Reprise économique en Haïti : Performance, enjeux et perspectives

Report No.7469-HA Economic Recovery in Haiti: Performance, Issues andProspects December23,1988 LatinAmericaand the Caribbean Regional Office FOR OFFICIALUSEONLY Document of theWorldBank This documenthasa restricted distributionand maybe usedby recipients only in the performance of their officialduties.Its contentsmaynot otherwise be disclosed without WorldBankauthorization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized CURRENCY EQUIVALENTS Currency Unit = Gourde (G) G 1 = US$0.20 US$1 = G 5 The Gourde has been pegged to the U. S. Dollar since 1919 at the rate of G 5 = US$1. WEIGHTSAND MEASURES Metric System 1 carreau = 1.29 hectares 1 hectare = 0.78 carreau FISCAL YEAR October 1 - September 30 This report uses FY for fiscal year. Thus FY87 refers to the period from October 1, 1986 to September 30, 1987. This report is based on the findings of an economic mission which visited Haiti in April-May 1988 and additional findings obtained in September 1988. The members of the economicmission were Hassan Fazel (macro-economist and Chief of Mission), Pedro Geraldes (infrastructure), Jacques Hallak (education),Maryvonne Plessis-Fraissard(health),Kanella Vasiliades (industry),Marc Botti (Consultant, education) and Warren Enger (Consultant,agriculture). Salma Cellier provided secretarial support and coordinated the printing of the report. FOR OFFICIL USEONLI TITLE : ECONOMIC RECOVERY IN HAITItPERFORMANCE, ISSUESAND PROSPECTS COUNTRY : HAITI REGION : LATINAMERICAAND THE CARIBBEAN SECTOR : COUNTRYECONOMIC REPORT TYPE CLASSIF MM/YY LANGUAGES 7469-HA CEM Restricted 12/88 English, Fr.-ch PUBDATE : 8812 ABSTRACT : This report reviews economic developments in Haiti duringthe country's fiscalyears 1986-88(FY86-88), focusing on the contents and the outcome of an adjustment and recovery program that was initiated early in 1986 following a major changeof political regime. An impressive array of economic policy reforms and an improved economic performance in FY86-87were followed in FY88 by a profound economic setback, including suspension of some vital external aid, broughton by recent political events. Taking into account the currently depressed domestic economic situation and external aid environment facingHaiti, the report recommends a programof short-to medium-term policy and expenditure priorities aimed at averting a further economic backslide. This document hasa restricted distributionand maybe usedby recipients only in the performance of theirofficialduties. Its contents maynot otherwise bedisclosed withoutWorldBankauthorization. ECOPlO 1 4IC RECOVERY IN HAITI: PERFORMANCE,ISSUES AND PROSPECTS TABLE OF CONTENTS Paxe No. ABSTRACT GLOSSARY MAPS COUNTRY DATA SHEET EXECUTIVESUMMARY SUMMARY ANDCONCLUSIONS ................................... ........ i I. INTRODUCTION: THE BACKGROUND TO RECENTDEVELOPMENTS ............. 1 A. Overview ........................... ................. 1 B. The Previous Report: A Background ... .................... 2 EconomicDeterioration in 1980-85 ....................... 2 Determinantsof Declirse and Disequilibrium ...............2 Major Policy Recommendations ........ .... ................ 5 II. ECONOMIC POLICIES AND PERFORMANCE, 1986-88 ................ 06* 7 A. The Setting......... ... ...o..................... 7 The Initial Policy Environment ............................ 7 The Advent of New Policies. ............................ . 8 B. Recent Economic Developments ........................... 8 Macroeconmic Trends .................. .. ........ ...... 8 Output and Employment .................................. . . 9 Public Finance ........ ... ....... .......... ...... .. 16 Money and Credit.......... PRIORITIES............................. 20 PrA cesonmc *dusmn and Reovery o r.................... 22 Balan ce of Payments and..nst....n...........2........... 34 Conclusion Impemntaio.......... .... .... 0 . ............ 29 III. DEVELOPMENT POLICIES AND PRIORITIES .......................................... 30 A. Economic Adjustment and Recovery Program ................................ 30 Program Objectives and Instruments ............................... . .. 30 Program Implementation ............................................ 30 B. Current Issues and Priorities ............ * ......... 32 Priority Economic Objectives and Strategy................ 32 C. MacroeconomicPolicies ........ ... .................... . 34 Trade Promotion ........ 0.............. 34 Domestic Resource Mobilization .........................36 Monetary Policy.............................. . .. 38 D. Selected Sector Policies ......... .... .. ............ . 39 Agriculture ..... * ........... *.... 39 Industry .......... 0 ....... *.. 41 Infrastructure ....... 9 ... oo.............*.so*............... 42 Human Resourceseeso ................. ................... *oo...... 47 E. Conclusionand Summary of Recommendations ................. 51 IV. MEDIUM-TERM GROWrH AND BALANCE OF PAYMENTS PROSPECTS ...........54 STATISTICALAPPENDIX .. ............ ... .... . . .... ..... 62 GLOSSARY AAN Autorite A;roportuaireNationale (NationalAirport Authority) APN Autorite Portuaire Nationale (NationalPort Authority) BCA Bureau de Credit Agricole (Agriculturpl Credit Bank) BCI Banque de Credit Immobilier (MortgageBank) BNC Banque Nationale de Credit (National Credit Bank) BNDAI Banque Nationale de DeveloppementAgricole et Industriel (NationalAgricultural and IndustrialDevelopment Bank) BRH Banque de la Republique d'Haiti (Bank of the Republic of Haiti - Central Bank) CAMEP Centrale Autonome Metropclif;aine d'Eau Potable (Metropolitan Water Authority) CIF Cost, Inaurance and Freight EdH Electricite d'Halti (Electricity company) ENAOL Entreprise Nationale des Oleagineux (edible oil company) EPPLS EntreprisePublique des Logements Sociaux (Publlc Housing Agency) FDI Fonds de D;veloppementIndustriel (IndustrialDevelopment Fund) FOB Free on Board FY Fiscal Year GDP Gross Domestic Product GNP Gross National Product ha hectare HASCO Haitian American Sugar Company ICA InternationalCoffee