(2020) Ayiti Konsèltasyon Atik IV 2019 - Kominike pou laprès; Rapò ekip la; ak Deklarasyon Direktè Egzekitif la pou Ayiti

© 2020 International Monetary Fund IMF Country Report No. 20/121 HAITI 2019 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR HAITI Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2019 Article IV consultation with Haiti, the following documents have been released and are included in this package: • A Press Release summarizing the views of the Executive Board as expressed during its January 24, 2020 consideration of the staff report that concluded the Article IV consultation with Haiti. • The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration January 24, 2020, following discussions that ended on November 22, 2019 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 December 20, 2019. • An Informational Annex prepared by the IMF staff. • A Debt Sustainability Analysis prepared by the staffs of the IMF and the World Bank. • A Staff Statement updating information on recent developments. • A Statement by the Executive Director for Haiti. The documents listed below will be separately released. Selected Issues 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. April 2020 Press Release No. 20/21 FOR IMMEDIATE RELEASE January 28, 2020 IMF Executive Board Concludes 2019 Article IV Consultation with Haiti On January 24, 2020, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV 2019 consultation with Haiti. 1 Since March 2019, Haiti has been experiencing a protracted political crisis and prolonged civil unrest that has at times shut down most economic activity in the country. The crisis has taken a toll on the economy and the already vulnerable population: inflation exceeded 20 percent year- on-year in September, output is estimated to have contracted by an estimated 1.2 percent in fiscal year 2019 (ending September 30), and the exchange rate depreciated by 25 percent over the same period. As fiscal revenues have plummeted and the cost of energy subsidies increased, the fiscal deficit widened to 3.8 percent of GDP in FY2019 and domestic arrears rose sharply. The public debt-to-GDP ratio jumped from 40 percent to 47 percent over the fiscal year. The authorities are making considerable efforts to limit the deterioration. The ministry of finance is implementing measures to improve revenue collection and better control spending and, in November, signed a new agreement with the central bank to strengthen fiscal discipline and limit monetary financing of the government. The central bank has been adjusting its interest rates to contain inflation while at the same time trying to support the private sector through the recession. Absent sustained implementation of good policies and comprehensive reforms, the outlook remains grim. Under the baseline assumption of some political stabilization in 2020 without major political or economic reforms, growth would improve but remain negative this year and below 1.5 percent over the medium term. Inflation is expected to decline slightly before eventually falling to below 10 percent by 2025. Risks to the outlook are primarily on the downside but political stability could bring important upsides. A resolution of the current crisis, appointment of a new government committed and able to implement reforms, and return of support from the international community could lead to higher investment and potential growth. 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. International Monetary Fund 700 19 th Street, NW Washington, D. C. 20431 USA Executive Board Assessment 2 Executive Directors agreed with the thrust of the staff appraisal. They expressed concern about the socio-political crisis in Haiti and stressed the urgency of restoring political and macroeconomic stability, addressing poverty and inequality, and tackling corruption. They called on all stakeholders to work toward a broad-based national dialogue to address the country’s daunting challenges and realize the potential scope for much stronger and more inclusive growth. Directors encouraged continued close cooperation with donors and the Fund, including through technical assistance, and welcomed the Country Engagement Strategy as a basis for future Fund engagement. Directors stressed that severe fiscal constraints necessitate shifting scarce resources away from non-priority spending toward social programs and investment. They underscored the importance of limiting monetary financing of fiscal deficits and preparing a notional budget for FY2020. Directors encouraged the authorities to focus on measures to boost domestic revenues and reduce exemptions in the near term, while working to strengthen tax administration, prepare a resolution plan for budget arrears, and bolster public financial management. Directors commended the authorities for progress on the new national plan for social protection, and stressed the need to advance its approval and focus on a limited number of cash transfer programs. Directors underscored the urgency of updating the anti-corruption policy priorities, including setting up the steering committee envisioned in the 2009 anti-corruption strategy. They also stressed the need to enforce the asset declaration system and conduct regular audits of state-owned enterprises and other public entities. Directors encouraged the authorities to allow the exchange rate to adjust in an orderly fashion. Looking ahead, they recommended setting a quantitative monetary target, and encouraged the monetary authorities to advance other institutional reforms. Directors supported the central bank’s efforts to continue deepening financial intermediation and inclusion, including via fintech. Directors emphasized that well-sequenced reform of the energy sector will be crucial for fiscal sustainability and higher growth and must be accompanied by clear communications and measures to offset the impact on vulnerable groups. They encouraged the authorities to overhaul the management and performance of EDH, work with stakeholders to reduce electricity costs, improve the reliability and efficiency of energy supply, and lower the related fiscal burden. Broader structural reforms are needed to improve the economy’s competitiveness, including efforts to streamline regulations, remove infrastructure bottlenecks, strengthen property rights, and enhance governance. Building resilience to natural disasters is also a priority. 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 summing ups can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm. Directors urged the authorities to take steps to improve the quality and timeliness of economic data, with the help of further Fund technical assistance. Haiti: Selected Economic and Financial Indicators 1 Nominal GDP (2018): US$9.7 billion GDP per capita (2018): $890 Population (2016): 10.847 million Percent of population below poverty line (2012): 58 Estimated Projections 2017 2018 2019 2020 2021 Output Real GDP growth (%) 1.2 1.5 -1.2 -0.4 0.9 Employment Unemployment (%) … … … … … Prices Inflation, (end of period) (%) 15.4 13.3 20.1 17.5 14.5 Central Government Finances (In percent of GDP; unless otherwise indicated) Revenue and grants 17.7 17.3 13.6 13.4 14.2 Domestic Revenue 14.0 13.0 10.8 10.0 11.1 Grants 3.7 4.3 2.8 3.4 3.0 Expenditures 17.5 19.0 16.1 15.6 16.2 Current expenditures 12.2 12.7 12.5 11.5 11.4 Capital expenditures 5.3 6.2 3.6 4.1 4.8 Overall balance of the nonfinancial public sector, incl. grants 2 -0.9 -2.9 -3.8 -3.4 -3.1 Total public sector debt 38.3 39.9 47.0 46.1 44.9 Money and Credit Broad money (% change) 12.9 13.7 18.9 18.6 17.0 Credit to private sector (% change) 4.5 12.5 9.9 14.6 17.0 3-month BRH bond interest rate (%) 12.0 12.0 22.0 19.4 16.4 Balance of Payments (In percent of GDP; unless otherwise indicated) External current account balance (incl. official grants) -1.0 -3.9 -2.0 -0.9 -1.1 External current account balance (excl. official grants) -5.6 -7.9 -4.8 -3.2 -4.1 Foreign direct investment (FDI) 4.5 1.1 0.9 0.9 1.3 Reserves (in months of imports of the following year) 4.4 4.7 4.9 4.8 4.8 External public debt 24.2 23.5 27.4 25.4 24. 2 Exchange Rate Real effective exchange rate (% change) (+ appreciation) 12.7 2.8 -10.8 … … Nominal GDP (millions of gourdes) 551,911 631,829 732,545 868,582 1,015,809 Nominal GDP (millions of U.S. dollars) 8,409 9,658 8,708 8,533 8,842 Sources: Ministry of Economy and Finance, Bank of the Republic of Haiti, World Bank, Fund staff estimates and projections. 1/ Fiscal years ending September 30. 2/ Includes transfers to the state-owned electricity company (EDH). HAITI STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on January 24, 2020. The staff report reflects discussions with the Haiti authorities in November 2019 and is based on the information available as of December 20, 2019. It focuses on Haiti near and medium-term challenges and policy priorities and was prepared before COVID-19 became a global pandemic and resulted in unprecedented strains in global trade, commodity and financial markets. It, therefore, does not reflect the implications of these developments and related policy priorities. The outbreak has greatly amplified uncertainty and downside risks around the outlook. Staff is closely monitoring the situation and will continue to work on assessing its impact and the related policy response in Haiti and globally. KEY ISSUES • Context: Driven by popular frustration with high levels of corruption and inequality, Haiti has been experiencing a protracted political crisis and prolonged civil unrest. The crisis has taken a toll on the economy and an already vulnerable population: output contracted by an estimated 1.2 percent and the currency depreciated by 2 5 percent against the U.S. dollar during fiscal year 2019 while inflation exceeded 20 percent (y/y) in September. With activity weak, the external current account deficit is est imated to have shrunk to 2.0 percent of GDP while foreign capital inflows have dried up. The fiscal deficit worsened to 3.8 percent of GDP and domestic arrears rose. • Outlook and risks: The baseline scenario assumes some stabilization in the political situation by early-2020 but no major political or economic reforms. This would allow growth to recover only gradually and in the absence of sustained implementation of good policies and structural reforms, potential growth would remain low at about 1.4 percent over the medium term. Downside risks, both domestic and external, remain elevated. A prolongation of political instability, extreme natural disaster, drop in remittances, and/or a contraction in exports because of trade tensions would worsen the outlook, particularly given the absence of buffers and fragile social conditions. On the other hand, political resolution and a n appointed government able to implement fundamental reform s could attract international support and lead to higher investment and potential growth. • Main policy recommendations: The challenge is to stabilize the macroeconomic situation in an unstable political context. Staff encourage the authorities to continue their efforts to contain the fiscal deficit and its monetary financing by the central December 20, 2019 HAITI 2 INTERNATIONAL MONETARY FUND bank. Improving domestic revenue collection and redirecting current spending would help create space for much needed social and capital expenditures. Together with steps to strengthen the central bank’s autonomy and legal framework, this would help reduce fiscal dominance. Other policy priorities include strengthening the social safety net, medium-term energy sector reform, and steps to tackle corruption and improve governance. Capacity development, enhanced cooperation with other development partners, and outreach with non-government stakeholders in Haiti would help raise ownership and support the implementation of staff’s main recommendations. HAITI INTERNATIONAL MONETARY FUND 3 Approved By Patricia Alonso-Gamo (WHD) and Jeromin Zettelmeyer (SPR) Discussions were held in Washington, D.C. and in Haiti during November 8-22, 2019. The IMF team comprise d Nicole Laframboise (head), Frederic Lambert, Rand Ghayad, Paola Aliperti (all WHD), Matthieu Bellon (FAD), and Chiara Fratto (SPR). Ahmed Zorome (Resident Representative) and Gabriel Duvalsaint (local economist) assisted the team and participated in discussions in Haiti. Patricia Alonso-Gamo (WHD) joined the concluding meeting. Mr. Saraiva, Ms. Florestal, and Mr. Pierre (OED) also participated in the meetings. The IMF team met with central bank Governor Dubois and Minister of Finance Jouthe, and with senior officials, representatives of the private sector, civil society, other IFIs, and academics. Madina Toshmuhamedova (WHD) assisted the team with logistics and contributed to the preparation of this report. CONTENTS BACKGROUND—THE CHALLENGES OF A FRAGILE STATE _____________________________________ 5 RECENT DEVELOPMENTS _______________________________________________________________________ 6 OUTLOOK AND RISKS ___________________________________________________________________________ 8 POLICY DISCUSSIONS—MACROECONOMIC STABILITY _____________________________________ 10 A. Fiscal Policy ___________________________________________________________________________________ 10 B. Monetary, Exchange Rate, and Financial Sector Policies _______________________________________ 12 C. Governance and Transparency ________________________________________________________________ 14 D. The Social Safety Net _________________________________________________________________________ 15 E. Reform of the Energy Sector __________________________________________________________________ 16 F. Statistical Issues _______________________________________________________________________________ 18 STAFF APPRAISAL _____________________________________________________________________________ 18 BOXES 1. Fund Relations and Policies Since the 2018 SMP _______________________________________________ 6 2. Near-term Measures to Restore Macroeconomic Stability _____________________________________ 12 3. The Fiscal Cost of Energy Subsidies ___________________________________________________________ 17 FIGURES 1. Real Sector Developments, 2013–19 __________________________________________________________ 21 2. Fiscal Sector Developments, 2013–19 _________________________________________________________ 22 3. Monetary Sector Developments, 2013–19 _____________________________________________________ 23 4. External Sector Development, 2013–19 ________________________________________________________ 24 5. Social Indicators _______________________________________________________________________________ 25 HAITI 4 INTERNATIONAL MONETARY FUND TABLES 1. Selected Economic and Financial Indicators, FY2017–24 _______________________________________ 26 2a. Non-Financial Public Sector Operations, FY2017–24 (in millions of gourdes) _________________ 27 2b. Non-Financial Public Sector Operations, FY2017–24 (in percent of GDP)_____________________ 28 3. Summary Accounts of the Banking System, FY2017–24 _______________________________________ 29 4a. Balance of Payments, FY2017–24 (in millions of US$) ________________________________________ 30 4b. Balance of Payments, FY2017–24 (in percent of GDP) ________________________________________ 31 5. Financial Soundness Indicators, June 2017–June 2019 _________________________________________ 32 ANNEXES I. Country Engagement Strategy _________________________________________________________________ 33 II. Risk Assessment Matrix ________________________________________________________________________ 35 III. External Sector Assessment ___________________________________________________________________ 37 IV. Proposals for Governance Reform ____________________________________________________________ 42 V. Capacity Development Strategy _______________________________________________________________ 48 HAITI INTERNATIONAL MONETARY FUND 5 BACKGROUND—THE CHALLENGES OF A FRAGILE STATE 1. Haiti’s recent history is marked by political instability, weak governance and widespread corruption. There have been 18 presidents and four coups d’état since the Duvalier dictatorship ended in 1986. Because of political instability and weak institutions, sustained implementation of policies has proved challenging. Since it disbanded its army in 1995, Haiti has relied heavily on UN peacekeeping forces to maintain order and train the police force, although the UN presence was downsized in October—as planned—to a smaller, mostly administrative office. The government recently moved to reconstitute its own military . 2. Poverty is widespread and inequality high. Over 58 percent of the population live below the national poverty line (US$2.41/day) and real per capita income has stagnated since 2015 at around US$870 (2018). Other indicators of human development remain at distressing levels, with life expectancy at 63 years, literacy at 62 percent, and only about 63 percent of the population with access to safe water (2015). As of 2012, about half of the country’s income share was held by the top 20 percent and the lack of opportunity to improve living conditions has driven rising social discontent. The recent crisis has placed severe strains on th e population given the burden of high inflation on the poor and shortages of basic goods and services 3. Natural disasters are frequent and environmental degradation contributes to fragility. Some 82 natural disasters hit Haiti during 1990-2017, including a devastating earthquake in 2010. Weak infrastructure, anarchic urban development, and deforestation aggravate the country’s vulnerability to earthquakes and hurricanes. Environmental degradation hinders social and economic development, including causing lower agriculture yields, water pollution, and health epidemics. 4. Productivity growth and capital accumulation are low, and barriers to entry high. A low level of human capital, limited electricity supply, weak regulations, and an under-developed financial system have hindered private investment. Annual GDP growth averaged 1.4 percent from FY2015 through FY2018, near the rate of population growth and slightly below the average of 1.5 percent from 1996- 2017. 1 Private sector resources and capital are highly concentrated among a relatively small but powerful group—much acquired during the Duvalier era through monopoly rights and exclusive import licenses. 2 5. There are growth opportunities to be explored. Economic growth could come from several sectors, including construction, agriculture, environmental remediation, tourism, mining, telecom, light manufacturing, alternative energy, and services. Community-based social structures are strong, and the Haitian diaspora presents a potential source of skills, resources and positive 1 In this report, annual data refer to the fiscal year ending September 30 th . 2 World Bank Group, “Haiti: Towards a New Narrative,” Systematic Country Diagnostic , May 2015. HAITI 6 INTERNATIONAL MONETARY FUND influence. To develop this potential, however, some degree of political stability and policy continuity are needed. RECENT DEVELOPMENTS 6. Economic conditions have deteriorated significantly over the past year . Following the 2018 Staff Monitored Program (SMP), staff responded to the authorities’ request for support and agreed ad referendum on a program in March 2019 (Box 1). However, this could not proceed after the resignation of Prime Minister Céant and failure to ratify a replacement; subsequent attempts have also been unsuccessful. The political crisis has many elements, but poverty, inequality, and corruption—most recently the misuse of public funds under the Petrocaribe program—appear to be fueling unrest. The political crisis has prevented the government from passing budget laws for FY2019 and FY2020, impaire d policy reforms, and adversely affected revenue collection and public spending. Output is estimated to have contracted by 1.2 percent in FY2019 while supply shortages and currency depreciation helped push inflation above 20 percent (y/y). External financial support has collapsed, with zero budget support in FY2019 and delayed project loans. Box 1. Fund Relations and Policies Since the 2018 SMP • A series of on-off Fund-supported programs since 2015 led to repeated delays of Article IV consultations. The Extended Credit Facility (ECF) arrangement approved in May 2015 terminated without completion of the first review. In November 2016, in the aftermath of Hurricane Matthew, the IMF approved SDR 30.715 million under the Rapid Credit Facility (RCF). An SMP agreed in 2018 aimed to pave the way for a possible upper credit tranche arrangement. • The 2018 SMP expired in August 2018 and achieved progress, though reforms in the energy sector were incomplete. The billing rate of the state -owned company Électricité d’Haiti (EDH) rose but fell short of the 50 percent target and the shortlisting of bidders to replace expired electricity supply contracts was late. Moreover, the government eliminated fuel subsidies in July 2018 without implementing planned mitigating measures in advance. This was followed by riots, reversal of the decision, and resignation of the prime minister. • Macroeconomic management did improve. A January 2019 agreement (Pacte de Gouvernance Économique et Financière) between the Banque de la République d’Haiti (BRH) and ministry of finance to limit BRH financing of the fiscal deficit was implemented, helping to slow the pace of international reserve decline. As recommended during program negotiations, the authorities also eliminated the oil import monopoly of the state Bureau de Monétisation des Aides Publiques au Développement (BMPAD). Efforts to draft a broad-based national plan on social policy (the Politique Nationale de Protection et de Promotion Sociale—PNPPS) and expand coverage of the beneficiary information system (SIMAST) have continued despite political turbulence. • Unfortunately, other policies were disrupted. The budget for FY2019 was not approved by parliament and no budget has been submitted for FY2020. While liberalization of oil imports was a step forward, the government failed to pay fuel companies on time, which has led to fuel shortages and budget arrears and, as noted above, insufficient progress in the energy sector. 7. As revenues collapsed and energy subsidies increased, the fiscal deficit widened. The deficit of the non- financial public sector (NFPS) in FY2019 rose to an estimated 3.8 percent of GDP against 2.9 percent of GDP in FY2018, largely due to a 22 percent drop in revenues in real terms, an increase in fuel subsidies to maintain fixed prices in gourdes, and losses of the electricity company EDH. Estimates of total government support to the energy sector increased from 4.6 to HAITI INTERNATIONAL MONETARY FUND 7 6.5 percent of GDP. In response, the government slashed domestically-financed capital spending by two-thirds and cut spending on goods and services by 10 percent in nominal terms. Despite the jump in energy-related transfers, government spending contracted by 3.0 percentage points of GDP. Domestic arrears though surged to 3.7 percent of GDP, fuel shortages occurred, and external arrears (to a foreign oil company) reached 0.4 percent of GDP at end- September. Haiti: Annual Fiscal Losses from the Energy Sector Source: National Authorities and IMF staff calculations. 8. As a result of currency depreciation and arrear s accumulation, public debt jumped by 7 percentage points to 47 percent of GDP at end-September. 3 About 58 percent of public debt is external and subject to exchange rate valuation effects. The debt sustainability analysis nonetheless shows that public debt is still sustainable, despite a high risk of debt distress related to institutional fragilities and exceptional vulnerability to natural disasters. 9. The authorities succeeded in partially containing monetary financing of the government in FY2019. In FY2018, the higher deficit and lower external financing pushed total financing by the BRH of the NFPS to 4.1 percent of GDP. In FY2019, BRH financing remained within the range set in the January 2019 Pacte de Gouvernance (henceforth “Pacte,” Box 1) but inflation rose due to a lagged impact from the 2018 surge in BRH credit to the government as well as supply shortages (food). The BRH sterilized part of this financing by raising interest rates on BRH bonds by 400-1000 basis points in June (depending on the maturity) and reducing net foreign assets. Despite these efforts, base money grew by 26 percent during the fiscal year and net international reserves (NIR) fell to US$649 million in September. 4 The BRH cut rates on BRH bonds by 500–700 basis points on November 15 th to support the private sector after a few months of “peyi lock” (nation- wide lock-down). 10. The external current account deficit has narrowed but the overall external balance has deteriorated. The current account deficit is estimated to have shrunk from 3.9 percent of GDP in FY2018 to 2.0 percent of GDP in FY2019 owing mostly to higher remittances but also to weak import growth. The tourism sector has been negatively affected by social unrest while net capital inflows and FDI have mostly dried up. The exchange rate depreciated by more than 25 percent in the first 9 months of FY2019 but was stable between June -November. 11. The authorities are making considerable efforts to limit the deterioration. The ministry of finance announced in October its intention to present a budget for 2020, despite the 3 This includes the debt of the government to the central bank of 12.2 percent of GDP. 4 A methodological change resulted in a downward revision of gross reserves by US$68 million at end-September 2018. Historical series were revised accordingly (Table 4) . FY2013FY2014FY2015FY2016FY2017FY2018FY2019 Electricity losses (in millions of gourdes)9,2949,97910,2538,6519,94111,66214,060 Fuel losses (in millions of gourdes) 6,8927,862 395 4,29710,46917,22233,331 Total losses of the energy sector (% of GDP)4.4 4.6 2.5 2.7 3.7 4.6 6.5 HAITI 8 INTERNATIONAL MONETARY FUND end of the parliamentary session, and reiterated its decision first announced in February to end most customs duties exemptions in order to boost revenue collection. 