Haiti: Towards Restoration of Growth and Development

ReportNo. 9523-HA Haiti Restoration of Growth and Development May 20, 1991 CountryDepartment Ill LatinAmericaand thc Caribbean Region FOR OFFICIALUSEONLY 0~~~~~ 0 o~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~i I C:S~~~C (C Doumn of t5 Wol B Kb~~~~t). Thsdcmn hsarsrceddsrbto admyb sd yrcpet on. in th eomn&3 hi iildte. It otnsmy o tews be diclse wihu ol akatoiain 0 ~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ . Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized FISCAL YEAR October 1 - September 30 WEIGHTS AND MEASURES Metric System CURRENCYAND EQUIVALENCYUNIIS Currency Unit - Gourde (G) US$1.00 G G 5.00 An economic mission visited Haiti ir, June-July 1990. The members of the economic mission were Feliciano Iglesias (Chief of Mission), Henri Henner (Consultant,Trade), Julio Linares (Water Supply),Adrian Guissari (Consultant,Public Finance),Marie-HeleneEwenczyk (Consultant, Education), Fernando Vio (Consultant, Health and Nutrition), and Coby Frimpong (Researcher). Christian Delvoie (Transport)and Carlos Mena (Consultant, Electric Power) provided inputs for the chapters on Transport and Electric Power sectors respectively. Jose Sokol (Lead Economist) travelled to Haiti in early March 1991 for an updating economicmission. He and Raj Nallari (Consultant)prepared the final draft of the report. Mrs. Maria Pilar Reyes has provided excellent secretarialassistanceat all the stages of the report. FOROFFICIAL USEONLY GLOSSARY OF A8DREVIATIONS APN Autorite Portuaire National (NationalPort Authority) BNC Banque Nationale de Credit (NationalCredit Bank) BNDAI Banque Nationale de DeveloppementAgricole et Industriel (NationalAgriculturaland IndustrialDevelopment Bank) BRH Banque de la Republique d'Haiti (Bank of the Republic of Haiti - Central Bank) CAIiEP Centrale Autonome Metropolitained'Eau Potable (Metropolitan Water Authority) CdH Cimente d'Haiti (Cement Plant) EdH Electricited'Haiti (Electricitv Company) ENAOL Entrepise Nationale des Oleagineux (edible oil company) HA Hectare HASCO Haitian American Sugar Company ICOR IncrementalCapital Output Ratio IDA InternationalDevelopmentAssociation ILO InternationalLabor Organization IMF InternationalMonetary Fund MARNDR Ministere de l'Agriculture,des RessourcesNaturelles et du DeveloppementRural (Ministryof Agriculture,Natural Resources and Rural Development) MdH Minoterie d'Haiti (Flour Mill) MENJS Ministry of Education, Youth and Sports MEF Ministry of Economy and Finance MP Ministry of Planning and External Cooperation MSPP Ministere de la Sante Publique et de la Population (Ministryof Public Health and Population) MTPTC Ministry of Public Works, Transport and Communications NGOs Non-governmental Organizations NFS Nonfactor Services OFATMA Office d'Assurance--Accidents du Travail,Maladie et Maternite (Workers'compensation,sickness and maternity insurance agency) OPRODEX Office de Promotion des Denrees Exportables (CommodityExport Promotion Agency) POCHEP Postes Communautaires d'Hygiene et d'Eau Potable (CommunityHealth and Drinking Water Posts) SEN Societe d'EquipementNational (Construction) SEPPRN Service d;EntretienPermanent du Resseau Routier National (NationalRoad Maintenance Organization) SNEP Service National d'Eau Potable (NationalWater Service) SONAPI Societe Nationale des Parcs Industriels (NationalIndustrialPark Company) TELECO Telecommunications d'Haiti (TelephoneCompany) USAID United States Agency for InternationalDevelopment UNESCO United Nations Scientificand Cultural Organization USN Usine Sucriere du Nord (NationalSugar Refinery at Citadelle) USND Usine Sucriere Nationale de Darbonne (National Sugar Refinery at Darbonne) Thisdocument has a restricted distributionandmaybe usedby recipients only in the performance of their officialduties. Its contents maynot otherwise be disclosed withoutWorldBankauthorization. TITLE I HAITIs TOWARDS RESTOiATICN OF GROWTH AND DEVELOPMENT COUNT8IY a HAITI REGION t LATIN AMERICA ANDTHE CARIBBEAN SECTOR s COUNTRY ECONOMIC REPORT NO M E CLASSIF NM|YY ANGUAGES 9523-HA CEM Restricted 05/91 English PUBDATE ABSTRACT s Haiti's economy has suffered a decade of stagnationand disequilibriumcaused in part by political instability. Ropulationpressure, inappropriateagriculturalpolicies, protection in industry, trade distortions,fiscal indiscipline,and sharp reductions in foreign aid since 1988 have exacerbated the economic decline. A stable macroeconomic environment and clear rules of the game are needed to restore the confidenceof the private sector for it to invest. To restore growth, the new Governmentneeds to promote export- oriented agricultureand industry, and develop tourism in conjunctionwith domestic resource mobilizationto finance much needed rehabilitationof infrastructurefacilities, fiscal discipline, and tight monetary policy. The Government'srole is found to be most productive if it invests in neonle (mainly primary education,basic health care, nutrition, and family planning), in infrastructure(operations and maintenance,rehabilitation of transport,power, water and irrigation systems) and concentratesin institutionbuilding (restructuring public utilities, improving civil service, technology transfer, and defining and protectingproperty rights). Growth in income should reduce poverty and infant mortality and raise life expectancy. At the same time, better primary health care and education, family planning and nutrition can, in their turn, promote growth. Opening up to trade promotes domestic and internationalcompetition leading to lower prices, importationof technology for productivity gains, and improvementsin health and nutritionwhich is the hallmark of economic development. Haiti is beset by institutional weaknesseswhich result in haphazard policy implementation. Investment in institutionbuilding should be an ongoing process. Haiti is heavily dependent on external assistance from grants and at highly concessionalterms to undertake priority investment,strengthenthe institutional capacity, and embark on policy changes to avert further economic