Haïti Consultation au titre de l'Article IV 2024 - Communiqué de presse; Rapport du personnel; et Déclaration du Directeur exécutif pour Haïti

© 2024 International Monetary Fund IMF Country Report No. 24/333 HAITI 2024 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 2024 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 November 20, 2024, 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 on November 20, 2024, following discussions that ended on October 26, 2024, 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 November 6, 2024. • An Informational Annex prepared by the IMF staff. • A Debt Sustainability Analysis prepared by the staffs of the IMF and the World Bank. • A Statement by the Staff Representative on Haiti • A Statement by the Executive Director for Haiti. 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 International Monetary Fund Washington, D.C. December 2024 PR 24/461 IMF Executive Board Concludes 2024 Article IV Consultation with Haiti FOR IMMEDIATE RELEASE Washington, DC – November 20, 2024: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation 1 with Haiti. Haiti faces an unprecedented multidimensional crisis encompassing humanitarian, economic, social, and security problems. The economy has a low tax base and a large informal sector that relies heavily on volatile remittance flows. Since the last 2019 Article IV consultation, Haiti has suffered a series of shocks, including the pandemic; a devastating earthquake in 2021; cholera outbreaks; and the economic spillovers of the war in Ukraine, which led to a food crisis that triggered acute hunger. The severe deterioration of security over the last few years has magnified these problems—leading to a surge in the number of displaced people within and outside Haiti and to a significant drop in potential growth. Haiti’s macroeconomic outlook is challenging and subject to elevated uncertainty. The supply-side shock caused by the security crisis would continue to greatly affect growth and feed inflation unless the security outlook improves. Fiscal revenues, which are essential to reconstruct basic infrastructure after years of social unrest and support large development needs, are only slowly recovering. Remittances would continue to finance consumption, although this reflects mainly an exodus of human capital which could further undermine a sustainable recovery. Growth is projected to be barely positive in 2025 and will stabilize at only 1½ percent over the medium term (pending further improvements in the security outlook). Executive Board Assessment 2 Executive Directors agreed with the thrust of the staff appraisal. They acknowledged the severity of Haiti's multidimensional crisis, resulting from security, economic, humanitarian shocks, and the ongoing political transition, which has greatly affected the well-being of the Haitian population. The outlook remains uncertain, as security continues to deteriorate, and growth is expected to remain low. Despite the headwinds, Directors recognized the authorities’ achievements over the last few years in implementing reforms aimed at strengthening economic resilience and restoring macroeconomic stability. Directors noted that normalization of security is essential to improve economic prospects, emphasizing the critical role of support from the international community in this regard, as well as in supporting the reform efforts and helping rebuild critical infrastructure. Directors also 1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. 2 At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm. 2 called for continued well-prioritized engagement with the Fund, particularly through capacity development, appropriately guided by the Strategy for Fragile and Conflict Affected States and welcomed the authorities’ interest in a new Staff Monitored Program, which would provide a useful policy anchor. Directors commended the authorities for the timely passing of the budget and their efforts to increase fiscal revenue. They emphasized that further advancing the authorities’ revenue mobilization agenda is paramount to address Haiti’s immense development needs, notably through the implementation of the new tax code to broaden the tax base. Directors encouraged the authorities to step up the ongoing efforts to enhance the quality, efficiency, and transparency of public spending and called for continued strong scrutiny and prompt audit of the resources provided through the Fund’s Food Shock Window. They emphasized the need for sustained efforts to preserve debt sustainability, including by avoiding non-concessional lending. Strengthening social safety nets to protect the most vulnerable and alleviate widespread poverty and continued endeavors to foster gender equality will also be critical. Directors welcomed the authorities’ commitment to keeping the monetary financing of the deficit at zero and called for continued efforts to promote price stability and enhance the monetary policy framework. They urged the authorities to conclude and publish the 2023 central bank audit to demonstrate commitment to transparency and limit FX interventions only to smooth excessive exchange rate volatility. Directors noted rising vulnerabilities in the banking sector, particularly from non-performing loans, and called for close monitoring and continued improvements to regulatory and supervisory frameworks. Further strengthening of the AML/CFT framework is also needed. Directors strongly underscored that progress in implementing the structural and governance reform agenda is critical to lift potential growth. They welcomed the authorities’ efforts to strengthen governance and anti-corruption frameworks and leverage digitalization. They urged the authorities to publish the governance diagnostic assessment and accompanying action plan as soon as finalized. Building resilience to natural disasters and fostering financial inclusion are also key. Directors strongly encouraged the authorities to improve data adequacy for surveillance purposes, while continuing to prioritize the quality and timeliness of monetary and reserve assets data. 3 Haiti: Selected Economic and Financial Indicators, FY2021– 27 (Fiscal year ending September 30) FY2021 FY2022 FY2023 FY2024 FY2025 FY2026 FY2027 Proj. Proj. Proj. Proj. (Change over previous year; unless otherwise indicated) National Income and Prices GDP at constant prices -1.8 -1.7 -1.9 -4 1 1.5 1.5 GDP deflator 19.3 29.8 31.5 29.1 23.2 17.6 10.4 Consumer prices (period average) 15.9 27.6 44.1 25.9 19.8 15.4 10.6 Consumer prices (end-of-period) 13.1 38.7 31.8 27.9 18.7 12.2 9.3 External Sector Exports (goods, valued in U.S. dollars, f.o.b.) 27.7 13.5 -25.5 -20 10 14.4 13.6 Imports (goods, valued in U.S. dollars, f.o.b.) 19.8 7.8 -1 -9 11 6 5.5 Remittances (valued in U.S. dollars) 22.5 -7.3 0.1 11 5 5 5.5 Real effective exchange rate (eop; + appreciation) 1/ -5 13.8 10.9 33 … … … Money and Credit (valued in gourdes) Credit to private sector 15.2 17.4 -6.2 -5.3 21.1 14.7 12 Base money 21.5 23.1 3.1 10 13.5 11.5 10 Broad money 38.2 21.1 4.6 4.1 15.5 11.5 11 (In percent of GDP; unless otherwise indicated) Central Government Overall balance (including grants) -2.3 -1.8 0.9 7.2 -0.1 -1.4 -1.5 Domestic revenue 5.9 5.3 6.4 4.9 5 5.3 5.7 Grants 1 1.3 0.9 6.8 1.2 0.7 0.3 Expenditures 9.3 8.3 6.4 4.5 6.2 7.4 7.4 Current expenditures 7.4 6.8 4.9 3.4 4.2 4.2 4.3 Capital expenditures 1.9 1.6 1.5 1.1 2.1 3.2 3.1 Overall balance of the nonfinancial public sector 2/ -2.2 -1.7 0 6.6 -0.1 -1.4 -1.5 Savings and Investment Gross investment 18 15.9 13.9 6.1 7.8 10.7 14.2 Of which: public investment 1.9 1.6 1.5 1.1 2.1 3.2 3.1 Gross national savings 18.5 13.5 10.4 5.5 7.2 9.8 13 External current account balance (incl. official grants) 0.4 -2.3 -3.5 -0.5 -0.6 -0.9 -1.2 Net fuel exports -3.1 -4.5 -3.6 -2.4 -2.3 -2.3 -2.3 Public Debt External public debt (medium and long-term, eop) 12.9 12.3 12.9 1.5 1.4 2.7 4.1 Total public sector debt (end-of-period) 28.9 29.5 28.5 13.9 11.4 10.9 11.4 External public debt service 3/ 9.4 8.1 11.8 13.5 3.3 4.7 4.6 Memorandum Items: (In millions of dollars, unless otherwise indicated) Net international reserves 4/ 456 119 391 960 1,159 1,341 1,501 Gross international reserves 2,534 2,067 2,346 2,496 2,621 2,771 2,921 In months of imports of the following year 5.6 4.7 5.3 5.6 5.6 5.6 5.6 Nominal GDP (millions of gourdes) 1,699,208 2,168,223 2,798,324 3,468,166 4,315,508 5,151,163 5,772,370 Sources: Ministry of Economy and Finance; Bank of the Republic of Haiti; World Bank; Fund staff estimates and projections. 1/ The real effective exchange rate for FY2024 reflects August 2024 data. 2/ Includes transfers to the state-owned electricity company (EDH), and unsettled payment obligations. 3/ In percent of exports of goods and nonfactor services. Includes debt relief. 4/ Excludes banks’ FX deposits, Venezuela escrow account, IMF liabilities (except Food Shock Window), and swaps. HAITI STAFF REPORT FOR THE 2024 ARTICLE IV CONSULTATION KEY ISSUES Recent developments. Haiti is facing exceptional challenges. While security has deteriorated steadily since the last 2019 Article IV Consultation, it reached crisis proportions in the first few months of 2024. Gangs controlled 80 percent of the capital during March-May 2024, paralyzing economic activity by disrupting supply chains, destroying much infrastructure, and rekindling inflation pressures. The escalation of violence has destroyed human and physical capital and led to a surge in the number of displaced people and greatly accelerated brain drain. The worsened security situation has amplified Haiti’s fragility, compounding its multiple shocks, including the pandemic, a devastating earthquake, political crisis following the assassination of President Moïse, worsening malnutrition resulting from the economic spillovers of Russia’s war in Ukraine which led to the food crisis, and repeated outbreaks of infectious diseases. The economy is only very slowly normalizing. The first wave of the contingent of the Multinational Security Support mission (MSS)—led by Kenya backed by the United Nations—arrived in Haiti at the end of June to help re-establish security. The new government, in place since June 2024 with a time-bound mandate through February 2026 (tasked with holding general elections), has a window of opportunity to implement reforms that could eventually help restore the country’s potential over the medium and long term. Themes of the Article IV Consultation. The analytical work underpinning the policy discussions, prepared by staff in agreement with the authorities, focuses on strengthening policy frameworks to enhance resilience (to make them less pro-cyclical). It also quantifies the impact of crime and climate on potential growth; points to the importance of closing gender gaps to