Agreement ICOR IncrementalCapital Output Ratio IDA InternationalDevelopmentAssociation IHSI Institut Haltien de Statistique et d'Informatique (HaitianInstitute of Statisticsand Data Processing) ILO InternationalLabor Organization IMF International Monetary Fund MARNDR Ministere de l'Agriculture, des Ressources Naturelles et du DeveloppementRural (Ministryof Agriculture,Natural Resources and Rural Development) MSPP Ministere de la Sante Publique et de la Population (Ministryof Public Health and Population) NFS Nonfactor Services OFATMA Office d'Assurance--Accidents du Travail, Maladie et Maternite (Workers'compensation,sickness and maternity insurance agency) ONA Office National d'Assurance (Social SecurityAgency) ONAC Office Nationale de l'AviationCivile (NationalCivil Aviation Office) OPRODEX Office de Promotion des Denrees Exportables (CommodityExport PromotionAgency) POCHEP Postes Communautairesd'Hygiene et d'Eau Potable (Community Health and Drinking Water Posts) SEN Societed'Equipement National(Construction) SEPPRN Serviced'Entretien Permanent du ResseauRoutierNational (National Road Maintenance Organization) SOFIHDES Soci;teFinanciere Haltienne de Developpement S. A. (Haitian Development FinanceCompany) SNEP ServiceNational d'Eau Potable(Natioaal Water Service) SONAPI SocieteNationale des ParcsIndustriels (National Industrial Park Company) USAID UnitedStatesAgency for International Development USN Usine Sucriere du Nord (Nati.onal SugarRefinery at Citadelle) USND Usine Sucriere Nationale de Darbonne (National SugarRefinery at Darbonne) TABLESAND SYtBOLS Totals in tablesdo not alwaysequalthe sum of theircomponents due to rounding. Not available Zero or insignificant NA Not applicable #, ,.aisorece IBRD211431 USA _ -0 .2- -20- 1o, Port de Pcix CUbA -- e-n, Rpbe- -- o----- DOMINICN R.A o ton. 0 REPUBLIC M.le St N-I,C,// . H-AI II IJIII P-t \ t \_ortMorgont 0 Cop Hoitien JAMAICA PuER1O - tICO 0-mnb /Oeee Rn-rb-dop.lin'0 B... d. He--nc--e Ft.L,Bivt6 _______________________________mbudoooisov_____° '-2 a R GosMoren o J . M ^long )s -. 4l 'A. -- _s. 0 tetteNenve LosFOt(eo. setz<e uto' jSt S- 0 . c GOnaves St Ropieel '* k V@IIi*t*, - St.~~~~~~\ I oe Ecologicol zones: p Very humid Humid C-do,e 5- So -IDe,eqi.-e N Dry k 5 Annual average rainfoll in millimeters Ce.co I S.-. Rivers PeRe~ d. LAr,pb-ntt Main h,ghwoys Secondory roads - ,e",et. ---- Tertiary roods Vtnd - - International boundary I . t ) Z KILOMETERS 0 i1 20 30 40 50 LLopelbe / 8eIIdt MILtS Q 10 20 •QNAVE 30 , D oto delkn of E-ologi-ni 0000s V lo, /lal ony. O LoCeoe R--~ ~ ~~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~- cJeremie CVl/{RO Nome Mo., Moron PORTAU PRINCE _e dn 9ocunos Pe. lt Ion dn N.ppc G G-th-r Source O....,..... PWA-6V- A Agen. A Jm 0' Hoonoir ~ Chood. C' iP6bonville Fend Par,J L., 4O., 10 B-rod-resO PetitF ar=e ' teslto.s ) \ osL~~~~~~~~~~~~~~~~~0'A,d. Go6ve \nTro-n Fg-dVer .tt> Lo Cohonoro CoP M-h Seke 0-O. Arne, rl-r, P0 P-or e \fmp Vrree Bo MOd _Aoorn 6i Mo oni _ 0 8e.I.oAns!, Th,. j A esxO [eL/e C apes ~s~--OCorsederer 0Eomt oJemlOrod-/ C.Y.~~~~~~~~~~~~~~~~~~~~~~~s Pgshe a Bott... k < v ,77)~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~. Y0 S,AI... 1,IYV6ll .d[f U{0 fcYY Y,.Z v. te 3o*OO,re&oo. 00 05, ore n cOsrrot rio,-rce,ot e 0150,0t .rr 74 72' SEPTEMBER 1988 Page 1of2 liIS' - COUNTYB DATA SHEET Area: 27,800 sq km Population: 6.2 sillioi (1987) Density: 223 per sq kb late of growth: 1.9(1977-87) Poulatiol eharacteristics Health Cude birth rate (per 1,000): 35 Iafant scrtality (per 1,000 live births): 123 Crude death rate (per 1,00): 13 Population per physician: 8,200 Population per hospital bed: 1,400 Income diotribution Distributioa of land ownership I of natioaal income, blighest quintile: t owned bytop 10S ofowners: lowest quintile: S owned by smallest 102 lecess tosafe water Access to electricity Iofpopulation -urban: 73 S of population -urban: 45 - rural: 25 - rural: 3 Nutrition Iducation Calorie intak. as I of requiresents: 80 Adult literacy rate (I) 35 Per capita prote6i intake (W/day): 42 Primary school enrollment (I) of relevant age group: 76 oIP per capita (05$, 1987) 1/ 360 gloSS ITIOAll PRODICT. 187 ANNUAL RATS OF GROWTH (I , Y80 prices) 06$ In 1 FYTS-8O FYBO-85 FY86 FS87 6IP atlarket Prices 2230.8 100.0 5.2 -0.9 0.6 0.5 gross Dooestic Investment 280.012.6 10.1 -2.1 -14.5 4.6 Gross lational Saving 147.7 6.7 14.0 -3.5 -9.1 -19.6 Currett Account Balance -132.3 -5.9 1xport ofGoods, IFS 277.612.4 10.3 -1.3 -9.2 -7.0 Import ofGoods, IS 449.720.2 10.0 -2.9 -6.4 1.0 OU7PUf, IIPLOTIKIT AID PBODUCTIVITY IN FY87 Vala g I dded Labo o loce V. A per Worker S ia I IL 1 Agricalture 728.2 35.4 2.0 66.7 364.1 Industry 498.8 24.2 0.3 10.0 1662.7 Services 830.6 40.4 0.7 23.3 1186.6 Total / Average 2057.6 100.0 3.0 100.0 685.6 Consolidated Public Sector General Coveenment GUL Percept U GOP G is Percent of GDP FY87 FY87 FY82 FY87 FY8T FY82 Corrent Receipts 13761 16.7 17.2 1020.5 9.1 10.1 Current lipendilture 1909.5 17.0 16.6 1218.5 10.8 11.1 Current Surplus -33.4 -0.3 0.6 -198.0 -1.1 -1.3 Capital lEpeaditure 756.4 6.7 9.8 610.8 5S4 8.4 !Jlorld HuhAtlas methodology. Page 2of 2 MAITI - COUNTRY DATA SHEET 03rI!, CRIDIT &PRICIS FT83 FY64 FY85 IY86 FT8t (IDourdeisoitstanding at end of period) Broad Honey Supply 2118.5 2357.8 2547.5 2835.3 3076.3 Bank Credit toPublic Sector 1587.0 1933.9 2150.2 2113.5 2164.9 BaAk Credit toPrivate Sector 1013.2 1070.3 1164.7 1172.4 1190.0 (Percentage or Indei lumbers) Broad Honey asI of GDP 26.0 26.0 25.4 25.3 27.4 Geaeral Price Index (FY80 100) 127.0137.1148.?160.8154.5 Annual percentage changes in: General Price Index 8.5 8.0 8.5 8.1 -3.9 Bank Credit to Public Sector 40.3 21.9 11.2 -1.7 2.1 Bank Credit toPrivate Sector -6.9 5.6 8.8 0.7 1.5 BIALICI OfPAYNENTS IIRCHINDISI IIPORTS (IVBRAGE FY84-87) FY84 FY85 mY86 FY67 .iIS 1.. (millions of 051) Coffee 46.6 21.7 Exports ofGoods, NIS 317.3304.0291.6277.6Cocoa 5.5 2.5 Imports ofGoods, HIS 481.6468.3423.3449.7Essential Oils 4.7 2.2 Resource Gap (deficit -) -164.3 -164.3 -131.7 -172.1 Other Agriculture 7.2 3.3 lanufactured Good. 