decline and restore growth and development. Paeg 1 of 2 HAITI - COUNTRY DATA SHEET Area: 27,600 sq km Population: 6.4 million (1989) Density: 228 per sq km Rateof growth: 1.8 X (1989) Population characteristics, Health Crudebirthrate (per1,000): 84.4 Infant mortality (per1,000livebirths): 117 Crudedoeth rate (per1,000): 12.7 Populntion per physician: 7179 Population per hospital bod: 1897 Incomedistribution Distribution of landownership -- _---------- I............... __ ......... ------------------------------ X of national income, highest quinti:s .. X ownedby top 10X of owners: lowestquintile: X.. X wned by smallest IOX Access to safewater Access to electricity -- _------------…---- --------------------- X of population - urban: 69 X of population - urban: 46 - rural: ao - rural: 8 Nutrition Education Calorliintake as U of requirements: 80 Adult literacy rte (X) : 62.4 Per capltaproteinIntake(g/day): 80 Primary schoolenrollment (X) of relovent age group: 78 ONP per capita (S, 1989) 1/ : 400 GROSS NATIONALPRODUCT, FY69 ANNUAL RATE OF OROWTH ( X , FY80 prices) US$ Mn X FY76-80 FY8O-86 FYS8-87 FY88 FY89 GNP at Market Prices 2662.8 100.0 6.2 -0.9 0.1 -1.6 -0.6 Gross Domestic Invostment 291.6 11.4 10.1 -2.1 -6.0 -1.0 -1.0 Gross National Saving 147.4 5.8 14.0 -8.6 -11.2 -1.9 -12.8 Current Account Balance -126.9 -6.0 Exportof Goods,NFS 269.3 10.1 10.8 -1.8 -6.6 0.8 -0.5 Im"port of Goods, NFS 428.6 16.6 10.0 -2.9 -6.5 -1.1 2.2 OUTPUT,EMPLOYMENT AND PRODUCTIVITY IN FY89 Value Added Labor Force V.A. per Worker UsS Mn X Mn % US$ Agriculture 839.9 19.1 2.0 68.7 170.0 Industry 614.9 29.0 0.8 10.0 1716.8 F.rvices 922.1 61.9 0.7 28.8 1817.8 Tots. / Average 1776.9 100.0 8.0 100.0 692.8 GOVERNMENT FINANCE __________________ Consolidated Public Sector Goneral Government …__________________________ -------------------- G Mn Percent of GDP 0 Mn Percent of GOP FY89 FY86 FY89 FY89 FY86 FY89 Current Receipts 2097.4 18.1 17.7 1140.2 10.1 9.6 Current Expenditure 2189.0 17.7 18.6 1889.8 11.4 11.7 Current Surplus -91.6 0.4 -0.8 -249.6 -1.8 -2.1 Capital Expenditure 688.6 5.8 4.6 896.8 8.9 8.8 1/ World Bank Atlas methodology. Page 2 of 2 HAITI - COUNTRY DATA SHEET __________________________ MONEY, CREDIT A PRICES FY86 FY8S FY67 FY88 FY89 (Mn Gourdeeoutstandinget end of perlod) Broad Money Supply 2647.6 2e86.8 8188.6 8468.8 8909.2 Bank Credit to Public Sector 2160.2 2118.6 2199.8 2828.0 26&8.9 Bank Credit to Private Sector 1164.7 1172.4 1186.0 1279.2 1870.0 (percontage or Index numbers) Broad Money as U of GDP 26.4 26.8 29.0 81.8 88.0 General Price Index (FY80 = 100) 148.7 160.8 144.1 149.6 164.9 Annual percentagechanges in: General Price Index P.4 8.6 -11.4 4.0 8.6 Bank Credit to Public Sector 12.0 0.9 8.2 8.0 9.1 Bank Credit to Privato Sector 8.8 0.7 1.1 7.9 7.1 BALANCE OF PAYMENTS MERCHANDISEEXPORTS (AVERAGEFY84-89) FY86 FY87 FY88 FY89 US$ Mn % (USS million) Coffee 42.8 20.8 Exports of Goods, NFS 291.6 281.6 278.4 269.8 Cocoa 4.8 2.8 Importsof Gooda, NFS 428.8 451.8 426.8 428.5 Essential Oils 4.3 2.1 ----- ----- ----- ----- Other Agriculture 6.7 3.2 ResourceGap (deficit -) -181.7 -170.8 -152.2 -164.2 ManufacturedGoods 180.8 62.7 Other Commoditiea 19.8 9.5 InterestPayments (not) 9.1 8.4 6.8 10.9 ----- Other Factor Payments (not) 7.8 6.9 10.7 11.1 Total 208.7 100.0 Net Current Transfers 52.0 56.8 68.4 59.3 ----- ----- Balanceon Current Account -98.4 -129.8 -106.3 -126.9 EXTERNAL DEBT, SEPTEMBER 80, 1989 Direct Pvt. For. Investment 4.8 5.0 10.1 9.4 --------------------------------- Not MLT Borrowing 88.0 66.2 84.4 15.6 Disbursements 48.8 67.0 48.8 28.9 USS Mn Amortizotion 10.8 11.8 18.9 18.4 ------ ----- ----- ----- ----- Pubi.c Debt, incl. Guaranteed 760.0 Subtotal (Dir.Inv.+Net MLT) 87.8 60.2 44.6 24.9 Non- '-iwrantecd Private Debt Tote( Outtsanding A Disbursed 760.0 Other Capital (not) and Capital n.e.l. 89.8 104.6 122 93 NET DEBT SERVICERATIO FOR FY87 2/ Increase In Reserves (-) -81.2 -86.6 -60.2 9.0 Public Debt, Inel. Guarantee 19.8 Non- Ousrents"d rivate Debt Gross Reserves 1/(end-year) 16.7 28.6 22.8 21.8 Total Outatanding A Disbursed 19.8 RATE OF EXCHANGE IBRD/IDALENDING (Sept. 80,1987) Annual Avereg ,and of period) ISRO IDA FY86 FY87 FY88 FY89 (US$ Mn) ---- ---- ---- ---- Outstanding A Disbursed 0.0 268.8 US81.00 = a 6.00 6.00 6.00 6.00 Undisburaed 0.0 82.6 C1.00 = USS 0.20 0.20 0.20 0.20 Outstondingincl.Undisbursod 0.0 846.9 1/ Includesgold holdings. 2/ Debt service, net of Interestearned on foreignexchange reserves, as a percentageof Exportsof Goods and NFS. HAITI: TOWARDS RESTORATION OF GROWTH ANDDEVELOPMENT TABLE OF CONTENTS Page No. COUNTRY DATA SHEET ABSTRACT SUMMARY AND CONCLUSIONS . . . . . . . . . . . . . . . . . . . . . . . . 1. INTRODUCTION: THE BACKGROUND TO RECENT DEVELOPMENTS . . . . . 1 Overview . . . . . . . . . . . . . . . . . . . . 1 The Previous Report: A Background . . . ... . . . .. 2 Disequili's-ium . . . . . . . . ... 2 Advent of New Policies ........ ....... 4 II. RECENT ECONOMIC POLICIES AND PERFORMANCE . . . . . . . . . . . 6 Macroeconomic Overview .. ..... ........... Balance of Payments and External Debt . . . . . . . . . . . . 9 III. DEVELOPMLNT POLICIES AND PRIORITIES . . . . . . . . . . . . . 11 Priority Economic Objectives and Strategy . . . . . . . . . 11 IV. PUBLIC FINANCES . . . . . . . . . . . . . . . . . . . . . . . 16 Overview . . * .* . . * . . * * * . . * *. 4 4. . . 16 Current Revenues . . . . . . . . ... .. . . . . 16 Current Expenditures . 19 Public Investment . . . . . 19 Public Enterprises .................... 20 Finances of the Consolidated Public Sector . . . . . . . . 23 Main Issues . a 4 * .*. * * . . . * * * 4 4.* o .* *. . 24 V. FOREIGN EXCHANGE ANDMPNETA YPOLICY . . . . . . . . . . . . 25 Overview . . . * * * * . ... .. 25 Main Issues . . . * ... .. . . . 28 VI. INDUSTRY AND TRADE . . . . . . ... . .. . . . . . . . .. 29 Overviev . . . . . . . . . . . . . . . . . . . . . . . 29 The 1986-87 Reforms . . . . . . . . . . . . . . . . . . . 31 Impact of Reforms . . . . . . . . 44444 32 Remaining Distortons . . . ........... 33 Main Issues .. * a 4 * * * 4 & * * * * * * * * ... 