(2010) Ayiti: Konsiltasyon Atik IV 2010 la ak Demann pou yon Aranjman Twa Zan Anba Faslite Kredi Elaji a

© 2010 International Monetary Fund August 2010 IMF Country Report No. 10/263 June 30, 2010 July 21, 2010 January 29, 2001 May 28, 2010 2010 January 29, 2001 Haiti: 2010 Article IV Consultation and Request for a Three-Year Arrangement Under the Extended Credit Facility—Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Haiti Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2010 Article IV consultation with Haiti, the following documents have been released and are included in this package:  The staff report for the 2010 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on May 28, 2010, with the officials of Haiti on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on June 30, 2010. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.  A staff supplement consisting of the joint IMF/World Bank debt sustainability analysis.  A Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its July 21, 2010 discussion of the staff report that concluded the Article IV consultation.  A statement by the Executive Director for Haiti. The documents listed below have been or will be separately released. Letter of Intent sent to the IMF by the authorities of Haiti* Memorandum of Economic and Financial Policies by the authorities of Haiti* Technical Memorandum of Understanding* *Also included in Staff Report The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information. Copies of this report are available to the public from International Monetary Fund  Publication Services 700 19 th Street, N.W.  Washington, D.C. 20431 Telephone: (202) 623-7430  Telefax: (202) 623-7201 E-mail: publications@imf.org Internet: http://www.imf.org International Monetary Fund Washington, D.C. INTERNATIONAL MONETARY FUND HAITI Staff Report for the 2010 Article IV Consultation and Request for a Three- Year Arrangement Under the Extended Credit Facility Prepared by the Western Hemisphere Department (In consultation with other departments) Approved by Gilbert Terrier and Dominique Desruelle July 8, 2010 EXECUTIVE SUMMARY The January 12, 2010 earthquake was a major setback for Haiti, after several years of progress in maintaining macroeconomic stability and implementing essential reforms. Perfor mance under the PRGF/ECF-supported program (November 2006-May 2010) remained satisfactory, despite a series of shocks, political instability, and social unrest. The sixth and last ECF review was completed on January 27, 2010, together with an augmentation of access equivalent to 80 percent of quota. There are signs that the economy is now rebounding, despite a relatively slow start of reconstruction activities. Damages and losses from the earthquake are estimated at 120 percent of 2009 GDP. Agriculture, construction, and textile manufacturing are leading the recovery. However, the humanitarian situation remains dire, with about 1.3 million people still in temporary shelters. Successful implementation of the authorities’ medium-term reconstruction plan hi nges crucially on the timely disbursement of aid commitments. Donors will need to accelerate disbursements of the amounts pledged in order for the reconstruction to proceed and to ensure a rapid improvement in living conditions. The reconstruction plan aims at sustainably raising medium-term growth and reducing poverty by creating decentralized economic growth poles, reducing vulnerability to natural disasters, enhancing access to basic social services, and strengthening state institutions. To support reconstruction, donors pledged US$9.9 billion, of which US$5.3 billion are to be disbursed over the next 18 months. Donors are also committed to cancelling Haiti’s debt. The proposed three-year program, supported by a new ECF arrangement in an amount equivalent to 50 percent of quota, aim s at buttressing macroeconomic policies and boosting economic growth. In the context of large and volatile aid inflows, Fund financing would help mitigate excessive exchange rate and reserves movements. These inflows ( projected to triple to about 15 percent of GDP a year on average in 2010 -14) will likely place upward pressure on the currency, which will have to be mitigated by efforts to expand supply capacity and remove structural obstacles to competitiveness. Program risks remain high, but the earthquake has highlighted the urgency of moving forward with the unfinished reform agenda and further strengthening institutions and economic governance. Relations with the F und. Haiti has accepted the obligations of Article VIII, Sections 2, 3, and 4, and its exchange rate system is free of restrictions on payments and transfers for current transactions. The de jure exchange regime remains a managed float with no pre-determined path for the exchange rate. 2 Contents Page Executive Summary ...................................................................................................................1 I. Post-Earthquake Challenges ...................................................................................................3 II. Recent Developments: An Incipient Recovery .....................................................................4 III. Policy Discussions: Building a Better Haiti .........................................................................6 A. Haiti’s Growth Challenges ............................................................................................. 8 B. Macroeconomic Outlook .............................................................................................. 10 C. Fiscal Policy ................................................................................................................. 11 D. Financial Sector Policies .............................................................................................. 15 E. Monetary and Exchange Rate Policy ............................................................................ 16 F. External Debt Sustainability ......................................................................................... 17 IV. ECF Arrangement ..............................................................................................................18 V. Staff Appraisal ....................................................................................................................19 Tables 1. Selected Economic and Financial Indicators ......................................................................... 25 2a. Central Government Operations (in millions of gourdes) ..................................................... 26 2b. Central Government Operations (in percent of GDP) ........................................................... 27 3. Summary Accounts of the Banking System .......................................................................... 28 4. Balance of Payments ............................................................................................................. 29 5. Financial Soundness Indicators of the Banking System ....................................................... 30 6. Medium-Term Scenario ........................................................................................................ 31 7. Indicators of External Vulnerability ...................................................................................... 32 8. Millenium Development Goals ............................................................................................. 33 9. Proposed Schedule of Disbursements ................................................................................... 33 10. Indicators of Capacity to Repay the Fund, 2010-2023 .......................................................... 35 Figures 1. Recent Economic Indicators .................................................................................................. 21 2. Financial Indicators of the Banking System .......................................................................... 22 3. Remi ttances ........................................................................................................................... 23 4. External Sector and Competitiveness .................................................................................... 24 Boxes 1. The Fund’s Response to the Earthquake and Donor Coordination ......................................... 5 2. Haiti’s National Action Plan for Recovery and Development ................................................ 7 3. Recent Improvements in Governance ................................................................................... 13 Appendices I. Methodological Note for Post-earthquake GDP Estimates ................................................... 64 II. Assessing External Stability .................................................................................................. 68 Attachments I. Letter of Intent ....................................................................................................................... 36 II. Memorandum of Economic and Financial Policies............................................................... 38 III. Technical Memorandum of Understanding ........................................................................... 