(2015) Haïti: Consultation de 2015 au titre de l'article IV et demande d'accord triennal au titre de la facilité élargie de crédit

© 2015 International Monetary Fund IMF Country Report No. 15/157 HAITI 2015 STAFF REPORT FOR THE ARTICLE IV CONSULTATION AND REQUEST FOR A THREE-YEAR ARRANGEMENT UNDER THE EXTENDED CREDIT FACILITY—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR HAITI In the context of the Staff Report for the 2015 Article IV Consultation and request for a three-year arrangement under the Extended Credit Facility, the following documents have been released and are included in this package:  Press Releases including a statement by the Chair of the Executive Board and summarizing the views of the Executive Board as expressed during its May 18, 2015 consideration of the staff report on issues related to the Article IV Consultation and the IMF arrangement.  The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on May 18, 2015, following discussions that ended on March 20, 2015, 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 May 6, 2015.  An Informational Annex prepared by the IMF staff.  A Debt Sustainability Analysis prepared by the staffs of the IMF and the World Bank.  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* Selected Issues *Also included in Staff Report The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents. Copies of this report are available to the public from International Monetary Fund  Publication Services PO Box 92780  Washington, D.C. 20090 Telephone: (202) 623-7430  Fax: (202) 623-7201 E-mail: publications@imf.org Web: http://www.imf.org Price: $18.00 per printed copy International Monetary Fund Washington, D.C. [MONTH June 2015 Press Release No. 15/241 FOR IMMEDIATE RELEASE May 28, 2015 IMF Executive Board Concludes 2015 Article IV Consultation with Haiti On May 18, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the 2015 Article IV consultation 1 with Haiti. In December 2014, Haiti completed an arrangement under the Extended Credit Facility (ECF), which helped to support economic growth and maintain macroeconomic stability after the 2010 earthquake. A drought that affected agricultural output slowed GDP growth to 2.7 percent in FY2014 (from 4.2 percent in FY2013), but inflation remained in the mid-single digits. The overall fiscal deficit of the central government remained high, in part due to one-off investment related to the Sandy storm. International reserves remained appropriate at about 5 months of imports. The implementation of structural reforms to support growth underpins the medium-term outlook, which is nonetheless subject to downside risks. GDP growth in FY2015 is expected to be between 2–3 percent, and to increase to 3–4 percent in the medium term. Inflation is projected to remain in the mid-single digits, and gross international reserves to be equivalent to between 4–5 months of imports, thanks to a prudent policy mix. Risks are mainly associated with a rebound in international oil prices, a stop in external financing from Venezuela, and weather events. Executive Board Assessment 2 Directors commended the authorities for maintaining macroeconomic stability in the aftermath of the 2010 earthquake—noting positive growth, moderate inflation, adequate international reserves, and an improvement in Haiti’s debt assessment. Nevertheless, growth remains insufficient to reduce poverty significantly, and vulnerabilities remain against the backdrop of a challenging domestic and external environment. Directors agreed that the authorities’ new 1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. 2 At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm . International Monetary Fund 700 19 th Street, NW Washington, D. C. 20431 USA 2 program appropriately focuses on entrenching macroeconomic stability, and ambitious structural reforms to enhance competitiveness, spur inclusive growth and strengthen policy buffers. They stressed that strong ownership and well-coordinated donor support will be important for the success of the program. Directors welcomed the approval of a revised FY2015 budget consistent with reducing the deficit of the non-financial public sector to about 2½ percent of GDP over the medium term, in line with debt sustainability and program objectives. They supported the front-loaded fiscal consolidation, and noted that the adoption of an automatic fuel price mechanism and measures to improve the performance of the electricity sector will help contain fiscal risks, and create space for increased priority social and investment spending. They stressed the importance of mitigating the impact of the reforms on the poor and vulnerable. Going forward, Directors encouraged the authorities to follow through on reforms to improve public financial management, including the implementation of the Treasury Single Account; and to strengthen tax administration and collection; and budgetary transparency. Directors encouraged the authorities to maintain a tight monetary stance, as needed, until the fiscal deficit is reduced, and to be ready to increase exchange rate flexibility, in order to preserve adequate international reserve buffers and anchor inflationary expectations. A number of Directors expressed concern that, if downside risks materialize, meeting the target for Net International Reserves could be challenging. Directors took note of the contingency measures that may need to be implemented in such case. Directors also encouraged the authorities to strengthen the monetary policy framework, through improvements in reserve management and the functioning of the foreign exchange market. Directors noted that the banking sector remains well-capitalized and profitable, while calling for continued vigilance against financial sector risks. They also stressed the importance of sustained efforts to further develop financial intermediation and inclusion. In this regard, they welcomed adoption of the new financial inclusion strategy, and encouraged the authorities to enact pending laws on financial cooperatives and microfinance institutions. Directors supported the program’s emphasis on structural reforms designed to lift Haiti’s growth potential and enhance its competitiveness. Priorities include: improvements to property rights, credit access and labor productivity; streamlining business regulations; and infrastructure development—most notably by strengthening the governance and performance of the electricity sector. Directors encouraged the authorities to improve the quality of the economic data, with technical assistance from the Fund and other donors. 3 Haiti: Selected Economic and Financial Indicators, 2012/13–2018/19 (Fiscal year ending September 30) Nominal GDP (2014): US$8.7 billion GDP per capita (2014): $833 Population (2014): 10.5 million Percent of population below poverty line (2012): 58 2012/2013 2013/20142014/15 2015/16 2016/17 2017/18 2018/19 Act. Prov. Proj. Proj. Proj. Proj. Proj. (Change over previous year; unless otherwise indicated) National income and prices 1/ GDP at constant prices 4.2 2.7 2.0-3.0 3.0-3.5 3.5-4.0 3.5-4.0 3.5-4.0 GDP deflator 6.6 3.8 6.6 6.4 5.4 5.0 5.0 Consumer prices (period average) 6.8 3.9 6.6 6.5 5.4 5.0 5.0 Consumer prices (end-of-period) 4.5 5.3 7.1 5.9 5.0 5.0 5.0 Exports (goods, valued in dollars, f.o.b.) 18.3 4.2 5.0 5.4 6.0 6.7 7.0 Imports (goods, valued in dollars, f.o.b.) 8.1 3.4 -4.7 3.8 5.5 5.5 5.2 Real effective exchange rate (end of period; + appreciation) 0.7 0.8 0.0 0.0 0.0 0.0 0.0 Money and credit (valued in gourdes) Credit to private sector (in dollars and gourdes) 16.4 11.2 4.7 11.4 9.0 10.4 11.4 Base money (currency in circulation and gourde deposits) 15.1 0.5 3.0 7.0 8.1 8.2 7.1 Broad money (incl. foreign currency deposits) 6.6 9.8 7.3 7.6 7.9 8.3 8.5 (In percent of GDP; unless otherwise indicated) Central government Overall balance (including grants) -7.2 -6.4 -2.7 -1.9 -2.2 -2.0 -2.0 Domestic revenue 12.8 12.5 14.7 14.7 15.0 15.3 15.5 Grants 2/ 8.1 6.5 6.1 5.6 5.3 5.0 4.8 Expenditures 28.1 25.4 23.4 22.2 22.5 22.3 22.3 Current expenditures 12.0 12.6 12.5 12.5 12.5 12.5 12.5 Capital expenditures 16.1 12.8 10.9 9.7 10.0 9.8 9.8 Overall Balance of Total Non-Financial