(2013) Ayiti: Konsiltasyon 2012 Atik IV ak Senkyèm Revizyon Anba Faslite Kredi Elaji a

©2013 International Monetary Fund IMF Country Report No. 13/90 HAITI 2012 ARTICLE IV CONSULTATION AND FIFTH REVIEW UNDER THE EXTENDED CREDIT FACILITY 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 2012 Article IV consultation with Haiti, the following documents have been released and are included in this package:  Staff Report for the 2012 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on December 7, 2012, 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 February 21, 2013. 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.  Informational Annex prepared by the IMF.  Financial Sector Report prepared by the IMF.  Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its March 11, 2012 discussion of the staff report that concluded the Article IV consultation.  Statement by the Executive Director for Haiti. The document listed below has 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* Selected Issues Paper 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. March 2013 HAITI STAFF REPORT FOR THE 2012 ARTICLE IV CONSULTATION AND FIFTH REVIEW UNDER THE EXTENDED CREDIT FACILITY KEY ISSUES Context. The economy is recovering from the January 2010 earthquake, albeit at a slower pace than anticipated. Prudent macroeconomic policies have helped keep inflation in the single digits and improve the external position. However, underexecution of capital spending due predominantly to limited administrative and absorptive capacity, coupled with a series of natural disasters, including cholera and tropical storms, has slowed down the reconstruction and the economic recovery. The business environment remains unattractive and the political situation tense. Outlook. The recovery is expected to be firmer in 2013, assuming a rebound in agricultural output and a pickup in public investment. Medium-term prospects are promising. The risks to the outlook are on the downside, stemming mainly from a further slowdown in the world economy, a volatile political environment, a fragile social context, and continued weak capacity. Article IV discussions. Policy discussions focused on macroeconomic policies and structural reforms to accelerate the reconstruction, foster broad-based and inclusive growth, create jobs and reduce poverty. The authorities and staff agreed that meeting these challenges will require, in addition to political stability and improved security conditions, optimizing sustainable growth-oriented fiscal policy, particularly by (i) ensuring fiscal sustainability; (ii) expanding the fiscal space for development goals; (iii) improving the execution rate and quality of capital spending; and (iv) strengthening public financial management (PFM). It will also require maintaining price stability and facilitating external adjustment, and improving the business environment by eliminating key impediments to private investments as well as to growth and job creation. Program implementation. Program performance is broadly satisfactory. All end-June 2012 indicative targets have been observed and all end-September 2012 quantitative performance criteria have been met. But progress on structural reforms has been mixed. The authorities have implemented the end-June 2012 benchmark and two out of the three end-September 2012 benchmarks. Two end-March 2012 structural benchmarks are not yet observed. February 21, 2013 HAITI 2 INTERNATIONAL MONETARY FUND Approved By Adrienne Cheasty (WHD) and Chris Lane (SPR) Discussions took place in Port-au-Prince from November 28 – December 7, 2012. The staff team comprised Mr. Loko (head), Mr. Bessaha, Ms. Sulla, Mr. Brousseau (all WHD), and Ms. Bova (FAD). Mr. Bouhga-Hagbe, the resident representative, assisted the mission. Ms. Florestal (OED) joined the policy discussions. The mission met with Prime Minister Lamothe, Minister of Economy and Finance Jean Marie, Minister of Commerce and Industry Laleau, Minister of Agriculture Jacques, Minister Delegate in charge of Human Rights and the Fight Against Poverty Auguste, Governor Castel, and senior financial and economic officials. The mission also met with representatives of the donor and diplomatic community and the private sector. CONTENTS CONTEXT __________________________________________________________________________________________ 5  RECENT ECONOMIC DEVELO PMENTS AND OUTLOOK _________________________________________ 9   A. Recent Developments: Weak Recovery ________________________________________________________ 9   B. Prospects and Risks: Promising but Challenging _____________________________________________ 11   POLICY CHALLENGES FOR SUSTAINING A BROAD-BASED AND INCLUSIVE GROWTH ____ 14   A. Optimizing fiscal policy for high and inclusive growth _______________________________________ 14   B. Maintaining price stability and facilitating external adjustment _____________________________ 20   C. Strengthening the Business Environment ____________________________________________________ 22   PROGRAM IMPLEMENTATION _________________________________________________________________ 24   OTHER ISSUES __________________________________________________________________________________ 25  STAFF APPRAISAL ______________________________________________________________________________ 25  BOXES 1. Natural Disasters ________________________________________________________________________________ 8   2. Strengthening Social Safety Nets and Human Capital _________________________________________ 16   3. Electricity Sector _______________________________________________________________________________ 19  FIGURE 1. Macroeconomic Developments Since the Earthquake, 2007-2012 ______________________________ 7   HAITI INTERNATIONAL MONETARY FUND 3 TABLES 1. Selected Economic and Financial Indicators ___________________________________________________ 28   2a. Central Government Operations _____________________________________________________________ 29   2b. Central Government Operations _____________________________________________________________ 30   3. Summary Accounts of the Banking System ____________________________________________________ 31   4. Balance of Payments __________________________________________________________________________ 32   5. Financial Soundness Indicators of Individual Banks ___________________________________________ 33   6. Indicators of External Vulnerability ____________________________________________________________ 34   7. Indicators of Capacity to Repay the Fund _____________________________________________________ 35   8. Proposed Schedule of Disbursements _________________________________________________________ 36   9. 2008 FSAP Recommendations and Implementation Status ___________________________________ 37 ANNEX 1. External Stability and Competitiveness ________________________________________________________ 38   APPENDICES I. Letter of Intent _________________________________________________________________________________ 40   Attachment 1. Memorandum of Economic and Financial Policies _____________________________ 42   Attachment 2. Technical Memorandum of Understanding–Update ____________________________ 55     HAITI 4 INTERNATIONAL MONETARY FUND Selected Abbreviations AML/CFT Anti-Money Laundering and Combating the Financing of Terrorism BRH Banque de la République d’Haïti FATF Financial Action Task Force FT Financial Terrorism GCI Global Competitiveness Index IFRS International Financial Reporting Standards MEF Ministry of Economy and Finance ML Money Laundering PCDR Post-Catastrophe Debt Relief Trust Fund PFM Public Financial Management UNDP United Nations Development Programme HAITI INTERNATIONAL MONETARY FUND 5 CONTEXT 1. Haiti’s growth and development challenges are daunting. In 2011, real per capita GDP was about US$ 1,034, 1 25 percent below its level twenty years ago. Almost 80 percent of the population lives with less than US$2 per day (extreme poverty) and living standards are very low. The country ranks 158 out of 187 countries according to the UNDP Human Development Index. Unemployment is high, particularly among the youth. In 2009 unemployment was estimated at around 30 percent overall, with 62 percent unemployment for the young (between 15 and 19-year-old). In addition to a persistent difficult security situation and political instability, as well as frequent natural disasters, these indicators reflect deep domestic institutional and structural weaknesses. 