boost potential output; calls for strengthening digital infrastructure to generate additional tax revenue to support inclusive growth; examines the main sources of inflation; and analyzes the macro financial linkages, using a balance sheet approach. Initial findings from the IMF staff-led governance diagnostic report were also discussed. Staff-Monitored Program (SMP). Building on progress achieved under the 2022 SMP covering June 2022-May 2023, a new SMP was negotiated in June 2023, initially covering the period June 30, 2023, through March 31, 2024. Despite meaningful initial November 6, 2024 HAITI 2 INTERNATIONAL MONETARY FUND progress, including the timely approval of the budget in September 2023, the amendments to the financial intelligence unit (FIU) law, and improved provision and timely dissemination of finance ministry data, program slippages occurred on other fronts. As a result of the IT incident in mid- summer 2023, whose impact was far more extensive than originally foreseen, the timeliness of monetary data suffered and prevented the conclusion of the First Review in December 2023. At that time, the SMP was extended by six months through September 2024. The extension was meant to allow for more time to accumulate a track record of effective policy implementation, which was eventually disrupted by the unfolding security crisis, and build the capacity to provide high-quality data. The worsened insecurity in the spring led to further slippages, including a collapse in tax collection and delays in achieving some structural benchmarks and in providing data. The latter reflected reduced capacity in compiling statistics attributable to the lockdowns. With the new interim government in place, the authorities and staff agreed to let the 2023 SMP lapse, rather than extending it further, and to start a new SMP after the finalization of the budget, which would anchor the new quantitative targets. Policy recommendations • Implement the budget for FY2025 and keep the monetary financing of the budget to zero, consistent with the objective of price stability. • Advance governance reforms, including publish the governance diagnostic assessment as soon as completed (and adopting accompanying action plan) and advance anti-corruption reforms. • Adopt measures to strengthen revenue collection, expenditure management and controls and increase budget allocations for social spending and for protecting the most vulnerable—and assess their impact. • Strengthen public finance reporting, transparency, and accountability in the use of public funds. • Continue to limit foreign exchange interventions to smoothing excess volatility and well-signaled foreign reserve build-up. • Complete and publish the audit of the Central Bank for FY2023 as soon as possible. • Provide more timely data to the Fund and enhance data transparency through timeline publication of core economic data. HAITI INTERNATIONAL MONETARY FUND 3 Approved By Patricia Alonso-Gamo and Peter Dohlman Policy discussions started in person in Washington DC during July 2-3, 2024, continued remotely during July 24-August 5, 2024, with several additional meetings throughout August and September and concluded in person in Washington DC during October 21-26, 2024. The team comprised Patrizia Tumbarello (head), Noah Ndela, Arsène Kaho, Gonzalo Huertas, and Juan Passadore (all WHD), Henrique Chociay (SPR), Mher Barseghyan (STA), Jinkyu Sung, (FAD) and Gabriel Duvalsaint and Ralph Wata (Port-au-Prince office). Monique Newiak (SPR) participated in the discussion on gender and inclusion. Joel Lee (LEG), Parisa Kamali (SPR), and Pamela Cardoso (MCM) participated in the discussions on Article VIII and Capital Flow Management. Former team members included Weicheng Lian and Justin Matz. Toyosi Ojo provided excellent research assistance. Soungbe Coquillat coordinated all work related to mission scheduling and document preparations. The mission met with Prime Minister Garry Conille, Minister of Economy and Finance and Minister of Planning and External Cooperation Ketleen Florestal, Central Bank Governor Ronald Gabriel, other senior government officials, members of the donor community, NGOs, and representatives of the private sector. Ms. Ludmilla Buteau Allien (OED advisor) participated to all policy and technical discussions. Mr. André Roncaglia (Executive Director) and Mr. Bruno Saraiva (Alternate Executive Director) joined the concluding meetings. THE SETTING _____________________________________________________________________________________ 5 RECENT DEVELOPMENTS ________________________________________________________________________ 7 OUTLOOK AND RISKS __________________________________________________________________________ 11 2023 SMP PERFORMANCE ______________________________________________________________________ 13 POLICY DISCUSSIONS ___________________________________________________________________________ 14 A. Fiscal policy—From Crisis to Resilience ________________________________________________________ 14 B. Strengthening Social Assistance _______________________________________________________________ 17 C. Addressing Governance and Enhancing Transparency to Lift Potential Growth _______________ 19 D. Implementing Structural Reforms to Support Potential Growth _______________________________ 22 E. Strengthening Monetary and Exchange Rate Policy Frameworks ______________________________ 24 F. Safeguarding Financial Sector Stability ________________________________________________________ 26 G. Improving Data Adequacy for Surveillance and Other Issues __________________________________ 28 STAFF APPRAISAL _______________________________________________________________________________ 30 BOX 1. Scarring from Multiple Crises—Loss in Potential Output _______________________________________ 9 CONTENTS HAITI 4 INTERNATIONAL MONETARY FUND FIGURES 1. Indicators of Well-Being and Digital Access ____________________________________________________ 6 2. Monitoring Economic Activity Through Satellite Data __________________________________________ 8 3. Revenue Performance, 2019–24 _______________________________________________________________ 16 4. Real Sector Developments, 2016–24 ___________________________________________________________ 32 5. Fiscal Sector Developments, 2016–24 __________________________________________________________ 33 6. Monetary and Financial Sectors Developments, 2017–24 ______________________________________ 34 7. External Sector Developments, 2017–24 _______________________________________________________ 35 TABLES 1. FSW. Spending Priorities Indicated by the Authorities _________________________________________ 20 2. Selected Economic and Financial Indicators, 2021–29 _________________________________________ 36 3a. Non-Financial Public Sector Operations, 2021–29 ____________________________________________ 37 3b. Non-Financial Public Sector Operations, 2021–29 ____________________________________________ 38 4a. Balance of Payments, 2021–29 _______________________________________________________________ 39 4b. Balance of Payments, 2021–29 _______________________________________________________________ 40 5. Summary Accounts of the Banking System, 2021–29 __________________________________________ 41 6. External Financing Requirements and Sources, 2021–29 ______________________________________ 42 7. Financial Soundness Indicators, June 2021–June 2024 _________________________________________ 43 ANNEXES I. Country Engagement Strategy _________________________________________________________________ 44 II. Impact of Crime on Economic Activity _________________________________________________________ 52 III A. Closing Gender Gaps ________________________________________________________________________ 54 III B. Macro-Critical Gender Gaps: The Case of Haiti ______________________________________________ 61 IV. Risk Assessment Matrix _______________________________________________________________________ 67 V. Domestic Revenue Mobilization: Reaping the Benefits of Digitalization through GovTech ____ 69 VI A. Assessing the Fiscal Policy Stance __________________________________________________________ 79 VI B. Strengthening the Fiscal Framework by Revising the Fuel Subsidy Regime _________________ 89 VII. Options to Further Strengthen Monetary and Exchange Rate Policy _________________________ 91 VIII. Assessing Macro-financial Linkages Using a Balance Sheet Approach_______________________ 99 IX. Data Issues ___________________________________________________________________________________ 107 X. External Sector Assessment ___________________________________________________________________ 109 XI. Inflation Dynamics in Haiti ___________________________________________________________________ 113 XII. Greening Haiti—Climate Policy and Structural Reforms _____________________________________ 120 XIII. Past IMF Recommendations and Implementation Status ___________________________________ 123 APPENDICES I. Joint Governance Matrix on Recent, Ongoing, and Forthcoming Capicity Development by the IMF and Development Partners _______________________________________________________________________124 HAITI INTERNATIONAL MONETARY FUND 5 THE SETTING 1. Haiti is a fragile and conflict-affected state—a low-income country with multiple challenges. Half its population lives below the poverty line. The economy has a low tax base and a large informal sector that relies heavily on volatile remittance flows. Since the last 2019 Article IV consultation, Haiti has suffered a series of crises and shocks, including the pandemic; a devastating earthquake in 2021; cholera outbreaks; and the economic spillovers of the war in Ukraine, which led to a food crisis that triggered acute hunger. The severe deterioration of the political and security situation over the last few years (including the assassination of President Moïse in 2021) has magnified these problems—leading to a surge in the number of displaced people (within the country and outside), a worsening brain drain, fatigue in host communities and in the region, and tighter capacity constraints (Annex I). Governance and corruption problems are pervasive. 1 2. Political and social insecurity deteriorated further during February-May 2024, reaching crisis proportions. 2 Gang violence inferred attacks on government buildings, police installations, and such key infrastructure as airports, roads, and ports. Schools have been forced to close and most Port-au-Prince residents have been cut off from critical supplies of food and healthcare. Gangs 1 Since late 2022, the United Nations, Canada, the EU, the United Kingdom, the United States, and other countries have imposed sanctions on high-profile Haitians for criminal activities. 