Public Sector 3/ -8.2 -7.4 -3.2 -2.3 -2.4 -2.2 -2.0 Savings and investment Gross investment 30.1 31.2 26.6 24.8 24.9 24.7 24.8 Of which: public investment 16.1 12.8 10.9 9.7 10.0 9.8 9.8 Gross national savings 23.7 24.8 23.1 21.0 21.1 21.0 21.2 Of which: central government savings 1.9 1.3 2.9 2.8 3.0 3.0 3.0 External current account balance (including official grants) 2/ -6.3 -6.3 -3.5 -3.8 -3.7 -3.7 -3.6 External current account balance (excluding official grants) -15.2 -12.8 -8.8 -8.8 -8.6 -8.5 -8.4 External Balance: Fossil Fuels -11.3 -11.9 -7.3 -7.8 -8.1 -8.3 -8.4 Public Debt External public debt (medium and long-term, end-of-period) 4/ 17.4 21.0 21.8 22.6 23.3 23.8 24.3 Total public sector debt (end-of-period) 5/ 19.5 24.1 25.5 26.4 27.2 28.2 28.9 External public debt service 6/ 1.8 2.4 3.7 4.6 5.5 6.1 6.1 (In millions of dollars, unless otherwise indicated) Overall balance of payments -282 -178 -210 -61 3 32 77 Net international reserves (program definition) 7/ 1,219 1,010 860 890 950 1,017 1,085 Gross International Reserves 8/ 2,384 1,914 1,782 1,808 1,872 1,940 2,010 In months of imports of the following year 6.3 5.3 4.8 4.6 4.5 4.5 4.5 Nominal GDP (millions of Gourdes) 364,526388,809424,832 466,707 510,359 555,960 605,653 Nominal GDP (millions of US$) 8,451 8,711 9,054 9,475 10,012 10,589 11,199 Sources: Ministry of Economy and Finance; Bank of the Republic of Haiti; World Bank; Fund staff estimates and projections. 1/ Staff assume a range of 2-3 percent and a point projection of 2.5 percent for FY2015; a range of 3-3.5 percent and a point projection of 3.25 percent for growth in FY2016, and a range of 3.5-4.0 percent and a point projection of 3.75 percent for FY2017-FY2019. 2/ A new ECF would catalyze identified multilateral budget support (see Tables 4a and 4b). Until a new IMF-supported program is approved, current account projections exclude these flows. 3/ Includes state-owned electricity company (EDH). 4/ Debt ratios differ slightly from those in the DSA given the use of average, instead of end-of-period, exchange rates. 5/ Excludes central bank repurchase operations in FY2013. 6/ In percent of exports of goods and nonfactor services. Includes debt relief. 7/ Includes SDR allocation as both an asset and liability. 8/ Includes gold; includes transactions related to BRH repurchase operations; corresponds to BPM6 definition of reserves. Press Release No. 15/231 FOR IMMEDIATE RELEASE May 19, 2015 IMF Executive Board Approves Three-Year US$69.7 Million Under ECF for Haiti The Executive Board of the International Monetary Fund (IMF) Monday approved a three- year SDR 49.14 million (about US$69.7 million, 60 percent of quota) arrangement under the Extended Credit Facility (ECF) for Haiti. The approval enables the immediate disbursement of an amount equivalent to SDR 7.02 million (about US$10 million), while the remaining amount will be phased over the duration of the arrangement, subject to semi-annual program reviews. The authorities’ ECF-supported program aims to raise Haiti’s growth potential and reduce vulnerabilities to shocks, while entrenching macroeconomic stability. Following the Executive Board’s discussion on Haiti, Mr. Min Zhu, Deputy Managing Director, and Acting Chair, made the following statement: “Haiti’s pursuit of macroeconomic stability in the aftermath of the 2010 earthquake is commendable—growth has been positive, inflation has remained moderate, and international reserve levels adequate. Going forward, continued efforts are needed to support sustained and inclusive growth, strengthen institutions and the policy framework, and maintain adequate buffers to absorb shocks. “The new three-year program supported by the Fund’s Extended Credit Facility (ECF) seeks to entrench macroeconomic stability, improve competitiveness to spur inclusive growth, and preserve buffers, through streamlined policies that have full country ownership. Donor support ensures the full financing of the program. “The program targets a reduction of the non-financial public sector deficit from 7.5 percent in FY2014 to 3.25 percent of GDP in FY2015 and 2.5 percent in the medium term to preserve sustainability. Lower oil prices will facilitate fiscal consolidation (allowing the government to raise fuel taxes and lower electricity subsidies), while preserving pro-poor spending. The adoption of an automatic fuel pricing mechanism will safeguard fuel taxes if oil prices rebound. International Monetary Fund Washington, D.C. 20431 USA 2 “The program aims to preserve price stability. Accordingly, the monetary policy stance will remain tight as needed until fiscal consolidation proceeds to anchor exchange rate expectations. The policy mix seeks to keep international reserves at an appropriate level to ensure adequate buffers. “The program’s structural reform agenda focuses on strengthening competitiveness to foster growth. It tackles deep-seated problems in the electricity sector; supports the authorities’ efforts to strengthen property rights; and includes actions to increase policy effectiveness through reforms in tax administration, tax policy and public financial management, as well as improvements in the monetary framework and economic statistics.” ANNEX Recent Economic Developments In December 2014, Haiti completed the arrangement under the Extended Credit Facility (ECF), which helped support positive economic growth and maintain macroeconomic stability after the 2010 earthquake. However, while per capita growth has been positive, it has been insufficient to significantly reduce poverty. Fiscal and external deficits rose to high levels, increasing Haiti’s vulnerabilities. Due partly to a difficult socio-political environment, progress on structural reform was limited. Main Program Objectives The program aims at entrenching macroeconomic stability and at deepening structural reforms, to support sustained and shared growth. The program seeks to maintain buffers in the form of foreign reserves and bank deposits to reduce Haiti’s vulnerability to shocks, and to avoid stop-and-go policies. Real GDP is projected to growth by 3-4 percent over the medium term helped by the implementation of structural and institutional reforms addressing bottlenecks to growth and job creation, including improvements in the business environment and property rights, financial inclusion, and access to available and cheap electricity. Inflation is expected to be contained in the mid-single digits, reflecting prudent fiscal and monetary policies, while gross international reserves would cover more than 4.5 months of imports. Fiscal policy aims at placing public debt on a sustainable path and preserving buffers against downside risks. It targets a reduction in the deficit of the non financial public sector to 2.5 percent of GDP in the medium term, while preserving poverty-reducing spending. Fiscal consolidation will result from the elimination of regressive fuel subsidies, the adjustment of investment spending to sustainable levels, and the reduction of quasi-fiscal losses in the electricity sector. In this regard, the revised FY2015 budget includes a strong fiscal adjustment that takes advantage of the low international oil prices. To prevent a reemergence of fuel subsidies if international prices rebound, the authorities have adopted an automatic pricing mechanism for petroleum products, which will reflect international oil prices into domestic fuel prices, while protecting the most vulnerable. 3 Additional Background Haiti, which became of member of the IMF on September 8, 1953, has an IMF quota of SDR 81.90 million. For additional background on the IMF and Haiti, see: http://www.imf.org/external/country/HTI/index.htm . 