5 The ministry also proposed short-term measures to contain energy subsidies, such as a rise in the price of aviation gasoline, the conversion of public transportation vehicles to propane, the temporary suspension of subsidies to EDH, and collection of amounts allegedly due the government by power producers for over- invoicing. On November 27, the BRH and m inistry of finance signed a new Pacte to limit financing of the deficit for FY2020 to 10 billion gourdes, about 1.2 percent of GDP. 12. Available data suggests that the banking system was negatively affected by high interest rates and weak domestic demand. Non-performing loans (NPLs) rose rapidly in 2019, which suggests the need for a cautious assessment of banking sector stability risks. Banks dominate the financial sector but play a limited role in the economy and financial inclusion. The ratio of private sector credit to GDP (in both gourdes and dollars) has stabilized at around 19.7 percent. Profitability assessed in local currency remains high on average, with return on equity declining from 23.9 percent in September 2018 to 21.1 percent in June 2019 as provisions have increased more slowly than NPLs . Regulatory capital to risk-weighted assets was 21.7 percent in June 2019, well above the regulatory minimum (12 percent). Risks from currency mismatches are limited as current prudential regulations limit banks’ net open foreign exchange position to 2.0 percent of equity and the two systemic banks report more assets than liabilities in foreign currency. The main vulnerabilities come from the concentrated lending portfolios and relatively underdeveloped credit risk management practices. OUTLOOK AND RISKS 13. Absent sustained implementation of good policies and comprehensive reforms, medium-term growth prospects remain grim. The baseline scenario assumes some political stabilization in FY2020 but not enough to deliver material progress. This would allow the formulation of a notional budget for FY2020 but growth would remain negative at -0.4 percent. 5 In the absence of an annual budget, the law directs the state to implement the last legally approved Budget Law. As of October 1, the government had reverted to the 2017/18 Budget Law. Sources: National Authorities and IMF staff calculations. 0 5 10 15 20 25 0 7,500 15,000 22,500 30,000 37,500 45,000 52,500 60,000 67,500 75,000 Sep -16 Dec-16 Mar-17 Jun-17 Sep -17 Dec-17 Mar-18 Jun-18 Sep -18 Dec-18 Mar-19 Jun-19 Sep -19 Monetary Financing and Inflation BRH net claims on central government ( millions of gourdes) CPI inflation, y/y , eop, percent (R HS) 0 20 40 60 80 100 1,700 1,800 1,900 2,000 2,100 2,200 2,300 Sep -16 Dec-16 Mar-17 Jun-17 Sep -17 Dec-17 Mar-18 Jun-18 Sep -18 Dec-18 Mar-19 Jun-19 Sep -19 Reserves and Exchange Rate Gross international reserves (US$ millions) Go urd e/U SD excha nge ra te, eop (R HS) HAITI INTERNATIONAL MONETARY FUND 9 Without measures to boost productivity, potential growth under the baseline is projected to remain below 1.5 percent over the medium term. 6 External capital flows are expected to decrease further in 2020 before recovering in subsequent years and inflation would ease to 17.5 percent (y/y) by end-2020, falling to below 10 percent by 2025. Short-term measures to contain energy subsidies combined with further spending cuts would imply a reduction in the fiscal deficit to 3.1 percent of GDP by 2021 where it would stabilize thereafter. Fiscal policy remains severely constrained by a lack of financing and would need to rely on accumulation of arrears for several years to close the gap. Beyond 2020, tax revenues are expected to recover somewhat with a normalization of revenue collection and boost from recent measures such as suspension of all tax exemptions except for those covered by treaties and diplomats. Fiscal losses to the energy sector as a share of GDP would decline gradually in real terms in line with international fuel prices and modest measures to reduce EDH losses, but would remain above the long -term average of about 3.0 percent of GDP (Table 2). The external current account deficit would shrink to 0.9 percent of GDP in 2020 as demand and imports remain weak. The external sector assessment suggests that Haiti’s external position at present is moderately weaker than medium-term fundamentals and desired policies (Annex III). 7 14. Risks are on the downside, but stability c ould bring important upsides (Annex II). Internal risks include a continuation of political instability and security problems, little economic reform, and extreme natural disasters. On the upside, a resolution of the current crisis, appointment of a government committed to reform, and return of support from the international community could lead to higher investment and potential growth. Externally, Haiti is vulnerable to oil price shocks and a reduction in remittance flows, triggered possibly by the termination of “Temporary Protected Status” of Haitian nationals in the U.S. or a slowdown in the U.S. and Canada. In an adverse scenario, cancellation of trade preferences, for example the U.S. HOPE Act, would hurt Haitian exports and could lead to FDI outflows in the textile sector, the main thriving export sector. Authorities’ Views 15. The authorities broadly agreed with the staff’s baseline growth projection and risk assessment. They indicated the report would benefit from the presentation of alternative, more positive macro scenarios. They emphasized the severity and unprecedented duration of the current crisis, which is forcing them to rethink existing plans. They indicated that the political crisis was a result of the relentless poverty and inequality in Haiti and could not be resolved independently of the latter, and which would require external support. A particularly worrying development is the deterioration of the security situation and growing role of armed gangs. That said, they agreed that a resolution to the political situation and resumption of activity in early-2020 could lead to a rebound and would support a higher growth trajectory than forecast by staff. They emphasized in 6 This number accounts for the average cost of likely natural disasters. It is slightly above projected population growth, resulting in a modest increase in per capita GDP. 7 The positive policy gap means, however, that desired policies would worsen, not improve, the current account deficit, suggesting significant structural competitiveness problems. HAITI 10 INTERNATIONAL MONETARY FUND particular that creating jobs and boosting growth should be the priority objectives of any reform program. POLICY DISCUSSIONS—MACROECONOMIC STABIL ITY Discussions focused on: (i) immediate policies to limit the economic deterioration in the current environment and build capacity, strengthen governance, and tackle corruption; and (ii) medium-term policies that would require improvements in political stability. Staff recognize the serious challenges to implementation posed by the current political and security situation. As such, the emphasis was on short-term measures that would be feasible under the current circumstances, supported with capacity building technical assistance (TA) from the Fund. In addition to fiscal and monetary policy reforms, staff recommended the authorities also focus on strengthening the social safety net and reforming the energy sector. A. Fiscal Policy 16. As an immediate priority, the authorities should prepare and publish a budget framework for FY2020. As a first step toward restoring fiscal stability, the government needs a notional budget with a deficit target consistent with financing constraints . The notional budget should include measures to stabilize domestic revenues by strengthening tax administration (¶19) and reducing tax expenditures . Exemptions under the three main taxes—income, sales (taxe sur le chiffre d’affaires), and import duties—amount to at least 2.6 percent of GDP. 8 The framework should also include a plan for the resolution of the stock of budget arrears. In the absence of budget guidance or obvious financing sources, staff project a deficit of the NFPS of 3.4 percent of GDP in FY2020. Gross financing needs, including debt amortization, would be met by domestic debt issuance, the central bank up to the limit under the Pacte, and further arrears accumulation (¶23-24, Tables 2a-b). 17. Over the medium-term, staff recommend a deficit target for the NFPS of 2.0 percent of GDP. This target is consistent with staff estimates that BRH financing of about 1.2 percent of GDP would not increase inflation in the medium term, assuming that the money base grows at the same rate as nominal GDP. Net project loans of about 0.8 percent of GDP per year would cover remaining financing needs under this framework. Staff estimate that a target of 2.0 percent of GDP would allow the debt ratio to decrease slightly over the medium term, leaving some room to accommodate adverse shocks. 18. Reaching even that goal will require significantly increasing domestic revenue collection. Staff recommend strengthening the capacity of the Directorate General of Taxes (DGI) and the Customs Administration (AGD), establishing a function- based organizational structure, enhancing their data exchange and use of third-party information to detect compliance risks, consolidating the registry of large taxpayers, and reducing tax expenditures. Efforts to advance 8 Évaluation de dépenses fiscales en Haïti —European Union, France, Haiti (April 2019). HAITI INTERNATIONAL MONETARY FUND 11 computerization of customs operations and increase the use of online tax payments should also continue (see Annex IV). 19. The authorities should continue modernizing tax policy. They should follow through with implementation of the tax reform roadmap adopted in March 2018. In addition to drafting and advancing adoption of the new Tax Code and Procedure Code, other measures need ed include excise tax reform, improvement of the framework for municipal taxation and, as noted above, reductions in tax expenditures. These reforms, including eventually a transition from the current sales tax to a VAT, should increase revenues over the medium term if properly sequenced and implemented. 20. Current expenditures should be reallocated to growth-enhancing capital and social spending. The public-sector wage bill and spending on goods and services need to be rationalized, including by adjusting the public workforce with attrition, adopting a price reference list for procurement of goods and services, and better enforcing spending controls (¶22). Spending on goods and services represents 20 percent of total spending, above the regional average. Transfers to the loss-making energy sector will need to be eliminated over time after mitigating measures are taken to compensate the impact of reform on the poor (Section C). 21. Strengthening public finance management (PFM) would improve governance and reduce the scope for misuse of public funds. In line with TA recommendations, Haiti should continue expanding coverage of the Treasury Single Account (TSA) to all ministries, autonomous agencies, and public enterprises. Other TA recommendations could be implemented regardless of the political turmoil, including ending recourse to “exceptional” spending procedures that undermine cash management. The authorities should also adopt a medium-term fiscal framework (MTFF) with the NFPS deficit target as the main anchor. This would aid in annual budget formulation, impose stronger fiscal discipline, and allow the government to sustain a stronger pace of public investment while keeping the overall deficit in line with the medium-term goal of fiscal sustainability. The Fund stands ready to continue providing TA in these areas. Authorities’ Views 22. The authorities reiterated their determination to put in place an appropriate budget. However, given the technical difficulties they face to obtain parliamentary approval, they are formulating a budget framework that would be adopted by the government for the purposes of programming expenditures and cash management. They stressed that security problems and “peyi lok” seriously impeded taxpayers from physically delivering tax payments, and tax and customs officials from going to work. Progress on revenue reforms was also stopped. That said, they concurred with the need to raise domestic revenues and took note of staff’s short -term suggestions to strengthen tax administration. They highlighted additional measures underway to reduce monetary financing of the NFPS deficit, including exploring options to reduce transfers to the energy sector that c ould generate more savings compared to staff’s baseline projections, such as negotiating a temporary reduction in transfers to EDH and seeking refunds from independent power producers (IPPs) related to alleged sur-facturation (over-invoicing). They would prefer to set HAITI 12 INTERNATIONAL MONETARY FUND a range for the medium-term deficit target to account for the uncertainty surrounding growth and investment projections. Box 2. Near-term Measures to Restore Macroeconomic Stability Fiscal: • Prepare and publish a notional budget for 2020, as announced in October. • Remove customs duties exemptions and reduce tax exemptions. • Further rationalize non-essential