2 According to UN data, homicides more than doubled in 2023 relative to 2022 and tripled relative to the pre- pandemic time. In 2024 homicide rates increased by 50 percent relative to 2023. Furthermore, 702,973 people were displaced within Haiti as of September 2024 (see UN International Organization for Migration agency), in addition to the 400,000 people who are displaced from Haiti. HAITI 6 INTERNATIONAL MONETARY FUND control large part of the capital. The widespread disorder has heightened Haiti’s fragility and compounded the populations’ suffering from severe malnutrition (Figure 1). Figure 1. Haiti: Indicators of Well-Being and Digital Access Life expectancy in Haiti is among the lowest in the world… …and children mortality rate is very high. Only 50 percent of the population has access to electricity… …and sanitation services are below other Fragile and Conflict-Affected States. Internet access is still limited… …as is the use of mobile phones. Sources: World Development Indicators and IMF staff calculation. Note: IDA=International Development Association; PRGT=Poverty Reduction and Growth Trust; FCS=Fragile and Conflict-Affected States. HAITI INTERNATIONAL MONETARY FUND 7 3. The government in place since June 2024 has a time-bound mandate to restore security, economic growth, and pave the way for orderly general elections in February 2026 (for the first time since 2016). A nine-member Transitional Presidential Council was established in April 2024, with the support of CARICOM, acting as the country’s presidency until February 2026. The first waves of the contingent of the Multinational Security Support Mission (MSS)—led by Kenya backed by the UN—arrived in Haiti at the end of June 2024. Progress in restoring security has been slow as the authorities maintained that the size of the MSS is still too small relatively to the originally expected presence to be impactful, with lack of resources being one of the main issues and requested the MSS to be replaced by a UN peacekeeping mission to have access to considerably additional funding and personnel. Kenya has committed a further 600 police officers by the end of the year. Some schools in the capital remain closed due to security and others host an increasing number of displaced people which could not return to their destroyed homes. A further escalation of violence took place since early October 2024. RECENT DEVELOPMENTS 4. Data point to a dire situation. Macroeconomic conditions remain difficult, with Haiti recording five consecutive years of negative growth (2019-23). Real GDP growth was negative 1.9 percent in FY2023, ending in September 2023. This reflected disruptions in production, exports, and in the distribution of goods and services (including energy) in local markets. The economy collapsed during March-May 2024 and has yet to fully recover. The airport in Port-au-Prince was closed from March to May and port capacity was at a minimum, as evidenced by staff’s monitoring of trade flows using satellite data through Portwatch (Figure 2). The supply-side shock caused by the security crisis has greatly fed inflation and worsened the hunger crisis: after 10 months of steady and remarkable decline, inflation resumed rising in February 2024, reaching 27.9 percent (year-on-year) in September. HAITI 8 INTERNATIONAL MONETARY FUND Figure 2. Haiti: Monitoring Economic Activity Through Satellite Data The pandemic and the intensification of criminal activity have disrupted trade flows. Import and export volumes, and the number of cargo and tanker ships are on a downward trend. Satellite data suggest that trade activity fell dramatically beginning in March-April 2024. Sources: IMF Portwatch (daily data), IMF Swift Monitor, and FlightsRadar24. Left upper chart: the blue line is the quarterly average of the daily arrivals of cargo ships. The red line is the quarterly average of the daily arrivals of tanker ships. Right upper chart: quarterly average of the daily import and export volumes. HAITI INTERNATIONAL MONETARY FUND 9 Box 1. Haiti: Scarring from Multiple Crises—Loss in Potential Output Results. Between 2019 and 2023, Haiti’s potential real GDP fell on average by about 2 percent a year, while that of a comparator group increased by 3.2 percent a year (Figure 1.1). The cumulative total gap between Haiti and the comparator group in the period is equal to 25 percent (Figure 1.2). 1 Methodology. We use a growth accounting exercise with a Cobb Douglass production function: Y ������=������ ������( � ������) ������ (� ������ ℎ ������) 1−������ , where Y ������ is real GDP, � ������ is labor force, ℎ ������ is human capital, and � ������ is capital stock, and ������ ������ is total factor productivity. • Step 1. To account for the impact of natural disasters on capital stock, we remove changes in investment, ������ ������ which are due to reconstruction efforts after natural disasters (to avoid upward bias in capital stock in the recovery phase). To this end, we estimate an ARIMA (1,0,1) model for investment and introduce a two-lag dummy for natural disasters. After subtracting the effect of natural disasters, we obtain a modified investment series: ������ ������ � . • Step 2. Calculate the corrected capital stock, � ������ � by using the perpetual inventory method with the “correct” investment process, ������ ������ � , as an input. • Step 3. Obtain the human-capital-adjusted labor force accounting for changes in population and in average years of schooling when available. Step 4. Estimate¸ using the growth accounting framework, the contribution of total factor productivity as a residual: A ������=� ������/( � ������ � ) 1−������ (� ������ ℎ ������) 1−������ . • Step 5. Compute the trend for productivity, A ������ ��������������� using the filter of Hodrick-Prescott. • Step 6. Use A ������ ��������������� and � ������ � to obtain potential output: � ������ ������������� =A ������ ��������������� (� ������ � ) 1−������ (� ������ ℎ ������) 1−������ . The impact of crime and climate on potential output. The channels through which crime affects growth are productivity, capital accumulation, and human capital. IMF (2023) computes the effect of crime on real GDP growth in a cross section of Latin American countries, with an elasticity ranging between -0.3 and -0.4 with respect to the homicide rate (measured in logs). Using homicide rate (i.e., homicides per 100,000 inhabitants) for Haiti which surged from 11 in 2019 to 59 in 2024, we conclude that crime could account for a drop in real GDP of at least 1.2 percent per year. In addition, climate will impact the computation of potential output through the difference between � ������ ⬚ and � ������ � (with the latter correcting for the upward bias due to reconstruction efforts in the aftermath of a natural disaster) and through the effect on natural disasters on productivity. 1/Prepared by: Sinem Kilic and Juan Passadore (WHD). Note: Regional Economic Outlook: Western Hemisphere, October 2023 (imf.org), “Securing Low Inflation and Nurturing Potential Growth,” Online Annex 4, “Crime and its Macroeconomic Consequences in Latin America and the Caribbean.” Note: Estimates of the homicide rate for 2024 (through August) are from UN Integrated Office in Haiti. HAITI 10 INTERNATIONAL MONETARY FUND 5. Latest data suggest that trade collapsed in recent months while remittances held up. The current account deficit widened in FY2023 to 3½ percent of GDP owing mainly to a collapse in exports (especially textile). The external position of Haiti in FY2023 is assessed as weaker than the level implied by fundamentals and desirable policies (Annex X). Preliminary BOP data point to a narrowing deficit so far in FY2024 to ½ percent of GDP, mainly the result of large import compression (amid strong real-side restraints on economic activity) and robust remittances. As a result, reserve buffers have been rebuilt to a comfortable level. Gross International Reserves (GIR) increased from US$2.1 billion at end-September 2022 to US$2.3 billion at end- September 2023—and stood at US$2.5 billion (equivalent to 5.7 months of imports) in August 2024. Net International Reserves (NIR) for September 2023 stood at US$356 million and jumped to almost US$1 billion (US$963 million in August 2024). The increase in net international reserves in FY2024 (US$607 million through August) was supported by net FX purchases by the BRH (US$471 million in the whole year, text chart), benefitting from a favorable FX supply in the market driven by remittances. Relative to the net reserves, gross reserves increased by a lower amount in FY2024 HAITI INTERNATIONAL MONETARY FUND 11 (US$188 million through August) due to the settlement with Venezuela, which reduced both FX assets and FX liabilities. The exchange rate exhibited a crawl-like behavior between June and December 2023 and has stabilized within a 2 percent band against the U.S. dollar since then. The authorities have continued to reduce the monetary financing of the fiscal deficit, in line with 2022-23 SMP objectives. 6. Debt restructuring with Venezuela implemented in early 2024 significantly reduced the debt stock and debt service of Haiti. By end-September 2023, Haiti’s outstanding Petrocaribe debt to Venezuela was US$2.2 billion, with US$642 million in arrears. In January 2024, Haiti and Venezuela finalized an agreement on a debt forgiveness of Petrocaribe debt of about US$1.7 billion in exchange for a lump-sum payment of US$500 million. As a result, Haiti’s debt-to-GDP ratio dropped to 14 percent in FY 2024 allowing the authorities to save approximately annually US$95 million (or 12.5 billion gourdes) in debt service. OUTLOOK AND RISKS 7. The macroeconomic outlook for Haiti remains clouded. Growth in FY2024 (ended in September 2024) is expected to be negative (for the sixth consecutive year), at minus 4 percent. Growth could reach 1 percent in FY2025 and 1½ percent over the medium term if the security situation improves. But further social turmoil would continue to disrupt economic activity. Staff’s analysis suggests that bolstering domestic security could greatly enhance growth. Should crime (proxied by the homicide rate) be brought to pre-pandemic levels, the impact on growth could be as large as 1.9 percentage points annually in the short and medium term (Annex II) and 1 percentage point in steady state (long term), all else equal. Furthermore, staff’s analysis (Annex III A) indicates that the medium- and long-term level of GDP could rise by 5-15 percent should Haiti’s gender gap, proxied by different gender labor participation rates, close. The increase in GDP would be even larger if education gaps were to close. HAITI 12 INTERNATIONAL MONETARY FUND Inflation is projected to ease further over the medium term, assuming adequate macroeconomic policies and improvement on the security front. The fiscal deficit of the NFPS is