127.6 59.3 Interest Payments (net) 13.8 8.4 10.5 9.5 Other Commodities 23.7 11.0 Other Factor Payments (net) 6.0 6.2 6.2 6.9 Total 215.1100.0 let Current Transfers 45.0 48.1 52.0 56.3 Balaace onCurrent Account -139.1 -130.8 -96.4 -132.3 UEITRNL DEBT. SIPTENER 30, 1987 0sS 0 Direct Pit. for. Investsent 4.5 4.9 4.8 5.0 Public Debt, ncl. Guaranteed 760.0 let ILT Borroving 46.9 39.7 33.0 43.7 Ion- Guaranteed Private Debt Disbarsements 62.6 65.2 43.8 64.5 Total Outstanding I Disbursed760.0 amortization 15.7 25.5 10.8 20.8 Subtotal (Dir.Iav..Het OLT) 514 44.6 37.8 48.7 IET DEBT SISRICI BJTIO FOR FY87 2/ Other Capital (net) Public Debt, iDCl. Guaranteed-in aod Capital n.e.i. 61i0 81.5 89.8 110.9 lon- Guaranteed Private Debt Increase inReserves (+) -26.7 -47 312 27.4 Total Outstanding & Disbursed ii9i gross Reserves l/(end-year) 23.4 12.8 15.7 24.3 IBID/ID LINDING (Sept. 30,1987) RIAI of EXCHANGE IBRD IDA Annual Averages [nd Period (US$ In) FY86 FY87 YT88 FT88 Outstanding I Disbursed 0.0 263.3 US$1.00 : 6 5.00 5.00 5 00 5.00 Undisborsed 0.0 82.6 61.00 : S$ 0.20 0.20 0.20 0.20 Outstanding incl.9ndisbursed 0.0 345.9 1/Includes gold holdings. BJ/ Debt service, net ofinterest earned on foreign exchange reserves, as a percentage of Exports of Goods and H1S. EXECUTIVE SUM4ARY 1. This report examines the evolution of E lvi's economy in the context of policies and government administrative practices which existed before and after the economic reforms undertaken from early 1986. It also highlights the current financial and economic crises, which began in 1987/88, and recommendsgovernment economic pollcy and expenditure priorities to avert further economic deterioration. 2. The report's medium-term scenario envisages maintenance of tight but viable financial balances and modest economic growth, averaging 2% per year. To attain this scenario, Haiti should maintain the economic reforms of 1986-87, which are elaborated in Chapter II. Those reforms, moreover, should be consolidated with additional measures, which are listed below and elaborated in Chapter III of the report. 3. The additional macroeconomic measures suggested at present include: (a) A review of export competitiveness to ascertain that the country remains attractive in manufactured exports vis-a-vis its neighboring countries,and to induce the production and exports of other commodities. (b) Introduction,after a necessary study, of a variable levy to replace the existing import licensing system for the seven designated agriculturalproducts. (c) Removal of the residual anomalies in the new Tariff Code regarding the treatment of finished goods and raw materials. (d) Increased mobilization of domestic resources, especially where there is scope (e.g. raising state land rentals to market values, closing wide exemptions in taxes) for doing so without harming production incentives or overburdening consumers. (e) Improved allocation of governmentexpenditures,emphasizing adequate funds for supplies, materials and equipment necessary for public employees and infrastructure to function effectively. (f) Careful monetary management, keeping the banking system's reserve requirementsunder review to match the demand for private sector credit, and promoting collaboration of commercial banks with the FDI to facilitateterm lending to the private sector. 4. For the main sectors of the economy, the following policy and expenditure priorities are proposed: (a) In asgriculture, Haiti should maintain the recent reforms (the elimination of export taxes, removal of direct quantitative restrictions,break-up of trading monopolies) and desist from any other forms of government price intervention. Agricultural investments should emphasize completion of ongoing and initiation of follow-up projects to raise and spread smallholderoutput, employment and incomes, and export earnings. This applies, in particular, to projects in rice, vegetables, coffee and maroes. The coffee sector being especially important in Haiti, efforts should be made to identify alternative sources of funds to continue the production of improved seedlings previously financed by USAID. Alternative sources of funds should be sought also for the targeted watershed management and secondary roads development projects. (b) In industry, Haiti should act to harmonize the 1985 Investment Code with the recent trade reforms; pursue efficient operation of Customs facilities and procedures; seek financial and technical assistance to effect smooth transition to the liberalized trade regime; and provide adequate supporting infrastructureat competitive rates. (c) Actions needed in the transport and power sectors are adequate operations and maintenance of the roads network; demand management--via peak pricing--before capacity expansion to deal with the passenger traffic load at the international airport in Port-au-Prince; greater use of provincial cabotage ports; investments to lower the average cost of electricity; and elimination of arrears payable to Electricite d'Haiti, the power company. (d) Policies in the water supply, and urban and housing sectors should focus on pricing and management problems. In addition, there are critical requirements for upgrading investments in water supply--and power--to uphold even the present low states of health and industry in Port-au-Prince and the vicinity. In urban housing, a basic change of governmentstrategy is warranted. Instead of limiting itself to low-income housing construction only, Government should focus also on strengthening the urban land market and encourage the private sector to undertake the needed housing constructionand finance. (e) The deep-seated management problems of the education and health sectors call for special emphasis on raising the efficiencyof resources devoted to these sectors, and for closer monitoring of the progress of the line ministries by the central budgetary authorities. The available resources, furthermore,should be augmented by continuing the systematic involvement of non-governmental organizations in these sectors. 