spending. • Prepare a plan for the resolution of arrears. Monetary: • Enforce the new Pacte de Gouvernance between the BRH and the ministry of finance. • Reduce base money growth. Governance: • Set up the steering committee envisaged under the 2009 National Anti- Corruption Strategy, with independent representatives from civil society. • Strictly enforce the asset declaration system for senior public officials. Social Protection: • Formally adopt the PNPPS. • Set up a robust cash-transfer distribution system. • Design and launch a cash-transfer pilot-program (for families with young children). Energy Sector Reform: • Overhaul the management and performance of EDH, including billing and collection. • Renegotiate contracts with independent producers in a transparent manner. B. Monetary, Exchange Rate, and Financial Sector Policies 23. While the Pacte aims to address fiscal dominance, a financing gap will persist. Staff commend the renewal of the Pacte to maintain fiscal discipline and limit monetary financing of the deficit. Unfortunately, with the difficult economic situation, external financing support not available, and a shallow market for domestic debt, staff estimate there would remain a financing gap of 3.1 percent of GDP in 2020—met by arrears accumulation under the baseline (Table 2) . Staff assessed the trade-off of different approaches and on balance, judged that this approach, compared to massive monetary financing of the deficit, was the least-worst option since it would imply lower inflation thereby less erosion of purchasing power of the poor, and would pose less risk to macro and financial stability. At the same time, the negative consequences of arrear s accumulation are non- trivial and likely to involve shortages of goods like fuel, interruptions in public services like electricity, lower growth, and erosion of confidence in fiscal policy. In this regard, it will be critical for the fiscal authorities to mobilize revenues in the near-term and limit expenditures until policy reforms can occur . 24. Looking further ahead, a quantitative monetary target should become the policy anchor as fiscal dominance declines. This would help the BRH resist pressure to finance the government or support the exchange rate for reasons beyond those laid out in its policy framework. The BRH requested TA to help with the development of a secondary market for government debt securities but should also advance work on the transition to IFRS, amendments to the central bank law, improvements in foreign reserve management and foreign exchange HAITI INTERNATIONAL MONETARY FUND 13 regulation, and development and strengthening of the quality of monetary statistics—with calculation of foreign exchange reserves consistent with IMF guidelines. 25. Foreign exchange interventions should be limited to instances of disorderly market conditions. In recent years, the BRH has allowed the exchange rate to adjust in an orderly fashion, selling reserves in response to external shocks like a drop in remittances while using prudential measures, including reserve requirements, to limit banks’ vulnerability to forex liquidity risk. While the exchange rate has been remarkably stable during the second half of 2019, intervention should be limited to s moothing volatility or stabilizing market expectations in the short term, given the large and rapid exchange rate pass-through to consumer prices. 26. Improvements in financial intermediation are needed to support growth. Credit to the private sector represents about 19 percent of GDP, only 33 percent of the adult population has an account at a formal financial institution (Findex), and 75 percent of bank lending goes to only 20 borrowers. This reflects weaknesses in the legal and institutional framework, including contract enforcement, and limited competition between banks. With investment in infrastructure connectivity, developing fintech and mobile banking would be critical for raising access to finance and promoting financial inclusion. These efforts c ould be supported by the BRH as part of its 2015 National Financial Inclusion Strategy. 27. Safeguards assessment. An update safeguards assessment of the BRH was completed in 2019, noting that the central bank continues to face significant safeguards risks. Fiscal dominance has strained its financial position and legislative reforms are required to strengthen its autonomy and governance arrangements and curb financing of the government. While the BRH has taken steps to reduce delays in completion of its annual audits, measures are still needed to reinforce financial accountability and transparency, including by transitioning to International Financial Reporting Standards (IFRS), revamping foreign reserves management, and tightening controls over the reporting of monetary statistics. Steps towards transition to IFRS have been initiated and the BRH requested Fund TA to prepare legislative amendments to the central bank law. Authorities’ Views 28. The authorities discussed the challenges faced in the conduct of monetary policy in the current environment. They concurred with staff’s assumptions on the composition of deficit financing as they intend to keep BRH financing at levels agreed under the Pacte in order to avoid excess liquidity creation given the high pass-through and direct impact on the exchange rate and inflation. In their view, the financing gap would be smaller, and the risk of arrears addressed since they expect that efforts underway and controls in place would limit fiscal financing needs. Their medium-term strategy aims to crowd in domestic private financing by accelerating reforms to deepen the market for government securities. The BRH explained that its reaction function currently puts more weight on the exchange rate than on money supply as the high dollarization of deposits complicates quantitative money targeting. They continue to view excessive exchange rate fluctuations as undesirable and agreed with staff on the need to intervene in the market as needed to avoid excess volatility. With regards to banking supervision, the BRH is committed to HAITI 14 INTERNATIONAL MONETARY FUND continuing the transition to risk-based supervision and to advancing reforms to promote financial inclusion, particularly raising access to finance for small business and moving forward with Fintech innovations. C. Governance and Transparency 29. Governance weaknesses continue to plague Haiti despite the authorities’ prior commitments to combat corruption (Annex IV). Notwithstanding some progress enhancing accountability and transparency, notably with regard to PFM, the draft law aimed at strengthening the anti-corruption unit (Unité de Lutte contre la Corruption, or ULCC) was never submitted to parliament and the steering committee tasked with monitoring implementation of the 2009 anti- corruption strategy was never established. Overall, the anti-corruption framework is not adequately deterring corruption. Relevant agencies lack the legal powers and financial means to fulfill their mandates and the prosecution and sanction of corruption offenses is limited. Staff recommend revamping the anti-corruption priorities and setting up the steering committee with participation from independent members of civil society to monitor implementation. The asset declaration system for senior public officials should be implemented in line with international best practices, including by verifying the accuracy of the declaration, sanctioning omissions and false reporting, and ensuring public access to declarations. Anti-money laundering (AML) measures would support anticorruption efforts, particularly by strengthening banks’ implementation of due diligence requirements on politically exposed persons and enhancing transparency by making related beneficial ownership information available. 30. Regulatory reforms should aim at reducing barriers to entry and rigidities that create opportunities for rent seeking and corruption. Reforms are needed to better guarantee property rights and reduce business and import monopoly powers. A more level-playing field is needed to stimulate competition, increase foreign investment, and promote private sector growth. These regulatory efforts should be accompanied by select infrastructure projects that tackle the worst physical bottlenecks and public investment to improve the power grid and telecommunica- tions network. Authorities’ Views 31. The authorities agreed that rooting out corruption and long-standing governance problems is a priority and essential for ensuring sustainable growth. They highlighted the progress achieved since the 2009 national strategy, including the strengthening of the anti- corruption legal framework, although they recognized implementation challenges. They described the process underway to prepare a new strategy for the next decade. More generally, they agreed 0 1 2 3 4 5 CPIA tr ansparency, accountability, and corruption in the public sect or CPIA quality of budgetar y and f i na nc i al ma nag emen t CPIA quality of public administra tion CPIA business reg ul ator y environment Ru l e o f la w Effectivenes s of A M L/ CF T meas ure s Governance Issues in Haiti Haiti L ICs Sources: World Bank, World Development Indicators; Worlwide Governance Indicators; FATF, Con solidated Asssessm en t Ratin gs; an d I MF staff c alc u lation s. Note: Variables h ave been n orm aliz ed(0=lowest level/ran k, 5=h igh est level/ran k). Low income countries (LIC) are defined as those with a GNI per capita, calculated using th e World B an k Atlas m eth od, of $1,025 or less in 2018. For th e effec tiv en ess of AML /CFT measures, the average of LICs was calculated using available data from Burkina Faso, Ethiopia, Haiti, Madagascar, Tajikistan and Uganda. HAITI INTERNATIONAL MONETARY FUND 15 that Haiti would benefit from reforms to strengthen property rights, reduce red tape, and create a level playing field for all businesses. D. The Social Safety Net 32. Staff commend the authorities for the ir progress on the new policy PNPPS, despite the political turmoil. The PNPPS is a national initiative led by the ministry of social affairs and labor (MAST ), the ministry of planning and external cooperation, and involving the ministries of health, education, and women’s’ condition, and other public organizations. A draft was submitted for national consultation in June 2019 and a revised draft wa s expected to be presented for approval by the Council of Ministers by end-2019. This inclusive and comprehensive approach is a good starting point to prepare a home-grown, more effective social safety net—a prerequisite for the success of other structural reforms. Staff urge the authorities to follow through with the timetable for finalizing the PNPPS. 33. The goals of the PNPPS are to reduce program overlap and boost coverage, effectiveness, and ownership. The existing array of programs is complex and ineffective, with inadequate coverage, overlaps and weak delivery systems (see Selected Issues Papers (SIP) on social protection and inequality). Staff support the approach of eliminating some programs and giving MAST the primary coordination role but encourage the authorities to focus on a limited number of unconditional, quasi universal cash transfer programs that are simple in design and have proven effective in other low-income countries. In coordination with the World Bank, staff urge the authorities to design and launch a new pilot program as soon as possible. They should continue expanding the coverage of the beneficiary information system (SIMAST), which can be used to identify beneficiary groups and improve the delivery of health and education services. The PNPPS should be based on a sustainable funding strategy as external support is phased out : while external financial flows may launch a pilot program and complement the PNPPS , funding for social protection should come primarily from domestic budget resources. 34. Effective transfer programs require the development of a strong system for the distribution of benefits. Methods for the distribution of cash transfers should be clarified quickly by drawing on lessons learned from programs set up after Hurricane Matthew and successful examples in other countries, adapted to prevailing technological and financial infrastructures. Haiti could draw on expertise from the World Bank and other partners. The mechanism chosen should be subject to regular and transparent monitoring and evaluation involving independent, non- government representatives in order to reduce the risks of mismanagement. Authorities’ Views 35. The authorities stated clearly that poverty reduction is the number one priority and a prerequisite for the success of any future reforms. They share staff’s diagnostic that the lack of coordination between various programs and providers has led to overlap and inefficiencies. They stated that strengthening the social safety net should be accompanied by employment programs and stronger growth. They expressed concern that unconditional cash transfer programs could hinder their ability to target scarce resources and lead to unintended consequences. The BRH HAITI 16 INTERNATIONAL MONETARY FUND emphasized that the 2015 national financial inclusion strategy could play an important role in helping to reduce poverty by supporting job creation, raising access to credit for en trepreneurs, and facilitating payments between individuals with Fintech advances. E. Reform of the Energy Sector 36. Achieving higher rates of economic growth will not be possible without comprehensive reform of the energy sector. Only 39 percent of Haitians have access to electricity. For those getting electricity from the grid (EDH), more than half are not billed. The rest of the population relies on diesel or charcoal-powered self-generation. Poor governance at EDH and flawed controls have led to large losses, including from theft at collection points, middlemen who intervene in the provision of electricity, non-payment by government entities, and illegal connections to the grid (see SIP). The fuel market is in flux with the end of the government import monopoly, while fixed retail fuel prices since early 2015, with one exception in 2017, have led to efficiency losses and resource misallocation. 