4 Haiti: Selected Economic and Financial Indicators, 2012/13–2018/19 (Fiscal year ending September 30) Nominal GDP (2014): US$8.7 billion GDP per capita (2014): $833 Population (2014): 10.5 million Percent of population below poverty line (2012): 58 2012/20132013/20142014/15 2015/16 2016/17 2017/18 2018/19 Act. Prov. Proj. Proj. Proj. Proj. Proj. (Change over previous year; unless otherwise indicated) National income and prices 1/ GDP at constant prices 4.2 2.7 2.0-3.0 3.0-3.5 3.5-4.0 3.5-4.0 3.5-4.0 GDP deflator 6.6 3.8 6.6 6.4 5.4 5.0 5.0 Consumer prices (period average) 6.8 3.9 6.6 6.5 5.4 5.0 5.0 Consumer prices (end-of-period) 4.5 5.3 7.1 5.9 5.0 5.0 5.0 Exports (goods, valued in dollars, f.o.b.) 18.3 4.2 5.0 5.4 6.0 6.7 7.0 Imports (goods, valued in dollars, f.o.b.) 8.1 3.4 -4.7 3.8 5.5 5.5 5.2 Real effective exchange rate (end of period; + appreciation) 0.7 0.8 0.0 0.0 0.0 0.0 0.0 Money and credit (valued in gourdes) Credit to private sector (in dollars and gourdes) 16.4 11.2 4.7 11.4 9.0 10.4 11.4 Base money (currency in circulation and gourde deposits) 15.1 0.5 3.0 7.0 8.1 8.2 7.1 Broad money (incl. foreign currency deposits) 6.6 9.8 7.3 7.6 7.9 8.3 8.5 (In percent of GDP; unless otherwise indicated) Central government Overall balance (including grants) -7.2 -6.4 -2.7 -1.9 -2.2 -2.0 -2.0 Domestic revenue 12.8 12.5 14.7 14.7 15.0 15.3 15.5 Grants 2/ 8.1 6.5 6.1 5.6 5.3 5.0 4.8 Expenditures 28.1 25.4 23.4 22.2 22.5 22.3 22.3 Current expenditures 12.0 12.6 12.5 12.5 12.5 12.5 12.5 Capital expenditures 16.1 12.8 10.9 9.7 10.0 9.8 9.8 Overall Balance of Total Non-Financial Public Sector 3/ -8.2 -7.4 -3.2 -2.3 -2.4 -2.2 -2.0 Savings and investment Gross investment 30.1 31.2 26.6 24.8 24.9 24.7 24.8 Of which: public investment 16.1 12.8 10.9 9.7 10.0 9.8 9.8 Gross national savings 23.7 24.8 23.1 21.0 21.1 21.0 21.2 Of which: central government savings 1.9 1.3 2.9 2.8 3.0 3.0 3.0 External current account balance (including official grants) 2/ -6.3 -6.3 -3.5 -3.8 -3.7 -3.7 -3.6 External current account balance (excluding official grants) -15.2 -12.8 -8.8 -8.8 -8.6 -8.5 -8.4 External Balance: Fossil Fuels -11.3 -11.9 -7.3 -7.8 -8.1 -8.3 -8.4 Public Debt External public debt (medium and long-term, end-of-period) 4/ 17.4 21.0 21.8 22.6 23.3 23.8 24.3 Total public sector debt (end-of-period) 5/ 19.5 24.1 25.5 26.4 27.2 28.2 28.9 External public debt service 6/ 1.8 2.4 3.7 4.6 5.5 6.1 6.1 (In millions of dollars, unless otherwise indicated) Overall balance of payments -282 -178 -210 -61 3 32 77 Net international reserves (program definition) 7/ 1,219 1,010 860 890 950 1,017 1,085 Gross International Reserves 8/ 2,384 1,914 1,782 1,808 1,872 1,940 2,010 In months of imports of the following year 6.3 5.3 4.8 4.6 4.5 4.5 4.5 Nominal GDP (millions of Gourdes) 364,526388,809424,832466,707510,359555,960605,653 Nominal GDP (millions of US$) 8,451 8,711 9,054 9,475 10,012 10,589 11,199 Sources: Ministry of Economy and Finance; Bank of the Republic of Haiti; World Bank; Fund staff estimates and projections. 1/ Staff assume a range of 2-3 percent and a point projection of 2.5 percent for FY2015; a range of 3-3.5 percent and a point projection of 3.25 percent for growth in FY2016, and a range of 3.5-4.0 percent and a point projection of 3.75 percent for FY2017-FY2019. 2/ A new ECF would catalyze identified multilateral budget support (see Tables 4a and 4b). Until a new IMF-supported program is approved, current account projections exclude these flows. 3/ Includes state-owned electricity company (EDH). 4/ Debt ratios differ slightly from those in the DSA given the use of average, instead of end-of-period, exchange rates 5/ Excludes central bank repurchase operations in FY2013. 6/ In percent of exports of goods and nonfactor services. Includes debt relief. 7/ Includes SDR allocation as both an asset and liability. 8/ Includes gold; includes transactions related to BRH repurchase operations; corresponds to BPM6 definition of reserves. HAITI STAFF REPORT FOR THE 2015 ARTICLE IV CONSULTATION AND REQUEST FOR A THREE-YEAR ARRANGEMENT UNDER THE EXTENDED CREDIT FACILITY KEY ISSUES Background. Haiti’s recently completed arrangement under the Extended Credit Facility (ECF) helped to maintain macroeconomic stability after the 2010 earthquake. While Haiti has seen four consecutive years of growth, reducing poverty requires higher and sustained growth rates. Article IV Discussions. Discussions focused on strategies to improve Haiti’s growth potential and external competiveness, as well as how to leverage the current period of low international oil prices to reduce Haiti’s vulnerabilities, particularly in the energy sector. These challenges must be overcome in order to sustain strong economic growth and achieve progress in poverty reduction. The Proposed Program. The authorities’ economic program, anchored on the Strategic Plan for the Development of Haiti (PSDH), aims to entrench stability through a front-loaded fiscal adjustment, deepen institutional reform, mitigate vulnerabilities, and support growth and employment. QPCs now include a limit on the deficit of the non-financial public sector. Structural benchmarks focus on reducing subsidies, improving PFM and expenditure effectiveness, and creating an enabling environment for growth. The program focuses on:  Lowering fiscal deficits while preserving poverty-reducing spending. This would crowd in private credit, preserve buffers, and support the use of the exchange rate as a nominal anchor.  Removing bottlenecks to growth and job creation with improvements in the business environment and property rights, and access to cheaper and reliable electricity.  Improving the policy framework by addressing governance issues, strengthening budgetary transparency, the public investment management and the monetary policy framework. Request for an ECF Arrangement. The Haitian authorities request a three-year arrangement under the ECF in an amount equivalent to SDR 49.14 million (60 percent of quota) in support of their medium-term economic reform program. Risks. Risks to the program include the complex political situation, which could delay implementation of reforms, a rebound in international petroleum prices, a sudden stop in external financing from Venezuela, and weather events. May 6, 2015 HAITI 2 INTERNATIONAL MONETARY FUND Approved By A. Cheasty (WHD) and B. Traa (SPR) Discussions were held in Port-au-Prince during February 2–12, and March 16–20, 2015. The staff team consisted of Messrs. Di Bella (head), Ntamatungiro and Norton (all WHD), Mr. El Omari and Ms. Hanedar (both FAD), Mr. Ishikawa (STA), and Mr. Camard (resident representative). It met with Prime Minister Paul; Minister of Economy and Finance Laleau; Central Bank Governor Castel; Minister of Public Works Rousseau; other senior government officials; representatives of the private sector; and development partners. Ms. Florestal (OED) participated in the policy discussions. CONTENTS HAITI AND THE FUND, 2006–2014 _____________________________________________________________ 4   CONTEXT: LOW GROWTH AMID CONTINUED VULNERABILITY ______________________________ 5   MEDIUM-TERM CHALLENGES: INCREASE GROWTH AND PRESERVE BUFFERS TO ADDRESS RISKS _______________________________________________________ 8   A. Structural Reforms for Sustained and Inclusive Economic Growth ______________________________8   B. Preserving Macroeconomic Stability and Reducing Vulnerabilities ____________________________ 10   A NEW ECF ARRANGEMENT: LIFTING BOTTLENECKS TO GROWTH AND ENTRENCHING MACROECO NOMIC STABILITY _______________________________________________ 14   A. Entrenching Macroeconomic Stability and Containing Risks __________________________________ 15   B. Structural Reforms to Support Growth and the Policy Framework ____________________________ 19   C. Program Modalities and Access _______________________________________________________________ 22   STAFF APPRAISAL ______________________________________________________________________________ 23  BOXES 1. Millennium Development Goals _________________________________________________________________7   2. GDP Growth Projections in the ECF ____________________________________________________________ 13   3. An Automatic Pricing Mechanism _____________________________________________________________ 18   FIGURES 1. Recent Economic Developments, 2011–15 ____________________________________________________ 26   2. Fiscal Developments, 2011–15 _________________________________________________________________ 27   3. Monetary and Financial Market Developments, 2011–14 ______________________________________ 28   4. Banking Sector, 2011–15 _______________________________________________________________________ 