5. Given the severity of Haiti's developmentproblems and its low-income levels, the success of domestic efforts to implement the policies and expendituressuggested above would be limited without the availabilityof external assistance. Hence, donor support will be essential to enable Haiti to uphold its recent economic nolicy reforms. SUMMARY AND CONCLUSIONS i. This report reviews economic developmentsin Ha.a'tl during the country's fiscal years 1986-88 tFY86-88),focusing on the contents and the outcome of an adjustment and recoveryprogram that was initiated early in 1986 following a major change of political regime. An impressive array of economic policy reforms and an improved economic performance in FY86-87 were followed in FY88 by a profound economic setback, including suspension of some vital external aid, brought on by a series of largely constitutionalcrises. Taking into account the currently depressed doinestic economic situation and external aid environment facing Haiti, the report recommendsa program of short-to medium-term policy and expenditure priorities aimed at averting a further economic backslide. Such a program at this time would provide a viable base on which to mount a full-fledgedrecovery program once domestic confidence increases and aid prospects improve. ii. Until the interruptionin FY88 of its recovery program, Haiti had pursued a wide-ranging program of economic policy reforms along the lines suggested in the World Bank's previous economic report on the country (Report No. 5601-HA dated June 10, 1985). The objectives of the program, which received substantial external assistance in FY86-87,were to establish conditions for a viable, growing economy and relieve the average Haitian of the burden of high consumer prices arising from the country's past policies of suppressing competition. iii. Those past policies were symbolized by the inefficient and inequitable economic system in place during FY80-85. The system was based on fiscal and trade regimes employing a variety of instruments (export taxes, excise duties, import quotas and prohibitions,customs tariffs) set at excessively high levels as well as on restrictive institutionsand practices, such as trade monopolies, outright closure of provincial ports and discriminatory administrationof investment promotion schemes. Large portions of public revenues accruing from that system, and public borrowing, were deployed to administer the system and to undertake capital expendituresthat were uneconomic or unaccounted for, rather than to expand efficiently the country's productive capacity or provide essential public services. iv. The economic distortions and the financial drain inherent in Haiti's policies in FY80-85 had resulted in very significanterosions of the country's incomes, living standards and finances. In that period, agriculturaloutput declined by 1.3% per year on average and industrial output by 2.5% per year on average,while unemployment rose from 22% to 30% and inflation accelerated from 6% to 8%. In the same period, real incomes and private consumptionper head each declined by 3% per year on average. Public consumption,on the other hand, grew faster than revenues, eroding public sector savings at the same time as public capital expenditures were increased. The overall public sector deficit averaged 9% of GDP in FY80-85 and the external current account deficit, 8% of GDP. The public sector deficit was financed principally by money creation--which, spilling into the balance of - ii - payments, led to loss of international reserves by US$22 million per year on average--andby stepped up credits from overseas suppliers and private banks--which contributed to the increase in the country's external debt, from around US$320 million (22% of GDP) in FY80 to US$690 million (34% of GDP) in FY85. v. To alter the economic system and situation described above, economic policies from March 1986 to November 1987 focused first on macroeconomicstabilization,and, second, on improvementof resource allocation and growth prospects. This was accomplishedthrough reform of taxes, public expenditure, public enterprises, competition and industrial incentives, and agriculturalpricing. Both expenditure and taxes were cut by about 2% of GDP, but education and health spending were increased by over 20% in real terms. Taxes on basic food items were reduced, helping to lower prices and raise private consumption among the low-income people. Income taxes were simplified, top marginal rates lowered and measures to strengthen tax collection initiated. The public investment program was pruned and concentrated on completing priority ongoing projects while the public sector's debt to the domestic banking system was reduced. Trade monopolies, both public and private, were dismantled. Of the five public industrial firms, two (the Darbonne sugar factory and the ENAOL vegetable oil mill), which were uneconomic,were closed, and another two (the flour mill and the cement factory) began to be restructured. vi. In a major reform of the trade regime, all but seven of the 111 quantitative restrictions on imports were eliminated. The remaining seven products (rice, maize, millet, beans, sugar, chicken parts and porkmeat parts), representing less than 20% of imports, became subject to import licensing without formal ceilings. Further, specific tariffs were all replaced by ad valorem ones, and the general level of protection was reduced drastically, with a view to both lowering prices and stimulating competitive efficiency, including at public enterprises. The export tax on coffee was phased out and other agriculturalexport taxes (on cocoa and sisal) were abrogated. vii. The reforms listed above were remarkably extensive and swift, the more so as they were initiated even before all commitments of supporting external aid were made to Haiti. The various measures began to stabilize and restructure the economy during FY86-87: the public sector deficit averaged an equivalentof 6% of GDP, compared to 9% in FY80-85; the external current account deficit averaged 5% of GDP, compared to 8% In FY80-85; the rate of inflationwas