37. Given the growing fiscal cost of energy subsidies, staff recommend initiating gradual and comprehensive reform of the sector. As a percent of GDP, direct fiscal losses are estimated at 4.5 percent in 2018 and 6.4 percent in 2019 (Box 3). Earlier progress under the SMP with respect to EDH accounting, billing, and contracting practices should be taken forward more aggressively. The management and oversight of EDH needs to be overhauled and costs, prices, and purchases from IPPs reviewed when their contracts expire. Any eventual approach to fuel subsidy reform should be well sequenced and differentiated to affect higher income groups, preceded by targeted measures to offset the impact on key groups, particularly the transportation sector, and include a clear communications plan that lays out in advance the rationale, timing and end- goals. It is essential that offsetting social programs be in place before engaging in reforms with redistributive implications. 38. The transition to a cleaner energy mix and off-grid electricity offer opportunities for greater pluralism (a mix of private and public sector) 9 . The private sector can play a role in financing the investment required to increase the use of renewable energy sources, namely biomass, solar and wind, and complement the government’s efforts to provide electricity to rural areas. Clean energy plans and energ y sector reform would help alleviate the adverse social and economic impact of environmental degradation and move Haiti toward its climate change mitigation targets. An island country vulnerable to climate change and natural disasters, Haiti would in due course benefit from a Climate Change Policy Assessment which would help identify relevant adaptation, financing, and risk management strategies. 9 Rethinking Power Sector Reform, World Bank (2019) 100 150 200 250 300 350 400 450 500 J an- 15 May-15 Sep -15 J an- 16 May-16 Sep -16 J an- 17 May-17 Sep -17 J an- 18 May-18 Sep -18 J an- 19 May-19 Gourdes/gallon Import Prices and Retail Prices Ga so li ne Diesel Kerosene Gasoline (pump) Diesel (pump) Kero sene ( pump) HAITI INTERNATIONAL MONETARY FUND 17 Box 3. The Fiscal Cost of Energy Subsidies • The energy sector in Haiti generates large fiscal and economic efficiency losses. Direct fiscal losses from the fuel and electricity sectors are estimated at 4.6 and 6.5 percent of GDP in FY2018 and FY2019 respectively (SIP). In FY2018, these comprised foregone tax revenues and transfers to cover the EDH losses (1.8 percent of GDP) and fuel price subsidies (2.7 percent of GDP), among other things. Retail fuel prices have been administered since 2011, despite swings in international prices and gourde depreciation. When the fixed price was not sufficient to cover payments to suppliers, excise taxes and custom duties were waived. As the retail and import prices diverged further, the government provided direct transfers to distributors in addition to forgoing taxes and duties. • With administered fuel prices lower compared to prices in the region, smuggling has risen. Retail fuel prices in Haiti are now about 50 percent lower than in neighboring Dominican Republic. This large difference has created an incentive to smuggle petroleum products to the DR, increasing the budgetary burden for Haiti. • Chronic losses at EDH have been covered by the budget. The state subsidizes the electricity sector in four ways: (i) foregone tax revenues—collected by EDH but never transferred; (ii) the provision of free fuel to thermal plants; (iii) payment guarantees in the form of electricity purchases from IPPs on behalf of EDH; and (iv) the payment of fuel purchased by Sogener, supposedly in exchange for incomplete payments by EDH for electricity supplied. EDH routinely pays late charges on its billings from IPPs, continues to maintain unpaid debts to them, and in the past has borrowed from the state bank Banque Nationale de Crédit to fund operations. The financing of EDH (through transfers, arrears, and loans) is neither clear nor transparent. 160 190 220 250 280 310 340 370 400 0 200 400 600 800 1000 1200 1400 Mar-15 Aug-15 Jan- 16 Jun-16 Nov- 16 Apr-17 Sep -17 Feb-18 Jul- 18 Dec-18 May-19 Fuel Prices and Revenue F uel tax r ev enue (HTG mil lio ns) Gaso line retail pr ice (H TG/g al lon ) (RH S) Gaso line pr ice wi thou t su bsid y (RH S) 30 40 50 60 70 80 90 100 110 120 130 3-Mar-18 17-Mar-18 31-Mar-18 14-Apr-18 28-Apr-18 12-May-18 26-May-18 9-Jun-18 23-Jun-18 7-Jul- 18 21-Jul-18 4-Aug-18 18-Aug-18 1-Sep-18 15-Sep-18 Price Difference between Haiti and Dominican Republic (In gourdes) Ga so line Diesel Kerosene FY2017/18 Subsidy Components % of GDP Fuel 2.7 EDH and others 1.8 (i) Sales tax collected by EDH but not transferred 0.1 (ii) Free fuel to EDH and PBM power plants 0.6 (iii) Electricity purchase from IPPs on behalf of EDH 1.0 Subtotal: EDH subsidy 1.7 (iv) Free fuel to Sogener power plants 0.1 Total Energy Sector 4.6 Sources: National Authorities and IMF staff calculations. HAITI 18 INTERNATIONAL MONETARY FUND Authorities’ Views 39. The authorities concurred with staff that energy sector reforms would improve the productivity of fiscal spending and remove an important constraint on growth. They agreed that the fiscal costs of the current system were unsustainable but noted that painstaking efforts were needed to prepare in advance for reform, including to offset its impact on the poor. They agreed that addressing high technical and commercial losses and weak management at EDH, and poor governance in the sector would reduce quasi-fiscal deficits F. Statistical Issues 40. Improving the quality of economic data is essential given shortcomings that hamper surveillance. The biggest priorities relate to national accounts and labor indicators, while fiscal and external sector data need improvement in coverage and timeliness. With Fund- supported TA, the authorities should produce revised monetary statistics and reduce publication lags. In particular, improving the timeliness and quality of the Standard Reporting Forms (SRFs) for monetary statistics—with calculation of foreign exchange reserves consistent with IMF guidelines—is a priority. STAFF APPRAISAL 41. The costs of the current political crisis are taking a heavy toll on the economy and an already vulnerable population. Growth is expected to be negative in 2019 and 2020 while inflation is running at about 20 percent . This has reduced the purchasing power of households, especially the poorest. External budgetary assistance has nearly dried up, domestic revenues have fallen sharply, and budget arrears have risen. Under the gloomy but realistic baseline assumption of only a stabilization in the political situation (but no fundamental reform), potential growth is estimated at 1.4 percent over the medium-term. Haiti has potential for much stronger and more inclusive growth, but its realization will require some political stability and sustained implementation of good policies. 42. While acknowledging the considerable challenges faced by the monetary and fiscal authorities in the current context, the immediate priority should be to stabilize the macroeconomic situation. In the absence of a formal budget approved by parliament, the fiscal authorities should implement a budgetary framework for 2020 that would include measures to boost domestic revenues and contain non- priority spending. Staff recommended implementing actions laid out in recent TA to develop tax administration capacity, including improving sharing of data, using third- party data to detect fraud, consolidating the register of large taxpayers, and continuing progress to computerize customs operations. 43. Under present circumstances, the authorities face a daunting challenge to close the financing gap. From this angle, the costs of the ongoing crisis stand in stark relief. With options limited, it will be critical for the monetary and fiscal authorities to continue to coordinate closely to manage risks, mobilize revenues in the near -term, and limit expenditures until reforms can be HAITI INTERNATIONAL MONETARY FUND 19 implemented. The IMF continues to provide policy advice and technical assistance and stands ready to help with more intensive support when political conditions permit. 44. Looking further ahead, the fiscal authorities will need to shift resources away from non-priority spending toward social programs and investment. Strengthening PFM should improve governance, including by adopting reference prices for the purchase of goods and services, tighter controls on spending, and gradually reducing transfers to the energy sector. The government should expand coverage of the TSA to all ministries and public entities, enforce proper accounting and audits, and prepare a resolution plan for arrears. It would be useful for Haiti to adopt a medium-term budget framework anchored around a target for the NFPS deficit. Staff stand ready to provide additional TA in the areas of tax administration and PFM. 45. The central bank should continue to allow the exchange rate to adjust in an orderly fashion. When the fiscal dominance issue is addressed in due course , monetary policy should set a quantitative growth target for the money supply so as to resist pressures to monetize the deficit or support the exchange rate for reasons other than to smooth excess volatility. The BRH should work to advance key institutional reforms in the areas of foreign reserve management, the transition of financial reporting to IFRS, amendment of the central bank law, and improvement in the quality of monetary statistics. The Fund stands ready to provide further TA in these areas. To deepen financial intermediation and access to financial products, staff urged the monetary authorities to accelerate efforts to develop financial technology. Over the longer term, reforms are needed to address weaknesses in the legal and institutional environment, in particular with regard to the enforcement of contracts. 46. Corruption remains an obstacle to prosperity and key actions could be implemented in the short-term. The authorities should update the anti-corruption strategy, set up the s teering committee with independent representatives from civil society, and implement the asset declaration system in line with international best practices. AML measures should support the fight against corruption and include insisting on verification and ‘know your customer’ rules. Regular audits of public companies and administrations by the High Court of Auditors should be enforced and published. Staff also encourage the government to present a new draft law to parliament (when possible) to strengthen the anti -corruption framework. 47. Existing resources devoted to social protection could be deployed more effectively. IMF staff commend the authorities for their efforts to finalize the PNPPS and urge its adoption by the Council of Ministers. Within this framework, staff recommend the introduction of a limited number of cash transfer programs under the auspices of MAST. Existing programs not in line with the objectives of the PNPPS should be wound down . The information system SIMAST should serve as the basis for the identification of beneficiaries and its coverage expanded. The methods for the distribution of transfers should be clarified quickly and coordinated with the development of mobile and financial infrastructures. HAITI 20 INTERNATIONAL MONETARY FUND 48. Fundamental reform of the energy sector is needed for fiscal sustainability and higher growth. In the electricity sector, a drastic overhaul of the management and performance of EDH is the first priority, followed by the transparent renegotiation of contracts with independent producers. In the fuel sector, the original goal of fixing prices was to protect purchasing power, yet this logic has unraveled: subsidy costs and fiscal deficits led to monetary financing which contributed to inflation, depreciation and a vicious cycle of higher subsidy costs, deficits, monetary financing and inflation. Any reform must be developed in consultation with relevant stakeholders, be preceded by measures to offset the impact on vulnerable groups, and involve a strong communications plan ex ante . Staff discussed possible approaches with the authorities, including implementing reforms differentiated by product and phased over time, and accompanied by compensating measures, such as assist ance to providers and users of public transport. The authorities are encouraged to include diversification of the energy matrix towards renewable, cleaner energy sources in their reform plan. 49. In the medium term, regulatory reforms are needed to open and level the playing field for private business. Haiti needs to ensure stronger property rights and remove import and industry monopolies to lower barriers to entry and raise investment. These regulatory efforts should be accompanied by infrastructure projects to address key bottlenecks and public investment to improve the electric power grid and the telecommunication network. 