29   HAITI INTERNATIONAL MONETARY FUND 3 TABLES 1. Selected Economic and Financial Indicators, 2012/13–2018/19 _______________________________ 30   2a. Non-Financial Public Sector Operations, 2012/13–2018/19 (in millions of gourdes) ___________________________________________________________________________ 31   2b. Non-Financial Public Sector Operations, 2012/13–2018/19 (in percent of GDP) _______________________________________________________________________________ 32   2c. Central Government Gross Cash Flows, 2012/13–2018/19 ___________________________________ 33   3. Summary Accounts of the Banking System, 2012/13–2018/19 ________________________________ 34   4a. Balance of Payments, 2012/13–2018/19 (in millions of US dollars) ___________________________ 35   4b. Balance of Payments, 2012/13–2018/19 (as a percentage of GDP on a fiscal year basis) __________________________________________________ 36   5. Financial Soundness Indicators, September 2013–September 2014 ___________________________ 37   6. Indicators of Public Debt and External Vulnerability, 2012/13–2018/19 _______________________ 38   7. Proposed Schedule of Disbursements Under the Proposed ECF Arrangement, 2015–18 ________________________________________________________ 39   8a. Indicators of Capacity to Repay the Fund (Existing Fund Credit), 2014/15–2024/25 _________ 40   8b. Indicators of Capacity to Repay the Fund (Existing and Proposed Credit), 2014/15–2027–28 _______________________________________________ 41   9. Indicative Targets and Quantitative Performance Criteria, June 2015–June 2016 ______________ 42   10. Proposed Prior Actions and Structural Benchmarks, FY 2015–16 _____________________________ 43   11. Structural Reforms to be Implemented During ECF, 2015–17 ________________________________ 44   APPENDICES I. Letter of Intent _________________________________________________________________________________ 45   Attachment 1. Memorandum of Economic and Financial Policies for 2015–2018 ____________ 47   Attachment II. Technical Memorandum of Understanding ___________________________________ 58   II. Risk Assessment Matrix ________________________________________________________________________ 68   HAITI 4 INTERNATIONAL MONETARY FUND HAITI AND THE FUND, 2006–2014 Reflecting Haiti’s challenging environment over the past ten years, the two previous Fund-supported arrangements focused on maintaining macroeconomic stability, rebuilding capacity and strengthening the policy framework. 1. Fund-supported programs with Haiti since 2006 focused on maintaining macroeconomic stability and supporting growth and poverty reduction in a difficult environment. Haiti’s 2006 program took place in the aftermath of a period of severe political instability, and the 2010 ECF arrangement was approved after a devastating earthquake. Reform efforts were supported by debt relief under the Enhanced Heavily Indebted Poor Countries (HIPC), the Multilateral Debt Relief Initiative (MDRI), in 2009, and the Post Catastrophe Debt Relief Trust (PCDR), in 2010. Given urgent reconstruction needs, the 2010-2014 Fund arrangement accommodated an ambitious public investment agenda, and anti-poverty spending. 2. In the 2012 Article IV discussions, the authorities were encouraged to maintain macroeconomic stability while redoubling reform efforts to achieve sustained and inclusive growth. Directors called for improved revenue administration to create fiscal space for pro-poor and growth-enhancing spending, as well as public financial management reforms to improve the quality of public spending. Directors stressed that strong and inclusive growth would require structural reforms to improve competitiveness. They identified improving financial intermediation, addressing infrastructure bottlenecks, notably in the electricity sector, and improving the business environment as key reform priorities. 3. The recent Ex-post assessment of Haiti’s longer-term program engagement (EPA) highlighted both achievements and disappointments of Haiti’s previous Fund engagement. The EPA noted that the authorities had been successful in maintaining macroeconomic stability. Monetary policy contained inflation in the mid-single digits, and the authorities avoided excessive exchange rate volatility while maintaining an appropriate reserve cushion. GDP growth, while positive and favorable compared with Haiti’s recent history, was lower than projected and insufficient to reduce poverty. Financed by concessional flows, fiscal and external deficits rose to unsustainable levels, increasing Haiti’s vulnerabilities. Progress on structural reform was also mixed, with ongoing problems at the state electricity utility (EDH), slower-than-projected progress in adopting the Treasury Single Account (TSA), and legislative delays in modernizing the legal framework for the financial sector. The EPA observed limited progress in improving Haiti’s business climate, governance, and competitiveness. HAITI INTERNATIONAL MONETARY FUND 5 CONTEXT: LOW GROWTH AMID CONTINUED VULNERABILITY Aid-financed reconstruction following the 2010 earthquake proceeded, but growth was lower than expected. Fiscal deficits increased, mainly financed by Petrocaribe flows, which are decreasing sharply in FY2015. Inflation remains contained, given moderate exchange rate depreciation. The political situation adds to risks. Oil price decreases should be used to improve energy policies and reduce fiscal vulnerabilities. 4. A complex political environment and the devastating 2010 earthquake provide the context for recent economic developments. Policy challenges were related to absorbing large aid flows without compromising sustainability. 1 Repeatedly postponed parliamentary elections resulted in a political impasse at end-2014. As part of the efforts to overcome the impasse, the President appointed, in January 2015, Mr. Evans Paul (an opposition figure) as new Prime Minister to lead a gouvernement d’ouverture. As a result, many of the newly appointed ministers belong to opposition parties. However, without a quorum to function, Parliament will not convene for most of 2015. Election-related tensions eased further following the publication of the electoral calendar in March 2015: Parliamentary and presidential elections are scheduled for the second half of 2015. The new Parliament will be known before end-2015, and a new President inaugurated in February 2016. 5. Fueled by reconstruction spending, per capita GDP growth was positive since FY2011, but meaningfully reducing poverty will require higher and sustained growth rates. Haiti achieved its fourth consecutive year of real per capita growth in FY2014. GDP growth last year (2.7 percent) decreased vis-a-vis FY2013 due in large part to a drought. Excluding the volatile agricultural sector, growth has been steady at about 4 percent since FY2011, supported by construction, industry and services. While Haiti has seen progress in meeting its Millennium Development Goals (MDGs, Box 1), per capita income growth since 2010 has not made a significant dent in poverty levels. 2 This reflects interrelated factors, including weak institutions and 1 Aid flows are expected to decrease to more moderate levels in the coming years. 2 See Haiti Ex-Post Assessment, Country Report No. 15/4 (December 4, 2014). -6 -4 -2 0 2 4 6 8 10 -6 -4 -2 0 2 4 6 8 10 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Program projection (as of 2010) Actual Per-Capita GDP Growth, Actual vs. Program Projections (2005-2014, percent) Sources: 2005-09, PRGF program request; 2010-13: first ECF review; 2014, fifth ECF review. -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Fiscal deficit Current account deficit Current Account and Fiscal Deficits (2005-2014, percent of GDP) Source: IMF staff estimates. 0 5 10 15 20 25 30 35 0 5 10 15 20 25 30 35 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 External debt Domestic debt Domestic and External Debt (2005-2014, percent of GDP) Source: IMF staff estimates. HAITI 6 INTERNATIONAL MONETARY FUND governance, lack of competition and predatory business practices, inadequate policy frameworks, weak donor coordination, vulnerability to natural disasters, inadequate infrastructure, and still-low labor productivity. A difficult socio-political environment slowed implementation of structural reforms. 