2. The massive 2010 earthquake further exacerbated the country’s development challenges. A total of 220,000 people were killed, including one out of three civil servants (many in middle management), 1,200 teachers, and over 500 health personnel. In addition, 300,000 houses, 13 out of 15 ministerial buildings, 4,200 schools, and more than 60 percent of the country’s hospitals were damaged or destroyed. Total damage caused by the earthquake was estimated at about US$9 billion, the equivalent of 120 percent of 2009 GDP. 3. In the aftermath of the 2010 earthquake, the Haitian authorities have adopted a ten- year action plan for building a better Haiti. 2 This plan provides a framework for the reconstruction, while laying the ground for achieving sustainable economic growth and reducing poverty. Donors pledged about US$10 billion in support of the authorities’ reconstruction plan (US$6.4 billion has been disbursed by end-December 2012). The IMF provided emergency funds in the amount of US$110 million and approved a three-year ECF arrangement in July 2010 (about US$60 million), together with debt relief under the Post-Catastrophe Debt Relief Trust Fund (PCDR) of US$268 million. 3 The Fund has also provided comprehensive technical assistance to help the authorities restore basic state 1 PPP based in 2005 US$. 2 Action Plan for National Recovery and Development of Haiti; Government of the Republic of Haiti, March 2010. 3 By October 2012, the authorities had used US$55.8 million reflecting the underexecution of capital spending due to limited administrative and absorptive capacity, and the long political transition after the earthquake. 60 80 100 120 140 160 180 200 220 240 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Dominican Republic Haiti Nicaragua Honduras LAC Real GDP per Capita, In PPP terms (Index, 1991=100) Sources: World Development Indicators 0 2,000 4,000 6,000 8,000 10,000 12,000 New York conference Other recovery fund Humanitarian -earthquake Humanitarian -cholera Total USD millions Pledged Disbursed Source: UN Office of the Special Envoy for Haiti :www.haitispecialenvoy.org/ Haiti: 2010-12 contributions to relief and recovery efforts as of December 2012 (excl. debt relief) HAITI 6 INTERNATIONAL MONETARY FUND functions and undertake much-needed reforms, including in the fiscal, financial, monetary, and statistics areas. 4. Significant progress has been made since the last Article IV consultation in July 2010 − just after the earthquake––to safeguard macroeconomic stability. Supported by the ECF arrangement and in line with policy advice in the 2010 Article IV, economic activity has rebounded and macroeconomic policies have contributed to smooth adjustment to the large aid inflows and keep inflation in the single digits (Figure I). Official inflows and remittances contributed to strengthen the external position. Haiti’s debt situation has significantly improved owing to additional debt relief from major partners (including the Fund) after the January 2010 earthquake. 5. However, the pace of the reconstruction has been slow. Progress was made in relocating people housed in temporary shelters, rebuilding many schools and restoring all state functions. About 80 percent of the debris generated by the earthquake has been removed. Further efforts are needed to provide permanent lodging to the remaining people still living in tents and rehabilitating many important structures, including public buildings, schools and hospitals. 6. The business environment remains unattractive. Doing Business Indicators rank Haiti at 174 out of 185 countries, while the 2012–13 Global Competitiveness Index (GCI) ranks it 142 out of 144 countries. According to these indicators and the investors’ survey of the GCI, the major constraints in Haiti’s business environment include poor infrastructure, access to finance, administrative procedures to start a business, and taxation. 7. The country is extremely vulnerable to exogenous shocks. Since the earthquake, the country has repeatedly suffered from natural disasters, including cholera and two major hurricanes and multiple floods (Box 1). Together, Hurricanes Isaac in August 2012 and Sandy in October 2012 caused at least 50 deaths and overall losses estimated at US$570 million (7.2 percent of 2012 GDP). The agricultural sector (about one-fourth of GDP) was again severely hit. In addition to direct costs to physical and human capital, natural disasters complicate macroeconomic management, undermine growth, and increase poverty. 1500 1370 1069 810 680 635 595 551 519516491 420 390369358 0 200 400 600 800 1000 1200 1400 1600 Sources: United Na tions, "Ha iti Moving Forw a rd S tep by Step, 2012 " Haiti: Total Number of Displaced Individuals from July 2010 to October 2012 (In thousands) 77% decrease in camp population since 2010 HAITI INTERNATIONAL MONETARY FUND 7 Figure 1. Haiti: Macroeconomic Developments Since the Earthquake, 2007-2012 Source: Haitian authorities and IMF Staff estimates. -6 -4 -2 0 2 4 6 8 2007 2008 2009 2010 2011 2012 Real GDP Growth -15 -10 -5 0 5 10 15 20 25 30 35 Jan-07 Ma y -07 Se p -07 Jan-08 Ma y -08 Se p -08 Jan-09 Ma y -09 Se p -09 Jan-10 Ma y -10 Se p -10 Jan-11 Ma y -11 Se p -11 Jan-12 Ma y -12 Se p -12 Headline CPI Food CPI Consumer Price Index (In percent, y/y change) 0 5 10 15 20 25 0 5 10 15 20 25 2007 2008 2009 2010 2011 2012 Domestic Revenue Grants Current Spending Capital Spending Haiti: Fiscal Aggregates (In percent of GDP) -40 -30 -20 -10 0 10 2007 2008 2009 2010 2011 2012 Current Account Excl. official transfers Current Account Haiti: Current Account Balance (In percent of GDP) -10 -5 0 5 10 15 20 25 30 35 2007 2008 2009 2010 2011 2012 Broad Money Base Money Evolution of Broad Money and Base Money (In percent, y/y) 0 200 400 600 800 1,000 1,200 1,400 2007 2008 2009 2010 2011 2012 Net International Reserves (In millions of US dollars) Growth has resumed Inflation remains in check in the single digits The current account has slowly improved Capital spending has surged, largerly financed by foreign grants and some gains in domestic revenues Broad money has decelarated ... and significant increase in NIRs. HAITI 8 INTERNATIONAL MONETARY FUND Box 1. Haiti: Natural Disasters Haiti’s exposure to natural disasters is exceptionally high. Over the last 20 years, the country has been struck by 60 natural disasters, affecting about 6 million people and causing almost US$ 9 billion in damages. The 2010 earthquake stands as the biggest natural disaster in Haiti’s history. It affected almost 4 million people and caused damage estimated at about 120 percent of 2009 GDP. More recently, hurricanes Isaac (August 2012) and Sandy (October 2012) caused about $170 and $400 million in damages, (mostly in the agricultural sector). Yet, improved warning and rescuing systems limited the toll on the population, compared to previous disasters. Natural disasters may have severe economic consequences. In addition to direct costs to physical and human capital, natural disasters complicate macroeconomic management, undermine growth and increase poverty. In Haiti, after the 2010 earthquake, real GDP declined by 5.4 percent compared