brought down to 2% per year, compared to 8% per year on average in FY80-85; and the effective exchange rate depreciatedby 14% in real terms, compared to a 40% appreciation,in real terms, between FY80 and FY85. At about 7% of GDP, Haiti's national savings remained low in FY86-87 owing to the policy-inducedgrowth of private consumption and a decline in FY87 public sector receipts. The latter reflected, in the main, the difficultiesof revenue collection by Customs and public utilities in an atmosphere of elections-related unrest which broke out in the last quarter of the fiscal year. Nonetheless, the overall investment- savings gap in FY86-87 was narrowed to a more sustainable 5% of GDP, compared to 8% of GDP in FY80-85. - iii - viii. Economic growth in FY86-87 averaged slightly under 1% per year, not enough, but better thar. the decline of about 1% per year in FY80-85. In large part, economic growth in FY86-87 was marred by the collapse of coffee export volume and prices, and, in the latter half of 1987, by disturbances related to the electoral process. Also, domestic agriculture and industry, already under expected stress from trade liberalization, had to endure added competition from the upsurge of contraband imports, which intensified when provincial ports, formerly closed, were opened up to internationaltraffic. While such developmentsentailed hardships for local producers--forexample, in the rice and other marketed food growing areas--therewere, on the other hand, offsetting factors, such as greater availabilityof basic wage goods, lower consumer prices, and the opening up of economic and employment opportunitiesin the trade and transport sectors. ix. Haiti's economic policies during 1986 and most of 1987 drew significant international support. Capital grant and net loan disbursementsfrom official sources, including use of IMF Credits, increased by 27% in FY86-87 over the average amount of FY80-85. The higher inflows, coupled with lower current account deficits, enabled the country to retire some arrears and accumulate some gross reserves. Consequently,import coverage improved to about two and a half weeks at the end of September 1987, compared to less than one and a half weeks at the end of September 1985. X. While the reforms initiated in 1986 still needed refinements, and many deep-seated problems of longer-termdevelopment (such as, the critical situation in health and nutrition, poor agricultural performance and deteriorating natural environment) remained to be tackled, Haiti had made a promising start. The momentum of the original economic reforms was lost, however, by a series of essentially constitutionalcrises, beginning in the last quarter of FY87 and persisting for over a year, that then compounded the country's economic and financial situation during FY88. xi. Economic developments in FY88 were characterized by work stoppages, investoruncertainties,distractionof government attention from economic policy reforms, shortfalls in public revenue, especially during the first half of the fiscal year, and slower disbursementsas well as suspension of vital external assistance. Economic growth was negligible, the rate of unemployment exceeded 30% and inflation accelerated to 6%. In response to the changing domestic and external circumstances,the four different Governments in FY88 made strong efforts at limiting the size of the budget and the external deficits. However, the shortfalls in budget support grants and in gross aid disbursementsproved too big for the country to deal with. In the end, there was a fiscal gap of over G150 million (nearly 2% of GDP) financed by monetary expansion, and external payments arrears of about US$20 million were incurred. xii. The political, economic and financial difficulties of FY88 notwithstanding, thus far Haiti has kept in place the basic fiscal and trade reforms that were implemented in 1986-87 (see paragraphsv and vi). The maintenance of those policies, together with additional adjustments outlined in paragraphs xiii to xx below, could form the - iv - basis for a core medium-term program aimed at averting a further economic backslide under the currently depressed state of the economy and unclear prospects for obtaining external aid at FY86-87 levels. The immediate implementation of a core program of priority macroeconomic and sectoral policies would prevent further impoverishmentat the moment and lay the foundations on which to build a full-fledgedadjustment program when domestic confidence increases and aid prospects improve. xiii. On the macroeconomic front, Haiti will need to review its export competitiveness to ascertain that the country remains attractive in manufactured exports over the medium term vis-a-vis its neighboring countries, and to promote the production and exports of other commodities. In other aspects, Haiti's trade regime already has been liberalized extensively. What is needed at present is to (a) sort out a few residual anomalies in the new Tariff Code regarding the treatment of certain finished goods (e.g. colored fabric) and raw materials (e.g. textile dyes) and (b) introduce a variable levy system to replace the existing import licensing system for the seven designated agriculturalproducts (see paragraph vi), for which a study is required urgently. xiv. Another pressing macroeconomicissue for the medium term is that of increased domestic resource mobilization and improved allocation of governmentcurrent expenditures. These are needed to substitute for external budget support, the restoration of which remains uncertain, and to provide adequate funds for operations and maintenance--andhence fuller utilization--ofexisting infrastructure. There is scope for mobilizing additional revenues by raising state land rentals for primary lease holders, who mostly sublease land or sell lease rights at market rates up to twenty or thirty times the primary rates charged by the Government. A study on this subject now under way in Haiti should be completed on time and its proposals followed up. Extra revenues could also be obtained by reducing