34 VII. AGRICULTURE . . . . . . . . . . . . . . . . . . . . . . . . 35 Overview . . . . . . . . . . . 35 Sectoral Performance ............... *... 36 Economic Policy Framework. ...... .. ....... . 36 VIII. THE TRANSPORT ECTOR . . . . . . . . . . . . . . . . . . . 40 Overv4ew * . . . o . . . . . . . . .4* * * * . . 40 Main Issues . . . . . . . . . . . . . . . . . . . . . . . 42 TALE OF CONTENS, (Continued) Pa 8 g No. IX. ELECTRIC POWR . . . . . . . . . . . . . . . . . . . . . . . 44 Overview . a . . . . . . . . .* . . . . . , . . , . . . . . 44 Main Issues .*. . . . . . . . .. * * * . * . * * * * * * * 45 X. WATER MIDSANITATION .................... 46 Overview . . . . . . . . . . . . . . a . . . . * . . . . . 46 Sector Institutionso .......... .......... 47 Constraints to Sector Development 9 * * * * * . . . . . . . 48 Main Isues . . . . . ... * . . ... * ........ . . 48 XI. ALTH AnD RITION o . . . . . . .*. . . . . . . . . . . . 49 Overview . . .. . * * * * * * * 49 Health * * * * . * . . * . * 50 Health Care System .......... ........ 51 Health Financing ................... 52 MainIssues ....... . . . . . . .. * * . 9 .. *.*.......*.53 XII. EDUCATION . . . . . . . . . . . . . . . . . . . . . . . . . 54 Overview . . . . ... . .9.. 54 Main Issues 9..**999. * * * o 9 9 * * * .9 * 56 XIII. MEDIUM-TERM RWTH AND BALANCE OF PANS PROSPECTS . . . 58 Overview . *.. . o . * . . . .. 9 9 9 * .. 9 .o * * * 58 Macroeconomic Framework . .9.9.9.9.9.999. 9999999 ......... 59 Public Sector Investment Program . . . . . . . . . . . e e 63 External FinancingRequirementsfor Investment . * . . . 65 STATISTICAL APPENDIX RAP (IBRD 21143) AUPEII HAITI TOWARDS RESTOPATION OF GROWTH AND DEVELOPMENT 'TATISTICAL APPENDIX POPULATIONAND EMPLOYMENT 1.1 Populationby Sex and Age: 1950, 1971, 1982 Censuses and Estimates for 1982-83 to 1986-87 1.2 Urban and Rural Population: 1950, 1971, 1982 Censuses 1.3 Crude PopulationBirth, Death, Migration and Net Grovth Rates, 1971-82 NATIONAL ACCOUNTS 2.1 Gross Domestic Product by Expenditureat Current Prices, FY75-89 2.2 Gross Domestic Product by Expenditureat Constant Prices, FY75-89 2.3 Gross Domestic Product by IndustrialOrigin at ConstAnt Prices, FY80-89 2.4 Key MacroeconomicIndicators,1990-99 2.5 National Accounts, 1990-99 BALANCE OF PAYMENTS AND TRADE 3.1 Balance of Payments, PY80-89 3.2 Composition of Merchandise Exports, FY80-89 3.3 Volume, Unit Price and Value of Principal Commodity Exports, FY8O-89 3.4 Exports of Light Manufacturersto the United States, f.o.b., FY8O-89 3.5 Compositionof Imports, c.i.f., FY80-89 3.6 Imports of Petroleum Derivatives,FY82-89 3.7 Services Account in Balance of Payments, FY8O-89 3.8 Direction of Trade, FY8O-89 3.9 Balance of Payments, 1990-99 EXTERNAL DEBT AND GRANTS 4.1 Medium and Long-Term External Debt, FY82-89 - Bilatoral Creditor. 4.2 Medium and Long-Term External Debt, FY82-89 - Multilateral Creditors 4.3 Medium and Long-Term External Debt, FY82-89 - Suppliers'Credits 4.4 Medium and Long-Term External Debt, FY82-89 - Private Financial Institutions 4.5 Medium and Long-Term External Debt, FY82-89 - Total All Creditors 4.6 Grant Die)ursementsby Donors, FY80-89 PUBLIC FINANCE 5.1 Public Sector Budgetary Operations,PY80-89 5.2 Composition of Treasury Revenues, FY8O-89 5.3 Economic Classification of Govern-nt Current Expenditures, FY82-89 1U RY AND CONCLUSIONS i. Over the past decade, the people of Haiti have suffered major losses in their standard of living. Failure in sustainingecor.omic growth over a long period of time has been a source of major frustrationsand of increased poverty. The economicperformance has been especiallv disappointing because a wide cross-sectionof the population, in rural areas and in urban centers,has not been able to share the fruits of development as in many other developing countries in the world. Instead,GNP per crpita in 1989 was US$400, the second lowest level recorded in the Western Hemisphere. ii. Economic developments in Haiti have continuouslybeen affected by political instability that has prevailed over the years. The coming into office of Haiti's democraticallyelected Governmentprovides a window of opportunity for the country to finally move towards susta4ned social and economic progress. In many ways, the economy and its economic policy are at a crossroadss important decisions regarding the country's developmentpotential need to be made with urgency. A variety of favorable factors which benefqtted the country in the past are less likely to be at hand in the future. Coffee, cocoa, and sugar, major sources of past agriculturalgrowth, face unpromising prospects, and other agricultura'exports have stagnated. Meanwhile, domestic production costs for agriculturehave mounted, adoption of new technology has lagged, supply problems exist for many commodities,and Haiti's agricultural export prospects are clouded by distortionsand inefficientuse of resources. Consumers'welfare has been lowered by higher monopoly prices. Exports from the free zone have declined, and tourism, a potential source of foreign exchange and employmenthas dramaticallydiminished. At the same time, Haiti's dilapidated infrastructure has been left largely unattended. At a time when most old problems remain and new constraints are emerging, new economic policies which will contrib;-te to a revitalization of agriculture and manufacturing,and to the developmentof tourism, are direly needed. However, the economy does not suffer from the excessive regulationsthat has impeded the progress of many other developing countries. The prices of most of the goods and services are not subject to governmentcontrols, and a substantial trade liberalization has taken place. Thus, there are important positive elements in the framework of incentivesfor private sector production and investment. Structure of the R iii. This report reviews in Chapter I the economic developmentsin Haiti following the economic reform efforts of 1986-87,which were interrupted by political crises. Chapter II details the recent economic performance. Except for an improved economicperformance