to the pre- earthquake projection of 2.4 percent. The impact of floods and storms can also be significant for agricultural output, which represents about 25 percent of GDP. Overall, excluding the recent earthquake, natural disasters are estimated to have reduced growth performance by an average of 1 to 2 percent of GDP. They also put pressure on the fiscal and external accounts and slowed progress toward poverty reduction. However, in most instances, adequate and timely external financing has helped the country address immediate resource needs and limit contractionary macro policies that could aggravate the effects of the shocks. The national risk and disaster management system (NRDMS) in place needs to be further strengthened. While natural disasters can rarely be prevented, the policy response will have an important impact on the speed of recovery. Available fiscal and external buffers, flexibility in macroeconomic policies, and external financing can help mitigate the impact of the shocks and accelerate the recovery. Much can also be done ex ante to reduce the human suffering and economic costs of natural disasters. These include relocating communities from disaster-prone areas, enforcing building codes, holding food inventories as buffers against drought, and developing emergency response mechanisms and a comprehensive system of social safety nets for the most vulnerable. Building a better Haiti will require enhancing the NRDMS, which still suffers from a lack of capacity, resources, and institutional support, to reduce vulnerabilities, protect human and physical capital and establish the conditions for broad-based and inclusive growth. type of disaster number of events Aver age years between disaster Casualties People affected Damage (US$'000) drought 2 10.0 - 35,000 - earthquake 1 20.0 222,570 3,700,000 8,000,000 flood 31 0.6 3,059 444,958 1,000 storm 26 0.8 5,071 2,407,164 331,620 total 60 0.33 230,700 6,587,122 8,332,620 So urc e: www.em dat.be Haiti: Natural Disasters, 1993-2012 HAITI INTERNATIONAL MONETARY FUND 9 8. The political situation remains volatile and tense. Recent publication of amendments to the Constitution opens the door for dual nationality, a measure aimed at involving Haitians living abroad in the development of Haiti. However, the President’s lack of majority in Parliament remains an impediment for the passage of key legislation. In addition, the upcoming cycle of senatorial, municipal, and other local elections 4 coupled with pervasive poverty and lack of progress in improving living standards could heighten social and political tensions. The security situation remains challenging. 9. Looking ahead, macroeconomic policies and structural and institutional reforms to reduce the country’s vulnerability to foreign assistance and to natural disasters, and create a conducive environment for private sector investment, will be needed to sustain high growth, reduce unemployment, and raise living standards. In the near-term, the main challenge remains to take full advantage of the technical assistance and financial support made available by the donor community and the IFIs, including the IMF, to build capacity, accelerate the reconstruction, and sustain the recovery while safeguarding macroeconomic stability. RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK A. Recent Developments: Weak Recovery 10. Economic activity decelerated and inflation picked up. After contracting by 5.4 percent in FY2010 following the earthquake, economic activity expanded by 5.6 percent in real terms in FY2011. Real GDP growth decelerated to 2.8 percent in FY2012, reflecting a spring drought, the impact of Hurricane Isaac, and delays in implementing key public investment projects. Inflation remains in the single digits, although it has picked up to 7.6 percent in December, up by 2.7 percentage points since June, reflecting primarily higher international food prices and reduced domestic food supply, because of Hurricanes Isaac and Sandy. 11. The overall fiscal deficit for FY2011/12 was higher than expected. Revenue was slightly below target (12.8 percent of GDP instead of 13.5 percent, corresponding to a 5.7 percent decline in nominal terms), because of lower imports and persistent inefficiencies in the tax and customs collection process. Disbursement of budget support was significantly lower than planned (US$27 million against US$55 million), reflecting the country’s limited administrative and absorptive capacities and slow progress in key structural areas important to donors, including procurement and governance. Emergency spending following Hurricane Isaac, outlays for new ministries and higher transfers to the electricity company, increased current spending by almost US$50 million above target (0.6 percent of GDP). Domestically-financed capital spending slightly exceeded the program target, although some of the spending merely represents transfers of resources to project accounts 4 The elections, which were initially planned for November 2011, have been postponed several times, particularly due to contention regarding the composition and mandate of the Permanent Electoral Council. Then there was an agreement to form a transitional body with a mandate to solely oversee the forthcoming elections. Discussions are still ongoing between the Executive, Legislative, and Judiciary to nominate the nine members of the Council. HAITI 10 INTERNATIONAL MONETARY FUND and not actual project execution 5 . Overall, the government ended FY2012 with a deficit of 5.9 percent of GDP, against a programmed deficit of 3.6 percent. 12. The external position has strengthened. The current account deficit decreased to 4 percent of GDP, from 4.6 percent in FY2011, despite the significant drop in official transfers from 19.6 percent of GDP to 12.5 percent of GDP, due to the completion of the immediate post- earthquake disaster phase, slow progress in structural reforms, and weak execution and absorption capacities. At the same time, capital inflows, including FDI, continued to be strong. The overall balance of payments recorded a small surplus and, gross international reserves increased to US$2.2 billion at end-December 2012, equivalent to 6 months of imports, above the commonly- used rule of thumb of 3 months of imports. 13. Monetary policy has been largely passive. Key policy rates have remained unchanged since January 2011. However, increase in public sector deposits contributed to a marked slowdown in broad money growth. Overall, broad money increased by 6.9 percent in 2012, well below the programmed level (11.2 percent). 14. Bank credit growth has been strong. Commercial bank credit to the private sector has continued to grow (34.5 percent at end-October 2012, y/y), fuelled by rising demand for short-term trade credit. Credit growth in gourdes was 1.7 times higher than that in dollars in October 2012 (37.5 vs. 22.7 percent), reflecting continued macroeconomic stability and recent decisions by the Central Bank to eliminate the requirement to keep in gourdes 30 percent of the reserves for dollar deposits. 