53 3 2009/10 2010/11 2011/12 2012/13Total and beyond Hum anitarian aid 3,047 … … … 3,047 Recovery and reconstruction 3,407 1,457 218 4,840 9,922 Grant 2,267 1,358 196 3,953 7,773 O f whi c h: budget support 441 100 5 270 816 Loan 132 32 18 20 202 New debt relief 712 0 0 90 802 Unallocated 296 68 4 7771,144 Source: United Nations, Office of the Special Envoy for Haiti. Text Table 1: Donor Pledges 1/ (in millions of U.S. dollars) 1/ As of June 7, 2010. I. POST-EARTHQUAKE CHALLENGES 1 1. The massive January 12, 2010 earthquake struck Haiti at a time when it s economic outlook was improving. The earthquake caused unprecedented destruction of human and physical capital, with damages and losses estimated at 120 percent of 2009 GDP. Over 225,000 persons were killed and 300,000 injured. Most ministries, hospitals, and schools were destroyed. Prior to the earthquake, the political and security situations were gradually improving and foreign investors’ interest in the tourism, energy, and textile manufacturing sectors had begun to materialize. In 2009, economic growth reached close to 3 percent. The authorities’ success at maintaining macroeconomic stability and implementing essential structural reforms despite of numerous shocks allowed the cancellation of US$1.2 billion of debt under the HIPC/MDRI Initiative in mid -2009. 2. Although the international emergency response has been generous, the humanitarian situation is only slowly improving, increasing risks of widespread social unrest. At a high-level UN conference in March, the government presented its reconstruction plan, aiming at building a better Haiti. The international community committed US$9.9 billion in support of this plan, of which US$5.3 billion are to be disbursed over the next 18 months (Text Table 1). In recent weeks, the distribution of tents to about 96 percent of homeless families, large-scale cash-for-work programs, and the reopening of schools have helped improve living conditions. However, about 1.3 million people remain in temporary shelters, at the start of the hurricane season. Recent attacks on MINUSTAH troops and rapidly rising insecurity are evidence of the rising discontent of the population. 3. Timely disbursement of the amounts pledged, effective coordination of reconstruction efforts, and strengthening of the government’s implementation capacity are essential. The Interim Haiti Reconstruction Commission (IHCR) is expected to set strategic reconstruction priorities and coordinate government and donor activities (including NGOs). A Multi-Donor Trust Fund (MDTF, or Haiti Reconstruction Fund ─ HRF) operated by the World Bank will help channel resources for the reconstruction. Disbursement of aid through the government budget or the Multi-Donor Trust Fund would enhance coordination and local capacity building. 1 Discussions were held in Port-au-Prince during May 24-28, 2010. The staff team, which comprised Ms. Deléchat (head), Ms. Martin and Ms. Touré (all WHD), Ms. Riad (SPR), Mr. Gray (MCM), and Mr. Bouhga-Hagbe (Resident Representative), was joined by Mr. Perez (OED) for some of the policy discussions. The team met with Prime Minister Bellerive, Finance Minister Baudin, Central Bank Governor Castel, and other government and private sector representatives. 4 4. Boosting investment will be key t o sustainably raising medium-term growth and reducing poverty beyond the reconstruction period. The authorities’ objectives to sustain an annual rate of growth of 5-6 percent over the medium-term and reduce the poverty rate from 54 percent to 40 percent by 2015 are ambitious in light of historical performance (Text Table 2). Reaching these objectives will require boosting investment and improving infrastructure, in particular with respect to electricity and roads ; removing obstacles to private sector credit; improving the business environment and economic governance; and enhancing the population’s access to basic social services. 5. In this context, the new ECF arrangement supports macroeconomic policies aimed at facilitating the absorption of aid inflows and raising medium -term growth, in line with the authorities’ objectives. Fund resources would play an important role in allowing the authorities to smooth out exchange rate and reserves fluctuations that may be caused by large and volatile aid resources. Aid inflows are expected to triple from an annual average of 5–6 percent of GDP during FY 2005-09 to almost 15 percent of GDP during FY 2011–14. Close coordination and enhanced effectiveness of fiscal, monetary, and exchange rate policies will be needed to ensure effective spending and absorption of these inflows. The program design complements and builds upon the large financial and technical support provided by IFIs and bilateral donors for Haiti’s reconstruction ( Box 1). II. R ECENT DEVELOPMENTS: AN INCIPIENT RECOVERY 6. Economic activity has rebounded rapidly since the earthquake . Agricultural production, construction (including debris removal), and textile manufacturing are leading the recovery. Remittances, which grew by 12 percent in January-May (year-on-year), are supporting consumption and imports. The trade deficit is widening, although exports are recovering. Twelve-month inflation reached 6. 4 percent in May, in line with staff’s projections for the end of this fiscal year (8.5 percent at end-September). The Gourde has remained broadly stable against the U.S. dollar since end-January, as the central bank (Banque de la République d’Haiti─BRH) has stepped up its net foreign exchange purchases. NIR grew to US$646 million at end-May (from US$402 million at end-December), while the 12-month rate of base money growth rose to 28 percent (Figure 1, Tables 1, 3-4, MEFP ¶5). 7. A recovery in revenue collection and weak spending have helped compensate for slow budget support disbursements. Revenue has been trending upward since January, and tax collections during February-May represented about 80 percent of budgeted amounts. The good performance of taxes based on sales of goods and services is likely to continue, as economic activity strengthens. However, sustaining the favorable revenue collection from income taxes, based on FY 2009 activity, will require a strengthening in controls and audits. Capital spending has remained subdued due to capacity constraints and uncertain financing, but has started to pick up in May. As of end -June, budget support disbursements amounted to only 30 percent of total commitments for the fiscal year ending in September (Table 2). Text Table 2. Average Real GDP Grow th (in percent) 1995-2000 2001-05 2006-09 20010-13 Haiti 3.8 -0.5 2.3 4.2 Low income countries 3.5 5.3 5.2 5.5 ECF countries 5.6 7.9 6.7 5.3 Post-conf lict countries 2.6 5.2 4.9 4.5 Source: World Economic Outlook; Fund staf f estimates. 5 Box 1. The Fund’s Response to the Earthquake and Donor Coordination The Fund’s prompt response to the January 2010 earthquake was closely coordinated with those of other major multilateral and bilateral donors. Emergency interventions in the immediate aftermath of the earthquake are being replaced by support for the authorities’ reconstruction plan over the medium-term. The Fund responded promptly to the emergency by providing liquidity support and technical assistance to restore basic state functions. The US$102 million ECF augmentation disbursed at end-January helped to keep cash flowing in the economy and finance emergency imports. Fund technical assistance missions helped restore basic treasury and revenue administration functions and provided advice on maintaining financial sector stability. These efforts were closely coordinated with other donors’ interventions, which focused on providing temporary office space and equipment to key government agencies (World Bank, Sweden, USAID); reestablishing the payments system as well as the government payroll and basic IT functions (World Bank, IDB and U.S. Treasury); and assessing the impact of the earthquake on the insurance sector (World Bank). The long-term reconstruction effort is supported by large- scale financial and technical assistance from the international community. Substantial resources for reconstruction projects, most of which are in the form of grants, have been committed by donors. Additional budget support commitments amount to US$171 million for this fiscal year and next. Most of Haiti’s creditors have also indicated that they would cancel Haiti’s remaining debt. In this context, the proposed three-year ECF-supported arrangement aims at providing a coherent macroeconomic framework that would help anchor support from other donors. The new ECF program is supported by a comprehensive medium-term technical assistance strategy focused on strengthening state institutions within the Fund’s core areas of expertise. The Haitian authorities have expressed a clear commitment to use the earthquake as an opportunity to accelerate reforms in certain areas, in particular revenue administration. In the fiscal area, Fund TA will focus on tax policy and revenue administration, budget preparation and planning, fiscal reporting, and Treasury management. The Fund is also assisting in financial sector issues with the establishment of a Partial Credit Guarantee scheme (PCG Fund) in collaboration with the World Bank, the IDB and the U.S. Treasury; the development of a domestic Treasury bill market; central bank recapitalization; and the design of a framework for insurance regulation. Haiti’s development partners are building capacity in complementary fields, such as payroll management, internal and external audits and procurement, anti-corruption and governance (World Bank), debt management (Canada, IDB), energy sector (World Bank, Canada), and restoration of IT systems (USAID). The European Union supports overall economic governance and public financial management reforms. 