50. Staff urge the authorities to continue their efforts to improve the quality, coverage, and timeliness of statistical data. 51. It is recommended that the next Article IV consultation take place on the standard 12-month cycle. HAITI INTERNATIONAL MONETARY FUND 21 Figure 1. Haiti: Real Sector Developments, 2013–19 1 Inflation reached 20 percent in August (y/y). Services and agriculture accounted for most of the growth in recent years, but most sectors contracted in FY2019. Net transfers, including remittances, reached 40 percent of GDP in FY2019. GNI per capita has stagnated since 2000, though HDI has improved slightly. Fuel consumption is projected to have declined in FY2019 due to supply and demand constraints. Unemployment is recorded at 13.5 percent. Sources: National Authorities; UNDP; World Bank; International Labour Organization (ILO) and IMF staff calculations. 1/ Data are in fiscal years, ending September 30. 2/ Data for 2019 is only available until August 2019. 3/ Modeled ILO estimate. 0 2 4 6 8 10 12 14 16 18 20 22 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18 Feb-19 Aug-19 Inflation (Percent change, eop, y/y) Ove ra ll C PI Local Impo rt ed -2 -1 0 1 2 3 4 5 6 2013201420152016201720182019 E Contribution to GDP Growth (Percent) Agriculture Manufacturing Construction Servi ces Ot her GDP Growth 0 5 10 15 20 2013201420152016201720182019 E Gross National Income (US$ billion) Gross Domestic Income Ne t T ra nsf ers f ro m th e res t o f th e world Gross National Disposable Inco me 2018 0 250 500 750 1,000 1,250 1,500 1,750 2,000 0 0.2 0.4 0.6 0.8 1 2000 2005 2010 2015 GNI Per Capita and HDI Value HDI val ue GNI per capita, 2011 PPP$ (RHS) 0 50 100 150 200 250 300 350 2013201420152016201720182019 Consumption of Fuel Products 2/ (Millions of US gallons) Ga so lineDieselKerosene 4 6 8 10 12 14 16 18 20 2000200220042006200820102012201420162018 Unemployment, Total 3/ (Percent of total labor force) HAITI 22 INTERNATIONAL MONETARY FUND Figure 2. Haiti: Fiscal Sector Developments, 2013–19 1 Fuel tax revenues have turned negative as the difference between world prices and fixed retail prices has widened. Public investment is projected to fall below 5 percent of GDP in FY2019. The NFPS deficit has deteriorated since FY2017… … accompanied by increasing domestic arears while BRH financing has been contained. 2,3 Tax revenue collection is structurally low and has fallen … … limiting the resources available for social spending. 4 Sources: National Authorities and IMF staff calculations. 1/ Data are in fiscal years, ending September 30. 2/ External financing under Financing by Source includes project loan disbursements and external arrears net of amortization. 3/ Non bank financing under Financing by Source includes domestic supplier credits and domestic arrears. 4/ Social spending includes health, education, and agriculture spending. No data breakdown between Ministries for years 2013-15 and 2019. 160 190 220 250 280 310 340 370 400 0 200 400 600 800 1000 1200 1400 Mar-15 Aug-15 Jan- 16 Jun-16 Nov- 16 Apr-17 Sep -17 Feb-18 Jul- 18 Dec-18 May-19 Fuel Prices and Revenue F uel tax r ev enue (HTG mil lio ns) Gaso line retail pr ice (H TG/g al lon ) (RH S) Gaso line pr ice wi thou t su bsid y (RH S) 0 5 10 15 20 25 2013201420152016201720182019 E Public Investment (Percent of GDP) Petrocaribe Foreign-financed Do mestically financed Total capital expen diture -1 0 1 2 3 4 5 6 7 8 9 10 2013201420152016201720182019 E Nonfinancial Public Sector Deficit (Percent of GDP) Other transfers to EDH Central government deficit Overa ll deficit of NFPS -20 -10 0 10 20 30 40 50 2013201420152016201720182019 E Financing by Source (Billions of gourdes) Petrocaribe External financing Central b ank Commercial banks Nonbank financing 0 2 4 6 8 10 12 14 16 18 20 22 2013201420152016201720182019 E Taxes (Percent of GDP) Taxes on income & profitsE xci s es Custo ms d uties Sales tax (TCA) Local taxes Other taxes 0 5 10 15 20 25 2013201420152016201720182019 E Social Spending (Percent of total expenditure) Ministry of Agriculture Ministry of E ducatio n Ministry of Public Health HAITI INTERNATIONAL MONETARY FUND 23 Figure 3. Haiti: Monetary Sector Developments, 2013–19 1 The dollarization of deposits is increasing… …fueled by the resumption of credit growth in dollars… … and dollar deposit growth, while gourde deposit growth has stalled. The BRH raised the rates on central bank CDs in June,… …and has tried to contain NFPS financing … which helped prevent a large drop in NIR. Sources: National Authorities and IMF staff calculations. 1/ Data are in fiscal years, ending September 30. 30 35 40 45 50 55 60 65 70 75 80 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18 Feb-19 Aug-19 Dollarization (Percent) Depo sits Credi t 10 15 20 25 30 -20 -10 0 10 20 30 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18 Feb-19 Aug-19 Credit Growth to the Private Sector (Percent) Dollar credit growth Go urd e cred it growth Private sector credit as % GDP (RHS) -10 -5 0 5 10 15 20 25 30 35 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18 Feb-19 Aug-19 Contributions to Broad Money Growth (Percen t, y/y) Currency in circulation Go urd e depos i ts Do llar deposits 0 5 10 15 20 25 30 Sep -13 Mar-14 Sep -14 Mar-15 Sep -15 Mar-16 Sep -16 Mar-17 Sep -17 Mar-18 Sep -18 Mar-19 Sep -19 Nominal Interest Rates (Percent) Short- term interest ra tes ( 91-d ay BRH bo nds) Lending rate -150 -130 -110 -90 -70 -50 -30 -10 10 30 50 70 90 110 2013201420152016201720182019 E Net Domestic Assets (NDA) of BRH (Billions of gourdes) Liabilities to comm ercial b anks and other Net credit to the central government Net credit to the rest of NFPS NDA 908 823 767 827830 677649 0 500 1000 1500 2000 2500 2013201420152016201720182019 E NFA NIR NFA and NIR of BRH (US$ million) HAITI 24 INTERNATIONAL MONETARY FUND Figure 4. Haiti: External Sector Development, 2013–19 1 The trade balance as a share of GDP sank to its lowest point in 7 years… …partly offset by growth in remittances to an estimated 35 percent of GDP (US$ 3,043 millions) in FY2019. With weak imports, the current account deficit shrunk to 2.0 percent of GDP in FY2019. Led by a drop in FDI, net financial flows declined in FY 2019. The gourde depreciated until June, then leveled off. Import coverage by gross reserves has been largely stable since mid-2017. Sources: National Authorities and IMF staff calculations. 1/ Data are in fiscal years, ending September 30. -60 -50 -40 -30 -20 -10 0 10 20 30 2013201420152016201720182019 Exports and Imports (Percent of GDP) Exports of goods Imports of goods Trade balance 0 5 10 15 20 25 30 35 40 0 5 10 15 20 25 30 35 40 2013201420152016201720182019 E Remittances (Percent of GDP) Remittances Y/Y % change (RHS) -14 -11 -8 -5 -2 1 4 2013201420152016201720182019 Current Account (Percent of GDP) Current account balance Fuel i mpo rt s -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 14 2013201420152016201720182019 E Composition of Capital and Financial Account (Percent of GDP) Other it ems (ne t) B anks (n et ) Ne t FDI Public s ector capital flows (net) Capital transfers Capital and financial account balance - - - - - - 0 2 4 6 30 40 50 60 70 80 90 100 Mar-16 Jun-16 Sep -16 Dec-16 Mar-17 Jun-17 Sep -17 Dec-17 Mar-18 Jun-18 Sep -18 Dec-18 Mar-19 Jun-19 Sep -19 Exchange Rate and FX Intervention Net central bank FX sales, US$ million (RHS) Go urd e/U SD excha nge ra te, eop 0 1 2 3 4 5 6 7 8 0 500 1000 1500 2000 2500 3000 3500 4000 Mar-13 Sep -13 Mar-14 Sep -14 Mar-15 Sep -15 Mar-16 Sep -16 Mar-17 Sep -17 Mar-18 Sep -18 Mar-19 Sep -19 International Reserves (US$ million) GIR, months of imports (RHS) NIR NFA HAITI INTERNATIONAL MONETARY FUND 25 Figure 5. Haiti: Social Indicators Sources: UNICEF, WHO, World Bank, Global Poverty Working Group and IMF staff calculations. 1/ Latest available data. The poverty headcount ratio is the percentage of the given population living below the national poverty lines. 2/ HND, PAN, GTM, CRI, DOM,HTI and SLV denote respectively Honduras, Panama, Guatemala, Costa Rica, Dominican Republic, Haiti and El Salvador. 3/ Low income countries (LICs) are defined as those with a GNI per capita (calculated using the World Bank Atlas method) of $1,025 or less in 2018. 4/ Average for Central American countries was calculated based on 2016 data or latest available for each country. 5/ The HCI index score ranges from 0 to 1 and measures the amount of human capital that a child born today can expect to attain by age 18. It attempts to measure the productivity of the next generation of workers compared to workers with complete education and full health. 6/ For South America: Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Paraguay, Peru, Uruguay, Venezuela and Mexico. 40.6 58.5 74.9 0 20 40 60 80 100 Poverty Headcount Ratio, 2012 1/ (% of population) Urba nOve ra ll pov er tyRura l 0 20 40 60 80 100 Hai ti Cent ral Ame ri ca South Ame ri ca Carib bea n s mal l s ta te s Clean Water and Sanitation, 2017 6/ (Percent of population using these services) Ba si c sani tatio n Basic drinking water 0 5 10 15 20 25 30 35 40 45 50 55 60 65 HND 2017 PAN 2017 GTM 2014 CRI 2017 NIC 2014 DO M 2016 H TI 2012 SLV 2017 GINI Index 2/ (0-100, where 0= perfect equality, last available data) 0 10 20 30 40 50 60 70 80 90 100 0 10 20 30 40 50 60 70 80 90 100 200020022004200620082010201220142016 Infant Mortality Rate and Life Expectancy 3/ Haiti infant mortality rate (per 1,000 births) Haiti life expectancy, total (years) (RHS) LICs infant mortality rate (per 1000 births) LICs life expectancy, total (years) (RHS) 0 20 40 60 80 100 Hai ti C arib bea n s mal l s ta te s C ent ral Ame ri ca South America Literacy Rate, 2016 4/ 6/ (Percent of people ages 15 +) Femal e Mal e 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 H TIGTMHNDDO MSLVNICPAN CRI Human Capital Index (HCI), 2017 5/ (Scale 0-1) H CI fe mal eH CI ma le H CI [... middle sections omitted for long document ...] HAITI 16 INTERNATIONAL MONETARY FUND Table 3. Haiti: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2020–40 202020212022202320242025202620272028202920302031203220332034203520362037203820392040 Baseline 16 15 15 15 15 15 15 17 18 20 22 24 27 31 34 37 39 42 43 44 44 A. Alternative Scenarios A1. Key variables at their historical averages in 2020-2030 2/ 16 17 18 19 20 21 23 24 27 29 31 35 38 42 45 49 52 55 57 59 60 0#N/A#N/A#N/A#N/A#N/A#N/A#N/A#N/A#N/A#N/A#N/A#N/A#N/A#N/A#N/A#N/A#N/A#N/A#N/A#N/A#N/A B. Bound T ests B1. R e a l GDP g r o wth 16 16 16 16 17 17 17 18 20 22 24 27 30 34 37 40 43 46 48 48 49 B2. Primary balance 16 15 15 16 16 17 17 18 20 22 23 26 29 32 35 38 41 43 45 45 46 B3. E xp o r ts 16 17 19 19 19 19 19 20 22 24 25 28 31 34 37 40 43 45 46 47 47 B4. Other flows 3/ 16 25 33 33 34 34 33 34 35 36 37 39 41 44 46 49 51 52 53 53 53 B5. Depreciation 16 19 11 11 11 12 12 14 16 19 21 25 29 33 37 41 45 48 50 51 52 B6. Co mb ina tio n o f B1-B5 16 24 31 31 32 32 31 32 33 35 36 38 41 44 46 49 51 53 54 54 54 C. Tailored Tests C1. Combined contingent liabilities 16 16 16 16 16 17 17 18 20 22 24 26 30 33 36 39 42 44 45 46 46 C2. Natural disaster 16 17 18 19 20 21 22 23 25 28 30 33 36 39 43 46 49 51 53 53 54 C3. Commodity pr ice n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a . C4. M a r ket Fina ncing n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a . Threshold 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 Baseline 88 86 84 84 84 86 86 93 101 112 122 137 154 172 190 206 221 231 235 236 237 A. Alternative Scenarios A1. Key variables at their historical averages in 2020-2030 2/ 88 94 100 105 111 118 127 137 149 163 176 194 214 235 255 274 293 305 313 318 323 0 88 77 68 60 53 47 45 44 46 50 54 61 70 79 86 92 97 98 95 90 85 B. Bound T ests B1. R e a l GDP g r o wth 88 86 84 84 84 86 86 93 101 112 122 137 154 172 190 206 221 231 235 236 237 B2. Primary balance 88 87 87 89 91 93 94 102 111 122 132 146 164 182 199 215 230 240 243 244 245 B3. E xp o r ts 88 104 131 131 132 133 133 141 151 163 175 192 214 236 256 276 294 306 311 311 311 B4. Other flows 3/ 88 138 189 189 190 191 187 192 196 203 209 219 233 247 260 272 284 290 290 287 284 B5. Depreciation 88 86 51 51 51 52 54 61 71 83 94 110 129 148 167 184 201 212 218 220 222 B6. Co mb ina tio n o f B1-B5 88 139 167 188 