or eliminating exemptions under the existing laws on income taxes, the general sales tax and Customs duties applicableto private and public enterprises. A good start was made in the August 1988 report prepared by a commission (La Commission d'Etude des Ressources Budgetaires) that had been ._harged to propose revenue measures for FY89. It is important to extend the scope of this study to the medium term. xv. The mobilization of revenues should be accompaniedwith improved allocation of expenditures, emphasizing adequate funds for non-salary operations and maintenance expenses. For several years now, including FY88, nearly 80% to 90% of government recurrent expenditures have been devoted to salaries, leaving little for supplies,materials and equipment necessary for the public employees and infrastructureto function effectively. A mere increase in funds for supplies and equipment, however, will not suffice. Haiti will also need to review the existing functions and size of its civil service establishment,and eliminate inessential functions. In this regard, an implementable action program should be prepared and undertaken, based on an ongoing study on public service pay and employment. - v - xv3. Finally in the macroeconomic arena, monetary ma.aRement will need to be consistent with balance of payments viability and the demand for private sector credit. Here, the banking system's reserve requirements,although not yet constraining credit to the private sector, should be kept under review in case lending opportunitiesfor viable productive investments increase in the country. The cost and the facilities for term credit, on the other hand, have been perceived as constraints to private investment. The problem, partly, is that commercial banks in the country lack a tradition and specialized practice (e.g. project appraisal) of term lending. The banks, therefore, employ large collateral requirements in addition to wide spreads between deposit and lending rates. One way to deal with this constraint in the near term would be to seek collaborationof commercial barks with the FDI, the country's specialized agency for term lending. xvii. As in the case of macroeconomicpolicies, the proposals for medium-term sector policies in this report are focused on implementing a core program critical to preventing a further backslide in economic conditions and poverty levels. In agriculture,it will be important to maintain the FY86-87 reforms (the elimination of export taxes, removal of direct quantitative restrictions, break-up of trading monopolies) and to desist from any other forms of governmentprice intervention. Agriculturalinvestments should emphasize completion of ongoing and initiation of follow-up projects to raise and spread smallholder output, employment and incomes, and export earnings. This applies, in particular, to projects in rice, vegetables, coffee and mangoes. The predominantlysmallholder coffee sector being especially important in Haiti, efforts should be made to identify alternative sources of funds to continue the production of improved seedlings previously financed by USAID. Alternative sources of funds should be sought also for the targeted watershed management and secondary roads development projects. xviii. The importance of upholding efficient production and employment in Haiti's largely private and labor-intensiveindustrial sector cannot be overemphasized, especially in view of the high and rising urban unemployment. For this sector, the required core policies include the trade promotion measures suggested earlier on (paragraphxiii), harmonizationof the 1985 InvestmentCode with the recent trade reforms, efficient operation of Customs facilitiesand procedures, financial and technical assistance to effect smooth transition to the liberalized trade regime, and provision of adequate supporting infrastructure at competitive rates. xix. Based on recent developments and current conditions, the overall assessment of the infrastructure sector in Haiti is that pricing policies, financial performance and management standards are satisfactory in the transport and power subsectorsc The key economic policy issues in these subsectors are the need to ensure adequate operations and maintenance of the roads network; the choice of demand management (e.g., via peak pricing) versus capacity expansion to deal with the passenger traffic load at the international airport in Port- au-Prince; greater use of provincial cabotage ports; and measures to lower the average cost of electricity and to eliminate arrears payable to Electricite d'Haiti, the power company. The water supply, and - vi - urban and housing subsectors, on the other hand, are beset with pricing and management problems. Present policy will need to focus on both these issues. In addition, there are critical requirementsfor upgrading investments in water supply--and power--to uphold even the present low states of health and industry in Port-au-Princeand the vicinity. Without such investments, private manufacturingoutput and employment could not be upheld, and the livelihoodsof the employees and their dependents (averaging five per employee) would be severely threatened. In urban housing, a basic change of government strategy is warranted. Instead of limiting itself to low-incomehousing constructiononly, Government should focus also on strengtheningthe utban land market and encourage the private sector to undertake the needed housing constructionand finance. The Government itself would still have a role in installing urban public utilities and other social services. xx. In the social sectors, despite the higher budgetary allocations for education and health since FY86-87, the deep-seated sectoral management problems persist, calling for special emphasis on raising the efficiencyof resources devoted to these sectors, and for closer and regular monitoring of the progress of the line ministries by the central budgetary authorities. Haiti's stuted strategies and policies for these sectors (the Educational Reform Program and the Nouvelle Orientation in health, both