8. Banking sector capitalization has been negatively affected by the earthquake. At end-2009, the Haitian banking system was well capitalized and highly liquid. Credit and deposits were growing, liquidity had improved, all banks posted positive earnings, and non-performing loan ratios had declined. However, financial intermediation margins remained wide, loan concentration high, and related lending pervasive. Bank capital has been negatively affected by the earthquake, and non-performing loans rose from 8.6 percent of 6 total loans in December to 12.1 percent in March. 2 The authorities estimate that a third of bank loans may have been impaired as a result of the earthquake. Pri vate sector credit declined by 12 percent between December and May (Figure 2, Table 5, MEFP ¶5). 3 9. The earthquake also exposed the underlying vulnerabilities of the non-bank financial sector. Both micro-finance institutions and insurance companies were poorly regulated. Micro-finance institutions, which were undercapitalized and, for the most part, uninsured, were hard-hit by the earthquake. For most borrowers to be able to repay existing loans, maturities will need to be extended and some new credit provided. The insurance sector is also affected, with gross costs estimated at around US$200 million. However, reinsurance coverage for catastrophic events appears to have been appropriate, covering most of the reinsured claims and about 75 percent of the total cost. 10. The political and security situations are increasingly volatile. Parliamentary elections, originally scheduled for February 2010, have been postponed to November 2010. They will be held simultaneously with the presidential and municipal elections. A controversy has emerged about the feasibility of this calendar, compounded by an 18-month extension of the state of emergency during which the Executive can govern by decree. T he security situation in Port-au-Prince has also deteriorated since the earthquake, as criminals and gang leaders escaped from prison, and kidnappings have increased, including of foreigners. III. P OLICY DISCUSSIONS: BUILDING A BETTER HAITI 11. The Government has prepared an ambitious reconstruction plan, which aims at raising long-term growth and reducing poverty. This plan focuses on creating decentralized poles of economic growth and streng thening state institutions (Box 2) . It also aims at reducing vulnerability to natural disasters and enhancing access to basic social services. The priority areas identified in the plan are consistent with the PRSP, although the plan gives more prominence to addressing housing and territorial development issues , which have been heightened by the earthquake. The authorities intend to prepare a PRSP update in 2011 but, in the meantime, staff and the authorities agreed that the reconstruction plan presents revised poverty reduction and growth objectives. 2 Excluding BNC, a large bank which absorbed the failed SOCABANK in 2008, the NPL ratio rose from 3.8 percent to 6.5 percent over the same period. 3 This decline was due in part to the fact that borrowers used their insurance payments to pay down lines of credit until they are in a position to re-start their businesses. 7 Box 2: Haiti’s National Action Plan for Recovery and Development On March 31, 2010 at a high-level UN donors’ conference, the authorities presented their ten-year action plan for building a better Haiti, raising long -run growth and reducing poverty. The first 18-month period aims at starting the economic recovery and reconstruction process, while continuing to provide emergency support to the affected population. Priority is given to humanitarian and rehabilitation needs ahead of the hurricane season. Schools and universities are reopening. Measures to stabilize the financial system and restore SMEs access to credit will help restart economic activity and create jobs. The longer-term development and growth strategy is structured around four pillars: • Territorial rebuilding. Economic activity is to be decentralized from the capital to the rest of the country through the development of regional economic centers. This will also require improving the transport and communication infrastructure, and implementing a land settlement strategy with a reliable land registry. • Economic rebuilding. Agriculture and private sector development are considered the main growt h engines. Agricultural yields will be improved through the distribution of agricultural inputs and the development of irrigation and rural road networks. Private sector development is to be promoted through: (i) strengthening the legal and regulatory framework for doing business; (ii) facilitating the establishment of manufacturing industries, tax-free zones, industrial areas, and tourism development; (iii) attracting private investment, including by eliminating red tape; (iv) boosting credit to the private sector, particularly to SMEs; and (v) seeking public-private partnerships ( PPPs) for large infrastructure projects. • Social rebuilding. The plan aims at reducing poverty rates from 54 percent in 2009 to 40 percent by 2015 (share of the population living under 1 U.S. dollar per day). Protecting the most vulnerable will be addressed by promoting employment and social inclusion. Basic public services and social safety nets will be enhanced. • Institutional rebuilding. Improving political, economic, and social governance will be critical to the success of the plan. The plan highlights the needs to support democratic institutions and seek political consensus. Institutions dedicated to manage the reconstruction process started to operate in June. The Interim Hait i Reconstruction Commission (IHRC) is co-chaired by Prime Minister Bellerive and the UN Secretary General’s Special Envoy Bill Clinton. Its mandate over the next 18 months will be to oversee reconstruction activity, including coordination among all partners. The Commission is composed by an equal number of Haitian and donor representatives. The IHRC will be replaced after 18 months by the Haiti Reconstruction Agency (HRA). A Multi-Donor Trust Fund (MDTF) or Haiti Reconstruction Fund (HRF) managed by the World Bank will support the reconstruction plan. All projects financed by the HRF will have to be approved by the IHRC. 8 -15 -10 -5 0 5 10 1965197019751980198519901995200020052010 So urce: IMF, Wo rld Economic Outlook. Per capita real growth (in percent) Trend per capita real growth Text Figure 1. Haiti. Real Per Capita GDP Growth, 1965-2010 A. Haiti’s Growth Challenges 12. Haiti has been impoverished by decades of volatile and declining growth. Real GDP per capita has contracted by 30 percent since the 1960s. Although macroeconomic stability was maintained and growth performance improved in recent years, growth remained below the PRSP objective (4 percent) and was insufficient to reduce poverty, with 72 percent of the population living under US$2 a day (Text Figure 1 and Text Table 3). Human Development Index Life expectancy at birth (years) DPT immunization rate (percent of children ages 12-23 months) Prevalence of undernourishment (percent of population) Adult literacy rate (percent of population above age 15) Haiti 1 0.53 61 53 58 55 2 Low income countries 0.54 58 80 31 64 Latin America and the Caribbean 0.82 73 92 9 91 Sources: UNDP, Human Development Report; World Bank, World Development Indicators. 1 Haiti ranks 149th over 182 in the 2009 Human Development Report. 2 Haiti uses the Creole literacy rate w hereas other countries use the main European language. Text table 3. Haiti: Selected Social Indicators 13. Staff and the authorities agreed that this disappointing growth performance is to a large extent attributable to the persistence of long -standing structural and institutional barriers, which continue to deter private investment and credit . Haiti’s extreme poverty, environmental degradation and concentration of the population in a few areas have heightened vulnerability to natural disasters and other external shocks. Although progress in maintaining macroeconomic stability, strengthening governance, and improving political stability and security are notable, these achievements do not seem to have yet reached the “critical mass” needed to boost private sector investment: • Progress made in strengthening governance and democratic processes, as well as improvements in the security situation, must be consolidated. Organizing a fair and free general election 10 months after the earthquake is a challenge, but will be critical to maintaining the government’s credibility and boosting donor and investor confidence. MINUSTAH’s presence should help reverse the post-earthquake deterioration in the security situation. The authorities’ strong commitment to continue strengthening governance is also welcome (see Box 3). • The population’s access to basic social services, in particular health and education, will need to be further enhanced. Living standards have deteriorated since the earthquake and tangible improvements must be made to reduce the risks of civil unrest and enhance human capital and labor productivity. 