018 SMP expired in August 2018 and achieved progress, though reforms in the energy sector were incomplete. The billing rate of the state-owned company Électricité d’Haiti (EDH) rose but fell short of the 50 percent target and the shortlisting of bidders to replace expired electricity supply contracts was late. Moreover, the government eliminated fuel subsidies in July 2018 without implementing planned mitigating measures in advance. This was followed by riots, reversal of the decision, and resignation of the prime minister. • Macroeconomic management did improve. A January 2019 agreement (Pacte de Gouvernance Économique et Financière) between the Banque de la République d’Haiti (BRH) and ministry of finance to limit BRH financing of the fiscal deficit was implemented, helping to slow the pace of international reserve decline. As recommended during program negotiations, the authorities also eliminated the oil import monopoly of the state Bureau de Monétisation des Aides Publiques au Développement (BMPAD). Efforts to draft a broad-based national plan on social policy (the Politique Nationale de Protection et de Promotion Sociale—PNPPS) and expand coverage of the beneficiary information system (SIMAST) have continued despite political turbulence. • Unfortunately, other policies were disrupted. The budget for FY2019 was not approved by parliament and no budget has been submitted for FY2020. While liberalization of oil imports was a step forward, the government failed to pay fuel companies on time, which has led to fuel shortages and budget arrears and, as noted above, insufficient progress in the energy sector. 7. As revenues collapsed and energy subsidies increased, the fiscal deficit widened. The deficit of the non-financial public sector (NFPS) in FY2019 rose to an estimated 3.8 percent of GDP against 2.9 percent of GDP in FY2018, largely due to a 22 percent drop in revenues in real terms, an increase in fuel subsidies to maintain fixed prices in gourdes, and losses of the electricity company EDH. Estimates of total government support to the energy sector increased from 4.6 to 6 INTERNATIONAL MONETARY FUND HAITI 6.5 percent of GDP. In response, the government slashed domestically-financed capital spending by two-thirds and cut spending on goods and services by 10 percent in nominal terms. Despite the jump in energy-related transfers, government spending contracted by 3.0 percentage points of GDP. Domestic arrears though surged to 3.7 percent of GDP, fuel shortages occurred, and external arrears (to a foreign oil company) reached 0.4 percent of GDP at end-September. Haiti: Annual Fiscal Losses from the Energy Sector FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 Electricity losses (in millions of gourdes) 9,294 9,979 10,253 8,651 9,941 11,662 14,060 Fuel losses (in millions of gourdes) 6,892 7,862 395 4,297 10,469 17,222 33,331 Total losses of the energy sector (% of GDP) 4.4 4.6 2.5 2.7 3.7 4.6 6.5 Source: National Authorities and IMF staff calculations. 8. As a result of currency depreciation and arrears accumulation, public debt jumped by 7 percentage points to 47 percent of GDP at end-September.3 About 58 percent of public debt is external and subject to exchange rate valuation effects. The debt sustainability analysis nonetheless shows that public debt is still sustainable, despite a high risk of debt distress related to institutional fragilities and exceptional vulnerability to natural disasters. 9. The authorities succeeded in partially containing monetary financing of the government in FY2019. In FY2018, the higher deficit and lower external financing pushed total financing by the BRH of the NFPS to 4.1 percent of GDP. In FY2019, BRH financing remained within the range set in the January 2019 Pacte de Gouvernance (henceforth “Pacte,” Box 1) but inflation rose due to a lagged impact from the 2018 surge in BRH credit to the government as well as supply shortages (food). The BRH sterilized part of this financing by raising interest rates on BRH bonds by 400-1000 basis points in June (depending on the maturity) and reducing net foreign assets. Despite these efforts, base money grew by 26 percent during the fiscal year and net international reserves (NIR) fell to US$649 million in September.4 The BRH cut rates on BRH bonds by 500–700 basis points on November 15th to support the private sector after a few months of “peyi lock” (nation-wide lock-down). 10. The external current account deficit has narrowed but the overall external balance has deteriorated. The current account deficit is estimated to have shrunk from 3.9 percent of GDP in FY2018 to 2.0 percent of GDP in FY2019 owing mostly to higher remittances but also to weak import growth. The tourism sector has been negatively affected by social unrest while net capital inflows and FDI have mostly dried up. The exchange rate depreciated by more than 25 percent in the first 9 months of FY2019 but was stable between June-November. 