15. The banking sector remains sound and profitable. Banks had an average capital adequacy ratio of 16.8 percent at end September 2012, above the regulatory minimum (12 percent). Returns on assets and equity are comfortable, and non-performing loans are low, at 2.4 percent of total loans at end September 2012. Liquidity and exchange rate risks related to the high financial dollarization appear manageable in the near-term. Current prudential regulations prevent banks’ net open foreign exchange position to exceed 2 percent of equity, and the three systemic banks in Haiti have more assets than liabilities in foreign currency. However, banks’ potential exposures to indirect credit risk may require closer oversight, although anecdotal evidence suggests that commercial banks in Haiti tend to grant dollar loans 5 Capital spending representing merely transfers to project accounts has not yet been translated into higher imports. Sep-10 Sep-11 Mar-12 Jun-12 Sep-12 Capital adequacy Regulatory capital to r is k-weighted as s ets 13.4 16.5 16.7 16.7 16.8 Asset quality and composition NPLs to gross loans 5.7 3.7 3.6 3.2 2.4 Provisions to gross NPLs 84.1 93.1 83.3 88.8 96.7 Earnings and profitability (cumulative since beginning of fiscal year) Return on Assets (ROA) 1.2 1.4 1.4 1.3 1.5 Return on equity (ROE) 18.4 22.2 22.2 21.7 21.9 Dollarization Foreign currency loans to total loans (net) 60.1 55.7 53.8 51.8 51.7 Foreign curr ency deposits to tota l deposits 44.1 62.3 63.9 64.5 62.9 Foreign currency loans to foreign currency deposits 31.3 32.6 34.6 35.7 37.3 Sources: BRH Banking System Financial Summary; and IMF estimates 1/ Defined as the difference between average lending rate and average fixed deposit rate in the banking system. Hai ti: Fi nanci al Soundnes s Indi cators of Indi vi dual Banks , September 2010 - September 2012 (In percent; unless otherwise stated) HAITI INTERNATIONAL MONETARY FUND 11 mainly to larger commercial entities that derive most of their income in US dollars. Vulnerabilities remain, particularly related to the concentrated lending portfolios, relatively underdeveloped credit risk management practices and weak governance. 16. The implementation of the recommendations of the 2008 FSAP to further strengthen the financial sector is underway, albeit with some delays. The January 2010 earthquake has slowed down the reform process, shifted priorities and added new challenges. Nevertheless, some progress was made with (i) the adoption of a new banking law, (i) the hiring of a new audit firm to conduct the audit of the BRH; and (iii), the establishment of a T-bill market (See Table 9). Measures have also been taken to enhance coordination between the central bank and the ministry of finance, and to improve liquidity management. Work is ongoing with the World Bank to establish a credit bureau and set up a collateral registry. B. Prospects and Risks: Promising but Challenging 17. The recovery is expected to continue in FY2013. Real GDP is projected to grow by 6.5 percent assuming a rebound in the agricultural sector and the continued execution of several large public investment projects, including those aimed at promoting exports and tourism. 6 Inflation should remain stable, in the mid-single digits. Official transfers are expected to decline reflecting the transition from the emergency situation, as well as weak execution and absorption capacities in Haiti. Higher reconstruction-related imports would widen the external account deficit, and reduce gross liquid official reserves to 5.5 months of imports. 18. Medium-term prospects are promising. Maturing ongoing agricultural projects, a rebound in public construction investment, and rising exports of textiles and other manufacturing goods assembled in emerging free zones are expected to sustain growth in the medium term. The external account deficit should decline, associated with a gradual winding-down of reconstruction-related 6 Renovation and upgrade of the airports in Haiti’s two largest cities are almost completed. The 128-room Royal Oasis has just opened and the 106-room Best Western hotel is scheduled to open in FY 2013. 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 GDP at constant prices 5.6 2.8 6.5 6.3 6.1 5.8 5.6 Consumer prices (end-of-period) 10.4 6.5 5.0 4.5 4.0 3.5 3.0 Overall fiscal balance -3.7 -5.9 -5.3 -5.5 -4.6 -3.4 -3.1 External current account balance -4.6 -4.0 -5.6 -5.3 -5.2 -5.0 -4.8 External current account balance (excluding official grants) -24.2 -16.5 -17.7 -16.1 -14.7 -13.5 -12.4 External public debt (end-of-period) 8.9 13.2 16.6 19.1 20.6 21.6 22.3 Total government debt (end-of-period) 12.2 15.4 20.4 24.2 26.7 28.6 29.7 Gross reserves (In months of imports of the following year) 6.3 6.5 5.5 5.2 4.8 4.4 4.1 So urces: H ait ian autho rit ies; and Fund st af f es tim at es and pro jec tio ns . (In percent of GDP; unless otherwise stated) Haiti: Medium-Term Macroeconomic Framework, 2010-2017 2010/11 (Change over previous year; unless otherwise stated) HAITI 12 INTERNATIONAL MONETARY FUND imports and improved exports. Total government debt-to-GDP, the medium-term fiscal anchor, will remain below 30 percent (the pre-earthquake level). 19. The outlook is subject to significant downside risks. On the external front, a severe shock to global growth could have negative spillovers (See Risk Assessment Matrix below) — predominantly through remittances (about 18 percent of GDP in 2012), trade (exports were 13.2 percent of GDP and mainly destined for the US), and official transfers (about 12.5 percent of GDP). However, remittances displayed some resilience during past episodes of the global slowdown. Higher food and oil prices are also a major source of external risk. On the domestic front, heightened political tensions could postpone or again slow down public investment spending and delay the reform agenda. Lingering social tensions, fueled by pervasive poverty and lack of progress in improving living standards, and natural disasters, could also impede the fragile recovery and constrain Haiti’s growth prospects. Finally, Haiti’s debt continues to be assessed as high-risk (Country Report No. 12/220; February 24, 2012). 7 20. The authorities broadly agreed with the staff’s overall outlook. However, they believed that growth could be higher than projected because of (i) the launching of the reconstruction of key public buildings, including those of the Ministries of Economy and Finance, and of Commerce as well as Parliament; (ii) the creation of four micro parks in rural areas aimed at improving the harvesting, stocking, and preservation of agricultural products; and (iii) the ongoing work to strengthen the national risk and disaster management system. Staff saw some merit to the authorities’ views, but pointed out that low capacity remains a major hindrance. In addition, staff emphasized that real GDP growth under the baseline scenario (6.5 percent) depends critically on a strong pick-up in reconstruction-related projects, including the construction of several public buildings. Also, the authorities viewed lower aid flows and higher food prices as key risks to the outlook. They indicated that lower official transfers coupled with the withdrawal of many international NGOs could lead to a more rapid decline in net international reserves in the medium term. They remain, however, committed to keeping international reserves above three months of imports. 7 The PV of public external debt to exports is projected to breach the indicative threshold of 100 percent. HAITI INTERNATIONAL MONETARY FUND 13 Risk Assessment Matrix 8 (Scale - high, medium, or low) 8 The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to occur in the view of IMF staff. The RAM reflects staff views on the sources of risks at the time of discussions with the authorities.” Nature/Source of Main Threats Impact if Realized Policy recommendations Global economic slowdown Likelihood: Medium Medium  Could affect Haiti through lower official transfers, remittances, and exports.  Lower growth.  Slow reforms.  Build buffers and increase flexibility in macroeconomic policies to help absorb shocks and undertake the necessary adjustment.  Delay some non-priority capital spending and mobilize additional domestic financing through the issuance of T-bills. Lower external aid Political instability and slow progress in structural reforms could slow aid inflows. Likelihood: High Medium  Slow growth.  Further delay reforms.  Mobilize additional domestic financing through the issuance of T-bills.  Delay some non-priority spending.  