9 • Infrastructure, in particular energy and transportation, needs to be upgraded. Energy supply is inadequate, expensive and unreliable. Roads, ports, airports, irrigation systems need to be repaired or built from scratch. • Property rights are difficult to enforce, impeding private investment and credit. The civil and land registries are unreliable and incomplete. The judiciary system is weak and 80 percent of this system in Port- au-Prince has been adversely affe cted by the earthquake. • Doing business is expensive and difficult. Administrative procedures for setting up new businesses are lengthy, costly, and cumbersome (according to the 2010 World Bank’s Doing Business indicators, it currently takes 180 days to start a business). The Center for Facilitation of Investments (CFI) will need to be transformed into an efficient one-stop shop for foreign investors. 14. The authorities are confident that implementation of their Action Plan will help address these issues and boost GDP growth to about 6 percent a year by 2015 while significantly reducing poverty. Staff agreed that the reconstruction plan provides a sound basis for sustainably raising growth, and noted that the substantial resources pledged by donors represented a unique opportunity to tackle Haiti’s development challenges in a comprehensive manner. Given vast needs, staff recommended that the authorities set clear priorities, further articulate their growth strategy, and focus their interventions where they could be the most effective. Donor-funded projects should be prioritized and coordinated by the Reconstruction Commission to reflect the authorities’ priorities. 15. Staff noted that successful economic decentralization was the cornerstone of the authorities’ Action Plan. Decentralization of economic activity, including across sectors (agriculture, tourism, textile manufacturing), would help expand and diversify the sources of growth, boost competitiveness, and enhance resilience to shocks. Creating new economic growth poles would imply developing infrastructure, housing, and business-related services in the provinces. To this aim, staff supported the authorities’ strategy to engage in PPPs for the development of ports and airports, to help attract private capital while minimizing costs to the budget. However, s taff emphasized the importance of strong legal and regulatory frameworks in this area, and noted that Fund technical assistance in that area would be available. Staff also stressed the importance of creating a level playing field for investment, and urged the authorities not to use tax exemptions or other discriminatory incentives to favor investment in the provinces. 16. Staff highlighted the importance of rapidly adopting concrete measures to jumpstart decentral ization and growth. The introduction and enforcement of a new building code are critical to increasing foreign direct investment in the textile and tourism sectors, and to developing new free trade and industrial zones. Strengthening the cadastre and property rights is also fundamental for the population to rebuild and for activity to settle outside of the capital. Small businesses have been hard hit by the earthquake, and a lack of adequate credit to the private sector in need of capital to restart activities could delay the recovery. The launching of major public and infrastructure works would create jobs and generate a reconstruction momentum. Delays in implementing these measures would undermine confidence in the government’s ability to implement its plan and risk weighing permanently on medium-term growth prospects. 10 17. Over the medium-term, t he authorities concurred that reforms to enhance non-price competitiveness would be critical in preserving export competitiveness, while allowing the absorption of large aid inflows ( MEFP ¶22-24). T he authorities agreed that better infrastructure, including roads and energy supply, and improvements in the business climate would go a long way toward boosting private investment. The government is determined to cut red-tape, simplify business regulations, and improve the delivery of judicial services. The authorities have started to revise the legal and financial regulation framework with a view to meet ing international FDI standards. Among other advantages, this would enable Haiti’s textile export sector to fully benefit from the Haiti Economic Lift Program (HELP) Act. 4 18. Against this backdrop, discussions focused on macroeconomic policies that would help support growth and the authorities’ plan. More efficient and transparent spending and renewed efforts to increase revenue would enhance the credibility of the state and the availability of domestic resources for reconstruction. Measures to boost absorptive capacity, modernize monetary and exchange rate operations, and enhance credit growth will be essential to eliciting the needed supply response. On December 11, 2009, Haiti also concluded the Economic Partnership Agreement (EPA) with the European Union, joining the fourteen Caribbean states that signed the EPA in October 2008. The EPA is expected to strengthen Haiti’s ties both with the European Union and with the region, and allow it to benefit from a stable trading environment for goods and services as well as greater opportunities for foreign investment. B. Macroeconomic Out look 19. Staff and the authorities agreed that the macroeconomic outlook for FY 2010–13 was highly uncertain and would depend heavily on the path of aid disbursements. Official grants are projected to average about US$1.5 billion a year (over 20 percent of GDP) until 2013, which will require careful coordination of macroeconomic policies. • In the near-term, growth should rebound strongly, to about 9 percent on average over the next two years, driven mostly by reconstruction. Staff and the authorities agreed that the projected growth path was realistic , based on detailed estimates of sectoral damages and losses, recovery potential in each sector, and given the projected path of aid inflows (Appendix I). Annual inflation would remain high, at 8.6 percent in FY 2011, due to supply and transport bottlenecks, and strong demand. Inflation would gradually decline thereafter to 7 percent by end-FY 2013. • Medium-term projections assume that aid inflows are effectively spent and absorbed, with the widening of the fiscal and current account deficits associated with reconstruction spending and imports to be sustainably covered by grants. NIR coverage would remain at about 3 months of imports throughout the period. By 2013, both the fiscal deficit and the current account (excluding grants) would converge to 4 The HELP Act, which was passed by the U.S. Congress on May 6, 2010 would extend Haiti’s trade preferences provided under the HOPE II initiative until 2020 and expand duty -free access to the U.S. market for additional Haitian textile and apparel exports. The initiative is designed to create jobs for Haitian factories. 11 levels consistent with fiscal and external sustainability, as indicated in the debt sustainability analysis and staff’s exchange rate assessment (Text Table 4, Table 6, MEFP ¶6). 5 (Fiscal year ending September 30) 2009 2010 2011 2012 2013 GDP at constant prices 2.9-8.59.8 8.4 6.9 Consumer prices (end-of-period) -4.78.5 8.6 7.5 7.0 Overall fiscal balance -4.4 -2.9 -3.9 -4.9 -4.2 Overall fiscal balance (excl. grants and externally financed projects)-4.4 -6.8 -5.7 -4.1 -3.0 Central bank net credit to the central government 0.2 0.1 0.0 0.0 0.0 External current account balance (incl. official grants) -3.2 -2.1 -3.7 -4.1 -4.1 External grants 7.4 26.6 20.5 15.5 12.7 External current account balance (excl. official grants) -10.6 -28.7 -24.2 -19.7 -16.8 Net international reserves (program) 439 301 339 425 455 Liquid gross reserves 948 1,076 1,140 1,212 1,302 In months of imports of the following year 2.9 3.1 3.2 3.2 3.4 Sources: Ministry of Economy and Finance; Bank of the Republic of Haiti; and Fund staff estimates. Text Table 4. Haiti: Medium-Term Macroeconomic Framework (change over previous year unless otherwise stated) (in percent of GDP, unless otherwise stated) (In millions of U.S. dollars, unless otherwise stated) Remittances to Haiti tend to be more countercyclical and resilient than in other countries of the region and are projected to continue to grow, albeit at a slower pace than in recent months (Figure 3). However, external vulnerabilities remain high, and weaker-than-anticipated remittances and exports could derail growth (Table 7), while natural disasters will continue to pose risks over the medium term. C. Fiscal Policy 20. Fiscal policy discussions focused on short - and medium-term challenges associated with the reconstruction. The earthquake destroyed the tax administration building and information systems, killed many directors, and damaged tax records. Staff and the authorities agreed that an immediate priority was to find adequate office space and restore basic functions. The earthquake has also further weakened spending execution capacity, at a time where needs are both massive and urgent. Over the medium term, the authorities noted that their main objectives were to : (i) raise domestic revenue through a reform of the tax system and the building of modern and efficient tax and customs administrations; (ii) align the budget and its financing to reconstruction priorities within a programmatic framework; and (iii) continue strengthen ing public financial management to enhance the quality and transparency of spending. Tax administration and policy 21. Staff and the authorities agreed that a comprehensive tax reform and a stronger revenue administration would help raise domestic revenue collection above 13 percent of GDP by FY 2013. At about 11 percent of GDP in FY 2009, Haiti’s fiscal pressure was below that of similar countries, and it has been set back further by the earthquake. The 5 See EBS/10/139, supplement 1, and Appendix II. 12 authorities intend to increase revenue collection by broadening the tax base, combating fraud, and reducing exemptions. Staff also welcomed the authorities’ efforts in leading an ambitious reform of the revenue administration, which would help reach medium-term revenue objectives. 