11. The authorities are making considerable efforts to limit the deterioration. The ministry of finance announced in October its intention to present a budget for 2020, despite the 3 This includes the debt of the government to the central bank of 12.2 percent of GDP. 4 A methodological change resulted in a downward revision of gross reserves by US$68 million at end-September 2018. Historical series were revised accordingly (Table 4) . INTERNATIONAL MONETARY FUND 7 HAITI end of the parliamentary session, and reiterated its decision first announced in February to end most customs duties exemptions in order to boost revenue collection.5 The ministry also proposed short-term measures to contain energy subsidies, such as a rise in the price of aviation gasoline, the conversion of public transportation vehicles to propane, the temporary suspension of subsidies to EDH, and collection of amounts allegedly due the government by power producers for over invoicing. On November 27, the BRH and ministry of finance signed a new Pacte to limit financing of the deficit for FY2020 to 10 billion gourdes, about 1.2 percent of GDP. 12. Available data suggests that the banking system was negatively affected by high interest rates and weak domestic demand. Non-performing loans (NPLs) rose rapidly in 2019, which suggests the need for a cautious assessment of banking sector stability risks. Banks dominate the financial sector but play a limited role in the economy and financial inclusion. The ratio of private sector credit to GDP (in both gourdes and dollars) has stabilized at around 19.7 percent. Profitability assessed in local currency remains high on average, with return on equity declining from 23.9 percent in September 2018 to 21.1 percent in June 2019 as provisions have increased more slowly than NPLs. Regulatory capital to risk-weighted assets was 21.7 percent in June 2019, well above the regulatory minimum (12 percent). Risks from currency mismatches are limited as current prudential regulations limit banks’ net open foreign exchange position to 2.0 percent of equity and the two systemic banks report more assets than liabilities in foreign currency. The main vulnerabilities come from the concentrated lending portfolios and relatively underdeveloped credit risk management practices. 75,000 25 2,300 100 Monetary Financing and Inflation Reserves and Exchange Rate 67,500 2,200 60,000 20 80 52,500 2,100 45,000 15 60 37,500 2,000 30,000 10 40 BRH net claims on central 1,900 22,500 government (millions of gourdes) Gross international reserves (US$ 15,000 5 CPI inflation, y/y, eop, percent 20 1,800 millions) (RHS) 7,500 Gourde/USD exchange rate, eop (RHS) 0 0 1,700 0 Sep-16 Sep-17 Sep-18 Sep-19 Mar-17 Mar-18 Mar-19 Jun-17 Jun-18 Jun-19 Dec-16 Dec-17 Dec-18 Sep-16 Sep-17 Sep-18 Sep-19 Mar-17 Mar-18 Mar-19 Jun-17 Jun-18 Jun-19 Dec-16 Dec-17 Dec-18 Sources: National Authorities and IMF staff calculations. OUTLOOK AND RISKS 13. Absent sustained implementation of good policies and comprehensive reforms, medium-term growth prospects remain grim. The baseline scenario assumes some political stabilization in FY2020 but not enough to deliver material progress. This would allow the formulation of a notional budget for FY2020 but growth would remain negative at -0.4 percent. 5 In the absence of an annual budget, the law directs the state to implement the last legally approved Budget Law. As of October 1, the government had reverted to the 2017/18 Budget Law. 8 INTERNATIONAL MONETARY FUND HAITI Without measures to boost productivity, potential growth under the baseline is projected to remain below 1.5 percent over the medium term.6 External capital flows are expected to decrease further in 2020 before recovering in subsequent years and inflation would ease to 17.5 percent (y/y) by end-2020, falling to below 10 percent by 2025. Short-term measures to contain energy subsidies combined with further spending cuts would imply a reduction in the fiscal deficit to 3.1 percent of GDP by 2021 where it would stabilize thereafter. Fiscal policy remains severely constrained by a lack of financing and would need to rely on accumulation of arrears for several years to close the gap. Beyond 2020, tax revenues are expected to recover somewhat with a normalization of revenue collection and boost from recent measures such as suspension of all tax exemptions except for those covered by treaties and diplomats. Fiscal losses to the energy sector as a share of GDP would decline gradually in real terms in line with international fuel prices and modest measures to reduce EDH losses, but would remain above the long-term average of about 3.0 percent of GDP (Table 2). The external current account deficit would shrink to 0.9 percent of GDP in 2020 as demand and imports remain weak. The external sector assessment suggests that Haiti’s external position at present is moderately weaker than medium-term fundamentals and desired policies (Annex III).7 14. Risks are on the downside, but stability could bring important upsides (Annex II). Internal risks include a continuation of political instability and security problems, little economic reform, and extreme natural disasters. On the upside, a resolution of the current crisis, appointment of a government committed to reform, and return of support from the international community could lead to higher investment and potential growth. Externally, Haiti is vulnerable to oil price shocks and a reduction in remittance flows, triggered possibly by the termination of “Temporary Protected Status” of Haitian nationals in the U.S. or a slowdown in the U.S. and Canada. In an adverse scenario, cancellation of trade preferences, for example the U.S. HOPE Act, would hurt Haitian exports and could lead to FDI outflows in the textile sector, the