188 190 186 192 198 206 214 226 242 259 275 290 304 311 312 310 307 C. Tailored Tests C1. Combined contingent liabilities 88 88 89 91 92 95 96 103 112 123 134 148 166 184 202 218 233 244 248 248 249 C2. Natural disaster 88 99 105 112 117 123 125 135 146 159 171 187 206 226 244 262 278 289 293 294 295 C3. Commodity pr ice n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a . C4. M a r ket Fina ncing n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a . Threshold 180 180 180 180 180 180 180 180 180 180 180 180 180 180 180 180 180 180 180 180 180 Baseline 8 8 8 8 7 7 7 7 7 7 8 8 9 10 11 12 13 14 14 15 16 A. Alternative Scenarios A1. Key variables at their historical averages in 2020-2030 2/ 8 8 8 8 8 8 8 8 9 10 11 12 13 14 15 17 18 19 20 20 21 0 8 7 7 6 6 5 4 4 3 3 2 2 2 2 2 2 2 2 2 2 2 B. Bound T ests B1. R e a l GDP g r o wth 8 8 8 8 7 7 7 7 7 7 8 8 9 10 11 12 13 14 14 15 16 B2. Primary balance 8 8 8 8 8 7 7 7 7 8 8 9 10 11 12 13 14 14 15 16 16 B3. E xp o r ts 8 9 10 10 10 10 9 9 10 11 11 12 13 14 15 17 18 19 19 20 21 B4. Other flows 3/ 8 8 9 10 10 10 9 11 14 14 14 15 15 16 17 18 19 19 19 20 20 B5. Depreciation 8 8 8 7 7 6 6 6 4 5 6 6 7 8 9 11 11 12 13 13 14 B6. Co mb ina tio n o f B1-B5 8 8 10 11 11 10 10 12 14 14 14 15 16 17 18 19 20 20 21 21 21 C. Tailored Tests C1. Combined contingent liabilities 8 8 8 8 8 7 7 7 7 7 8 9 9 10 11 13 13 14 15 15 16 C2. Natural disaster 8 8 8 8 8 8 8 8 8 8 9 10 10 11 13 14 15 15 16 17 17 C3. Commodity pr ice n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a . C4. M a r ket Fina ncing n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a . Threshold 15 15 15 15 15 15 15 15 15 15 15 15 15 15 15 15 15 15 15 15 15 Baseline 14 12 11 11 10 10 9 8 8 9 9 10 11 12 13 14 15 15 16 17 17 A. Alternative Scenarios A1. Key variables at their historical averages in 2020-2030 2/ 14 13 12 11 11 11 10 11 11 12 13 14 15 16 17 19 20 21 22 23 23 0 14 12 10 9 8 7 6 5 4 3 3 2 2 2 2 2 2 2 2 2 2 B. Bound T ests B1. R e a l GDP g r o wth 14 13 12 12 11 11 10 9 9 10 10 11 12 13 14 15 16 17 18 18 19 B2. Primary balance 14 12 11 11 10 10 9 9 9 9 10 11 11 12 13 15 15 16 17 17 18 B3. E xp o r ts 14 13 12 12 11 11 10 10 10 11 11 12 12 13 14 15 16 17 18 18 19 B4. Other flows 3/ 14 12 13 15 14 13 12 15 17 17 17 18 18 19 19 20 21 21 22 22 22 B5. Depreciation 14 16 14 12 11 11 10 9 7 8 9 9 11 12 13 15 16 17 18 19 20 B6. Co mb ina tio n o f B1-B5 14 13 14 15 14 13 12 14 16 16 17 17 18 18 19 20 21 21 22 22 22 C. Tailored Tests C1. Combined contingent liabilities 14 12 11 11 10 10 9 9 9 9 10 10 11 12 13 14 15 16 16 17 17 C2. Natural disaster 14 12 12 11 11 11 10 10 10 10 11 11 12 13 14 15 16 16 17 18 18 C3. Commodity pr ice n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a . C4. M a r ket Fina ncing n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a . Threshold 18 18 18 18 18 18 18 18 18 18 18 18 18 18 18 18 18 18 18 18 18 Sources: Country authorities; and staff estimates and projections. 1/ A b o ld va lue ind ica tes a b r ea ch o f the thr es ho ld . 2/ Va r ia b les includ e r ea l GDP g r o wth, GDP d efla to r (in U.S. d o lla r ter ms ), no n-inter es t cur r ent a cco unt in p er cent o f GDP, a nd no n-d eb t cr ea ting flo ws . 3/ Includ es o fficia l a nd p r iva te tr a ns fer s a nd FDI. Debt service-to-exports ratio Debt service-to-revenue ratio PV of debt-to-exports ratio Projections 1/ PV of debt-to GDP ratio HAITI INTERNATIONAL MONETARY FUND 17 I Table 4. Haiti: Sensitivity Analysis for Key Indicators of Public Debt, 2020–40 202020212022202320242025202620272028202920302031203220332034203520362037203820392040 Baseline 37 37 36 36 36 36 35 36 37 39 39 40 41 42 43 45 47 49 51 53 55 A. Alternative Scenarios A1. Key variables at their historical averages in 2020-2030 2/37 39 40 41 41 41 41 41 40 40 40 39 39 38 38 38 39 39 40 40 41 0#N/A#N/A#N/A#N/A#N/A#N/A#N/A#N/A#N/A#N/A#N/A#N/A#N/A#N/A#N/A#N/A#N/A#N/A#N/A#N/A#N/A B. Bound T ests B1. R e a l GDP g r o wth 37 39 41 42 43 43 44 46 48 49 51 52 54 56 58 60 63 66 68 72 74 B2. Primary balance 37 40 42 41 40 40 39 40 40 41 42 43 43 44 45 47 49 51 52 55 56 B3. E xp o r ts 37 38 40 40 39 39 39 40 41 42 42 43 44 44 45 47 49 51 52 55 56 B4. Other flows 3/ 37 47 55 55 55 54 53 54 54 55 55 55 55 55 56 57 58 59 61 62 63 B5. Depreciation 37 38 36 35 35 33 33 32 33 33 33 33 33 33 33 34 35 37 38 40 41 B6. Co mb ina tio n o f B1-B5 37 38 38 35 35 35 35 36 37 38 39 39 40 41 42 44 46 48 50 52 54 C. Tailored Tests C1. Combined contingent liabilities 37 43 42 41 41 40 39 40 41 42 42 43 44 45 46 47 49 51 53 55 57 C2. Natural disaster 37 61 58 56 54 52 50 50 51 51 52 52 53 54 55 56 58 60 62 65 67 C3. Commodity pr ice n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a . C4. M a r ket Fina ncing n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a . Public debt benchmark 55 55 55 55 55 55 55 55 55 55 55 55 55 55 55 55 55 55 55 55 55 Baseline 279 259 240 232 226 221 213 216 219 222 223 225 226 228 232 237 244 252 260 270 275 A. Alternative Scenarios A1. Key variables at their historical averages in 2020-2030 2/279 272 262 258 254 251 243 239 235 231 226 221 217 214 212 211 210 211 213 216 218 0 135 85 86 85 84 83 82 79 76 71 66 61 54 44 36 29 24 20 19 22 28 B. Bound T ests B1. R e a l GDP g r o wth 279 272 269 267 265 264 260 267 274 281 285 289 294 299 306 314 324 336 346 359 368 B2. Primary balance 279 279 278 265 254 246 235 236 237 239 239 239 240 241 244 249 255 263 270 279 284 B3. E xp o r ts 279 268 264 256 249 243 234 236 238 240 240 240 241 242 245 250 256 263 270 279 284 B4. Other flows 3/ 279 328 367 356 347 338 323 322 319 316 312 307 304 301 300 301 304 308 312 318 320 B5. Depreciation 279 271 244 230 222 211 200 196 196 192 191 185 185 182 182 184 187 192 197 205 209 B6. Co mb ina tio n o f B1-B5 279 268 252 229 223 218 210 213 216 220 220 222 223 225 229 234 241 249 257 267 272 C. Tailored Tests C1. Combined contingent liabilities 279 306 279 266 255 247 236 237 238 240 240 240 241 243 246 251 257 265 272 282 287 C2. Natural disaster 279 431 384 359 338 322 304 300 298 297 294 293 292 292 294 299 305 313 320 329 335 C3. Commodity pr ice n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a . C4. M a r ket Fina ncing n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a . Baseline 135 137 132 129 126 123 118 117 115 112 106 99 90 78 66 57 51 46 45 48 57 A. Alternative Scenarios A1. Key variables at their historical averages in 2020-2030 2/135 143 141 140 138 135 130 125 120 112 104 94 83 70 58 50 44 41 40 42 47 0 135 85 86 85 84 83 82 79 76 71 66 61 54 44 36 29 24 20 19 22 28 B. Bound T ests B1. R e a l GDP g r o wth 135 142 145 148 149 149 147 148 148 146 141 135 126 114 103 93 87 84 84 87 97 B2. Primary balance 135 137 148 159 150 142 133 130 125 120 113 106 95 83 71 61 54 50 49 51 60 B3. E xp o r ts 135 137 132 130 127 123 119 118 117 113 108 101 91 79 67 58 51 47 46 49 58 B4. Other flows 3/ 135 137 134 132 129 126 121 122 122 119 113 106 96 84 72 62 56 51 50 52 61 B5. Depreciation 135 130 126 121 115 117 109 111 106 106 97 94 82 74 63 55 48 45 44 46 54 B6. Co mb ina tio n o f B1-B5 135 134 131 128 125 122 118 117 114 111 106 99 90 78 66 57 50 46 45 48 56 C. Tailored Tests C1. Combined contingent liabilities 135 137 170 159 150 142 133 129 125 120 113 105 95 82 70 60 53 49 47 50 58 C2. Natural disaster 135 138 269 238 214 194 177 165 155 145 135 124 112 97 84 73 65 60 58 60 68 C3. Commodity pr ice n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a . C4. M a r ket Fina ncing n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a .n.a . Sources: Country authorities; and staff estimates and projections. 1/ A b o ld va lue ind ica tes a b r ea ch o f the b enchma r k. 2/ Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP. 3/ Includ es o fficia l a nd p r iva te tr a ns fer s a nd FDI. Projections 1/ PV of Debt-to-Revenue Ratio Debt Service-to-Revenue Ratio PV of Debt-to-GDP Ratio Statement by the Staff Representative on Haiti Executive Board Meeting January 24, 2020 This statement provides information that has become available since the staff report was finalized. This information does not alter the thrust of the staff appraisal. 1. Dissolution of parliament. It was not possible to hold parliamentary elections by end- October 2019 as programmed due to failure to approve a new electoral law, the absence of a budget, and no agreement on the composition of the Provisional Electoral Kouncil. As a result, President Moïse announced that the mandates of all deputies in the legislature and two-thirds of the senate had formally expired on January 13 th , leaving the country without a legislative body and creating what he called an "institutional void". However, there is disagreement regarding the number of departing senators and the term of their mandate as determined by the constitution. Pending acceptance by these departing senators that their mandate has ended, and based on precedent, it is understood that the president would rule by decree. The next presidential election is due in December 2021. 2. Anti-government protests. Public demonstrations waned towards the end of 2019 and schools and businesses have re-opened. Employees of the Haitian Institute of Statistics (IHSI) have been on strike since October 2019 to protest the dismissal of the head of the institution, halting its activities and the publication of economic indicators. 3. Fiscal policy. Staff have received no indication that the authorities have prepared or published a notional budget for FY2020, as recommended by staff (to guide fiscal policy and assist with programming expenditures and cash management). President Moïse announced on January 13 th that he would allocate the 2020 salaries of the departed senators and deputies, which he valued at 1.16 billion gourdes (US$11.7 million), to build 10 schools. 4. Food insecurity. The WFP reports that 3.7 million people in Haiti (one in three) need food assistance, while the UN Humanitarian Affairs Office (OCHA) warned that this number could reach 4.2 million by March, with some 1.2 million likely to experience “emergency levels”. The deterioration in food security has been driven by supply disruptions related to social unrest during 2019, high inflation and depreciation of the gourd against the U.S. dollar, and a drought in 2018 that lasted until mid-2019 and led to a decline in agriculture production by about 12 percent in many parts of the country. Statement by Mr. Bevilaqua, Executive Director for Haiti and Mr. Saraiva, Alternate Executive Director, and Ms. Florestal, Advisor to the Executive Director for Haiti January 24, 2020 The discussions for Haiti’s 2019 Article IV consultation took place under exceptional circumstances and are an unequivocal testimony of the strong commitment of the authorities and the IMF team to complete the process. Given the unique circumstances that impeded mission travel to Haiti in November 2019, we commend WHD for making effectual use of the flexibility in Fund’s guidance for completing Article IV consultations in FCS countries. Accordingly, the technical discussions were held mostly through teleconferencing, while the authorities consented to come to Washington for the policy discussions. The comprehensive set of documents is evidence of the quality of the dialogue between Fund staff and their Haitian counterparts and of the wealth of information gathered during the past four years of continuous Fund engagement. Such engagement led to the adoption and largely successful implementation of the 2018 SMP and to the staff level agreement on an ECF in March 2019. Nonetheless, the repeated socio-political shocks that prevailed since 2015 had impeded the conclusion of program negotiations and Article IV consultations. The recent socio-economic disruption, which culminated with several weeks of “peyi lok” (country lockdown) whereby all economic and social activities were severely halted, is deemed to have had very damaging and long-lasting impact. In November 2019, at the time of the Article IV discussions, Haiti was at its sixth week of “peyi lok” and at the height of uncertainty. The looming political and social crisis – ignited by the 2018 fuel price hikes – intensified after March 2019 and effectively brought the country to a standstill. For the first time since the devastating 2010 earthquake, GDP is estimated to have contracted, while inflation reached 20 percent yoy, pushed by a 32 percent depreciation of the currency. A humanitarian crisis led by shortages of food and social services has ensued and remains as a major challenge. Currently, economic activity is gradually resuming, as the security situation has become less volatile and domestic stakeholders seem to tacitly agree that the country must avoid a downward spiral. Challenges abound but there are hopeful signs that the daily life may be starting to normalize, including the reopening of schools after several months. Indisputably, Haiti is at a decisive juncture. However, the complexity of the political situation should not be an impediment to immediately addressing the multiple challenges at hand. While a thorough assessment of the impact of the recent crisis is still pending, it is known that the tourism industry is facing severe challenges, including the closure of hotels. Likewise, with the plunging activity the banking sector and microfinance institutions (MFIs) are confronting the rapid increase of NPLs. In addition, anecdotal evidence of yet another wave of migration of skilled labor suggests that Haiti’s dearth of human capital may become a more binding constraint to growth moving forward. 