22. The authorities are designing a strategy for r ebuilding a modern and efficient tax administration. Tax and customs administration will be refocused on performance and fiscal missions, verification and controls will be stepped up, and quarterly performance reports will be published (MEFP ¶11). Design and implementation of the strategy will be supported by technical assistance from the Fund and other partners. 23. Tax policy reforms will focus on a review of the tax system, including exemptions. The authorities welcomed Fund technical assistance in reforming the VAT, excises, and income taxation , and for the preparation of a new tax code. As a first step, they plan to establish, by end-September 2010, a working group tasked with preparing and submitting revised tax laws to Parliament during FY 2011. These new laws would be consolidated in a tax code in FY 2012. In the short-run, the authorities agreed to introduce (by end-September) a tax on incoming international calls and car registration fees, which had been delayed by the earthquake. These measures are expected to increase annual revenue by about 0.4 percent of GDP. The authorities also indicated that they would continue reviewing exemptions to reduce their number, and would publish quarterly reports identifying all fiscal expenditures by beneficiary sector, starting in September 2010 (MEFP ¶11, Table 2). Fiscal spending 24. Staff and the authorities agreed that stronger and more transparent fiscal institutions could help attract additional budget support resources. In May, Haiti’s main budget support donors and the authorities agreed on a revised set of priority measures to pursue ongoing reforms to enhance economic governance (Box 3). These measures would form the basis for future budget support disbursements, thereby strengthening donor coordination and increasing the predictability of external financing. Staff and the authorities agreed to base program conditionality in the fiscal area on this common matrix, which includes measures to strengthen budget preparation and execution, revenue mobilization, payroll and treasury management, controls and audits and corruption prevention, as well as measures to increase and track poverty-reduction spending. In the short-term, fiscal transparency will be enhanced through the publication of data on: (i) quarterly spending on poverty-reducing expenditures; (ii) monthly transfers to investment project accounts, including PetroCaribe projects; and (iii) monthly subsidies and cash transfers by beneficiary entity (MEFP ¶13–14). 25. Strengthening public financial management will be essential to support the implementation of the reconstruction plan. The authorities envisage progressively shifting to a programmatic budget approach, starting with key line ministries in FY 2012. As a first step, rolling multi-year public investment programs will be prepared, informed by better recording and tracking of investment spending. CARTAC and FAD technical assistance is supporting the establishment of a macro-fiscal unit at the Ministry of Finance that would help strengthen planning and better reflect spending priorities in the budget. Budget planning will be supported by the preparation of monthly reconciled Treasury balances and of quarterly 13 plans for liquidity management. The progressive move to a Single Treasury Account will complement these reforms. (MEFP ¶14). Box 3. Haiti: Recent Improvements in Governance Since 2004, the Haitian government has implemented reforms aiming at improving transparency and strengthening governance. The government is strongly committed to continue with these reforms in order to improve the business environment, boost private investment, and create jobs. Although Haiti continue s to rank low in world governance indicators, progress has been made in recent years in several areas: • Public financial management. Achievements include: (i) approv al of budgets before the start of the fiscal year and publication in the official journal; (ii) monthly publication of information on budget execution; (iii) improvements in budget execution (the share of spending executed without prior authorization fell from 62 percent of non-wage current spending in FY2004 to 3 percent in FY 2009); (iv) reinforcement of expenditure management and control through the extension of the current spending management system (SYSDEP) to various branches of the government, the deployment of public accountants and financial comptrollers in line ministries, ; (v) the establish ment of civil service employment verification systems based on attendance lists; (vi) auditing public accounts, submitting them to Parliament, and publishing audit results; and (vii) the passing of a new P rocurement law in June 2009. • Public enterprises. Financial audits of the national port authority (APN), the telecommunications company (TELECO), and the national electricity company (EDH), were completed by international auditing firms in 2005. TELECO was privatized in May 2010, completing the central bank’s disengagement from commercial activities. • Anticorruption efforts. The government created an Anticorruption Unit (ULCC) in 2004 to fight corruption in the public administration. The unit key achievements’ include the adoption and implementation of an asset declaration law for civil servants in 2008 and the adoption of a national anticorruption strategy in March 2009. While Haiti has been strengthening governance, efforts in that area need to be pursued . Most decrees implementing the Procurement law have yet to be adopted, and compliance with the asset declaration law among members of the legislative and judicial branch should improve. The tracking and quality of public investment spending, and overall fiscal transparency, need to be further enhanced. The authorities have committed to implementing specific measures in these areas, as part of the common conditionality framework for budget support agreed with key donors. 26. To reach their objective of reducing the poverty rate to 40 percent by 2015, the authorities aim at increasing priority social spending by 30 percent by September 2011 (MEFP ¶13). The earthquake has aggravated the poverty situation and led to a deterioration in food security, highlighting the urgency of improving access to social services and reducing vulnerability to natural disasters. The authorities noted that public investments under the reconstruction plan would focus on improving the delivery of public services including education and health, establishing basic social safety nets, and developing transport and communication infrastructure. 14 Budget financing 27. The authorities expressed a strong preference for channeling aid through existing coordination mechanisms, either the budget or the MDTF. Staff agreed, noting that this would help strengthen transparency, better monitor fiscal developments, and improve coordination in an environment of limited capacity. Staff and the authorities agreed to include all donor-financed government projects, as well as previously off-budget resources such as PetroCaribe financing, in the revised FY 2010 and subsequent budgets and budget execution reports. The Interim Haiti Reconstruction Commission (I HRC) is expected to play the leading role in coordinating reconstruction activities with reconstruction institutions and donors (including NGOs). It will also track aid disbursements to ensure transparency, coordination, and exchange of informatio n between all actors involved (MEFP ¶9). 28. Despite the large donor pledges, the slow start of aid disbursements and difficulties in securing adequate budget financing for the next 12-18 months has been a concern. The immediate needs of the affected population include the relocation of families in temporary shelters ahead of the hurricane season, the provision of basic social services, and the purchase and distribution of seeds and fertilizers. The shortfall in revenue caused by the earthquake has led the authorities to re prioritize spending. Lower-than-budgeted spending on wages and goods and services has created room for higher expenditure on transfers and subsidies (including on public utilities and hospitals that have lost their revenue base) and investment spending, which could be well-above originally budgeted amounts to meet post-earthquake needs. They have also allocated a portion of accumulated PetroCaribe resources (up to US$163 million) to emergency relocation and infrastructure projects (MEFP ¶12). So far however, only 30 percent of all scheduled budget support financing for this fiscal year has been disbursed, and ensuring that the remainder will be disbursed before end-September 2010 is a challenge. The program envisages that a financing shortfall of up to US$25 million could be compensated by an ad hoc issuance of T-bills (MEFP ¶19). Based on projected quarterly budget support disbursements, the first year of the program is fully financed (i.e. through end-June 2011). However, a financing gap of about US$50 million remains for the last quarter of the fiscal year ending in September 2011 (Text Table 5) . FY 2011 Pr e - earthquake Commitments Pos t- earthquake Commitments Total Disbursed (in percent) 1 Total Gr ants 150.0 104.8 254.7 31.4 138.6 IDB 30.0 20.0 50.0 50.0 IDA 27.0 15.5 42.5 29.4 20.0 European Union 76.2 76.2 60.9 33.9 CA RICOM 7.8 7.8 100.0 Brazil 15.0 15.0 Colombia ( UNA SUR) 3.4 3.4 Ecuador 2.0 2.0 100.0 France 26.1 26.1 25.0 26.1 Norw ay 15.0 15.0 Spain 6.6 6.6 United States 10.2 10.2 47.1 8.6 Sources: Haitian authorities; and Fund staf f estimates. 