projected at about 0.1 percent of GDP. The current account deficit is projected to increase to 1 percent of GDP in the medium term as imports recover. Gross reserves are expected to grow this year, assuming confidence-building from the Kenya deployment mission and strong remittances; they could remain at 5½-6 months of imports over the medium term. 8. Domestic and external risks cast a long shadow (Annex IV, RAM). These risks include intensified political instability; continuous gang-related disruptions to economic activity, especially if full deployment of the MSS is delayed; a worsening of the hunger crisis; natural disasters; and pervasive corruption and weak rule of law. Externally, Haiti is vulnerable to volatile remittance flows, reduced external financing from development partners, and renewed surges in global food and energy prices. The macroeconomic baseline for Haiti is subject to elevated uncertainty. Given the country’s fragility, conflict, and violence, it is highly vulnerable to macro risks that could erode confidence in the baseline projection. Such risks include continuation of recession, problems in mobilizing revenue owing to a resurgence of violence, and the transitional government’s weakened capacity to implement policy. Under this adverse scenario, substantial monetary financing of the budget would likely resume, further undermining macroeconomic stability. The debt risk outlook is negative, in light of the high likelihood that Haiti debt carrying capacity will be downgraded in the next debt sustainability analysis (DSA) absent significant strengthening of country fundamentals. The accompanying DSA still assesses Haiti’s risk of debt distress as high but sustainable. This is because of Haiti’s large exposure to natural disasters, its large development and infrastructure needs, and its still-low potential growth—mainly the result of a lack of security and poor infrastructure. However, the sustainability of overall debt hinges on the ability of the authorities to secure donor financing over the short to medium term. 9. That said, the current government has a narrow window of opportunity to implement reforms that could help restore the country’s potential over the medium and long term. Official transfers could rise if countries within and outside the region support the Kenya-led operation with additional financing and if they support Haiti’s reconstruction. Normalization of the security situation would greatly improve the medium-term outlook. If this were combined with the implementation of a strong anti-corruption strategy, it could bring back the foreign direct investment FDI and talent that have left the country. Should downside risks materialize, additional donor support (via grants) will be essential to preserve macro stability and support priority spending, without reverting to monetary financing. 10. Authorities’ views. The authorities’ economic outlook is consistent with that of IMF staff. That said, they believe that GDP numbers, in and of themselves, do not accurately portray the real conditions of the Haitian population and the extent of the current humanitarian, social, and economic, crises. They indicated that the current government has nonetheless a narrow window of opportunity to implement reforms. Quite apart from the immense challenges, the country could face meaningful prospects in the medium term that would require strong support from the private sector and large development partners. The authorities expect only a small current account deficit in HAITI INTERNATIONAL MONETARY FUND 13 FY2024, a result of import compression and security-related trade flow disruption, as well as strong remittances (supported by migration). Over the medium term, they see risks of a wider current account shortfall attributable to imports of consumer goods and a potential slowdown in remittances related to the expiration of Temporary Protected Status by the United States. They also see risks tilted to the downside and an exceptional level of uncertainty deriving mainly from the unsettled security situation, which could lead to further brain drain, prevent FDI inflows, and continue to undermine long-term growth. They see large multilateral and bilateral external assistance as paramount for supporting growth prospects to finance the large development needs and see the continuation of grant financing as essential to preserve debt sustainability. 2023 SMP PERFORMANCE 11. Building on progress achieved under the 2022 SMP (June 2022-May 2023), a new SMP was negotiated in June 2023. The new SMP went off track despite the authorities’ continuously close engagement with staff. 3 A cyber/IT attack on the central bank in June 2023 and delay in providing timely monetary data prevented the completion of the first review in December 2023. The Fund addressed concerns about monetary data by providing capacity development (CD) assistance to the central bank in helping it compile for the first time the reserve data according to the international standard provided by the “reserve template.” The central bank recompiled manually central bank balance sheet data, prior to a new software being introduced. A FIN-tailored new safeguard-monitoring mission in March 2024 revealed persistent weaknesses in foreign reserve management, with 60 percent of reserves invested in corporate bonds. The main lesson of the 2023 SMP is that without a minimum level of security, the authorities’ commitment is insufficient to ensure successful implementation. Despite the challenges, until March 2024, the fiscal aggregates were in line with the approved program (2023 SMP) and the fiscal stance was more conservative than expected. 12. The worsened security situation led to further slippages (in providing data and lower tax collection and in delaying the achievement of some structural benchmarks), also the result of reduced capacity in data compilation because of the lockdowns. This prevented the completion of the combined First and Second Reviews in March. Despite slippages, the authorities continued to deliver, and most quantitative targets (QTs) were met until March. But implementation of structural benchmarks has been mixed. The authorities have continued to share detailed quarterly financial statements for the FAES and have provided monthly reports on the execution of fiscal spending financed by the Food Shock Window (FSW)—according to the template provided by staff, no later than 45 days after the end of each month. The General Finance Inspectorate has conducted internal audits of all ministries that use FSW emergency resources and is transmitting the documentation to the Superior Court of Accounts and Administrative Disputes (CSCCA). The authorities also had met—ahead of the December 2023 target—the structural benchmark on the Council of Ministries’ approval of the amendments of the organic law on the financial intelligence unit. But all benchmarks introduced in December as part of the SMP extension were not met. These 3 The initial nine-month SMP was approved in June 2023 and extended in December 2023 through September 2024. HAITI 14 INTERNATIONAL MONETARY FUND include: (i) provision of more granular monetary data, including detailed information on government deposits at the central bank, as opposed to the provision of aggregate numbers, which was provided to staff with substantial delay; (ii) publication of core macroeconomic and financial indicators, according to timeliness and periodicity of the e-GDDS; (iii) publication of governance diagnostics and an accompanying action plan agreed by the authorities; and (iv) publication of the upcoming audit of the central bank for FY2023, albeit progress had been made on most fronts. Until a new government was in place, it was not possible to conclude the government diagnostic with an agreed action plan. The audit of the central bank has been much delayed because the Superior Court of Accounts has yet to approve the audit firm’s contract. POLICY DISCUSSIONS A. Fiscal policy—From Crisis to Resilience 13. Revenues. Haiti’s level of tax revenue is among the lowest in the world (5 percent of GDP). As a result of the social, political, and security crises, domestic revenue (excluding customs) has remained below pre-pandemic levels (Figure 3)—even before the escalation of gang activity in early 2024. That said, tax revenue performance in FY2023 was very promising. It rose by 55 percent, year- on-year in FY2023, thanks mainly to higher custom duties (which grew 120 percent). These duties accounted for 35 percent of total domestic revenue, which largely reflected higher fuel import taxes and improved customs revenue administration. Excise taxes also outperformed expectations, surging 310 percent, although representing only 5 percent of total domestic revenue. Revenue grew sharply during October-December 2023, owing mainly to continued strong customs collections which grew 48 percent y/y, well above inflation. But revenue began declining in early 2024 and collapsed by 73 percent in March 2024, reflecting economic paralysis, before beginning a mild recovery in July 2024. 14. Recent reforms. Since the last 2019 Article IV consultation, the government has passed important reforms aimed at raising domestic revenue over the medium term: 1) new tax code (and accompanying tax procedure code) in December 2022, which was originally supposed to be implemented in October 2024 but is now on hold pending finalization of implementing regulations; 4 2) the publication of customs tariffs; and 3) a new customs code adopted in March 2023. The tax and tax procedure codes seek to rationalize and simplify the personal income tax and corporate income tax, including by broadening the tax base and eliminating many exemptions. Tax and customs administrations remain vulnerable to arbitrariness and corruption, due to the complex system, inequitable processes, and the low level of digitalization. Overall lack of transparency and accountability, weak integrity standards and oversight mechanisms leave officials and executives of tax and customs administrations exposed to corruption risks. 