6. Fiscal and current account deficits widened with increased Petrocaribe flows and diminished buffers. The central government deficit increased to 6–7 percent of GDP during FY2013–FY2014, raising the current account deficit. Financing came from Petrocaribe inflows (which averaged 4 percent of GDP during FY2009–FY2014), and by diminished fiscal and external buffers (in the form of government deposits at the banking system and international reserves) during FY2013–FY2014. External public debt (which had fallen to 9 percent of GDP in FY2011 following HIPC completion point and the debt write-offs after the earthquake), rebounded to 21 percent of GDP in FY2014, almost exclusively due to Venezuela-related Petrocaribe concessional financing. Domestic public debt is around 4 percent in FY2014, reflecting shallow domestic financial markets. 7. The energy sector’s very poor performance and policies are a key driver of fiscal imbalances. The deficit (before central government transfers) of the state-owned electricity sector company EDH increased to 2.5 percent of GDP in FY2014, due to low billing, substantial technical losses and widespread electricity theft. 3 Domestic fuel prices were frozen from March 2011 until October 2014, resulting in foregone tax revenues that peaked at about 2 percent of GDP in FY2014. 4 The combined fiscal cost of regressive fuel subsidies and EDH’s deficit has been larger than social spending, which hovered around 3–4 percent of GDP since FY2010. Lower oil prices provide a unique opportunity to improve energy policies. 8. The Central Bank (BRH) has striven to keep gourde depreciation at a moderate rate given a high pass-through to inflation. Large external aid flows coupled with slow absorption resulted in a build-up of international reserves in FY2010–FY2012. Higher fiscal deficits in FY2013–FY2014 prompted the BRH to sell foreign exchange and to tighten monetary policy to keep exchange rate depreciation moderate at 3–4 percent per year. Some easing in the monetary stance at end- FY2014 (to accommodate the payment of debt to suppliers) resulted in pressures in the foreign exchange market, while political risks have increased dollar hoarding and reduced supply. Accordingly, international reserves declined to below 5 months of imports by February 2015. The BRH responded by letting the gourde depreciate more (by about 6 percent y/y 3 See accompanying Selected Issues Paper “Opportunities and Challenges for Growth.” 4 According to the World Bank, about 90 percent of fuel subsidies accrued to the richest 20 percent of the population. -6 -4 -2 0 2 4 6 8 -100 -50 0 50 100 150 200 2011 2012 2013 2014 2015 Net FX intervention, millions of US$, cumulative since October 2010 gourdes per dollar, percent y/y (right axis) Net FX Intervention and Exchange Rate Depreciation Sources: BRH; and IMF staff estimates. Net sales Net purchases 0 1 2 3 4 5 6 0 1 2 3 4 5 6 2013 2014 Health Education Agriculture Forgone fuel taxes EdH deficit Source: IMF staff estimates. 2013 2014 Social Spending vs. Energy Subsidies (Percent of GDP) HAITI INTERNATIONAL MONETARY FUND 7 through March), and by tightening monetary policy in March through increased reserve requirements and policy rates. Anchoring inflation expectations depends on lowering the fiscal deficit and maintaining BRH reserves equivalent to 4–5 months of prospective imports. 5 Box 1. Haiti: Millennium Development Goals 1/ Haiti has made progress towards achieving a number of the Millennium Development Goals (MDGs). The proportion of people living under extreme poverty dropped to about 25 percent, while the number of underweight children under 5 years old was halved. Net enrollment in primary education grew from 47 percent in 1993 to 88 percent, attaining gender parity in primary and secondary education. Haiti also made progress in health indicators. Infant and child mortality has decreased drastically since 1990, while access to maternal healthcare improved and maternal mortality was reduced. Haiti has also contained the spread of HIV/AIDS, and nearly 65 percent of households now have improved access to water (see table). Despite progress, vast challenges remain, due to low capacity, insufficient resources and difficulties to coordinate key stakeholders (including donors). Strengthening safety nets, while increasing spending in health and education, remain key priorities and mobilizing donor support remains essential. Continued migration from rural areas to urban centers creates challenges. Vulnerability to epidemics remains high. The government’s goal is to reduce poverty and achieve free universal education through the implementation of various social programs such as the Ede Pep (Help the People), and the PSUGO (Programme de Scolarisation Universelle Gratuite et Obligatoire). The Strategic Plan for the Development of Haiti (PSDH) launched in May 2012, aims at speeding up poverty reduction and making Haiti an emerging country by 2030. These efforts signal the country’s ongoing commitment beyond 2015. 1/ This box was prepared by Daniela Cortez. 5 Staff analysis suggests that international reserves within this range would be appropriate for a country like Haiti that is subject to multiple and frequent shocks. See Selected Issues Paper “External Buffers and Competitiveness to Absorb Shocks And Support Growth.” Millennium Development Goals Indicator Baseline Current Status 2015 Target 1. Eradicate extreme poverty and hunger Proportion of people living on less than $1.25 a day 61.7 58.6 30.9 Proportion of people living under extreme poverty ($1, PPP) 24.7 No target Employment-to-population ratio 50.2 30.0 No target Prevalence of underweight children under five years of age 23.7 11.4 11.9 2. Achieve universal primary education Literacy rate in the age group of 15-24 years of age 32.3 85.1 100 Proportions of pupils starting grade 1 who reach last grade of primar y 68.0 66.2 100 Net enrollment rate in primary education 47.0 88.0 100 3. Promote gender equality and empower women Ratio of girls to boys in: Primary education … 0.9 1.0 Secondary education 1.0 1.1 No target Proportion of seats held by women in national parliament 2.7 4.3 30.0 Share of women in wage employment 44.2 No target 4. Reduce child mortality Under-five mortality rate 156.1 88.0 50.4 Infant-mortality rate 109.1 59.0 36.4 Proportion of one-year-old children immunized against measles 25.8 85.0 100 5. Improve maternal health Proportion of births attended by skilled health personnel 24.2 37.3 100 Maternal mortality rate (per 100,000 live births) 157.0 No target 6. Combat HIV/AIDS, malaria, and other diseasesPeople living with HIV, 15-49 years old (percentage) 2.9 1.8 No target Prevalence of HIV/AIDS aged 15-24 years old 1.0 0.9 No target Malaria death rate (per 100,000 population) 5.0 No target 7. Ensure environmental sustainability Proportion of land areas covered by forests (percentage) 5.5 3.7 No target Proportion of population using an improved drinking water source 36.5 64.8 72.7 Slum population as percentage of urban 93.4 70.1 Min. 62 8. Global partnership for development Internet users per 100 inhabitants 0.2 10.6 No target Source: United Nations - MDG Indicators, 2013 Report Last updated: 07/07/2014 Haiti: Millennium Development Goals Indicators HAITI 8 INTERNATIONAL MONETARY FUND MEDIUM-TERM CHALLENGES: INCREASE GROWTH AND PRESERVE BUFFERS TO ADDRESS RISKS Article IV discussions focused on reforms and policies to: strengthen competitiveness to spur sustained and inclusive growth in the context of lower external support; safeguard macroeconomic stability by preserving fiscal and external buffers; and strengthen the policy framework to address vulnerabilities. A. Structural Reforms for Sustained and Inclusive Economic Growth 9. Sustained growth is essential for poverty reduction and social cohesion. Given the tapering of aid, staff argued that the impetus to growth needs to come from structural reforms and institutional strengthening. Lower oil prices, if sustained, will also support growth. Potential growth and competitiveness remain low as reforms implemented in recent years are insufficient (impeding, e.g., taking full advantage of preferential trade agreements). The authorities concurred, but noted progress in social indicators and pointed out that the slow pace of reforms is at times rooted in their complex nature, which sometimes affect vested interests. The authorities also highlighted the need to carefully analyze trade policy, arguing that low average tariff rates (below Caribbean Community and Common Market, CARICOM, levels) put domestic producers at a relative disadvantage vis-à-vis countries in the region. 