1 As of June 28, 2010. Text Table 5. Haiti: Budget Support in FY 2010-11 (in millions of U.S. dollars, unless otherw ise specif ied) FY 2010 15 D. Financial Sector Policies 29. Staff and the authorities agreed that restarting private sector credit while preserving financial stability will be critical to the reconstruction efforts. Full implementation of the financial sector reforms identified by the 2008 FSAP, including measures to lower the cost of collateral and ease the recovery of non-performing loans, would be the most effective way to support existing enterprises and boost credit. Staff welcomed the BRH’s decision to restructure bank loans affected by the earthquake, provided that they were performing before the earthquake. Staff also encouraged the BRH to relax provisioning against NPLs, whe n the delays in payments we re related to the earthquake. Staff and the authorities agreed that it would be important to introduce a regulatory and supervisory framework for the insurance sector, following on the establishment of a similar framework for credit unions in FY 2009 (MEFP ¶15). 30. The authorities highlighted the urgency of proceed ing rapidly with their plans to establish a Partial Credit Guarantee (PCG) scheme to restart private credit growth. The scheme is composed of two pillars: (a) Pillar 1 aims at restructuring viable bank loans impacted by the earthquake and financing business recovery; and (b) Pillar 2 supports new lending to small and medium- sized enterprises. The PCG scheme can be accessed by banks and cooperatives which are compliant with prudential standards and have strong lending procedures. An upfront commission is payable, and after a deductible amount related to bank-specific historic NPLs, the scheme would guarantee up to 50 percent of the unpaid balance of loans under Pillar 1 and up to 80 percent of the loan under Pillar 2. Access terms will be the same for state-owned and private banks, although the BRH acknowledges that donors may require a heavier burden of proof for state -owned banks. 31. Funding for the PCG still needs to be fully secured. About US$100 million in capital is required for Pillar 1 and US$30 million for Pillar 2. Donor funding so far only amounts to US$25-30 million, and is insufficient in regard to the total amount estimated to be needed to capitalize the scheme (around US$130 million). Given the urgency of the situation, staff agreed that the central bank should launch the scheme promptly, setting aside on a temporary basis some of its foreign exchange reserves (US$70 million) as initial guarantee. No payouts are expected during the first half year of operations of the scheme, as loans covered must be non-performing for at least six months before claims can be made. Over time, the authorities will need to secure additional resources to cover potential future losses and replace the temporary BRH guarantee. Such financing could be secured in the form of commitments from donors including through the MDTF. 32. Staff noted that complementary financial reforms as identified in the 2008 FSAP would be essential to deepen financial intermediation. The authorities had made good progress prior to the earthquake in setting up a credit bureau that would help lower the cost of lending. Although the building was destroyed in the earthquake, they are now rekindling their efforts in that area. The authorities also plan to press ahead with the establishment of a centralized registry for movable collateral and a strengthened civil registry and cadastre (for which donors have offered funding and technical assistance). Reducing the spreads between lending and borrowing rates, and improvements in risk assessment capacity are also expected to help boost credit. (MEFP ¶17). Staff recommended reforming insolvency legislation. 16 E. Monetary and Exchange Rate Policy 33. In real effective terms, Haiti’s currency has appreciated by almost 90 percent between 2003 and December 2009. Despite this appreciation, export indicators have improved since 2003, with Haiti’s export share of U.S. apparel imports up sharply in recent years, and increases in market shares compared to regional textile export competitors (Figure 4). Staff and the authorities agreed that the pre-earthquake real appreciation did represent an equilibrium response to the sustained increase in aid and remittance inflows, with the modest overvaluation uncovered by econometric analysis well within the model’s error margins (Appendix II). 34. The authorities concurred that the appreciation trend is likely to continue in the context of aid inflows, which could pose important challenges to monetary and exchange rate management. In addition, lags between large and lumpy aid inflows and related import demand can lead to exchange rate volatility. Staff agreed that the central bank’s net purchases of foreign exchanges since the earthquake had helped smooth excessive exchange rate volatility and rebuild reserves, but noted that this had also contributed to rapid monetary growth. With inflation rising, staff recommended that, going forward, such purchases be at least partly sterilized. The authorities indicated that they would continue to aim at containing base money growth, while noting that large reconstruction expenditures could contribute to an increase in money demand. They reiterated their commitment to tighten monetary policy if needed (MEFP ¶18). 35. The authorities’ plans include steps to improve the monetary operations framework. High dollarization, underdeveloped money markets, and excess liquidity have limited the effectiveness of monetary policy. Staff and the authorities agreed on the importance of allowing for greater exchange rate flexibility and of deepening financial markets over the medium term. This would help support the development of interest-rate transmission mechanisms and enhance the effectiveness of open market operations. The authorities also plan to develop regular foreign exchange auctions (instead of sales where both price and quantity are fixed) as part of a strategy to facilitate the absorption of aid inflows while managing exchange rate fluctuations (MEFP ¶19). 36. The central bank welcomed the prospect of replacing BRH bonds with T-bills, and the associated move to open-market operations as one of the main instruments of monetary policy. The authorities envisage launching the domestic T- bill market with the publication of a regular auction calendar. Staff noted that, in order to be successful, the development of a T-bill market needed to be underpinned by improvements in liquidity and Treasury management, inflation forecasting, and debt management. Staff noted that T -bills would also be used to gradually securitize the outstanding government debt to the central bank and thus contribute to BRH recapitalization (MEFP ¶19). 37. Staff and the authorities agreed that central bank independence should be enhanced to strengthen the ability of the central bank to conduct monetary operations. Implementation of the central bank recapitalization plan would need to be complemented by the adoption of a modern central bank law. The new law ( to be submitted to Parliament by FY 2011) will anchor the principle of central bank independence and provide for the gradual elimination of direct government financing. It will also provide for the rotation of external 17 auditors and the publication of audited BRH accounts within 6 months after the end of the fiscal year (MEFP ¶20). F. External Debt Sustainability 38. Haiti remains at high risk of debt distress, as the earthquake has significantly worsened the macroeconomic outlook. Despite the delivery of US$1.2 billion in debt relief under the HIPC/MDRI initiative in June 2009, Haiti remained at high risk of debt distress prior to the earthquake. By generating massive reconstruction needs, deteriorating the macroeconomic outlook, reducing the export base, and further weakening debt management capacity, the earthquake further worsened Haiti’s debt outlook. The updated LIC DSA shows that Haiti’s risk of debt distress remains high, with the net present value (NPV) of debt- to- exports ratio breaching the relevant policy-dependent threshold in the baseline scenario for the medium-term. 39. Delivery of debt relief announced by multilateral and bilateral creditors after the earthquake, including the Fund, would substantially improve the debt sustainability outlook. Creditors representing about 92 percent of Haiti’s end -September 2009 debt stock (excluding the Fund) are committed to cancelling Haiti’s remaining debt. 6 Among the main multilateral and bilateral creditors, the World Bank has already cancelled SDR 24.3 million (about US$36 million as of May 21, 2010), and debt relief for the IDB (US$ 479 million) is expected to become effective in the near future, as soon as the committed donor financing is available. Venezuela also confirmed that it would provide debt relief on US$395 million of outstanding PetroCaribe debt . 