Insert buffer in budget Deterioration in international food and energy prices Likelihood: Low Low  Could lead to higher inflation; food and fuel represent more than half of Haiti’s CPI basket  Could generate social unrest and exacerbate political tensions.  Deterioration of fiscal and external positions and slow growth.  Consistent with past Fund advice, the authorities should accommodate the first round effect and use targeted subsidies to protect the poor. BRH should be ready to tighten monetary policy if any signs of second- round effects materialize. Heightened political tensions Likelihood: High High  Slow the reconstruction and recovery and weaken the business environment.  Delay the approval of key legislation and limit progress in the reform agenda.  Build a national political consensus on a sustainable growth reform agenda.  Improve transparency and governance and combat corruption.  Ensure that growth is inclusive. Natural disasters Likelihood: High High  Loss of human life and destruction of capacity and infrastructure.  Higher volatility and deterioration in macroeconomic accounts.  Low growth prospects and delays in poverty reduction.  Build financial buffers.  More flexibility in macroeconomic policies.  Strengthen the national risk and disaster management system. HAITI 14 INTERNATIONAL MONETARY FUND POLICY CHALLENGES FOR SUSTAINING A BROAD- BASED AND INCLUSIVE GROWTH 21. Policy discussions focused on macroeconomic policies and structural reforms to accelerate the reconstruction, foster broad-based and inclusive growth, to create jobs and reduce poverty. The authorities and staff agreed that in addition to political stability and improved security conditions, meeting this challenge will require (i) optimizing fiscal policy for higher and more inclusive growth; (ii) maintaining price stability and facilitating external adjustment; and (iii) and improving the business environment by eliminating key impediments to private investments as well as growth and job creation. A. Optimizing fiscal policy for high and inclusive growth 22. Staff and the authorities agreed that fiscal policy can help achieve higher and more inclusive growth while ensuring medium-term sustainability. 9 This will require expanding the fiscal space for development goals, improving the execution rate and quality of capital spending, and strengthening public financial management (PFM). 23. The FY2013 budget targets an overall deficit of 5.3 percent of GDP, down from 5.9 percent in FY2012. The decline reflects mostly higher revenue and somewhat lower current spending.  Revenue is projected to reach 14.1 percent in FY2013, up from 12.8 percent of GDP in FY2012. This increase reflects reforms in tax policy and revenue administration. Some tax reforms approved in FY2012 (the new excise on alcoholic beverages and fees on casinos and house games) will have their full effect in FY2013. Achievement of the 2013 Budget Law will importantly depend on the effectiveness of the wide ranging improvements in revenue administration, including stronger controls and enforcement of tougher collection practices, a newly created 9 See Chapter I of the Selected Issues Paper: “Building Inclusive Growth in Haiti: the Role of Fiscal Policy.” 2012 2013 ∆ Total Revenue 12.8 14.1 1.3 Domestic Revenue 8.5 9.2 0.7 TCA 3.6 3.9 0.3 Tax on income and profits 3.0 3.3 0.3 Excises 0.3 0.6 0.3 (excise on alchoolic beverages) (fees on casinos and house games) Other Taxes 1.6 1.3 -0.3 Custom duties 4.2 4.7 0.5 (combating evasion) Other 0.1 0.2 0.1 Haiti: Impact of Potential Revenue Measures FY2013 (percent of GDP) (improved tax collection with the new medium-taxpayer unit and implementation of e-declaration) (improved tax collection with the new medium-taxpayer unit and e- (improving identification and product evaluation at customs) HAITI INTERNATIONAL MONETARY FUND 15 unit for medium-size tax payers, and an e-declaration which has been in place since January 2013 (MEFP, ¶ 14). Improved identification and evaluation of merchandise and a better control of exemptions are expected to enhance collection at customs.  The wage bill is expected to increase by almost 0.6 percent of GDP owing mostly to new hiring in social sectors and security, and higher salaries for the low-earning civil servants. Nevertheless, the budget targets lower levels of goods and services as well as transfers to make room for higher development spending. In particular, outlays in goods and services will remain in line with previous years’ levels (MEFP,¶ 15). Consistent with the authorities’ intention to step up the reconstruction, domestically-financed capital spending will be ramped up to around 9 percent of GDP, more than 2 percent higher than in 2012. The projected deficit is fully financed with external resources (4.4 percent of GDP) and domestic financing, including issuance of T-bills (0.9 percent of GDP). 24. Staff viewed the FY 2013 fiscal policy stance as broadly appropriate, but highlighted several implementation risks. First, the underperformance observed in the first quarter of FY2013 (October-December 2012) of the fiscal year poses a challenge for meeting the FY2013 revenue target. Second, weak administrative capacity and inadequate public investment framework could lead again to underexecution of capital spending. Finally, the continued practice of bunching expenditure near the end of the fiscal year could adversely affect spending quality and complicate liquidity and macroeconomic management. 25. Looking ahead, fiscal policy will aim at further enhancing revenue mobilization and improving the composition of public spending. Domestic revenue would increase to about 15 percent of GDP in 2017 while donor support is expected to trend down to about 6 percent of GDP, down from 10.6 percent in FY2012. Current expenditures are expected to be contained below 11 percent while protecting social spending (Box 2). Progress with reconstruction and the country’s developmental needs would maintain capital spending high in the medium term. The overall deficit is projected to decrease gradually to 3.1 percent of GDP by 2017. Expanding the fiscal space for achieving development goals 26. The revenue target for 2013 is ambitious. The authorities indicated that the underperformance observed in the first three months of FY2013 is partially due to Hurricane Sandy, which disrupted revenue collection. They were confident meeting the end-year target, and reiterated their commitment in stepping up efforts to increase revenue mobilization. Staff underscored the need for steadfast implementation of the revenue measures included in the 2013 budget law. The authorities and staff agreed that, given the high reconstruction-related needs, the government has the option of drawing down its deposits and issuing additional T-Bills 0 2 4 6 8 10 12 14 Total Domestic revenue Customs FY2012 FY2013 actual FY2013 projections Haiti: Revenue Q1 (In billions of gourdes) S ource s: Ha iti a uthoritie s a nd IMF sta ff projections HAITI 16 INTERNATIONAL MONETARY FUND Box 2. Haiti: Strengthening Social Safety Nets and Human Capital Haiti ranked at 158 out of 187 countries in the UNDP Human Development Index in 2011. The literacy rate remains significantly lower than that of the Caribbean average and maternal mortality almost four times higher than average. Government spending on education and health remains relatively low, at 2.1 and 1.4 percent of GDP respectively, compared to 3.8 and 3.4 percent on average in the region. Health spending in Haiti has actually declined since 1997 in percent of GDP. Therefore, strengthening current transfer schemes and safety nets for the poor while increasing spending in health and education, remain key priorities. The national social assistance program known as “Ede Pep” (or “Help the People”), has put great