6 Staff and the authorities agreed that the main constraints to competitiveness include:  Weak institutions. Weak property rights constrain the real estate market, foreign investment, access to credit, and efficient agriculture (which provides the basic livelihood to most Haitians). 7 Predatory practices are widespread. Lack of transparency in government contracting has resulted in, e.g., unfavorable conditions for electricity supply, high electricity costs, and hidden costs in the structure of fuel pump prices (Box 3). 8 A still-large U.N. force continues to ensure security.  Domestic Politics. Political crises caused severe decreases in the level of per-capita income during the last 30 years (Box 2). Accordingly, the yield for growth of maintaining political peace would be significant. 6 See accompanying Selected Issues Paper “Opportunities and Challenges for Growth.” 7 Haiti is ranked 147 th (out of 148 countries) in property rights in the World Economic Forum’s “Global Competitiveness Index” for 2014. 8 Haiti is ranked 166 th (out of 177 countries) in the 2014 “Corruption Perceptions Index” by Transparency International. 0 10 20 30 40 50 60 70 80 90 100 0 10 20 30 40 50 60 70 80 90 100 Construction permits Starting a business Registering property Ease in getting credit Overall Haiti Jamaica DR LAC Sources: Doing Business (2015) World Bank Report. Doing Business Indicators (2015) (Rank 100=best) HAITI INTERNATIONAL MONETARY FUND 9  Inadequate infrastructure. Port services and electricity supply are inefficient and expensive, and road infrastructure is deficient to keep the country fully integrated. 9  The policy framework needs strengthening. Fiscal policy implementation is constrained by the lack of an integrated framework. A number of small taxes result in informational and operational costs to investors. Administrative formalities for enterprise creation add costs.  Low labor productivity. Access to healthcare and technical education is limited, restricting human capital formation, and social infrastructure is the worst in LAC. These factors constrain investment.  Data quality. Data provision has serious shortcomings that significantly hamper surveillance. Most affected are the national accounts and labor indicators. Fiscal and external sector data are broadly adequate, but need improvements in coverage and timeliness. Collection, production and distribution of economic data were seriously affected by the 2010 earthquake. This deprives policy-makers and the private sector alike of access to timely and accurate information about the economy, including potential opportunities. 10. Staff argued Haiti’s real effective exchange rate (REER) level is broadly appropriate, but that further appreciation may constrain competitiveness, and thus, that the gourde should remain flexible to respond to changes in fundamentals. The REER drifted slowly upwards since 2010, as exchange rate depreciation has been moderate and inflation, while well-contained, has been higher than in Haiti’s main trading partners. Staff analysis suggests that the moderate upward movement in the REER reflects both strong aid and remittance inflows, as well as a significant improvement in the net foreign asset position following substantial post-earthquake debt relief. 10 Haiti’s exchange system (a crawl-like arrrangement, with no significant restrictions for capital movements) remains unchanged since the 2012 Article IV consultation. 11 11. Staff highlighted that Haiti’s low competitiveness would be best addressed by removing structural bottlenecks to growth. These range from a lack of basic public services, a cumbersome legal and regulatory environment, to political uncertainty and weak governance. The authorities added that a sharp change in the nominal exchange rate would raise inflation and fuel social pressures without appreciably improving competitiveness, and underscored the need to diversify Haiti’s productive and export base. 9 Haiti is ranked 177 th (out of 189 countries) on the World Bank’s “Doing Business” indicators for 2015. As pointed out in an independent evaluation of the Doing Business survey (see www.worldbank.org/ieg/doingbusiness), care should be exercised when interpreting these indicators given their, at times, subjective nature, limited coverage of business constraints, and a small sample, which taken together tend to overstate the indicators' coverage and explanatory power. 10 See Selected Issues Paper “External Buffers and Competitiveness to Absorb Shocks And Support Growth.” 11 Thus, as in the last Article IV consultation, Haiti’s system is free from restrictions on the making of payments and transfers for current international transactions. HAITI 10 INTERNATIONAL MONETARY FUND B. Preserving Macroeconomic Stability and Reducing Vulnerabilities 12. Preserving macroeconomic stability is a prerequisite for growth. Staff and the authorities agreed that a low and stable rate of inflation underpinned by moderate exchange rate depreciation and a sustainable fiscal position should contribute to anchoring investors’ expectations. They concurred that maintaining adequate financial buffers is essential to support Haiti’s resilience in the face of shocks, and avoid stop-and-go growth dynamics. (i) Rebuilding fiscal space and strengthening the quality of fiscal policy 13. Staff and the authorities agreed on the need to cut the central government’s deficit to preserve buffers. This is also needed given expected reductions in available concessional financing between FY2014 and FY2018. External grants and Petrocaribe inflows are each projected to decline by 2 percent of GDP (as earthquake rebuilding winds down and on lower oil prices, respectively). Staff argued that in view of the limited domestic financing prospects, the need to preserve fiscal buffers (in the form of deposits at the banking sector), and to contain fiscal risks, the central government deficit should be reduced from 6¼ percent of GDP in FY2014 to about 2 percent GDP in FY2018. Haiti’s risk of debt distress has improved on the back of expected fiscal consolidation, but importantly, is based on a projection of significantly lower oil prices in the medium term. A rebound in oil prices, however, could result in the risk of debt distress to become high again (see Debt Sustainability Analysis, DSA). 12 The authorities agreed on the need to cut the deficit to preserve macroeconomic stability, but underlined the need for donors to support the adjustment by keeping a steady flow of budgetary and project grants. Staff stressed that lower fiscal deficits will allow a gradual loosening of monetary policy and crowd in bank credit to the private sector. 14. Staff and the authorities also agreed on the importance of reining in EDH’s deficit. The decrease in international oil prices reduces EDH’s deficit by 0.5 percent of GDP in FY2015, given lower generation costs, and unchanged tariffs. The authorities explained that the latter will be adjusted only after an analysis of their structure. They further explained that EDH management presented a revised FY2015 budget with an action plan to increase cash recovery based on improved billing and collection from larger clients. The Ministry of Public Works (which oversees EDH) has selected Electricité de France (EDF) to develop a master plan for the sector, with World Bank financing. 