7 40. The authorities are committed to continue to strengthen debt management capacity. Ongoing efforts include the operationalization of a debt unit with front, middle, and back-office functions that would be overseeing external and domestic debt. The legal framework is being updated and work on a public debt law is underway. Capacity building If Haiti were to be deemed eligible to full stock debt relief by the Fund, such relief would cover about US$ 263 million (SDR 178.13 million) in outstanding debt as of end-January 2010. An alternative DSA scenario including these debt relief commitments shows that, although the debt-to-exports ratio would breach the policy- dependent ceiling between 2014 and 2018, external debt would then be placed on a downward path. Nonetheless, vulnerability to shocks would remain high, highlighting the importance of covering financing needs mostly through grants; any new borrowing should be limited and on highly concessional terms. 6 Paris Club creditors have al ready committed to cancel all of Haiti’s outstanding debt as part of HIPC/MDRI debt relief committed in July 2009. Bilateral agreements with Canada and the U.S. have already been signed, and the signature of agreements with France, Italy and Spain is imminent. 7 Under the PetroCaribe arrangement, financing of oil imports is provided on concessional terms, namely, two- year grace period, 25-year maturity and 1 percent interest. The size of the financed portion of oil shipments is determined based on prevailing oil prices and varies between 30 percent of total shipments for oil prices US$40-50 per barrel to 70 percent for oil prices US $150 and above. 18 efforts are focusing on the development of a medium-term debt strategy that would form the basis for annual financing plans (MEFP ¶25). IV. ECF ARRANGEMENT 41. Access. The earthquake has aggravated Haiti’s already protracted and substantial balance-of-payments needs. However, given that most of the medium- term external financing need is expected to be covered by grants and that program risks are high, including due to weaker implementation capacity, staff proposes that access be relatively low , at 50 percent of quota (SDR 40.95 million or US$ 60.43 million). Nonetheless, Fund resources would be instrumental in allowing the central bank to smooth out exchange rate and reserves fluctuations caused by large and volatile aid resources. Donors have also clearly indicated that satisfactory progress under the Fund-supported program is an essential element for their continued engagement. Staff proposes that total access be set at 10 percent of quota each for the first two disbursements, followed by five disbursements equivalent to 6 percent of quota each. Program reviews would be linked to end -March and end-September test dates, in line with Haiti’s fiscal year (Table 9). 42. Monitoring. Performance criteria will include a zero ceiling for net central bank credit to the central government, a ceiling on net domestic assets of the central government, a floor on NIRs, and zero ceilings on the accumulation of external and domestic arrears, and the contracting or guaranteeing of non-concessional debt. Indicative targets will help monitor net domestic financing of the government, and base money growth. An indicative floor on poverty-reducing spending was set in close consultation with the World Bank (MEFP Table 1). Structural reforms objectives for FY 2010-11 will focus on improving revenue collection, enhancing the efficiency and tracking of government spending, and developing a T -bill market. The program will also promote transparent and regular reporting of poverty-reducing expenditures (MEFP Table 2). 43. External financing and capacity to repay the Fund. The program assumes continuing budget support in the order of about US$100 million a year starting in FY 2012. It includes a US$50 million external financing adjustor to offset delayed disbursement of already-identified budget support. The associated domestic financing would be expected to unwind when the budget support is received and at the latest, to be fully repaid within one year (TMU ¶36). Reserve coverage would average 3.2 months of imports throughout the program period. Debt service to the Fund is projected to peak in 2016 at 4 percent of exports of goods and services and 3 percent of domestic revenues. Debt service capacity is expected to remain manageable throughout the program period, but would be significantly improved once the committed debt relief materializes (Table 10). If the Fund provides debt relief on the outstanding debt stock as of end -January 2010, debt service to the Fund would be significantly lower, at 0.7 percent of exports of goods and services and 0.5 of domestic revenues in 2019. 44. Safeguards. A safeguards assessment should be completed at the time of the first review. The last safeguards assessment was completed in September 2008. The updated assessment would be based on the progress of the external audit of the BRH’s financial statements for the fiscal year ending September 20, 2009, and the documents provided by the BRH for review. The authorities have made some progress in implementing the key 19 recommendations of the 2008 safeguards assessment update. Revised reserve investment guidelines have been adopted and an investment committee has been appointed. The external audit of BRH accounts for FY 2008 has been published, and NIR data for FY 2009 have been verified by the external auditors. The authorities committed to publishing the BRH audited financial statements for FY 2009 by the time of the first p rogram review (MEFP Table 2). 45. Risks. Key program risks include: (i) widespread social unrest, triggered by delays in the start of reconstruction activities, and/or the elections; (ii) pervasive capacity constraints, amplified by the earthquake; and (iii) high vulnerability to external shocks, in particular natural disasters. The international community has an important role to play, by delivering on the commitments made at the New-York conference, and by assisting with the organization of peaceful elections. Visible improvements in fiscal transparency and governance as supported under the program would also help mitigate political and social risks. Finally, the comprehensive TA strategy implemented by the Fund and other development partners aims at building capacity and strengthening institutions. V. S TAFF APPRAISAL 46. The January earthquake represents a major setback for Haiti, after years of progress in maintaining macroeconomic stability. The earthquake caused damages and losses estimated at 120 percent of GDP, and affected one-third of Haiti’s population, making it one of the largest natural disasters in recent history. The destruction of human and physical capital created a massive and immediate need for recovery and reconstruction resources and radically altered the macroeconomic outlook, jeopardizing recent hard-won gains. 47. The authorities’ determination to build on the reform momentum and to use the earthquake as an opportunity to build a better Haiti is commendable. Staff believes that the National Action Plan for Recovery and Development provides an appropriate anchor for rebuilding the economic structure and institutions of the country, and promote more transparent and effective policies. Implementation of the Action Plan in a context of severe capacity constraints will require close coordination and tracking of interventions of all development partners by the IHRC. Channeling external assistance through the government’s budget or the MDTF would effectively support coordination and local capacity building. 48. Disbursement of the amounts pledged in New-York should start and reconstruction should begin promptly. The expectations created by the large aid pledges and the limited progress so far are increasing risks of widespread social unrest. On their part, the authorities should continue their efforts to facilitate the relocation of families, adopt a new building code with anti-seismic norms, and launch large public works programs to generate a reconstruction momentum. 