4 Pending regulations include certain provisions on: (i) transfer pricing documentation and simplified declaration model, (ii) detailed list of products exempt from turnover taxes, (iii) detailed list of products subject to excise, (iv) procedures for appointing members of the tax litigation appeal commission, (v) application of special regimes (investment code, free zones, and industrial parks), (vi) registration and tax identification numbers, (vii) audit procedures, (viii) code of conduct for tax officials, and (ix) taxpayers charter and users’ service policy. HAITI INTERNATIONAL MONETARY FUND 15 15. The capacity to raise taxes is essential, both in the short and medium term and digitalization can help. But it requires the restoration of security, implementation of the new tax code, and enhanced revenue administration. Staff’s analysis (Annex V) suggests that, over the medium term, revenue gains from strengthening the digital infrastructure of customs administration (GovTech) could generate additional tax revenue of 0.6-0.9 percent of GDP a year by limiting the impact of trade fraud on the value, origin, and tariffs on imported goods or of smuggling. Other important reforms include the adoption and publication on the website of the 2024-27 strategic reform plan of the tax administration and custom administration to improve transparency of strategic objectives and expected results for both tax and customs administrations. The simplification of declaration procedures is a prerequisite for their digitization. For the Directorate General of Taxes (Direction Générale des Impôts or DGI), staff recommended abolishing the issuance of payment authorizations in the context of the periodic tax return procedure. On the General Administration of Customs (Administration Générale des Douanes or AGD), staff strongly encouraged to initially apply the simplified procedure as recommended by Article 108 of the Customs Code. Intensive use of technologies by the tax and customs administrations would increase transparency in revenue administration; strengthen traceability of the core operations; and reduce face-to-face interactions; and minimize the intrusion of officers into the affairs of users intending to comply with the law and meet their reporting and payment obligations. Accordingly, the customs and tax administrations must take advantage of the available technological solutions developed by mobile phone operators to set up tax payments by mobile telephone initially, and subsequently by bank transfer. It will also be essential to establish the interconnection of DGI and AGD IT systems, with a view to exchange data to enlarge the taxbase and fight more efficiently against frauds. The authorities can make progress by formalizing the information exchange protocol between the tax and customs administrations and developing the platform to support electronic exchange of data, as well as implementing the planned capacity development activities targeting local authorities who will oversee the determination of the property tax base. 16. Spending. Since the last 2019 Article IV consultation, the authorities have limited spending relative to historical averages, which enabled a rebuilding of fiscal buffers. But fiscal policy was at best weakly countercyclical (Annex VI A). In FY2023, spending decreased by 1.9 percent of GDP, thanks to a large drop in fuel subsidies. 5 Other current expenditures were contained (relative to 5 In July 2023, the authorities reduced prices of all fuel products (with larger reductions on diesel and kerosene). The price of diesel fell from 670 to 620 gourdes; the price of kerosene, from 665 to 615 gourdes; and the price of gasoline from 570 to 560 gourdes. HAITI 16 INTERNATIONAL MONETARY FUND inflation), with nominal wages and salaries rising at an annual rate of 17 percent and goods and services by 20 percent—and declining as a percent of GDP. Social spending was equivalent to 1.3 percent of GDP, below the previous year (1½ percent) —the result of the deteriorating security situation’s impact on implementation. Lockdowns triggered by gang violence also hampered the authorities’ ability to spend in FY2024 (at least through June). Figure 3. Haiti: Revenue Performance, 2019–24 Sources: Ministry of Economy and Finance and IMF staff calculations. As for the top charts and lower left chart: index, cumulative values, September 2019= 100, nominal GDP discounted. 17. Fiscal balance. The authorities’ containment of current spending yielded a zero balance for the non-financial public sector (NFPS) in FY2023 (while the SMP envisaged a deficit of 1.9 percent of GDP). Monetary financing reached 1 percent of GDP at the end of FY2023, below the 1.4 percent projected at the SMP’s outset. The FY2024 budget (approved on September 28, 2023) was consistent with the 2023 SMP goal of reducing monetary financing of the deficit to lower inflation and restore stability. The fiscal balance of the NFPS is expected to register a surplus equal to 0.7 percent of GDP (excluding a one-off capital transfer owing to the repayment of the debt to Venezuela), with spending underperforming by 1.9 percentage points of GDP relative to FY2023. 0 20 40 60 80 100 120 OctNovDecJanFebMarAprMayJunJulAugSep 2019 2021 2022 2023 2024 Total Domestic Taxes HAITI INTERNATIONAL MONETARY FUND 17 With global oil prices rising only moderately, fuel subsidies are projected at zero in FY2024. At the same time, revenue on fuel imports is projected at 0.7 of GDP. 18. FY2024 revised budget and FY2025 budget. In August 2024, the Council of Ministries passed swiftly a revised budget (budget rectificatif) to take into account the lower revenue relative to the original budget and the recent debt operation with Venezuela—and to re-direct former interest payments to social spending. The FY2025 budget was approved on time before the start of the new fiscal year and points to a balanced budget, in line with staff projections; and the fiscal stance is appropriate. Staff and the authorities differ in the size of total revenues and grants as well as capital spending. Staff projects lower revenues and grants relative to the authorities (by 0.9 percent of GDP) and lower capital spending (also by 0.8 percent of GDP), with capital spending depending on the size of project grants. To mitigate fiscal risks from lower project grants, the authorities have discussed with staff a contingency plan. Shortfalls in revenue or external project grants need to be offset by limiting planned increases in current and capital spending in FY2025, while preserving social spending on the most vulnerable. The authorities agreed to avoid running domestic arrears to finance shortfalls and avoid resuming monetary financing of fiscal deficits. 19. Gender. The FY2025 budget purposefully introduced measures to close gender gaps. These include: a project called the Support for Women's Entrepreneurship under the Ministry of Industry and Commerce designed to support new jobs among youth, particularly women, with a budget allocation of 75 million gourdes; and an increased allocation by 30 percent relative to the previous year budget to the Ministry for Women's Affairs (for a total amount of 150 million gourdes) to promote gender equality rights and strengthen security and protection of women. 20. The medium-term fiscal framework. The authorities published the forward estimates in line with the 2022 SMP commitment. The fiscal balance is expected to shift into small deficit equal to 1.4-1.7 percent of GDP (Table 3b) over the medium term. The medium-term forecast rests on an increase in capital spending to support infrastructure needs and goods and service spending as a mild recovery unfolds; it also assumes a small increase in wages (to retain talent). In addition, the tax-to-GDP ratio will rise gradually, owing to further revenue administration reforms, while monetary financing of the budget will be capped at zero percent of GDP. Implementation of the tax code over the medium term is also expected to raise tax revenue. B. Strengthening Social Assistance 21. Efforts to strengthen social safety nets have advanced and should continue. On September 9, 2023, the government started distributing the long-awaited fuel cards to low-income workers in the transportation sector to mitigate the impact of fuel price adjustments and to better target subsidies. These actions were accompanied by cash transfer (checks) to the most vulnerable as identified in the SIMAST database, which the World Bank and WFP helped maintain and expand. HAITI 18 INTERNATIONAL MONETARY FUND 22. Fuel subsidy revisions were essential to ensure medium-term fiscal sustainability and progress has been made to adjust the prices. Given the political and social implications, the authorities have been following a cautious home-grown approach, both in terms of the modalities and timing of the reform, guided by good policy principles. They have reviewed the retail price- setting mechanism, as part of a draft amendment of the 1995 Law, in order to allow changes in international fuel prices and exchange rates to be partly passed on to consumers, with a smoothing mechanism that caps the monthly variation of retail prices, and they are considering a reform in due course. Since the price adjustment implemented in September 2022, which allowed prices at the pump to cover supply costs, the government has been considering allowing changes in international fuel prices and exchange rates to be partly passed on to consumers. This would protect the budget from large international price volatility, improve public finance management, and encourage the efficient consumption of fuel products. In addition, a smoothing price mechanism is being considered that would distribute international price and exchange rate volatility between consumers and the budget. The smoothing will generate subsidies in some periods (when oil prices rise) and savings in others (when oil prices drop) but lower than otherwise without smoothing. Staff emphasized the importance of an elaborated communication policy to help the authorities’ reform strategy. Establishing a regulatory framework for the petroleum-products sector and strengthening related regulatory institutions should remain among the authorities’ reform priorities. Introducing a simple smoothing mechanism (Annex VI B) would reduce the volatility of fuel net revenues and retail prices. Moreover, since the proposed pricing mechanism caps monthly price changes, the population will not be subject to ad hoc unforeseen discretionary adjustments—which could help enhance social stability. 