2 The Government has reaffirmed its commitment to undertake necessary reforms to reestablish macroeconomic stability and restore the conditions for economic growth. The Haitian authorities share staff’s view that key priorities at this juncture are: curbing economic deterioration, reforming the energy sector, strengthening governance and developing social safety nets. Despite the challenging environment, measures were taken recently to stave off further deterioration of the fiscal balance and avert unsustainable monetary financing. Most notably, the “Pacte de Gouvernance” – a cash management agreement between the Ministry of Economy and Finance and the Central Bank – was renewed to cover the current fiscal year, in an effort to curb monetary financing. The authorities hope that the signing and observance of the governance pact will contribute to quell some of the uncertainty and reassure investors. Measures have also been taken to rein in tax expenditures, strengthen tax collection, control the accumulation of domestic arrears and improve public financial management. The authorities seek to ensure that discretionary tax exemptions are effectively prohibited and to limit the abuse of this privilege by NGOs and other beneficiaries. Also, to facilitate tax collection, the payment of taxes through banks was recently tested in pilot form and will become effective once a few technical issues are solved. To quell leakages at the border with the Dominican Republic, in line with the protocol signed in 2017, the exchange of information between the custom offices of Haiti and the Dominican Republic has started in September 2019, while certain technical challenges still need to be ironed out. In addition, a training session for custom officers of both countries is scheduled for February 2020 mostly to enhance their coordinated approach in the management of the border. Moreover, the authorities have drafted a framework – consistent with the Fund’s baseline scenario of no external budget support – to dispel uncertainty and reestablish the budget as a binding fiscal constraint and a tool to promote equity and sustainable growth. The total FY20 budget envelope is to be shrunk by up to 20 percent in comparison to the preceding year due to the sharp drop in fiscal revenues linked to the contraction of economic activity. The details of the budget to be adopted by the new Government during the following few weeks are still being crafted along those lines. It is expected that a positive signaling from the Fund with a possible approval of a program could unleash a more optimistic outlook with further engagement from development partners. The energy sector is the main source of fiscal imbalance and requires a multi-pronged approach to suppress the leaks and become more competitive, diversified and efficient. The authorities look forward to working with the Fund on fuel subsidy reform in synchrony with the building of appropriate social safety nets. We welcome the analytical chapters on fuel subsidies and the electricity sector and consider the recommendations key inputs for the efforts to be undertaken. As underscored in the staff report, the government has transferred the fuel purchasing responsibility to the private sector. To minimize the risk of fuel shortages, the administration has committed to make regular payments to suppliers of petroleum products in order to reduce arrears. Progress registered in billing and collection at EDH under the SMP continued until early 2019 but were reversed during the recent crisis, since billing and collection were severely hindered by the roadblocks and the interruption in the income flow among the population and businesses. 3 Currently EDH is taking forceful steps to improve its financial performance including by cutting clients in payment arrears off the grid, while being supported by the Ministry of Economy and Finance’s directive instructing public entities to ensure timely payments of their electricity bill. Strengthening governance and promoting greater transparency and accountability are indeed among the authorities’ highest priorities. Within the framework of accelerating its fight against corruption, the authorities appointed, as the head of the anti-corruption unit (ULCC), a legal expert with a strong track record in previous high-profile functions in the legal system. On January 10, the anti-corruption unit issued a press release informing the rapid increase in compliance to the asset declaration by government officials and setting January 31st as the deadline to comply. Concurrently, the unit is moving forward with at least two high- profile investigations into fraudulent activities, the conclusions of which should be made public once it would not jeopardize its course. Also, this past week the ULCC organized an open-door day to promote a better understanding of its work and knowledge about what is considered acts of corruption. The Central Bank continues to take steps towards reinvigorating financial markets, easing inflation pressures mainly from exchange rate volatility and maintaining an adequate level of international reserves. BRH officials are pursuing a stable macroeconomic environment, while addressing institutional weaknesses and the vast infrastructure gap to stimulate credit and growth. However, they also acknowledge that the tightening of monetary conditions in the last fiscal year may have impinged on credit in a context of already low credit growth and increased volatility of the exchange rate. Continuous disruptive conditions in the first three months of FY20 and ensuing decline in sales resulted in an increase in failure to service credit, threatening the profitability and stability of the financial system. In this context, with the combination of tighter monetary policy and plunging activity leading to a steadier exchange rate, the Central Bank decided to recalibrate its policy stance, while remaining cautious not to pose threats to price stability. The Central Bank continues to see the exchange rate as a key policy indicator. The exchange rate severely affects residents’ purchasing power, including the most vulnerable, who depend on imports for most of their basic-good needs. The monetary authority remains attentive to tensions on the foreign exchange market that may need to be contained considering the strong pass-through of exchange rate fluctuations to inflation. Notwithstanding the Central Bank foreign exchange interventions during the past year, the net international reserves remained above 700 million US dollars and gross reserves still represent over 5 months of imports. The authorities are also actively working on the implementation of the national financial inclusion strategy adopted in 2015. Fintech use is being promoted to boost financial intermediation. The recent launching of a web-based platform fo r economic agents to access the different costs of financial services is expected to foster competition. The National Financial Education Plan is expected to be adopted in the near term, with a view to stimulate financial inclusion through financial education. 4 Significant progress has also been achieved in addressing issues raised in the Fund’s safeguards assessment report. Haiti has received instrumental technical assistance for the legal and banking supervision aspects of IFRS compliance, as well as the drafting of modifications to the macro-prudential supervision framework. Relatedly, seven draft regulations have been shared with the banking sector for feedback before finalization and adoption. They cover capital requirements in relation to Basel II, internal control, governance, cross-ownership of capitals, as well as adequate level of equity shares of banks in non-financial institutions. The Central Bank will implement those measures and establish a risk-based supervision framework with the support of ongoing MCM TA. With regards to AML/CFT, Haiti is working toward closing the gaps identified at the Fourth round of mutual evaluation undertaken in the summer of 2018. A comprehensive and risk-sensitive strategy has been adopted to address the absence of risk assessments, which is considered to have impeded achieving the international standards of effectiveness and technical compliance. The National Anti-Money Laundering Committee in collaboration with government officials and key stakeholders from the private sector are striving to fulfill all AML/CFT requirements for technical compliance of applicable legislation and regulations by the November 2020 progress report deadline. However, progress has been delayed because of the recent country lockdown and ensuing postponement of delivery of relevant TA by the World Bank. To secure macroeconomic stability and put the economy back on the path of sustainable and inclusive growth, the adoption of a comprehensive recovery plan with wide-ranging domestic and external support is essential. In this regard, the IMF’s unwavering and active engagement with Haiti has a crucial role. Strong domestic resource mobilization remains critical and will decisively pursued but will not be enough to address the sources of fragility, as well as social and infrastructure needs. Like most LICs, Haiti is particularly vulnerable to sharp swings in commodity prices, natural disasters, and the unpredictability of external financing flows. Without resuming support from development partners, progress made towards meeting the SDGs, may irremediably be reversed with the current economic crisis. Predictable, timely and effective donor support is needed to implement a sustainable program of economic growth and stability with critical measures to mitigate anticipated short-term negative impact of structural reforms on the most vulnerable. Strengthening social safety nets need to be at the core of any macroeconomic and structural program. Programs initiated during the past couple of years contributed to filling the significant gaps in social safety nets. However, they represented dispersed efforts without a sustainable source of financing. During the past year, with support from the international community, a central registry of beneficiaries has been constructed within the Ministry of Social Affairs and is expected to play an instrumental role in ensuring that the upcoming cash transfer program effectively targets the neediest and is not prone to abuses. In line with Fund’s guidance for work in countries in fragile situations, they see the creation of social safety nets to mitigate potential negative impact of reform measures as an essential prerequisite. 5 The authorities took note of the conclusion that Haiti was now assessed to be at moderate risk of debt distress but with a weak debt carrying capacity. They are hopeful that soon their efforts to mobilize domestic resources and implement targeted measures to reestablish macroeconomic stability will be supported by enough grant resources from international partners to take the path of sustainable and inclusive growth. In this regard, they are convinced that Fund’s strong signaling through its technical and financial engagement will be paramount. Our authorities welcome the framing of the Fund’s engagement with countries in fragile situations in a medium-term perspective and stand ready to work with the Fund on Haiti’s Country Engagement Strategy (CES). The draft CES presented in Annex I of the staff report clearly points to the damage caused by fragmentation of initiatives and lack of coordination among development partners leading to inefficient delivery of goods and services and, most importantly, loss of policy ownership. The strategic focus on four areas is welcome, namely, macroeconomic stability, governance and transparency, social safety net, and energy. That said, one of the main benefits of a CES would be to facilitate a strong engagement of the Fund throughout episodes of increased fragility, avoiding counterproductive stop and go approaches. In addition, it would be important for the CES to address key issues, such as: (i) the profile of country team members and their level of experience and turnover rates; (ii) the streamlining and realistic timing and sequencing of conditionality, to ensure they are more in line with the country institutional capacity; and (iii) the finetuning of the modalities of TA delivery to ensure effective transmission of knowledge and avoid undermining domestic ownership of reform. Stronger IMF engagement will signal to other technical and financial partners that Haiti is in a position to make progress in adjusting and reforming its economy and needs urgent support now. Ideal conditions rarely exist in countries with multiple sources of fragility. Failure to effectively engage with Haiti may tip the country over into deeper fragility, instability and poverty. 6 7