during 1986-87, the decade of 1980. is characterizedby negative growth in output, high levels of unemployment,rising inflation,unsustainablefiscal and balance of payments deficits, breakdown in the provision of general services, and sharp changes in external assistance. Taking into cot 'derationthe depressed economic situation, this report outlines in ter III a development strategy that should bring about short term relief without jeopardizingthe longer term developmentneeds. Short-to-medium term policies are needed to correct - ii - internal and external imbalances, attract private investment, and encourage external assistance in an effort to ccunter the forces of downward spiral and restore growth in output and employment. Past macroeconomicpolicies have resulted in an uncompetitive,inefficient,and inequitableeconomic system. A rev;ew of these :.ssues is detailed in Chapter IV through VI, which deal with public finance,exchange rate and monetary pclicies, and industry and trade respectively. The sectoral issues and policy requirementsdealing with microeconomicefficiency and improvementof services are discussed in the next six chapters. These pertain to agriculture,transport,power, water and sanitation,health and nutrition, and education. Haiti needs to urgently attend to its developmentproblems. Chapter XIII illuetrates the medium t growth and balance of payments prospects taking into considerationcurrent economic conditionsand the impact of the proposed policy changes. The investmentneeds of the domestic economy are derived considering the growth prospects and the urgency of rehabilitatingsystams in critical sectors. Therefore, Haiti has to depend heavily on external capital inflows. It is projected that barring any severe exogenous shocks, Haiti should be able to arrest its economic deteriorationand restore growth in output and employment should it undertake the needed institutionaland economic policy changes with the support of external assistance. Recent Economic Developments iv. Rapid economic growth during the late 1970s was achieved through the interactionof private sector dynamism in exports of agriculture crops and assembly manufactures,and public sector investmentin infrastructure, basic services, and tourism. This spurt in economic activity was short lived as the Government increasinglyintervened,albeit moderately,by employing fiscal and trade practices that were both restrictiveof the private sector and bit ad against exports. However, the small size of the internalmarket has resulted in the evolution of private monopolies in cement, sugar and oil. Barriers to entry exist in the coffee exporting sector, and importers collude, hoard and speculate in trading of some essential items. The Governmentalso created monopolisticpublic enterprises and squanderedpublic expenditureswithout increasingproductivecapacity. This resulted in an inefficientand inequitableeconomic system which significantly eroded the country's incomes, living standards,and financial health. During 1980-85,production declined markedly in all sectors. This depressed the economic situation,lowered domestic savings and private investment,and led to internal and external imbalanceswhich resulted in higher inflation,exchange rate misalignment,and the draw down of scarce internationalreserves. v. Faced with economic decline and rising unemployment,Haiti pursued wide ranbing economic reforms during 1986-87,which focused on reform of taxes, public expendituresand investment,industrialincentives, trade reform, and agriculturalpricing. The reform measures began to stabilize the economywhich recordedmodest improvementsin the growth rate of real GDP. Internaland external imbalancescontinued to be brought down, inflationwas reduced as monetary financing of the fiscal deficit was minimal, and employmentgrew at 1.6X per year. The reforms were supportedby substantial commitmentsof external assistance. - iii _ vi. In aid-1987, a aories of political crises erupted. Economic developments sincethen have been ch%racterized by work stopp4ges, uncertainties for privateinvestors, shortfAlls in publicrevenues, curtailment of externsi assistance, accumulation of external payments arrears, and pervasive econonic deterioration. As a consequence of the gravityof the situation, in 1989the Government adopteda stabilization programto strengthen publicfinances, stabilize the balanceof payments, reduce inflationarv pressures, and reversethe declinein investment and economic activity. The programobjectives couldnot be achieved as the fiscaldeficit widenedbecauseof revenueshortfalla and resulted in domettic credit exranding more rapidlythan contemplated. New external paymentarrears were incurred. In 1990,the C3vernment took a numberof actionsto strengthen the monetary and external policies. Hbwevar, thesewere insufficient and the economic situation further deteriorated. vii. The new Government (during February-May, 1991)has taken some measures to improveits fiscalrevenues, counterthe contraband activity, promotetourism, and encourage the privatesector. Importdutieshave been reduced on rice,pork, iron,tin sheetsand tools. All taxesand dutieson ricehave been removedand only a US$2.50tax per bag is being levied(price of each rice bag is US$40now). Moreover, rice importsdo not need an import license now. There are no pricecontrols, but the Government did intervene to controlthe pricesof some essential itemsduringMarch-April 1991. This was for a shortduration aA hoarding and speculation droveup the pricesof some essential items. The Importlicensing systemis now flexible and even cement can be imported freely. The Government has streagthened the Customs Administration by tightening up controloverports,changing customofficials, and introducing new rules,which has resulted in increasing revenues and lowering of contraband activity.A smallbureauof tourism has been established and negotiations with touristagencies/shipping linesare in incubation. Develoyme_t Strate2v. ObJectives. and PoliciL viii. The new Government's intention is to undertake a development