23. Food Shock Window (FSW). Until July 2024, spending related to commitments previously indicated by the authorities on food security had been limited (about 3 billion gourdes or 20 percent of total FSW disbursement). Criminal activity, lockdown, and ongoing political transition prevented the previous government from targeting spending at the more vulnerable population (e.g., children could not attend schools regularly as a result of gang activity and displacements). The authorities provided lately detailed information of the amount authorized to be spent (Table 1). HAITI INTERNATIONAL MONETARY FUND 19 24. Authorities’ Views. The authorities indicated that despite multiple challenges posed by the difficult juncture, they were able to be approved the FY2025 budget on time. They also emphasized that reducing gender inequality is one of the government's priorities as reflected in specific allocation of gender areas in the recently approved budget. These essentially aim to strengthen support for women's empowerment by improving women's education and training as well as their access to financing and participation in the labor market. These efforts also include improving access to health care, with a view in particular to reducing maternal mortality, and the implementation of programs dedicated to protection against gender-based violence. The authorities were open minded regarding channeling the FSW resources through the WFP, but they indicated having a strong preference from channeling them through the budget to demonstrate spending capacity, exercise more ownership, and avoid the overhead costs from a third party. C. Addressing Governance and Enhancing Transparency to Lift Potential Growth 25. Finalizing and publishing the results of the Fund-supported governance diagnostic assessment by December 2024 is urgent. Similarly, the authorities’ continued commitment will be critical to ensuring implementation of priority recommendations identified in the action plan. Important priority areas include establishing an agency or center (Pôle Anti-Corruption) for serious organized crime, corruption and related money laundering offences and publishing asset declarations of top officials. The implementation of the action plan of the governance diagnostics should be a priority and should provide a road map for reforms to enhance governance and fight corruption. The implementation of the plan will require CD not only from the Fund but also from development partners. Staff strongly urged the authorities to continue strengthening domestic revenue mobilization, thereby sustaining reductions in monetary financing of the budget. While such financing has been lately lower than expected, this has reflected lower spending, which is also the result of the security threats preventing full execution. Such expenditure levels will not be sustainable nor preferable given the economy’s fragility and widespread poverty. As security stabilizes and spending capacity rises, higher revenue mobilization will be necessary to finance large investment needs. Staff underscored the importance of sustaining reforms to enhance digitalization, transparency and accountability in tax revenue collection and use of public funds. On the expenditure side, increasing spending capacity, better targeting social spending, and enhancing transparency of public spending are key for attracting donor support. HAITI 20 INTERNATIONAL MONETARY FUND Table 1. Haiti: FSW. Spending Priorities Indicated by the Authorities (In millions of gourdes) HAITI INTERNATIONAL MONETARY FUND 21 26. Public financial management (PFM) reforms should continue to enhance public finance reporting, transparency, and accountability. The authorities have been providing more detailed monthly data on budget execution (including spending on wages, goods and services, and capital investment by ministry and by project) and publishing (on the website of the Direction Générale du Budget, MEF) detailed budget execution by line ministries. They continue to share more detailed quarterly financial statements for the Fund for Economic and Social Assistance (FAES), following PFM best practices provided by FAD. The staff stressed the need to prepare the medium- term budget framework (MTBF), based on the adopted medium term fiscal framework (MTFF), and use a top-down approach to set expenditure ceilings to guide budget preparation at the ministry level. Building on this reform, in the medium run, each key line ministry should prepare a medium- term expenditure framework (MTEF) using its defined expenditure ceilings to ensure better resource allocation and prioritization. Other PFM reforms could include: 1) limit the volume of unspecified expenditure in the budget by bringing it down to around 3-5 percent of total government expenditure to improve fiscal transparency (text table); 2) reinstate the financial controller’s prerogatives about a priori control over public investment expenditures; 3) adopt, and implement a revised expenditure execution manual; 4) revise the procurement law to streamline its internal control mechanisms and make the procurement system competitive and transparent; 5) further strengthen internal and external audits, including by the Inspectorate General of Finance and the Superior Court of Accounts and Administrative Disputes (CSCCA) to produce and publish an annual report to follow-up TA recommendations. 27. Improvements in governance are paramount for rebuilding the trust of investors and development partners, given low ODA flows in recent years. The forthcoming governance diagnostic action plan would help guide the government’s dialogue with development partners. On monetary data, the recent STA recommendations on the reserve template should be implemented swiftly to enhance transparency. The audit of the central bank for the fiscal year ending September 2023 should be finalized by the end of December 2024. 28. Recommendations by FIN in the context of the recent tailored safeguard monitoring mission in March should be implemented urgently. Strengthening the governance and accountability arrangements in reserves management would also be key for enhancing the transparency of central bank operations. The BRH should commit to undertaking (in close consultation with staff and through Fund CD) an external comprehensive review of reserves HAITI 22 INTERNATIONAL MONETARY FUND management practices to address current shortcomings and align with leading practices for central banks on aspects related to, inter alia: (i) governance; (ii) policy/guidelines/strategic asset allocation; and (iii) portfolio composition. The review should establish a roadmap to guide the BRH through a transition in the medium term. The BRH should undergo an external assessment of its portfolio to determine: (i) the actual level of liquidity (considering the nature and quality of the assets); and (ii) the alternatives that may be available to the BRH, in the short term, to effectively transition to a reserve portfolio more aligned with the principles of liquidity and security. The shortcomings highlighted in the 2016 and 2019 safeguards assessments and the 2015 Technical Assistance over the investment policy and guidelines as well as the strategic asset allocation, remain valid. 29. Authorities’ Views. The authorities reiterated their commitment to fight corruption and strengthen governance as a centerpiece of the government's action plan. They recognize that tangible and rapid progress in this area is essential to restoring macroeconomic stability, achieving inclusive growth, and addressing the root causes of the country's fragility, including violence. They intend to publish the IMF governance diagnostic and to build on the recommendations to complement and accelerate the implementation of ongoing reforms, with a focus on strengthening the rule of law, public finance governance, financial sector oversight, and anti-corruption and anti- money laundering frameworks. D. Implementing Structural Reforms to Support Potential Growth 30. Beyond the immediate crisis, Haiti needs to implement reforms needed to exit fragility. While facing huge development challenges, Haiti also faces enormous long-term opportunities. This will require continuing preserving the fiscal space, improving the quality of public spending, investing in resilient infrastructure (both physical and digital) and human capital. In addition to tapping international assistance, these large investments should be financed by stepping up efforts in revenue mobilization. Closing gender gaps could greatly enhance economic activity by 5-15 percent (Annex III A) by boosting women’s participation in the labor market. Other measures include tailoring a gender-friendly tax system, improving women’s health and reducing maternal mortality, raising level of education and job skills, increasing financial inclusion. Unequal access to education could be addressed through targeted social spending, conditional cash transfers that encourage girls’ access to education, and child allowances to reduce the dropout rate of girls. From a sectoral perspective, Haiti has untapped opportunities on the tourism sector, which would require sizable investment to improve business environment. Tapping these opportunities calls for a comprehensive strategy involving both the public and HAITI INTERNATIONAL MONETARY FUND 23 the private sector. Staff discussed the authorities’ specific development objectives for human capital development (health, education) and physical infrastructure (water and sanitation, electricity, and roads) for the medium term and aligned them to staff’s estimates of the additional spending to achieve Sustainable Development Goals (SDGs) on these areas. Staff estimated that for Haiti the spending needs to achieve these five SDGs are equivalent to 14.4 percent of GDP, using 2030 GDP. The spending does not reflect only fiscal costs. The achievements of these goals will require a combination of 1) higher revenue, 2) donor financing (not already channeled through the budget to avoid double counting), 3) higher efficiency of spending; and 4) private sector financing. Staff estimates indicates that capital stock and infrastructure quality for Haiti is low which is not surprising given years of social unrest. Climate Change and Natural Disasters 31. Haiti is very much exposed to natural disasters and climate shocks which poses severe macro-critical challenges. In addition to their devastating human cost, natural disasters and climate change destroy or damage infrastructure and other capital and impacting potential growth (Box 1). 32. The government is implementing actions aimed at strengthening resilience and adaptation to climate change. Investments to exploit the potential of renewable energy through the development of micro-grids in rural areas are in progress with the support of USAID. Irrigation projects, adoption of new technical packages and ecosystem management are being implemented in order to strengthen the resilience of the agricultural sector and food security. With the aim of improving accessibility and rural resilience, efforts are focused on bridge and road constructions. Furthermore, to provide effective and efficient responses to disaster risks, the budget allocates every year US$6-7 million for three parametric insurance HAITI 24 INTERNATIONAL MONETARY FUND policies against risks such as hurricane, earthquake, and floods. In addition, the budget has a special allocation in the Emergency Fund. The government is currently working to set up warning systems and temporary shelters in the departments most vulnerable to climate shocks. 