main thriving export sector. Authorities’ Views 15. The authorities broadly agreed with the staff’s baseline growth projection and risk assessment. They indicated the report would benefit from the presentation of alternative, more positive macro scenarios. They emphasized the severity and unprecedented duration of the current crisis, which is forcing them to rethink existing plans. They indicated that the political crisis was a result of the relentless poverty and inequality in Haiti and could not be resolved independently of the latter, and which would require external support. A particularly worrying development is the deterioration of the security situation and growing role of armed gangs. That said, they agreed that a resolution to the political situation and resumption of activity in early-2020 could lead to a rebound and would support a higher growth trajectory than forecast by staff. They emphasized in 6 This number accounts for the average cost of likely natural disasters. It is slightly above projected population growth, resulting in a modest increase in per capita GDP. 7 The positive policy gap means, however, that desired policies would worsen, not improve, the current account deficit, suggesting significant structural competitiveness problems. INTERNATIONAL MONETARY FUND 9 HAITI particular that creating jobs and boosting growth should be the priority objectives of any reform program. POLICY DISCUSSIONS—MACROECONOMIC STABILITY Discussions focused on: (i) immediate policies to limit the economic deterioration in the current environment and build capacity, strengthen governance, and tackle corruption; and (ii) medium-term policies that would require improvements in political stability. Staff recognize the serious challenges to implementation posed by the current political and security situation. As such, the emphasis was on short-term measures that would be feasible under the current circumstances, supported with capacity building technical assistance (TA) from the Fund. In addition to fiscal and monetary policy reforms, staff recommended the authorities also focus on strengthening the social safety net and reforming the energy sector. A. Fiscal Policy 16. As an immediate priority, the authorities should prepare and publish a budget framework for FY2020. As a first step toward restoring fiscal stability, the government needs a notional budget with a deficit target consistent with financing constraints. The notional budget should include measures to stabilize domestic revenues by strengthening tax administration (¶19) and reducing tax expenditures. Exemptions under the three main taxes—income, sales (taxe sur le chiffre d’affaires), and import duties—amount to at least 2.6 percent of GDP.8 The framework should also include a plan for the resolution of the stock of budget arrears. In the absence of budget guidance or obvious financing sources, staff project a deficit of the NFPS of 3.4 percent of GDP in FY2020. Gross financing needs, including debt amortization, would be met by domestic debt issuance, the central bank up to the limit under the Pacte, and further arrears accumulation (¶23-24, Tables 2a-b). 17. Over the medium-term, staff recommend a deficit target for the NFPS of 2.0 percent of GDP. This target is consistent with staff estimates that BRH financing of about 1.2 percent of GDP would not increase inflation in the medium term, assuming that the money base grows at the same rate as nominal GDP. Net project loans of about 0.8 percent of GDP per year would cover remaining financing needs under this framework. Staff estimate that a target of 2.0 percent of GDP would allow the debt ratio to decrease slightly over the medium term, leaving some room to accommodate adverse shocks. 18. Reaching even that goal will require significantly increasing domestic revenue collection. Staff recommend strengthening the capacity of the Directorate General of Taxes (DGI) and the Customs Administration (AGD), establishing a function-based organizational structure, enhancing their data exchange and use of third-party information to detect compliance risks, consolidating the registry of large taxpayers, and reducing tax expenditures. Efforts to advance 8 Évaluation de dépenses fiscales en Haïti —European Union, France, Haiti (April 2019). 10 INTERNATIONAL MONETARY FUND HAITI computerization of customs operations and increase the use of online tax payments should also continue (see Annex IV). 19. The authorities should continue modernizing tax policy. They should follow through with implementation of the tax reform roadmap adopted in March 2018. In addition to drafting and advancing adoption of the new Tax Code and Procedure Code, other measures needed include excise tax reform, improvement of the framework for municipal taxation and, as noted above, reductions in tax expenditures. These reforms, including eventually a transition from the current sales tax to a VAT, should increase revenues over the medium term if properly sequenced and implemented. 20. Current expenditures should be reallocated to growth-enhancing capital and social spending. The public-sector wage bill and spending on goods and services need to be rationalized, including by adjusting the public workforce with attrition, adopting a price reference list for procurement of goods and services, and better enforcing spending controls (¶22). Spending on goods and services represents 20 percent of total spending, above the regional average. Transfers to the loss-making energy sector will need to be eliminated over time after mitigating measures are taken to compensate the impact of reform on the poor (Section C). 