strategy that will increase the qualityof life for all Haitians. Thia calls for a complementary role for the privateand publicsectors, a stable macroeconomic environment, openness to trade,and promotion of domestic and international competition.Rapid development of otherlow-income developing countries suggests thatprivateproduction and tradeis enhanced by the Government providing a stablemacroeconomic foundation by maintaining fiscal discipline, eliminating distortions in tariffs, taxes,and exciseduties, maintaining a marketdetermined exchange rate,eliminating artificial barriers to entryof new entrepreneurs, such as licensing, regulations and permits, providing ar:cess to creditand financial institutions, and providing adequate infrastructure support. Historyof development in many developing countries suggests that the Government's role is foundto be most productive if it lnvests in People (mainly primaryeducation, basichealthcare,nutrition, and familyplanning), and in infrastructure (maintenance, and rehabilitation cf transport, power,water,and irrigation systems), and concurrently - iv - concentrates in instutu£ipn_building (restructuring public utilities, improving the quality of the gatherin8 and disseminatinginformationto facilitate civil service, technologytransfer, and defining and protecting property rights). ix. Economic developmentneeds an efficia.ltly operating private sector, aided and abetted by a responsibleGovernment. The private sector and the public sector are not substitutesbut are intrinsicallybound together in making the whole of economic gain greater than the sum. Fiscal discipline will result in reduction of wasteful public spending, and lower money financingand taxation to cover the fiscal deficit. This translates in'o lower inflation and more take-home pay which will be beneficial to all Haitians, particularlythe poorer segment of the population. Elimination of export taxes will result in farmers receiving higher farmgate prices, thus enhancing production. Distortions in tariffs and misalignment of exchange rate will only encourage contraband activitywhich is detrimental to consumers. Eliminatingbarriers to entry for new entrepreneursalong with access to credit will enable more production,exports and employment. Tariff protectionand import licenses nave resulted in collusion among importers, generationof "rents" and subsidies to producers of rice, sugar, flour, maize and sorghum,which &re not in the interests of the common Haitian. Similarly, inefficientpublic enterprisesprovide inadequateservices at higher prices and further financiallyburden the average Haitian when these enterprises operate in deficit. Opening up to trade brings in its train, competitiveness along with medical, engineering,and scientifictechnology. Technological change will increaseproductivityand produce sustainableeconomic development as reflected in higher quality of life and improvementsin health and nutrition. X. The country's main developmentobiectives are to: (i) achieve a minimum real GDP growth averaging about 32 per year during 1992-94 and around 4% during 1995-1999. This would translate into a real per capita income growth of 1.2% per year during the 1990s, which would constitute a reversal of more than a decade of negative growth and increased poverty; (ii) increase employmentat a minimum of 4% per year; (iii) improve the efficiency in the provision of social services, especiallyin health and education. Growth in incomeshouldreducepovertyand infantmortality and raiselife expectancy. At the same time, better primary health care and education,family planning, and nutrition can, in their turn,promotegrowth;and (iv)achieveeconomic efficiency and equitable developmentthrough democraticmeans. xi. A stable macroeconomicenvironmentis one of the most important publicgoodsthat the Government can provide. When in the past, government spending was not controlled, the resultwas oftenlargefiscaldeficits, excessive borrowing and/ormonetary expansion, quicklyfollowed by inflation, chronic overvaluation of currency, and loss of exportcompetitiveness. Restoring the confidence of the privatenectorAs now a major challenge for the Government after the country's long historyof macroeconomic instability. Imbalances in fiscalaccounts is the main policyissuein Hai-. Thu3,the macroeconomic policies proposed in this reportfocuson strengthening of publicfinances while reducing the size of the publicsector,strengthening -v- monetary and exchange rate policies, and eliminating the remaining distortions in agriculture and ii;dustry.Fiscal disciplineshould be achieved, and public savings raised to finance much needed investmentsin critical sectors. xii. The diversity of financial sources increases the difficultiesin project coordination. Within the Haitian administration, both the MEF (Ministryof Economy and Finance) and the MP (Ministryof Planning and External Cooperation)have shared responsibilities in the area of public investment. The MEF is responsi..e, through the budgetary process, for the allocationof resources to line ministries and public enterprises. The MP is responsiblefor the overall public sector investmentprogram but has no responsibility regarding public enterprises. As a result, there is no clear definitionof overall responsibilityfor public investment. On the other hand, because donors channel a substantialpart of their funding directly to public sector agencies and NGOs, neither the MEF nor the MP have relevant informationon the projects involved. Thus, the total amount allocated is not known. Moreover, donor records show that the investment levels are much higher than those recordedby the MP. Despite all of this, the fact is that public investmenthas fallen drastically,from 10.82 of GDP in FY84 to just 5.8% in FY89, reflectingboth the curtailmentof external resources and the decreaae in domestic resourcemobilizationefforts. The latter fell from 16.5% of GDP on average during FY81-85 to 11.22 of GDP during FY86-89. There is a need to redefine the roles of MEF and NP. MEF should be responsiblefor budgetary