33. Enhancing resilience to natural disasters and climate change entails a multi-pillar strategy at the national and regional, and multilateral levels. It also requires enhancing Haiti’s risk management capacity (Annex XII). 34. Authorities’ Views. The achievements of SDGs will require financial support from development partners. The government is fully committed to build resilience to climate shocks. It intends to finalize in December 2024 a Climate Prosperity Plan to tackle the climate emergency, including through a full- scale deployment of renewable energy in due course. E. Strengthening Monetary and Exchange Rate Policy Frameworks 35. Haiti’s monetary policy framework was strengthened since the last Article IV consultation and central bank independence has increased lately. The monetary stance during the last two years has been tighter than programmed, as financing of the budget was reduced to zero, thereby enhancing the credibility of the policy frameworks. The current policy mix to reduce inflation (through the combination of continued fiscal adjustment and zero monetary financing of the budget) should help bring inflation down from currently high levels (which lead to large negative real rate of about 15 percent). Nonetheless, staff’s analysis (Annex XI) suggests that inflation is more recently associated with security-related supply-side shocks. Thus, restrictive monetary and fiscal policies will not be sufficient to keep inflation under control without a normalization of the security outlook. Staff continued to recommend: • greater exchange rate flexibility, • a ceiling on credit to the NFPS as the main anchor to continuing avoiding monetary financing of the deficit; and • short-term liquidity-absorbing operations at a fixed rate (policy rate) and full allotment to strengthen the monetary and exchange rate frameworks. 36. The BRH should continue to limit its interventions in the foreign exchange (FX) market to smoothing excessive exchange rate volatility and signaling a build-up of NIR. Deposit and HAITI INTERNATIONAL MONETARY FUND 25 credit dollarization remains high (Figure 6), which limits the effectiveness of monetary policy and heightens the economy’s susceptibility to external shocks and financial instability. Recent data suggest that the authorities’ interventions in the FX market are also to rebuild NIR. Staff recommended that the BRH: o put in place an appropriate mechanism for FX interventions, such as well-designed weekly FX auctions, in lieu of the FX allocation system. o advance its ongoing work on an FX market intervention rule; and o complete the revision of banks’ net open position limits (Annex VII, para 15). 37. Exchange rate system. The de jure exchange rate is floating. The de facto exchange rate is classified as stabilized since January 2024. Staff discussed with the authorities whether any changes had been introduced in the foreign exchange system since the last 2019 Article IV that could influence capital flows (CFMs) but did not find any such evidence. 38. Authorities’ Views. The authorities indicated that the main goal of monetary policy remains price stability. The fiscal and monetary authorities are committed to keeping the monetary financing of the budget to zero. They also indicated that FX market interventions (lately with net purchases of dollars) have been aimed mainly at smoothing the volatility of the gourde (i.e., prevent further appreciation) and improving the reserves cushion. The authorities acknowledged that the gourde has been appreciating in real terms and noted that a depreciation would not boost exports (as security and structural problems are the main impediments) and that a stable gourde is important to ensure price stability. They also indicated that the FX purchases did not expand the monetary base and that inflationary pressures have been attributable mainly to supply-side factors (i.e., security constraints to the movement of goods). The authorities stated they do not engage in prioritization or rationing in the FX market but note that there has been targeted provision of FX to critical sectors (through commercial banks), such as pharmaceutical imports during COVID, and more recently the oil sector. The authorities acknowledge the existence of an informal FX market, focused on cash transactions (as there is dual circulation of paper currency in Haiti). The informal market benefits from lower administrative constraints, the large size of the informal economy, and its ability to reach consumers in more locations. The BRH is trying to bring more market agents into formality. The authorities maintain that the main goals of recent HAITI 26 INTERNATIONAL MONETARY FUND remittance regulations were to bring more formality to the FX market and protect consumers from unfavorable rates and abuses, not to change the allocation of funds by market agents. They affirm that transfer houses remain able to send funds abroad through the financial sector if they desire. F. Safeguarding Financial Sector Stability 39. Background. Haiti ranks low on the Fund’s Financial Development Index. Its financial system is small, with the assets (excluding the central bank) of the entire system equivalent to less than 20 percent of GDP. Haiti also has underdeveloped capital markets, with limited trading activity in stocks, bonds, and other securities. It would greatly benefit from financial deepening. Credit-to-GDP declined to 5.3 percent in FY2023 (from 10.5 percent in 2019) as banks reduced lending to the private sector, mainly because of the security crisis. Staff estimated the credit-to-GDP gap at negative 22 percent in June 2024. Haiti’s banking sector remains highly concentrated, with the three largest banks holding more than 80 percent of banking system assets (Annex VIII). The worsening of the security crisis and governance issues have also weakened the financial sector. Vulnerabilities have increased, as reflected in lower capital adequacy ratios and a more-than-doubling of non-performing loans—from 5 percent in 2020 to 12 percent in June 2024. All banks but one, which is state-owned, meet the minimum capital adequacy ratio of 12 percent. The Board of the National Bank of Credit was replaced in early August, following internal investigations, and the new Board was placed under the supervision of the central bank. More information is needed to fully assess the risks faced by the financial sector, including the size of a possible recapitalization and the public funds required. The BRH has been strengthening banking supervision, with Fund assistance, to upgrade the regulatory framework and move to risk-based supervision. But six years of recession and security crisis have hurt the financial system. The BRH is advancing reforms to increase financial inclusion and access to credit, including in rural areas. Fiscal dominance, a pervasive problem until 2022, has been phased out, with no monetary financing of the deficit expected for FY2024 (ending in September 2024). [... middle sections omitted for long document ...] HAITI 18 INTERNATIONAL MONETARY FUND Table 2. Haiti: Structure of Public Debt and Debt Service (Fiscal-year basis) Table 3. Haiti: External Debt Sustainability Framework, Baseline Scenario, 2021–2044 (In Percent of GDP, unless otherwise indicated) INTERNATIONAL MONETARY FUND 19 HAITI Table 4. Haiti: Public Sector Debt Sustainability Framework, Baseline Scenario, 2021–2044 (In Percent of GDP, unless otherwise indicated) HAITI HAITI 20 INTERNATIONAL MONETARY FUND HAITI INTERNATIONAL MONETARY FUND 21 Table 5. Haiti: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2024–2044 (In Percent) HAITI 22 INTERNATIONAL MONETARY FUND Table 6. Haiti: Sensitivity Analysis for Key Indicators of Public Debt, 2024–2044 Statement by the IMF Staff Representative on Haiti November 20, 2024 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.On November 11, 2024, the Transitional Presidential Council (TPC) of Haiti designated a new Prime Minister, Mr. Alix Didier Fils-Aimé. As a result, former Prime Minister, Garry Conille, resigned. A decree listing the names of the new cabinet members (comprising 18 ministries, including eight reappointments from Mr. Conille’s administration) was issued on Friday November 15. Since his appointment, the new Minister of Economy and Finance, Mr. Alfred Metellus, has already met with the IMF team, together with Central Bank Governor Gabriel. Minister Metellus has indicated his strong commitment to remain closely engaged with the Fund, which is seen as an important anchor for signaling the authorities’ commitment to continue making progress toward macroeconomic stabilization and strengthen governance, and locking in macroeconomic gains accumulated over recent years, despite the many headwinds. Former Minister of Economy and Finance, Ms. Ketleen Florestal, maintains her portfolio as Minister of Planning and External Cooperation. Statement by Mr. Andre Roncaglia, Executive Director for Haiti, Mr. Bruno Saraiva, Alternate Executive Director, and Ms. Ludmilla Buteau Allien, Advisor November 20, 20 24 On behalf of our Haitian authorities, we would like to thank management and staff for the Fund’s continuous engagement during this period of crisis. We broadly concur with staff’s assessment of the current situation. After five consecutive years of GDP decline in Ha iti, negative shocks have frustrated expectations of an economic recovery in the last fiscal year. Since th e last article IV assessment in 2020, the country has experienced a series of shocks ranging from the pandemic to natural disasters and the spike in food and energy prices. In the meantime, the security situation h ad deteriorated, particu larly after the assassination of the fo rmer p resident, Jovenel Moise. The country has been living through a protracted period of political instability, leading more recently to a humanitarian crisis, with a rising number of conflict- affected internally displaced people largely over 700,000 as of this week with a new set of people fleeing their homes. Different regions of the country have been besieged by criminal gangs, hampering mobility and the normal functioning of institutions and businesses. The constrained circulation of goods and services have disrupted value chains and overall supply, keeping inflationary pressures high and leaving nearly half of the population under acute food insecurity. Moreover, the country’s fragility continues to be severely worsened by prolonged economic recession, social discontent, and significant loss of human capital. The substantial brain drain that has taken place in the past few year s has further weakened the Haitian economy. Volatile security condit ions led to disruptions across sectors with greater impact on productive activities. The quarterly indicator of economic activity published for the third q uarter o f the 2024 fiscal year (May-Jul) reveals a dismal