descvibed in chapter III of this report) are considered appropriate for the country situation. The core medium-term policy, therefore, should largely seek vigorous improvementsof the internal efficiencies of these sectors in public and private facilities. Provided Government acts on this front, the social sectors should be among the priority areas for external aid to Haiti. xxi. The commitmentsand disbursements of official aid to Haiti had increased substantially in FY86-87, compared to FY80-85. Aid commitments had averaged about US$145 million per year in FY80-8.; these were boosted to average US$225 million per year in FY86-87. Net disbursementsof grants and loans from official sources, including use of IMF Credit, had averaged about US$110 million per year in FY80-85; and those rose to US$140 million per year in FY86-87. Aid prospects for the medium-term, however, are not quite clear at present. In view of this uncertainty, the core scenario developed in this report projects new commitmentsof aid in FY88-92 at the same nominal levels as in FY80-85. Net disbursementsof aid in FY88-92 are also projected at the same nominal level as FY80-85, with up to 60% of the loan disbursementsin FY88-92 expected on account of past commitments;that is, commitmentsmade prior to October 1987. xxii. While the levels of aid projected for FY88-92 are lower than FY86-87, they are nevertheless predicated on the implementationof core medium-term policies summarized in paragraphs xii to xx above and elaborated in chapter III of the report. If those policies are followed, real GDP growth in the next four years could feasibly average about 2% per year, rising gradually from 0.3% in FY88 to between 22 to 3% in FY92, and accelerate a little thereafter. This rate of total GDP growth implies very modest growth of real income per capita. The growth of private consumption per head, in real terms, is - vii - projected to be smaller than the growth of incomes. Such a restrained growth of consumptionwill be necessary to establish and maintain a viable macroeconomic balance in the face of lower levels of aid assumed for the medium term compared to FY86-87. xxiii. Barring some major exogenous shocks, the pursuit of appropriate growth and trade policies would avoid deteriorationof the external current accoLnt balance, enabling Haiti to cover the current deficits, meet debt repayment obligations and maintain modest amounts of gross reserveswith the external capital inflows projected on the assumptions specified in paragraph xxi. The projected capital disbursementshave been assumed to consist of grants and concessional loans only; in other words, no medium-term commercialborrowing has been assumed. Provided this is adhered to, the projected debt service payments relative to GDP, export receipts and public revenues would remain manageable. As the old Stand-by Credits of the IMF are paid off, the debt service ratio would decline, from 15% in FY87 to 9% in FY92. As a proportion of projected public revenues, external debt service payments in FY92 would be about 25%, the same as in FY87. xxiv. The analysis of medium-term outlook for this report has explored the economic consequencesin case the proposed core policies are not undertaken. As might be expected in such a case, Haiti's economy would stagnate or decline further and its financial situation exhibit large and growing deficits. Such a scenariowould bring about major dislocations in the economy and perpetuate, if not worsen, the misery of a large part of Haiti's population. The preferableway out of the current situation, especially in view of the lower levels of aid anticipated at present, would be to consolidate the economic policy reforms already in place so as to attain at least a little economic growth while maintaining viable financialbalances. This is an approach that would retain a base on which to found an enhanced adjustmentprogram when one becomes feasible. xxv. Finally, given the severity of Haiti's developmentproblems and the constraints imposed by low-income levels on the potential for generating domestic savings, the success of domestic efforts would be limited without the provision of external support. Hence, as Haiti itself acts to consolidate its recent economic reforms, external assistance, in the form of concessional aid, will be essential to promoting the country's economic and social development. Chapter I INTRODUCTION: THE BACKGROUND TO RECENT DEVELOPMENTS A. Overview 1.1 After an improved economic performance in 1986 and most of 1987,1 Haiti at present is experiencinga profound economic setback brought on by a series of largely political crf-ea. 2 In contrast to the improvementswhich had begun in 1986-87. the current economic situation is characterizedby stagnant output, a dangerouslyhigh and increasing level of open unemployment, especi.ally in the urban areas, rising prices, large budgetary and balance of payments gaps, and rapidly deterioratingprovision of economic and social services. This situation will have to be addressed as the political climate facing Haiti becomes clear. 1.2 In view of the ultimate necessity to deal with economic conditions, this report recommends some short-to medium-term policy and expenditure priorities for Haiti, taking into account the current economic situation. Broadly, following a review of recent economic developments, this report contends that, with requisite external assistance, Haiti will need to consolidate the public sector management measures and the growth-oriented policy reforms which it had been pursuing most recently. This is essential to avert a major economic backslide. Once domestic confidence is increased, and aid prospects improve, an enhanced adjustmentand growth program should be worked out and backed with firm and adequate external assistance. Until the unfortunate interruption in 1988 of its adjustment and recovery program begun in early 1986, the country lived up to its economic policy undertakings. The economic reforms it pursued in FY86-87 were supported by various donors (see paragraph 3.3 in Chapter III), and were solidly along the lines suggested in the World Bank's previous economic report on Haiti. 