allocation for public investmentand performance review of line ministries and public enterprises. The MP should be responsible for investmentprogramming and donor coordination. xiii. Both the overall level and the structure of investment expenditureswere significantlybelow the country's needs. Public sector savings have decreasedwhen doaor financinghas been curtailed. (Domestic resourcemobilization efforts have been positivelycorrelatedwith the flows of externally financed investments.) The reallocationof budgetary resources has favored current expenditures,particuilarly wages. This rising trend necds to be reversed, as it is incompatible with two important Government's objectives: (i) increasingefficiencyin resource use; and (ii) providing the counterpart funding to external assistancenecessary to support a larger public investmentprogram. Increasingpublic savings however will not be an easy task, particularlybecause of the need to reallocatepublic investmentto the education and health sectors,where the recurrent expendituresneeded to utilize and maintain new investmentsare high. xiv. When net foreign inflows were at their peak, much of the investmentwas directed towards public enterprisesthat have not only become a fiscal burden but are also unable to provide adequate services. In the past, governmentoperation of the enterprises as state monopolies resulted in generating revenue for the budget. In recent years, they have become a drain on the budget. Moreover, these enterprisesdo not pay income tax, sales tax, or any other taxes. In the absence of privatizationor leasing arrangements, and given the history of their inefficiency,they will increasinglyrequire Central Bank financial support. Minoterie d'Haiti (MdH) and Ciment d'Haiti (CdH) were private owned until their nationalizationin the early 1980s. _ vi - While in the privatesector,both Mdi and CdH competed internationally to exportcement, and were generating overallsurpluses.Sincein recentyears, thesetwo enterprises have become a fiscalburden,the Government should contract privatefirmsto manageand Improve their finances, open up these enterprises to international competition and pricingso that domestic consumers benefitand exportsare resumed. Privateparticipation by selling stocksand s4iares shouldbe considered by the Government.Privatemonopolies shouldnot be replaced by publicmonopolies and vice-versa.Interventions to eliminate thesepublicmonopolies shouldbe givenhigh priority. In other cases,such as power,water or telecommunication., an adequate regulatory framework is necessary. In most cases,theseenterprises are in deficitand providea poor service. In other.,such as Telecommunications d'Haiti (Teleco), they generate revenues for the Government.Furthercreation and expansion of publicenterprises shouldbe avoidedbecausethe publicsectoris overstretched and its resources are neededto investin peopleand infrastructure. Talented managersand professionals are used to run these publicenterprises, while theirservices are most neededelsewhere in the Government to ensuredevelopment. xv. Despitethe relatively optimistic prospects for fiscal improvement, reeources will hardlybe enoughto financean adequate public investment program. At best, generalgovernment resources can be mobilized to providecounterpart funds for a higherlevelof publicinvestment financed from external resources.Recourse to cost recovery schemes(power, irrigation, water, sanitation and socialservices) shouldmobilize additional domestic resources for thispurpose. The availability of counterpart funding for foreign financed projects couldalso be addressed throughreducing current outlays. Rationalization of publicexpenditures throughretrenchment should free resources for improving in efficiency.Additionally, improved tax administration shouldraisefiscalrevenues. Broadening the base of the value added tax,whichwas introduced in 1983,and raisingthe tax rate on and collecting property taxeswill contribute to fiscalrevenues. However, equallyimportant to generating counterpart funds,is to addressthe issueof the publicsector's absorptive capacity, particularly to broadenservices in the healthand education sectors. xvi. To createa favorable macroeconomic environment the Government needs to reduceinflation and maintain a marketdetermined exchange rate to correct imbalances in external accounts. Since 1987,monetaryfinancing of the fiscalgap has generated inflation.Further, the 401 foreignexchange surrendering requirement has createda dual exchange rate regime, which was implicitly equivalent to a 152 exporttax. This is partlyresponsible for spurring exportcontraband activity. Two short-term actionsare proposed: (i) the unification of the exchange rate regimeat the currentmarket determined rate;and (ii)the elimination of the exportsurrendering requirement.If the Government were to requireforeignexchange to service its external obligations (i.e., petroleum importsand debt service), it could purchase it from the commercial banks. Alternatively, the Government could retainthe proceeds from the foreign exchange surrendering requirement, but pay for the foreignexchange at the marketdetermined rate. Appropriate marketbased incentives for savingand investment are essential if domestic - vii - resources are to play their proper role in financing development. An undesirable feature of the regulatory framework of the financial system has been that loans are subject to a maximum limit of 22% on interest rates, which should be eliminated. Uniformity of reserve requirementsshould be gradually reestablished. Further, the reliance on reserve requirementsto help finance the public sector has contributedto the emergence of a large spread between lending and deposit rates in the banking system. Hence, alternativecredit control instruments such as open market operations should be explored. Meanwhile, it is feasible to narrow the reserve requirements while concurrentlyintensifyingthe fiscal efforts. The supervisorypowers of the Central Bank have to be enhanced and prudentialregulationsneed to be introduced. xvii. In