performance by the main sectors of the economy, especially agriculture and manufacturing, with a 3.8 percent decline y-o-y in the index. Nonetheless, the economy experienced episodes of timid recovery in December 2023 an d April 2024, due to end-of-year festivities and to the reopening of the Por t-au-Prince port and airport, whose operations had been interrupted. However, the agricultural sector, which continues to suffer from climate related shocks, h as not benefited from the r elative 2 above-mentioned upturn in business activity periods. Lower-than-average rainfall, rising input costs (both fertilizers and seeds) and labor supply bottlenecks, as well as the reduction in cultivated land, which has been overtaken by armed gangs, have weakened the country's production, intensifying inflationary pressures and food insecurity. Despite the subdued economic activity, trade deficit has deteriorated, while the local currency appreciated by close to 2 percent in nominal terms through September 2024, driven mainly by rising remittances. Preliminary data show a 5.8 percent widening of the trade deficit in 2024, despite the downward trend in imports throughout the fiscal year, reflecting the slowdown in economic activity. Exports totaled US$732 million, down 17 percent over the first 11 months of 2024, with the downturn in the textile industry, which account for an important share of the country's exports. In the meantime, the current account balance has been sustained by remittances, which rose by 11 percent year-on-year for FY2024. The easing of tensions on the foreign exchange market enabled the monetary authorities to bolster official reserves through net purchases of US$470 million. Net international reserves were valued at nearly one billion US dollars at the end of the fiscal year. Throughout this protracted crisis, the Ministry of Finance and the central bank (BRH) have remained functional and active, averting even worse macroeconomic outcomes. Despite the political instability and the crumpling institutional framework, the two key economic institutions in the countries have still been engaged with the Fund, trying to pursue feasible measures to contain macroeconomic imbalances and ensure a reasonable level of economic functioning in the country. In the second quarter this year, the acute deterioration in security conditions, led to the creation of a Transitional Presidential Council (TPC), which assigned a new transitional government to conduct the country through general elections by 2026. This week, the TPC designated a new Prime Minister for the task and the process of constituting the new administration is being finalized. That said, the TPC and the Prime Minister have committed to release a joint action plan outlining measures to improve security and governance, and to bring the country to free elections. An amendment to the FY2023/24 budget in August and the timely approval of FY2024/25 budget brought fiscal policy to a sustainable track. As of September 30, 2024, revenue collection decreased by 3 percent year-on-year in nominal terms. This drop in total revenues is owed to the underperformance of internal revenues which resulted from the intermittent halting of the General Tax Directorate (DGI) activities, the temporary closure of ports and airports, and the slowdown in economic activity. Customs revenues showed a slight nominal increase of 1.5 percent compared with the previous year, and a worse performance was averted by new measures taken at the General Customs aiming at reducing contraband at the Port. General Customs Administration had adopted new set of controls of imported merchandises during the beginning of the fiscal year, which was reinforced by the digital verification process during the third quarter. Government spending was also halted by a collapse in public investment spending due to the deterioration of the security situation. Ultimately, the fiscal year 2024 was closed with a small surplus, already signaling the zero- monetary financing for fiscal year 2025. These recent developments in public finances have 3 helped keep monetary aggregates on check. That said, monetary aggregates subdued trend also reflects a sluggish economic activity, with a decline in both credit supply and demand. Monetary policy stance remained focused on the objectives of containing inflation and averting undue volatility of the exchange rate. To this end, the monetary authorities have decided to maintain the stance adopted since August 2022, against a backdrop of a wait-and- see attitude on the part of economic agents less inclined to invest. Furthermore, the banking system's excess liquidity continued to be absorbed through BRH bonds, in an environment that was hardly conducive to intermediation activities. As a result, the outstanding amount of these securities increased significantly, while the reserve requirement ratios on gourde and foreign currency deposits were kept unchanged at 40 percent and 53 percent respectively for commercial banks; and 28.5 percent and 41.5 percent for savings and housing banks. Repo rates were maintained at 17 percent for BRH bonds and 14 percent for treasury bills. With the stronger fiscal stance and the cessation of monetary financing, as well as the more stable exchange rate, it is expected that the monetary policy stance will help bring inflation on a downward trajectory. In order to preserve financial stability, the BRH adopted a range of measures from moratoria to loan restructuring. Similarly, the incentive programs put in place by BRH since 2013 have been maintained to date. It should be noted that these measures aimed to facilitate the granting of credit to sectors such as private construction, hotels, agriculture and agribusiness, real estate promotion and development projects (PPDI) and free trade zones, which have important impact on economic activity and job creation. The BRH has also conducted a survey of the financial sector’s exposure to the current prolonged crisis. The preliminary results point to the need of more in-depth analysis and assessment, with the stress- testing of the financial system’s risks, which will be performed with help from the IMF team. The continuous deterioration in the business climate has impinged significantly on the financial system. In addition to the loss of close to 700 executives in the banking sector, the losses and material damage incurred by these banks have disrupted their normal operations, testing their resilience. According to data available as of June 30, 2024, there was an alarming 2.7 percent decline in net banking income (NBI), a deterioration in banking profitability, with return on assets (ROA) down to 0.64 percent (from 0.94 percent) and return on equity (ROE) down to 7.68 percent (from 11.13 percent). However, there have been signs of improvement in asset quality, with a decline in the arrears’ ratio to 12 percent. BRH has finalized the harmonization of its regulatory standards in the case of money laundering actions, the financing of terrorism, and the financing of the proliferation of weapons of mass destruction. In addition, to ensure that all its regulated entities are fully aware of the new regulations in force, it has organized training sessions on these standards. As part of the enhanced monitoring of Haiti following its FATF evaluation, and the reports describing the strategies implemented to remedy the shortcomings identified during the said evaluation, Haiti may request a review of the ratings for which it has received an NC or PC rating. A coordinating committee composed of the Ministry of Justice, the MEF, and the 4 BRH has been set up to monitor the process of removing Haiti from the FATF “grey list.” Under the leadership of this committee, the National Risk Assessment (NRA) was officially launched. In such a challenging context, the authorities are committed to urgently pursue reforms aimed at breaking the cycle of political instability, violence, recession, and poverty. Through the 2024- 2005 Budget, the government intends to address the growing structural vulnerabilities of the population. It has been elaborated with the perspective of a real GDP growth of 1%, a decelerating inflation rate, a sustainable debt level, and an increase in revenue collection. As we anticipate a favorable performance of revenue collections agencies, we predict a continued cessation of any monetary financing. On governance reforms, some important measures, such as lease contract procedures standardization and regulation within the public administration, are expected to lead to improved management of public debt, public spending rationalization, and public service delivery to the population. Supporting employment for the younger population and promoting a better integration in the workforce will contribute to enhancing opportunities and reducing inequalities, which is likely to take steam from social conflicts. Engagement with the Fund has been an important anchor for the Haitian authorities which are facing protracted extremely challenging circumstances. Haiti is a fragile, conflict-affected country beleaguered by several of the factors that hinder economic development. Our Haitian authorities, who work under tremendous duress and have kept the economy afloat in most demanding situations, very much value the dialogue with the Fund and count on its support to their enduring efforts to bring the country back on a virtuous track. A Rapid Crisis Impact Assessment following the crisis of February through April was conducted under the leadership of the authorities and with the support of important international partners and MDBs. The authorities are aware of the dire circumstances and call upon all development and bilateral partners’ support in order to achieve this recovery. This document estimates the needs to relaunch the post-conflict economy at around 2 billion dollars. Therefore, a new SMP is an essential piece of the strategy and will signal the authorities’ commitment to continue making progress toward macroeconomic stabilization and strengthened governance, consolidating some hard- won gains accumulated over the recent years. This should help build a track record for a UCT-quality program and mobilize other development partners as the authorities continue to seek technical and financial support to put in place an effective stabilization and development plan. Fund’s capacity development continues to be vital to help cope with widespread constraints in this fragile and conflict- affected country, particularly as human resources continue to leave. The authorities look forward to the Executive Directors’ recommendations and support, as they continue to lead efforts toward macroeconomic stability and to address the causes of fragility, in order to put Haiti on a path to prosperity.