emphasis on the most vulnerable segments of the population , and about one million children are now attending school for free under the PSUGO (Programme de Scolarisation Universel Gratuit et Obligatoire). The conditional cash transfer program (“Ti-manman-cheri”) has benefitted about 25 thousand women who have been receiving monthly allowances from the government. The disabled and elderly have also benefitted from cash transfers. Looking ahead, the authorities intend to promote access to preschool, primary and secondary education through dedicated learning centers, expanding school feeding programs, strengthening vocational and technical training through the creation of training centers and government fellowships and increasing the provision of health services. Haiti Dominican Republic Caribbean Literacy rates of 15-24 years old, (in percentage) 72.3 95.8 89.5 Mortality rate, infant (per 1000 live births) 57 22 38 Maternal mortality ratio ( per 100,000 live births) 670 100 170 Prevalence of HIV, total (Percentage of population 15-49) 2.2 0.9 1.0 Births attended by skilled health personnel (In percentage) 26 97.8 69 Primary completion rate, both sexes 27.4 89.5 Source: The Millennium Development Goals Report 2011, United Nations. Haiti: Millennium Development Indicators, 2010 in the event of a shortfall in domestic revenue, while ensuring medium-term debt sustainability and macroeconomic stability (MEFP,¶ 13). The authorities could also consider reducing some non-priority current spending or delaying some non-reconstruction-related domestically- financed capital spending (without affecting the overall execution and consistency of the investment program). 27. The authorities are aware that achieving their revenue target of 15 percent by 2017 will require moving forcefully on tax policy and administration reforms. This will require decisive actions to further improve revenue collection and compliance, reduce and rationalize exemptions (more than 3 percent of GDP in FY2011), and expand the tax base, including through increased formalization of economic activity (MEFP,¶ 21). In particular, staff underscored the importance of launching a broader reform of the tax system, including a shift to a VAT system. Efforts are also needed to improve controls, internal audits, and training in both customs and revenue administrations. HAITI INTERNATIONAL MONETARY FUND 17 28. The authorities agreed that further restraint on recurrent expenditure would free resources to fund growth-enhancing projects and social spending. This will require:  Containing the public sector wage bill. The wage bill in Haiti remains relatively low in comparison to regional peers and low-income countries. Staff recognized the need for higher civil service wages to compensate for cost-of living increases, maintain competitive pay to improve administrative capacity, and support the hiring of additional workers in social sectors. However, it reiterated the importance to limit the rise in the civil service wage bill to avoid the risk of crowding out domestically- financed public investment. The authorities shared staff concern and indicated that they will contain the wage bill at 5.0 percent of GDP in the medium term. In this context, they intend to launch in the near term a civil service reform aimed notably at rationalizing the public work force (elimination of ghost employees) and streamlining the public service sector.  Gradually unwinding subsidies to the electricity company EDH. While conceding that this is a challenging issue given its social and political impact, the authorities agreed that a comprehensive strategy, developed with the assistance of key donors, would help reverse the financial difficulties of EDH, reduce budgetary transfers (MEFP,¶ 15), and create the conditions for improving electricity availability at a reasonable cost (Box 3). Improving the execution rate and quality of capital spending 29. The execution rate of public investment has been low. 10 This underperformance is attributable to various factors, including poor design and preparation of projects, low execution capacity, lack of coordination between government agencies, weak reporting, political uncertainty, volatile security, and loose enforcement of internal control mechanisms. 30. There was a broad agreement that weaknesses in public investment, including a low execution rate, have impeded reconstruction and slowed growth. The steady rise in investment particularly during the post-earthquake period put pressure on the already weak institutional framework, overran current technical capacity, and highlighted the fragile state of the project management process. Public investment efficiency as measured by the Public Investment Management Index (PIMI) 11 ranked Haiti in the lowest quartile of project performance. 10 See Chapter II of the Selected Issues Paper: “A Renewed Public Investment Policy in Support of Growth and Poverty Reduction.” 11 See Dabla-Norris et al. 2011, "Investing in Public Investment: an Index of Public Investment Efficiency”, Working Paper (WP/11/37), International Monetary Fund, Washington DC. The PIMI is built around four key pillars, (continued) 0 2 4 6 8 10 12 14 0 2 4 6 8 10 12 14 Wages and Salaries 2012 (percent of GDP) HAITI 18 INTERNATIONAL MONETARY FUND Overall Index Appraisal Selection Management Evaluation Highest Score 3.53 4.00 4.00 2.80 3.33 Median 1.65 1.33 1.60 2.00 1.33 Haiti 1.07 0.00 1.20 1.73 1.33 Barbados 1.19 0.50 2.00 0.93 1.33 Trinidad and Tobag 1.10 0.00 2.40 1.33 0.67 Belize 0.27 0.00 0.80 0.27 0.00 So urce: Era Dabla No rris, Jim B rumby, A nnette Kyo be, Zack M ills, and Chris P apageo rgio u, 2011. Sub Indices Haiti: Public Investment Management Ranking 31. Improving the execution and quality of capital spending will require a strong political commitment and leadership to upgrade the current public investment framework through enhanced transparency, better procurement practices, and stronger governance. In particular, there is a need to redefine and clarify responsibilities among government institutions involved in public investment project management, strengthen the units in charge of project execution within ministries (including by hiring technical experts), enhance the control system, and promote a more dynamic information system (MEFP,¶ 16). Preliminary results of an analytical paper on this issue were presented to the government and the donor community and its recommendations were well received. 12 Staff intends to continue working with the authorities and donor community to strengthen project preparation, execution, and control while ensuring the overall quality and consistency of public investment. Improving public financial management The authorities reiterated their commitments to improve public financial management. In particular, the authorities highlighted ongoing progress towards a treasury single account (TSA), with completion of the first phase that included closing all identified dormant government accounts in the banking system, and the training of public accountants. It is now important to introduce the TSA by June 2013 in a first wave of ministries with adequate capacity for a rapid shift. The authorities and staff viewed the establishment of a TSA as key to improving cash management, budget execution and the quality of public spending, particularly by enhancing the execution rate of capital spending and improving transparency by eliminating the current practice of bunching transfers of resources to project accounts including strategic guidance and project appraisal, project selection and budgeting, project implementation, and project evaluation and audit. 