49. The authorities’ medium-term growth objectives are ambitious but can be reached provided measures to boost private credit and investment are implemented. The rapid implementation of the PCG scheme is essential to restart private sector activity. The reform momentum generated by the earthquake also provides an opportunity to implement structural reforms to improve the business environment. Development of infrastructure, in particular transport and energy, in partnership with the private sector would [... middle sections omitted for long document ...] Haiti: Selected Economic and Financial Indicators 2006/07 2007/08 2008/09 2009/10 (proj) (Annual percentage change, unless otherwise indicated) Domestic economy GDP at constant prices 3.3 0.8 2.9 -8.5 Consumer prices (end-of-period) 7.9 19.8 -4.7 8.5 Gross domestic investment (in percent of GDP) 25.0 26.0 23.4 23.9 Gross national savings (in percent of GDP) 24.8 21.5 20.2 21.7 (In percent of GDP) Public finances Central government overall balance (including grants) 0.2 -3.1 -4.4 -2.9 Central government overall balance (excluding grants) -5.0 -7.5 -11.1 -17.3 Public sector savings 3.2 1.4 1.2 2.2 (Changes in percent of beginning-of-period broad money) Money and credit Net domestic assets -1.2 3.7 8.5 7.6 Credit to the public sector (net) -1.9 -7.2 3.6 -5.2 Credit to the private sector 3.9 9.6 5.9 -3.2 Broad money (including foreign currency deposits) 4.8 17.7 11.0 11.4 (Annual percentage change, unless otherwise indicated) External sector Exports (f.o.b.) 5.7 -6.2 12.4 -12.1 Imports (f.o.b.) 4.5 30.2 -3.3 15.5 Current account balance (including official grants, in percent of GDP) -0.3 -4.5 -3.2 -2.1 Current account balance (excluding official grants, in percent of GDP) -6.9 -11.7 -10.6 -28.7 External public debt (end-of-period, in percent of GDP) 25.6 29.5 16.6 22.0 External public debt service (in percent of exports of goods and nonfactor services) 8.3 8.2 3.9 3.1 Net international reserves (in millions of U.S. dollars) 1/ 290.4 313.6 438.6 300.5 Liquid gross reserves (in millions of U.S. dollars) 2/ 544.7 707.8 947.5 1076.2 In months of imports of the following year 2.3 2.9 2.9 3.1 Real effective exchange rate (appreciation +) 15.3 2.9 1.0 ... Sources: Ministry of Economy and Finance; Bank of the Republic of Haiti; and Fund staff estimates. 1/ Excludes commercial banks' foreign currency deposits with the BRH. 2/ Gross reserves excluding capital contributions to international organizations. Press Release No. 10/299 FOR IMMEDIATE RELEASE July 21, 2010 IMF Executive Board Cancels Haiti’s Debt and Approves New Three-Year Program to Support Reconstruction and Economic Growth The Executive Board of the International Monetary Fund (IMF) today approved the full cancellation of Haiti’s outstanding liabilities to the Fund, of about SDR 178 million (equivalent to US$268 million). The Board also approved a new three-year arrangement for Haiti under the Extended Credit Facility (ECF) requested by the authorities to support the country’s reconstruction and growth program. Both decisions form part of a broad strategy to support Haiti’s longer term reconstruction plans, following the devastating earthquake of January 12, 2010. The cancellation of existing debt was advocated by IMF Managing Director Dominique Straus s-Kahn in the days following the disaster as part of a concerted international effort to launch a “Marshall Plan” for the reconstruction of the country. The new program provides a strong and forward- looking framework to support economic stability and reconstruction in the country, and will also help catalyze donors’ contributions. “Donors must start delivering on their promises to Haiti quickly,” Mr. Strauss-Kahn said, “so reconstruction can be accelerated, living standards quickly improved, and social tensions soothed.” At a high-level donors' conference in March, the international community pledged US$ 9.9 billion to Haiti’s reconstruction, of which US$ 5.3 billion is to be disbursed over the next 18 months. Resources freed by IMF debt relief will help Haiti to meet substantial balance-of-payments needs exacerbated by the earthquake. The debt relief is financed by the Post-Catastrophe Debt Relief (PCDR) Trust Fund, recently established by the Fund to help very poor countries hit by catastrophic natural disasters (see attached factsheet). The new ECF arrangement will provide SDR 40.9 million (about US$ 60 million) over three years to boost Haiti’s international reserves and help the central bank manage potential swings in the value of the local currency - important to avoid raises in the prices of basic commodities consumed by the poor - without adding to the country’s net debt. Financing under the ECF carries a zero interest rate until end-2011 and thereafter zero to 0.5 percent, with a maturity of 10 years and a grace period of 5½ years. The temporary interest waiver is International Monetary Fund Washington, D.C. 20431 USA 2 part of the package that was approved in July 2009 to support the IMF’s lending to low- income countries, financed from the IMF’s internal resources, including the use of resources linked to the gold sales, and through bilateral contributions (see Factsheet “Financing the Fund’s Concessional Lending to Low-Income Countries”). The new program also includes important policy commitments from the authorities that will help protect macroeconomic stability, and strengthen fiscal governance. “The new program will provide a coherent macroeconomic framework to support the implementation of our Action Plan and ensure efficient spending and absorption of aid inflows,” Haiti’s Minister of Economy and Finance Ronald Baudin said. Technical Assistance The IMF will also provide a comprehensive medium-term technical assistance program aimed at strengthening state institutions, concentrating in the areas of tax policies, revenue administration, budget preparation and execution, and helping the country in organizing its first ever issuance of government securities. “Improving the business environment and fostering private credit and investment will be essential to support growth,” Charles Castel, Governor of the Bank of the Republic of Haiti said. “The Fund’s technical assistance will help rebuild economic institutions and build capacity.” Following the Executive Board discussion on Haiti, Mr. Naoyuki Shinohara Deputy Managing Director and Acting Chair, issued the following statement: “The January 2010 earthquake was devastating for Haiti, after several years of progress in maintaining economic stability, resuming growth, and implementing essential reforms. The authorities are to be commended for good policy implementation in the six-month period since the earthquake, in spite of limited financial resources and weakened capacity. “Haiti meets the eligibility and qualification conditions for debt stock relief under the PCDR Trust Fund. Resources freed by debt stock relief under the PCDR Trust Fund are critical to meeting the large and protracted balance-of-payments needs exacerbated by the earthquake and subsequent recovery efforts, and to placing Haiti's debt on a sustainable path. Debt relief from the Fund is part of a concerted international effort to cancel Haiti's remaining debt after the earthquake. “The newly approved ECF-supported arrangement provides a coherent macroeconomic framework to support the authorities' reconstruction and growth objectives. The macroeconomic outlook, and implementation of the authorities' reconstruction plan, depends crucially on the timely disbursement of the large donor pledges. Furthermore, improvements in infrastructure and the business environment will be essential to raise medium-term growth, 3 by attracting private investment and expanding the export base. The establishment of a partial credit guarantee fund will help restart private sector credit “The Fund-supported program aims at smoothing the impact on the economy of large expected aid flows, projected to triple to about 15 percent of GDP over in the next 3 years. Fiscal objectives are to raise domestic revenue, align the budget and its financing with reconstruction priorities, and continue strengthening fiscal governance. Monetary and exchange rate policies will be upgraded to facilitate the absorption of aid inflows, while avoiding large swings in the exchange rate and keeping inflation under control The program is supported by a comprehensive medium term technical assistance strategy, coordinated with Haiti's development partners.” ANNEX Recent Economic Developments The earthquake of January 12, 2010 caused unprecedented destruction of human and physical capital, with losses estimated at 120 percent of 2009 GDP. The disaster struck the country at a time when its outlook was improving after several years of prudent macroeconomic management. In 2009, Haiti’s growth reached almost 3 percent, the second-fastest rate in the Western Hemisphere. A still fragile recovery is taking place after the earthquake. Agricultural production, construction and textile manufacturing are supporting economic activity, while remittances, which grew by 12 percent between January and May of 2010 (over the previous year), are supporting consumption and imports. Exports are recovering, although the trade deficit is still widening. Main Program Objectives The program is focused on macroeconomic policies that can support growth and the Haitian authorities’ reconstruction plan, as well as help manage the aid inflows. It includes improving the efficiency and transparency of spending, increasing revenues, modernizing monetary and exchange rate operations, and enhancing credit growth. Growth: GDP is projected to expand by 9 percent in fiscal year 2011-12, due mostly to reconstruction activity, and 6 percent by 2015. Inflation: expected to reach 8.5 percent in the current fiscal year and to decline to 7 percent by 2013. Fiscal strategy: to boost revenue collection to 13 percent of GDP by 2013, from 10% percent currently. The authorities’ objective is to enhance the quality and effectiveness of reconstruction spending and rebuild a more modern and efficient tax administration. 4 Monetary policy: the program aims at building a sustainable external position while absorbing the reconstruction-related foreign exchange flows. To enhance the effectiveness of monetary policy, further steps will be taken to improve the Bank of the Republic of Haiti’s independence. The authorities also aim at gradually developing a market for government securities.