agriculturaltrade, the main policy issue is that the allocation of resources continues to be distorted in favor of import substitutingcrops. Trade needs to be promoted by eliminatins quantitative restrictionson sugar, rice, flour, maize, beans, chicken parts, and pork meat parts; and by reducing incentivesto contrabandby institutinga 5% uniform import tariff rate. All imports should be subjected to the consumption tax. The Investment Code should be revised and harmonizedwith the revised tariffs; public enterprises exemptions should be eliminatedso as to promote domestic and internationalcompetition,especially in cement and flour. Coffee export sector needs new investmentto undertake replanting and pruning. xviii. The Government can foster domestic competitionby: (i) avoiding interventions,except as a last resort when markets fail; and (ii) providing public goods, which traditionallyare "law and order" issues such as, protecting private property and environment. An efficient domestic economy requires public goods, such as a regulatoryframework that enhances competition and protection of well defined legal and property rights. For instance, property rights and the tenure system will provide much needed security for the small farmer. It also requires adequate public investmentin infrastructure,so as to increase returns to private investment. Opportunitiesfor partnershipbetween public and private sectors, perhaps in tourism, need to be sought out and exploited. The private sector should be encouraged to provide services often associatedwith public domain: social services, transport,telecommunications, agriculturalresearch and extension, small-scale rural credit and environmental protection. The Government should support private trade and productionby provision of adequate infrastructure and utility services. As a result of the general breakdown in these services, immediate actions are needed. xix. To enhance agriculturaloutput, the Government should facilitate credit access to farmers by abolishing legislationprecluding use of land as collateral, and developing a regulatoryand supervisory framework for credit unions; enable legal titling and tenure security through legislationand administrative work; rehabilitateirrigationsystems; and undertake and coordinate research on several promising crops. The Government should enhance environmentalprotectionby improving forest management, increasing forested areas by transferringand rezoning State lands as national parks and forest reservee, and developing a legal and institutionalframework for - viii - environmentalregulation. Protectionhas encouraged growing of annual crops which hasten soil erosion, whereas coffee growing is ecologicallysound. Finally, introductionof cost recovery to cover operations and raaintenance costs, water fees, and leasing of State lands at market rates will add to fiscal revenues. xx. The single most important issue in the transport sector is the lack of financing to carry out road maintenance and rehabilitationprograms. Road user charges have been broadly adequate, but they have been used to finance general governmentexpenditures. Resources have not been efficiently used by the Ministry of Public Works, Transport and Communications(NTPTC) and mostly allocated to pay excess personnel. At the same time, the tax base has been eroding over the last few years as petroleum taxes have progressively declined, vehicle registrationtaxes have been kept low, and tax evasion increased. Earmarking of funds from uaer charges for road maintenance and rehabilitationshould be introduced. A special fund established from receipts on petroleum taxes, vehicle registrationand licensing fees from users should be used for road maintenance and pollution control. MTPTC needs to rationalize its expendituresby a combinationof retrenchment,reduction in the wage bill, and reduction in operating costs. Expansion of capacity and maintenance should be increasinglycontractedout to the private sector. Finally, constructionof penetration roads to service remote rural areas should be given priority. MTPTC's areas of operation are ever growing. It now covers urban developmenttoo, which is in need of additional investment. xxi. The country is under an electricalpower crisis. Because of the lack of funds, spare parts needed to make two main diesel generatingunits operationalcannot be purchased. The electricalpower crisis has severely impaired the efficient capacity utilization in productive sectors. The poor service has annoyed consumers resulting in revenue losses for EdH. Donors have financed the lease of 13 small diesel generating sets for five months in order to bring efficiency to an acceptablelevel. However, this will not sustain reliabilityof service because of the lack of reserve capacity. The power crisis should be resolved immediatelyif growth is to be restored in the productive sectors and tourism. xxii. Electricite d'Haiti (EdH) should improve its financial position by a combination of price differentiation, adequate tariffs to generate sufficient finances, cut backs in personnel, and eliminationof non-technical losses from non-metering. Over the medium-term,it will be necessary to contract out the operationsand maintenance of all diesel plants to improve the service. Restructuringand privatizationof EdH should be examined. xxiii. The Government should strive to attain higher service coverage levels in water and sanitation. A merger of Service National d'Eau Potable (SNEP) and Postes Communautairesd'Hygiene et d'Eau Potable (POCHEP) should eliminate overlapping of responsibilities. The sector's financialposition should be improved by price differentiation between commercialand residential,urban and rural consumers, and reduction in staff. To improve service and coverage, professionalmanagers should be brought in and in the medium term privatizationof water services should be considered. The - ix - Government should invest in rural areas and emall towns and create a small agency to enforce envircŽnmentally sound regulationof coastal aquifers. xxiv. The health