3 1/ Haiti's annual economic statistics are compiled on the basis of the country's fiscal year, which runs from October 1 to the following September 30. Wherever calendar year notations are used in this report, the conventionadopted is to identify fiscal years by the calendar years in which they end. Thus, 1986 means Haitian FY1985/86; 1987 means Haitian FY1986/87. 2/ From July 1987, there had been intermittent civil disturbances associated with the electoral process, culminating in a cancellation of elections at the end of November 1987 amidst violence on election day. Fresh elections were held in January 1988 and a new civilian Government assumed office in February. Four months later, a military Government took over, lasting three months till it too was replaced. These political crises over the past year have impeded economic performance by way of loss of investor confidence, work stoppages, distraction of Government attention from economic policy reforms and slow disbursementsas well as suspension of vital external assistance. 3/ World Bank, "Haiti: Policy Proposals for Growth," Report No. 5601-HA, June 10, 1985. - 2 - B. The Previous Report: A Background 1.3 The thrust of the last report on Haiti was to propose a mix of fiscal, agricultural,and industrialpolicy reforms aimed at short- term stabilization, efficient resource allocation, and revival of economic growth. The policy proposals were based on analyses of the extent to which the Haitian economy had deteriorated in 1980-85 compared to 1975-80, the major factors underlying the economic stagnation and the financial disequilibrium that had set in, and the country's long-term potential for sustained growth of output and employment. Economic Deteriorationin 1980-85 1.4 The deterioration of economic performance in FY80-85, compared to FY75-80, is illustrated in Table 1 below, whicn shows that production in all sectors, trade, incomes, employment and private consumption each declined very markedly. While the overall rate of investmentwas maintained in FY80-85, a large portion of public investmentwent into acquisition or establishmentof uneconomic state manufacturing enterprises. With public capital expenditures increasingwhile savings were falling, the overall public sector deficit rose absolutely and as a proportion of GDP. The deficit was financed principally by money creation--which, spilling into the balance of payments, led to substantial loss of reserves--andby stepped up credit from overseas suppliers and private banks--which contributed to the increase in the country's external debt between 1980 and 1985. Determinantsof Decline and Disequilibrium 1.5 As identified in the last report, the major fantors underlying Haiti's economic stagnationand financial disequilibriumin 1980-1985 were the pressure of population on land leading to decreasing agricultural productivity, the effect of protection on domestic industry, and the inadequacy and poor allocation of public resources. The deteriorationof Haiti's agriculturewas, and remains, a long-term phenomenon explained by, among other factors, relentless pressure of population on the country's roughly one million hectares of cultivated land, mostly marginal hillside farms, on which an estimated two million peasants and a ricultural workers app2.ied extremely backward cultivation practices. Much of the state and 4J Indicatorsof worsening population pressure on land in Haiti include data such as: (a) increasing population density per square kilomeser of agriculturalland; this density rose from 296 in 1965 to 408 in the mid-1980s; (b) decreasing farm sizes, revealed by the fact that the proportion of farms of 1 carreau (1.29 ha) or less rose from 39% in 1950 to 71% in 1971, the year of the last agriculturalcensus; (c) rapid increases in the value of land between 1975-81,when prices of poor land rose at 15% per year in nominal terms, and those of fertile lands at much higher rates, sometimes as much as 752 per year; and (d) declining agriculturalvalue added per worker, from G926 in 1965 to G858 in 1985, both measured in constant 1976 prices. large private land went *.nexploitedwhile, elsewhere in the country, the shortage of land, coupled with insecurityof tenure and the demand for wood and charcoal for energy, had generated a vicious long-term cycle of deforestationand soil erosion, further intensifyingthe land shortage. Table 1: SELECTED ECONOMIC INDICATORS, FY76-80 and FYB-86 Indicator FY76-80 FYSO-86 Average growth rates --- (X per year)-- GroseDomestic Product /a 6.3 -0.9 Agriculture Ib 1.8 -1.8 Industry L 9.5 -2.5 Services 'b 8.3 -0.8 GNPper Capita /L 8.3 -2.6 Private Real Consumptionper Capita 2.5 -8. 1 Export Volume /d 10.8 -1. 8 Import Volume 7 10.0 -2.9 Consumer Price'Index 6.5 8.3 ------ (X )------ Unemployment Rate 1!. End of Period 21.9 29.8 -Ratios to GDP LL Ratios to GDP Lf ---- (X of GDP)---- GroseDomestic Investment 186. 16.4 Public 9.1 10.0 Private 7.6 6.4 National Savings 9.8 8.2 Public 1.8 0.6 Private 7.8 7.7 PublicSectorBalance L2, BeforeGrants -7.7 -9.4 PublicSectorBalance , AfterGrants -4.6 -6.0 Domestic Bank Financing Lj 1.1 2.8 External Current Account4alance -7.0 -8.2 …___-(USS Mn)----- Net Changsin Reserves /I (- meansdrewdown) 29.8 -130.8 External Debt Outstanding Li, end of period 818.2 687.4 i In real term, at marketprices. In real term%, at factorcost. I Includes mining, manufacturing, construction, and water s*id electricity. /d Goodsand nonfactor services. Estimated from available data on total labor forceand civilian cmployment only.End of FYS0-86 periodfigure refers to 1988. / At current prices. Overall budgetbalance of general government, majorpublic enterprises and nonconsolidated public sector. By monetary authorities. Cumulative duringperiod. Disbursed only. Sources: Statistical appendices of this and previous Bank reports; ILO and IMF. 1.6 In addition, until 1985, agriculturalpricing policy, iarked by heavy export taxation, especially of coffee, and quantitative restr