21. Strengthening public finance management (PFM) would improve governance and reduce the scope for misuse of public funds. In line with TA recommendations, Haiti should continue expanding coverage of the Treasury Single Account (TSA) to all ministries, autonomous agencies, and public enterprises. Other TA recommendations could be implemented regardless of the political turmoil, including ending recourse to “exceptional” spending procedures that undermine cash management. The authorities should also adopt a medium-term fiscal framework (MTFF) with the NFPS deficit target as the main anchor. This would aid in annual budget formulation, impose stronger fiscal discipline, and allow the government to sustain a stronger pace of public investment while keeping the overall deficit in line with the medium-term goal of fiscal sustainability. The Fund stands ready to continue providing TA in these areas. Authorities’ Views 22. The authorities reiterated their determination to put in place an appropriate budget. However, given the technical difficulties they face to obtain parliamentary approval, they are formulating a budget framework that would be adopted by the government for the purposes of programming expenditures and cash management. They stressed that security problems and “peyi lok” seriously impeded taxpayers from physically delivering tax payments, and tax and customs officials from going to work. Progress on revenue reforms was also stopped. That said, they concurred with the need to raise domestic revenues and took note of staff’s short-term suggestions to strengthen tax administration. They highlighted additional measures underway to reduce monetary financing of the NFPS deficit, including exploring options to reduce transfers to the energy sector that could generate more savings compared to staff’s baseline projections, such as negotiating a temporary reduction in transfers to EDH and seeking refunds from independent power producers (IPPs) related to alleged sur-facturation (over-invoicing). They would prefer to set INTERNATIONAL MONETARY FUND 11 HAITI a range for the medium-term deficit target to account for the uncertainty surrounding growth and investment projections. Box 2. Near-term Measures to Restore Macroeconomic Stability Fiscal: • Prepare and publish a notional budget for 2020, as announced in October. • Remove customs duties exemptions and reduce tax exemptions. • Further rationalize non-essential spending. • Prepare a plan for the resolution of arrears. Monetary: • Enforce the new Pacte de Gouvernance between the BRH and the ministry of finance. • Reduce base money growth. Governance: • Set up the steering committee envisaged under the 2009 National Anti-Corruption Strategy, with independent representatives from civil society. • Strictly enforce the asset declaration system for senior public officials. Social Protection: • Formally adopt the PNPPS. • Set up a robust cash-transfer distribution system. • Design and launch a cash-transfer pilot-program (for families with young children). Energy Sector Reform: • Overhaul the management and performance of EDH, including billing and collection. • Renegotiate contracts with independent producers in a transparent manner. B. Monetary, Exchange Rate, and Financial Sector Policies 23. While the Pacte aims to address fiscal dominance, a financing gap will persist. Staff commend the renewal of the Pacte to maintain fiscal discipline and limit monetary financing of the deficit. Unfortunately, with the difficult economic situation, external financing support not available, and a shallow market for domestic debt, staff estimate there would remain a financing gap of 3.1 percent of GDP in 2020—met by arrears accumulation under the baseline (Table 2). Staff assessed the trade-off of different approaches and on balance, judged that this approach, compared to massive monetary financing of the deficit, was the least-worst option since it would imply lower inflation thereby less erosion of purchasing power of the poor, and would pose less risk to macro and financial stability. At the same time, the negative consequences of arrears accumulation are non-trivial and likely to involve shortages of goods like fuel, interruptions in public services like electricity, lower growth, and erosion of confidence in fiscal policy. In this regard, it will be critical for the fiscal authorities to mobilize revenues in the near-term and limit expenditures until policy reforms can occur. 24. Looking further ahead, a quantitative monetary target should become the policy anchor as fiscal dominance declines. This would help the BRH resist pressure to finance the government or support the exchange rate for reasons beyond those laid out in its policy framework. The BRH requested TA to help with the development of a secondary market for government debt securities but should also advance work on the transition to IFRS, amendments to the central bank law, improvements in foreign reserve management and foreign exchange 12 INTERNATIONAL MONETARY FUND HAITI regulation, and development and strengthening of the quality of monetary statistics—with calculation of foreign exchange reserves consistent with IMF guidelines. 