sector is characterizedby its extreme inefficiency. Despite substantial total outlays on health and nutrition programs, progress in improving health conditionshas been highly unsatisfactory,particularly when compared to many other countrieswhere the mortality and morbidity rates have been reduced more rapidly with considerablylower expenditures. The activities of Ministry of Public Health and Population (MSPP) and Non- governmentalOrganizatic s (NGOs) should be coordinated to eliminate redundancy. Emphasis should be placed on preventive rather than curative medicine, on the provision of water and sanitary facilitiesand on nutrition and nutrition-education programs. Malaria preventionshould be given the highest priority by these agencies as malaria is a major impedimentto tourism growth and foreign investment. Food delivery campaign targeted on high risk infant groups should be introduced. xxv. The demographicchallenge facing Haiti since the early part of this century has resulted in a relentlesspressure of population on its limited natural resources. The relativelyhigh population growth of 1.8% per year is a result of high total fertility rate (combinedwith reduced infant and child mortality) and the inability of contraceptivedistributivesystems to rapidly expand in rural areas. The 1987 survey suggests that total fertility rate has risen and is now about 6.8, and that less than 5% of married women use modern contraceptives. A series of activities are needed to strengthen family planning, maternal and child health. These activitiesare: (i) delivery of family planning services at the clinical and community level; (ii) implementation of procedures for screening and referringwomen at obstetric and reproductiverisk; and (iii) spread of knowledge about family planning programs through mass media, printed materials, and video cassettes. xxvi. The salient features of the inadequaciesof the Haitian education are the limited enrollments,low quality of instruction,and inefficient management of educationalresources. The emphasis should continue to be on primary education. An updating of national policy on educationalpriorities and programs should be undertaken focusing on an institutionalassessment of the sector entities and the definitionof their respectivemandates; finalizationof the curricula; the financing plan for the sector and the amount, modalities and conditions of the contributionof the national budget to private education to ensure free enterpriseefficiency,expanding coverage and quality of teaching; the official approval of a set of educational materials support in production, distributionand use of materials; the definitionof cost recovery procedures in public schools; the definition of an action plan to reduce dropout, repetitionand the incidence of overaged students, and the updating of school constructionnorms and definition of maintenance norms and modalities. Given the contributionsof the private sector to education and its role in attractingneeded external contributions to the sector, a long-term private investmentprogram in collaboration with the authorities is also needed. xxvii. Notwithstandingthe recent political and economic instabilityand current financial constraints,several factors are favorable to the improvement of the quality of basic education in Haiti today: (i) Haiti has many dedicated educators with good expertise; (ii) the unabated demand for education even among the poorest rural familieshas been associatedwith the development of a responsive and cost-effective private sector; (iii) the recent evaluation of the 1982 reform provideswell-defined and broadly accepted areas for further sectoral development; (iv) a successfulexperience with public subsidies to private rural schools initiatedunder IDA's Fourth Project has helped identify options for an improvedpartnership and future investment; above all (v) the Government'ssupport which had been lacking since the launching of the reform can now be harnessed for the benefit of the sector; and (vi) the United Nations Development Progra a (UNDP) and other agencies and donors are committed to supportingthe development and implementationof a realistic sector policy. xxviii. The successful implementation of macroeconommicand sectoral policies detailed in this report should help reverse more than a decade of economic decline and sharp reductions in the living standards and the provision of essential services. However, some aspects of the policies could impose additionalhardship on certain segmentsof the population. These vulnerable groups are the rural and urban poor, elderly people living on pensions, the unemployed and underemployed, and the laid off workers of the public sector as a result of its rationalization. xxix. In order to protect these vulnerable groups during the process of adjustment, the Government should design and implement a social sector program that focuses on amelioratingthe additionalhardships. The program's components should include: (i) creating employmentto improve incomes of some of the vulnerable groups through labor-intensive small projects and schemes; (ii) providing complementarysocial services, such as feeding and sheltering the high-risk groups, materral health and child care, food aid for low-income pregnant and lactatingwomen and under-nourishedchildren of 1-5 years old, and quick disbursing lump-sum supplement income for impoverishedpensioners; and (iii) opening multiple community resource centers. Such a program should explicitly seek resources and support from the external donors, private sector, and non-governmental organizations. xxx. The role of the Governmentis at the very core of developmentwhen it invests in institutions. By defining and protectingproperty rights, providing legal, judicial and regulatorysystems, and improving the efficiency of the civil service, the Government introducesa set of rules, and thus, a stable and favorable environment for the functioningand expansion of the private sector. It also assists the Governmez', to lay a strong foundationfor long term development by har