15. Domestic revenue should be increased. Staff noted that Haiti’s revenue-to-GDP ratio is low by regional standards, in part due to forgone fuel tax revenues. Staff urged the authorities to take advantage of the decline in international oil prices to eliminate remaining fuel subsidies, which should yield 1.5–1.6 percent of GDP in FY2015. The authorities agreed, and highlighted that they 12 The DSA also shows that Haiti’s external debt profile remains vulnerable to shocks to borrowing conditions and the exchange rate, while shocks to growth have a negative impact on public debt. The cost of a sudden stop of Petrocaribe financing would be lower than previously assessed provided oil prices evolve as projected. HAITI INTERNATIONAL MONETARY FUND 11 had resisted pressures for large decreases in pump fuel prices. Staff further argued that multi-year investment in improving revenue administration (notably by strengthening the large and medium tax payers’ offices and the unit in charge of NGOs and exempted entities), should allow domestic revenue to increase to 15.5 percent of GDP by FY2019. Staff stressed that the elimination of several low-yield taxes will improve clarity of the tax code, and that work towards VAT implementation and a new mining code should continue. The authorities noted that work in these areas is ongoing, with help from donors, including the IMF. 16. Staff and the authorities concurred on the need to strengthen the fiscal policy framework with a view to improving the quality and composition of public spending. Strengthening the public investment framework (including the preparation, evaluation, and monitoring of projects) will decrease ineffective spending. Advancing the implementation of the Treasury Single Account (TSA) will improve cash and debt management and control over fiscal policy. The authorities explained that they have made significant progress in both areas with help by the World Bank and the IMF. Staff urged the authorities to develop a more targeted and sustainable social safety net. Eliminating blanket subsidies and reorienting them to poverty-reducing outlays (such as education and health) will build social cohesion and improve human capital. 13 The decrease of transfers to EDH should create fiscal space for priority expenditures, including on health, education, and a fully-staffed national police, in view of the expected decrease in MINUSTAH forces. The authorities agreed that the decrease in EDH transfers will create space for priority expenditure including for the national police, health expenditures, and education spending under the PSUGO program, and they requested technical assistance from the World Bank to design a social tariff for public transportation. 17. Staff urged the authorities to strengthen fiscal transparency. Staff stressed that budget documents should report special accounts and programs, civil service pensions and future pension liabilities, earmarked resources for municipalities, financial transactions with SOEs (including contingent liabilities) and all Petrocaribe-funded transactions. 14 The authorities explained that only central government–related transactions can be included in the national budget, and that all Petrocaribe-funded transactions (with the exception of those related to EDH) are already included in the budget. (ii) Strengthening the monetary policy framework and the soundness of the financial sector 18. Staff and the authorities concurred that monetary policy should be geared at keeping a low and stable inflation rate. Given high pass-through rates, this will require both moderate exchange rate depreciation, and well-anchored exchange rate depreciation expectations. This is only possible if the REER is close to equilibrium, and if the expected path for the fiscal deficit is consistent with keeping international reserves at 4–5 months of prospective imports (i.e., sufficient for credible 13 See accompanying Selected Issues Paper “Public Expenditure in Haiti: Balancing Human Capital and Infrastructure Formation.” 14 See accompanying Selected Issues Paper “Haiti’s Public Sector: Explaining the ECF’s Fiscal Target” HAITI 12 INTERNATIONAL MONETARY FUND market intervention). 15 Staff stressed that foreign exchange market intervention should also reduce excess volatility. Staff argued that if fiscal consolidation falters, the BRH should allow for more exchange rate flexibility, as the depletion of buffers can negatively impact expectations and reduce the room to react in the face of shocks. Staff cautioned that unanchored expectations may result in a decrease in gourde demand amid increasing volatility and higher dollarization. Strengthening the communication of monetary policy decisions will assist in managing expectations. 19. Staff urged the BRH to keep the stance of monetary policy tight until the fiscal deficit is reduced. High legal reserve requirements have reduced excess reserves, strengthening the transmission from open market operations (OMOs) to credit growth. Using OMOs for any further tightening should then be preferred to further increases in legal reserve requirements as this will help improving the functioning of the interbank money market and strengthening the transmission mechanism. BRH authorities indicated that this is indeed the instrument that it was used to tighten the monetary stance since mid-2014. Staff also encouraged the BRH to consider using 5-year government bonds acquired at end-FY2014 when conducting OMOs. Staff urged the BRH to avoid the use of exceptions in the computation of reserve requirements, as this undermines their effect and makes the policy stance less transparent. 16 The BRH’s authorities indicated that they are analyzing the use of government bonds in OMOs, as well as their intention to issue dollar- indexed bonds to absorb liquidity and reduce foreign exchange market pressures. Staff noted that, if market priced, such bonds can help discover exchange rate depreciation expectations. However, staff cautioned that they also could exacerbate foreign exchange pressures if the fiscal deficit is not swiftly reduced. 20. Staff noted that there is room to further improve BRH operations. Reserve management needs strengthening, in line with the 2011 safeguards recommendations and IMF technical assistance. Developing a deeper foreign exchange market would improve monetary policy effectiveness, as would an enhanced framework for foreign exchange intervention. Timely access to information would help improve real-time monetary policy decision-making. The authorities welcomed IMF technical assistance on reserve management, stressing that revised investment guidelines and a more appropriate benchmark could help achieve the BRH’s objective of securing a positive real return on its reserve portfolio without compromising capital preservation and liquidity objectives. They also highlighted the efforts to continue developing the interbank foreign exchange market to reduce unnecessary exchange rate volatility. 15 See Selected Issues Paper “External Buffers and Competitiveness to Absorb Shocks And Support Growth.” 16 See Selected Issues Paper “Monetary Policy and Financial Intermediation.” 30 31 32 33 34 35 36 37 38 39 40 Headline Reserve Rate Effective Reserve Rate Headline and Effective Required Reserves (Percent of Deposits, weighted average of goude and dollar rates) Sources: BRH FMI Weekly; Fund Staff Calculations [... middle sections omitted for long document ...] HAITI 12 INTERNATIONAL MONETARY FUND Figure 1. Haiti: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2015–2035 1/ Sources: Country authorities; and staff estimates and projections. 1/ The most extreme stress test is the test that yields the highest ratio on or before 2025. In figure b. it corresponds to a One-time depreciation shock; in c. to a Terms shock; in d. to a One-time depreciation shock; in e. to a Terms shock and in figure f. to a One-time depreciation shock. 0 2 4 6 8 10 12 14 16 18 20 2015 2020 2025 2030 2035 Baseline Historical scenario Most extreme shock 1/ Threshold 50% Inc. Oil Prices f.Debt service-to-revenue ratio 35 36 36 37 37 38 38 39 39 40 40 0 1 2 3 4 5 6 7 8 2015 2020 2025 2030 2035 Rate of Debt Accumulation Grant- equivalent financing (% of GDP) Grant element of new borrowing (% right scale) a. Debt Accumulation 0 5 10 15 20 25 30 35 40 2015 2020 2025 2030 2035 b.PV of deb t-to-GDP+remittances ratio 0 20 40 60 80 100 120 2015 2020 2025 2030 2035 c.PV of deb t-to-exports+remittances ratio 0 50 100 150 200 250 2015 2020 2025 2030 2035 d.PV of deb t-to-revenue ratio 0 2 4 6 8 10 12 14 20152020202520302035 e.Debt service-to-exports+remittances ratio HAITI INTERNATIONAL MONETARY FUND 13 Figure 2. Haiti: Indicators of Public Debt Under Alternative Scenarios, 2015–2035 1/ Sources: Country authorities; and staff estimates and projections. 