25. Foreign exchange interventions should be limited to instances of disorderly market conditions. In recent years, the BRH has allowed the exchange rate to adjust in an orderly fashion, selling reserves in response to external shocks like a drop in remittances while using prudential measures, including reserve requirements, to limit banks’ vulnerability to forex liquidity risk. While the exchange rate has been remarkably stable during the second half of 2019, intervention should be limited to smoothing volatility or stabilizing market expectations in the short term, given the large and rapid exchange rate pass-through to consumer prices. 26. Improvements in financial intermediation are needed to support growth. Credit to the private sector represents about 19 percent of GDP, only 33 percent of the adult population has an account at a formal financial institution (Findex), and 75 percent of bank lending goes to only 20 borrowers. This reflects weaknesses in the legal and institutional framework, including contract enforcement, and limited competition between banks. With investment in infrastructure connectivity, developing fintech and mobile banking would be critical for raising access to finance and promoting financial inclusion. These efforts could be supported by the BRH as part of its 2015 National Financial Inclusion Strategy. 27. Safeguards assessment. An update safeguards assessment of the BRH was completed in 2019, noting that the central bank continues to face significant safeguards risks. Fiscal dominance has strained its financial position and legislative reforms are required to strengthen its autonomy and governance arrangements and curb financing of the government. While the BRH has taken steps to reduce delays in completion of its annual audits, measures are still needed to reinforce financial accountability and transparency, including by transitioning to International Financial Reporting Standards (IFRS), revamping foreign reserves management, and tightening controls over the reporting of monetary statistics. Steps towards transition to IFRS have been initiated and the BRH requested Fund TA to prepare legislative amendments to the central bank law. Authorities’ Views 28. The authorities discussed the challenges faced in the conduct of monetary policy in the current environment. They concurred with staff’s assumptions on the composition of deficit financing as they intend to keep BRH financing at levels agreed under the Pacte in order to avoid excess liquidity creation given the high pass-through and direct impact on the exchange rate and inflation. In their view, the financing gap would be smaller, and the risk of arrears addressed since they expect that efforts underway and controls in place would limit fiscal financing needs. Their medium-term strategy aims to crowd in domestic private financing by accelerating reforms to deepen the market for government securities. The BRH explained that its reaction function currently puts more weight on the exchange rate than on money supply as the high dollarization of deposits complicates quantitative money targeting. They continue to view excessive exchange rate fluctuations as undesirable and agreed with staff on the need to intervene in the market as needed to avoid excess volatility. With regards to banking supervision, the BRH is committed to INTERNATIONAL MONETARY FUND 13 HAITI continuing the transition to risk-based supervision and to advancing reforms to promote financial inclusion, particularly raising access to finance for small business and moving forward with Fintech innovations. C. Governance and Transparency 29. Governance weaknesses continue to plague Haiti despite the authorities’ prior commitments to combat corruption (Annex IV). Notwithstanding some progress enhancing accountability and transparency, notably with regard to PFM, the draft law aimed at strengthening the anti-corruption unit (Unité de Lutte contre la Corruption, or ULCC) was never submitted to parliament and the steering committee tasked with monitoring implementation of the 2009 anti corruption strategy was never established. Overall, the anti-corruption framework is not adequately deterring corruption. Relevant agencies lack the legal powers and financial means to fulfill their mandates and the prosecution and sanction of corruption offenses is limited. Staff recommend revamping the anti-corruption priorities and setting up the steering committee with participation from independent members of civil society to monitor implementation. The asset declaration system for senior public officials should Governance Issues in Haiti CPIA transparency, accountability, and corruption in the public sector 5 be implemented in line with international best practices, including by verifying the accuracy of the declaration, sanctioning omissions and false reporting, and ensuring public access to declarations. Anti-money laundering (AML) measures would support anticorruption efforts, particularly by Effectiveness of AML/CFT measures Rule of law 4 3 2 1 0 CPIA business regulatory environment CPIA quality of budgetary and financial management CPIA quality of public administration Haiti LICs strengthening banks’ implementation of due diligence requirements on politically exposed perso