12 See Chapter II of the Selected Issues Paper: “A Renewed Public Investment Policy in Support of Growth and Poverty Reduction.” HAITI INTERNATIONAL MONETARY FUND 19 near the end of the fiscal year. Continued progress needs to be made to strengthen budget formulation, execution, transparency and reporting, and improve internal and external controls (MEFP, ¶ 22). Box 3. Haiti: Electricity Sector By law, the public utility Electricité d’Haïti (EDH) holds a monopoly over the purchase, transmission, distribution and commercialization of electricity, and generates about 15 percent of the energy produced in Haiti. About 75 percent of the electricity it distributes is produced by independent power producers, the rest being generated by power plants operated by the Tripartite Cooperation (Haiti-Venezuela-Cuba). Installed generation capacity of 212 MW is insufficient to meet peak load demand estimated at around 250 MW. Insufficient generation capacity and inefficient distribution grid lead to frequent energy rationing, which causes businesses and residential users to rely on expensive back-up generators. There is no clear responsibility within the Government for sector oversight, and no investment master plan for the sector. EDH’s financial situation is critical. Technical and commercial losses are estimated at about 66 percent, the ratio of energy unpaid to energy produced is high (35 percent of the energy delivered is stolen), 1 and the utility paid bills cover less than a third of the electricity generated. In this context, EDH charges high electricity tariffs: average tariffs amount to $0.31/kWh 2 , at par with levels in the Caribbean, but industrial and commercial tariffs are even higher at $0.35/kWh. In February 2011, a Memorandum of Understanding (MOU) was agreed between the government, the IADB, and USAID to help reform the electricity sector. On August 2, 2012, the EDH Board approved a loss reduction plan for the utility. On August 17, 2012, the external firm TETRATECH was given the authority to implement measures to improve EDH performance. A new managing director and deputy directors were also appointed at EDH to improve management of the company, reduce distribution and commercial losses, and raise bill payments proceeds. In addition, the government and EDH signed a MoU establishing a mechanism for budgetary transfers to the electricity sector for the fiscal years 2013 to 2016. Despite all these recent measures and an improvement in revenue collection, the sector financial situation remains dire. Government transfers to EDH amounted in FY2012 to US$ 142 million. Next steps would include (i) an immediate analysis of the current financial situation of EDH and the sector as a whole; (ii) measures to improve the financial situation of EDH and of the electricity sector over the medium-term; and (iii) the design of a detailed program to implement a financial recovery strategy for the electricity sector, starting with the preparation of a financial recovery plan. More specifically,  EDH is developing a plan with the support of donor partners to restore EDH’s financial soundness, including reducing losses and production leakages, improving the distribution network, enhancing bill collection, and strengthening energy supply. This plan, which would eliminate transfers by 2016, will be submitted to the government for adoption in April 2013.  Donors (including USAID, the World Bank, and the IADB) have committed to support the government’s electricity strategy through a coordinated investment plan of approximately US$400 million over the next five years, focusing on loss reduction, grid rehabilitation and extension, and technical assistance to improve capacity in the sector and within EDH. ______ 1 MTPTC Stratégie de développement du sous-secteur de l’Electricité en Haïti (2006 à 2011). 2 WB Project Appraisal Document on a Proposed Grant for Rebuilding Energy Infrastructure and Access Project, August 27, 2012. [... middle sections omitted for long document ...] 2 the national action plan presented by the Government after the 2010 earthquake. The channeling of donor resources through parallel structures that compete with public institutions for funding and qualified personnel adds to Haiti’s development challenges. 6. Donor-financed projects constitute the bulk of the public investment program (PIP) and their alignment with national development goals remains crucial. This is one of the key mandates of the newly created structure under the leadership of the Minister of Planning and External Cooperation to replace the Interim Haiti Recovery Commission. Greater coordination and harmonization of procedures within the donor community would also be instrumental. Information on the sectoral distribution and geographic location of externally financed operations and disbursements of development partners needs to be made available to the Government on a timely basis. There is no other way to make sure that scarce development resources are efficiently allocated and integrated into the national development plan. 7. Haiti’s absorptive capacity is also weakened by the heterogeneity of donors’ procurement regulations and the multiplication of executing units. The time national institutions, including line and coordinating ministries, spend receiving missions from abroad, could have been more efficiently used in implementing the PIP and the structural reform agenda. 8. Our authorities look forward to the streamlining and harmonization of donor procedures and the increased reliance on Haiti’s rules and institutions in the use of donor resources. At the same time, they are convinced that the difficulties faced by the public sector in hiring and retaining experienced professionals are amplified by the high salaries and fringe benefits offered by NGOs and international organizations. The public sector cannot compete with these institutions under its human resource management framework and financial constraints. With support from Canada and the IDB, an action plan for reforming the public service, including through changes in the salary scale, is being elaborated under the leadership of the Prime Minister’s office. Taxes and fiscal administration 9. The staff report and the issues note summarize well the assessments and recommendations of Fund technical assistance missions and other development partners. Strengthening the organizational structure and administrative capacities of the tax offices seems critical for attaining fiscal objectives and for improving the quality of services offered to taxpayers. A significant step forward in this direction was the launching of the e-declaration through which taxes can be declared online. It is expected that by the end of the year the electronic liquidation of taxes will also be possible. Also, an internationally renowned firm is being hired to support the Ministry of Economy and Finance (MEF) in its efforts to strengthen the organizational structure and administrative capacities of the tax offices. 3 10. The size of the informal economy in Haiti explains to a large extent the preponderance of indirect taxation and makes comparisons with regional peers that have mainly formal economies less relevant. Nonetheless, the authorities are determined to enlarge the income tax base. A medium tax payer unit was recently created to contribute to this end. Despite the comparatively low custom tariffs, fiscal revenues depend largely on trade and are thus vulnerable to international demand and price volatility. Reforms have been initiated to shift the burden of taxation to internal sources of revenue. The transformation of the TCA (Taxe sur le Chiffres d’Affaires) to a TVA (Taxe sur la Valeur Ajoutée) should also help. The timing of the official launching of the TVA and its success will however hinge on the speed at which the authorities are able to put in place an adequate information system in the fiscal administration. 