1/ The most extreme stress test is the test that yields the highest ratio on or before 2025. 2/ Revenues are defined inclusive of grants. Baseline Public debt benchmark Most extreme shock 1/ Petrocar ibe StopsHistorical scenario Fix Primary Balance 0 50 100 150 200 250 300 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 PV of Debt-to-Revenue Ratio 2/ 0 10 20 30 40 50 60 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 PV of Debt-to-GDP Ratio 0 5 10 15 20 25 30 20152017201920212023202520272029203120332035 Debt Service-to-Revenue Ratio 2/ Statement by Paulo Nogueira Batista, Executive Director for Haiti, Oliveira Lima, Alternate Executive Director, and Ketleen Florestal, Advisor to the Executive Director May 18, 2015 1. On behalf of our authorities, we would like to thank management and staff for the continued engagement with Haiti. Recent Developments 2. At the time of the Executive Board’s discussion of the eighth review of the last Extended Credit Facility (ECF) this past December, the Government of Haiti had already indicated that it would want a successor arrangement with the Fund and specified the priority areas for the new program. Negotiations with staff were initiated in March 2015, less than two months after a new Government took office. Concurrently, the authorities were confronted with significant challenges, including the shrinking budget funding from PetroCaribe, given its link to petroleum prices that had fallen rapidly. Repeated strikes were called from different sectors. Some of those, convened by unions in the transportation sector to press the Government to reduce petroleum prices at the pump, became violent and complicated the social and economic situation. 3. The Haitian authorities continued to press ahead with politically-sensitive reforms, despite the fact that 2015 is an electoral year with elections on all levels –including presidential. The reforms seek to enhance the transparency and efficiency of public expenditure management, in particular with the full implementation of the single treasury account, to improve the performance of the electricity sector and to phase-out fuel subsidies. The authorities’ commitment to fiscal sustainability was exemplified by the completion of two key prior actions: (i) the adoption of an automatic price mechanism for refined oil products with regular price adjustments starting in June 2015; and (ii) the adoption by the board of the public electricity company (Electricité d’Haiti – EDH) of a revised budget with substantial programmed savings. 4. The Government’s program lays the basis for a significant transformation of the Haitian economy by enhancing its growth potential and reducing its vulnerability to external shocks. Key program targets are to remove bottlenecks to growth and strengthen the fiscal policy framework. The authorities are also committed to pursue tax and fiscal administration reforms as a way to build sustainable fiscal conditions. The authorities’ reform package is ambitious and comprehensive. Besides phasing out untargeted fuel price subsidies and upgrading the performance of EDH, the program seeks to improve tax compliance and collection, to strengthen the legal framework and the functioning of the cadastre, and to enhance access to credit. Electricity Sector Reforms 5. The authorities consider that there is a small window of opportunity to jumpstart the reforms in the electricity sector, with the support of the IMF and several donors. As stated in 2 the MEFP, the electricity sector has been both a key bottleneck to growth and a significant fiscal drain. The staff report and the selected issues paper have underscored how the weak performance of the electricity sector is affecting several aspects of economic life and social well-being. The sources of losses and inefficiencies at EDH are also highlighted. These include onerous contracts with independent power producers and, until recently, weak coordination among donors and within public entities. 6. Our authorities wish to reiterate their determination to achieve a complete overhaul in the electricity sector. However, as staff indicated, the reforms jeopardize vested interests and the authorities know they will continue to face strong resistance both domestically and externally. They are confident that with political will and domestic ownership positive results can be achieved. The authorities also look forward to better coordination among donors and an enhanced level of accountability by domestic and external stakeholders. 7. As for the pricing of petroleum at the pump, the authorities are committed to depoliticize the system and to ensure that subsidies are better targeted. The Government has sought technical support from the World Bank to design a program that would shelter the vulnerable segments of the population from significant price increases in public transportation. Monetary and Exchange Rate Policy 8. The Haitian authorities place great emphasis on adhering to their commitments under the ECF program with the Fund. Because of that, they have expressed concerns regarding the performance criterion (PC) on net international reserves (NIRs). The concerns of the Haitian authorities are reinforced by the rapid increase in petroleum prices since the close of negotiations about six weeks ago, from US$50 to US$65 per barrel; by expectations of an increase in food imports due to a recent drought; and by the prospects of a decrease in travel inflows linked to uncertainties related to the upcoming elections. 9. The authorities are also concerned about the limit the adjusters may impose on their capacity to take advantage of additional external support. The program takes into account assistance that was confirmed at the time of negotiation and sets up caps to the amount of additional external financing that can be freely used. Beyond those caps, external financing will entail a reduction in the amount of net domestic financing to the central government allowed in the program. On the debt sustainability analysis 10. According to staff’s assessment, Haiti is considered this year to be at moderate risk of debt distress. However, staff warns that the change in classification from high to moderate is mostly due to the fall in oil prices and ensuing improvement in the terms of trade. Hence, staff recommends caution as the oil price decrease could be temporary. Our authorities share the view that continued prudence is warranted in contracting debt. However, they find staff’s considerations on the DSA unbalanced, because the potential upside risk from the increased 3 economic activity in the United States, which would impact Haiti particularly through remittances, does not seem to have been considered. Conclusions 11. The Fund should support the authorities’ efforts to undertake difficult reforms in an electoral year. At the time of the last Board discussion, Directors advised that future Fund engagements with Haiti be guided by the recommendations of the Ex Post Assessment of Longer-Term Program Engagement, including the need for a more realistic policy framework and greater ownership. As we have underlined on several occasions, full domestic ownership of an arrangement with the IMF requires that the authorities remain in the driver’s seat while the Fund helps them marshal support for the program. 12. Haiti is a country in a fragile situation, member of the g7+ grouping. We believe that this is one of the instances in which the Fund could showcase its willingness to cater appropriately to the needs of this segment of the membership. With the reduction of PetroCaribe flows expected to be of about 50 percent, there is also a pressing need to develop innovative lending mechanisms that would ease the current financing constraints and allow Haiti to invest in a better future.