11. As Haiti complies with the requirements of CARICOM membership, including adoption of the common external tariff (CET), increases in the average tariff rates are expected. Staff observes that the overall impact on revenues is uncertain, given that revenue losses would result from reduction or elimination of tariffs on imports from CARICOM countries. However, since most of Haiti’s imports are presently coming from countries such as the US and the Dominican Republic, we expect that the net effect on fiscal revenues of aligning the country’s tariffs with those of CARICOM will probably be positive, at least in the short-term. 12. Tax expenditures have reached alarming levels. The authorities started to tackle this problem through a two-pronged approach: first by ensuring that NGOs and international institutions comply with legislation and, second, by limiting or eliminating certain exemptions and exonerations, including to firms executing contracts for the public sector. The Executive Order of August 2012 underscores the obligations and duties of those who are granted tax exemptions and seeks to ensure that beneficiaries participate in the realization of national development plans. Energy sector 13. The Haitian authorities remain mindful that an orderly reduction of the Treasury’s subsidies to the public utility company Electricité d’Haïti (EDH) is imperative. With the ensuing savings, fiscal space will be generated for social expenditures and the funding of job creation and growth enhancing projects. However, they are also conscious that the strengthening of EDH’s financial situation and production capacity will occur only gradually. Hence, the government adopted a set of measures to phase- out the subsidies and achieve sustainable financial soundness at EDH. The phasing out of budget transfers to EDH has been initiated with a target date of 2016 for complete elimination. An MOU was also signed between EDH and the MEF at end- 2012. It includes a commitment by the management of the electric company to present a financial sustainability plan by end-March 2013 on which an agreement will have to be reached by the end of the year. 4 14. A delegate minister for energy was appointed with a specific mandate that includes the responsibility of overseeing the sector and preparing a financial recovery program and an investment master plan that addresses EDH’s financing needs. However, the Ministry of Public Works continues to be the lead oversight institution for the electricity sector. 15. Additionally, to enhance transparency, equity and control over the operations of the independent power producers (IPPs), long-distance power metersthat allow EDH to monitor the quantity of electricity produced and consumed, have been installed at five out of a total of six IPP plants. A standard contract is also being drafted by EDH management with a view of harmonizing the terms of the agreements with all six IPPs by the end of 2013. 16. The involvement of the external firm Tetratech in the reform of EDH, subsequent to an agreement with the development partners, represents a valuable step. Success depends on an effective cooperation between donors, EDH and the authorities. Financial sector 17. Several reforms have already been initiated to enhance access to credit. Many challenges remain including completing legislative changes such as the Law on Financial Cooperatives (FCs) and the Bill for Microfinance Institutions (MFIs). A top priority of the BRH's regulatory agenda is the drafting of a law to cover financial leasing and factoring. In addition, with support from the World Bank and IDB, a credit bureau will be launched soon. 18. Our authorities welcome the policy recommendations for the long-term development of the microfinance and cooperative sectors. They are determined to establish a regulatory framework commensurate with the needs and diversity of the current players. The microfinance and cooperative sectors are preponderant in the rural areas. Their presence and active involvement in financing productive activities make them central to the financial inclusion agenda. FCs and MFIs meeting minimum IT and regulatory requirements will also have access to the credit bureau. 19. The authorities recognize the need to address the problem of insufficient information on the nonbank financial sector. They intend to hasten the process of drafting and approving regulation covering the sector. The informal sector of the economy relies mostly on microfinance provided by nonbank institutions. As informality is progressively reduced, the need for timely availability of quality data will become more pressing. 5 Remittances 20. The Haitian authorities are fully cognizant of the importance of remittances in providing a reliable source of income for the most vulnerable. They welcome recommendations to strengthen the regulatory framework, promote competition in the money transfer market, reduce costs and secure transactions. As mentioned in the staff report, a flat fee on remittance flows was introduced about a year ago. Preliminary data compiled by the Central Bank since the introduction of the measure do not show evidence of negative effects either on the number of transactions or on the total amount. Hence, suggestions to consider alternatives to the current flat fee appear somewhat premature. 21. The issues note on the financial sector also calls for an in-depth study of the structure and operation of the Haiti-Dominican Republic corridor in the flow of remittances. The Haitian authorities are of the view that such a project would gain from being conducted jointly by the central banks of the respective countries. In addition, given the importance of the US-Haiti and France-Haiti corridors, the authorities are more inclined to start with the assessment of these channels and derive adequate lessons to be applied to support financial inclusion. Monetary, credit and exchange rate policy 22. The Central Bank has maintained the accommodative stance adopted since the earthquake, leaving interest rates on its paper unchanged since January 2011. However, with 12-month inflation above 7 percent, the Central Bank slightly tightened the monetary policy stance, raising banks' reserve requirement ratios by 5 percentage points to a maximum of 34 and 39 percent on liabilities in local and foreign currency, respectively. This measure became effective on February 1st, 2013. 23. The Central Bank is committed to move gradually towards greater exchange rate flexibility. Despite the recent increase in the volume of transactions, the foreign exchange market remains quite shallow and constrained, given the small number of players. The Central Bank considers the expansion and modernization of the foreign exchange market a prerequisite to the establishment of a single price foreign exchange auction system. Ongoing TA and the Fund’s support will be instrumental in deciding on the appropriate sequencing of measures for the change in auction type. NGOs and exporters already hold frequent free auctions to allocate foreign currency to local banks in a wholesale-like market. Conclusion 24. The building and reconstruction of economic and social infrastructure offer enormous business opportunities which are being seized by some investors as attested by the continuation of growth in FDI last year. Going forward, domestically financed capital 6 investment is to be allocated primarily to projects that will upgrade the stock of infrastructure and foster private sector investments. Transformational projects, those that can change the dynamics of development in Haiti, require the mobilization of important resources. Thus, the use of Private Public Partnerships (PPP) is a useful complement to the conventional sources of development finance. Our authorities would welcome technical support for the finalization of a consistent framework for PPPs.