Haïti: Quatrième revue dans le cadre de l'accord triennal au titre de la Facilité pour la réduction de la pauvreté et la croissance, et demande de dérogation au critère de performance et d'augmentation de l'accès

©2009 International Monetary Fund March 2009 IMF Country Report No. 09/77 Haiti: Fourth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, and Request for Waiver of Performance Criterion and Augmentation of Access—Staff Report; Staff Supplement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Haiti In the context of the fourth review under the three-year arrangement under the Poverty Reduction and Growth Facility, and request for a waiver of performance criterion and augmentation of access, the following documents have been released and are included in this package: • The staff report for the Fourth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, and Request for Waiver of Performance Criterion and Augmentation of Access, prepared by a staff team of the IMF, following discussions that ended on November 14, 2008, with the officials of Haiti on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on February 2, 2009. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF. • A staff supplement on the joint IMF/World Bank debt sustainability analysis. • A Press Release summarizing the views of the Executive Board as expressed during its February 11, 2009 discussion of the staff report that completed the review. • A statement by the Executive Director for Haiti. The documents listed below have been or will be separately released. Letter of Intent sent to the IMF by the authorities of Haiti* Memorandum of Economic and Financial Policies by the authorities of Haiti* Technical Memorandum of Understanding* *Also included in Staff Report The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information. Copies of this report are available to the public from International Monetary Fund • Publication Services 700 19 th Street, N.W. • Washington, D.C. 20431 Telephone: (202) 623-7430 • Telefax: (202) 623-7201 E-mail: publications@imf.org • Internet: http://www.imf.org International Monetary Fund Washington, D.C. INTERNATIONAL MONETARY FUND HAITI Fourth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, Request for Waiver of Performance Criterion and Augmentation of Access Prepared by the Western Hemisphere Department (In consultation with other departments) Approved by Gilbert Terrier and Dominique Desruelle February 2, 2009 PRGF Arrangement The IMF Executive Board approved in November 2006 a three-year PRGF arrangement in an amount of 90 percent of quota (SDR 73.71 million), and Haiti’s HIPC decision point. The third program review, completed on June 20, 2008, included an access augmentation of 20 percent of quota (equivalent to SDR 16.38 million) in response to the food and fuel price shocks. The authorities are requesting a second augmentation of access under the arrangement equivalent to 30 percent of quota (SDR 24.57 million), to mitigate the significant deterioration in the external position caused by a series of hurricanes and flooding in August and September 2008, and the negative impact of the global downturn on remittances and exports of goods and services. Discussions A mission visited Port-au-Prince during November 10–14, 2008 and met with Finance Minister Dorsainvil, Central Bank Governor Castel, other government officials and development partners. The mission consisted of Ms. Redifer (Head), Mr. Di Bella (both WHD), and Messrs. John (PDR) and Bouhga-Hagbe (FAD), and was assisted by Mr. Fasano, Resident Representative. Mr. Bauer (outgoing Mission Chief) and Ms. Florestal (OED) participated in the policy discussions. Given difficulties in identifying financing for higher spending needs, discussions continued through January from headquarters, led by Ms. Deléchat (Mission Chief). 2 Contents Page Executive Summary...................................................................................................................3 I. Introduction ............................................................................................................................4 II. Recent Economic Developments ..........................................................................................5 III. Program Performance Through End-September 2008.........................................................8 IV. Economic and Financial Policies for FY 2009....................................................................8 A. Macroeconomic Outlook...........................................................................................9 B. Fiscal Policy..............................................................................................................9 C. Monetary Policy......................................................................................................11 D. External Sector and Debt Sustainability .................................................................12 E. Structural Policies....................................................................................................13 F. Program Monitoring ................................................................................................14 V. Program Risks.....................................................................................................................14 VI. Staff Appraisal...................................................................................................................15 Tables 1. Selected Economic and Financial Indicators ...............................................................17 2a. Central Government Operations ..................................................................................18 2b. Central Government Operations ..................................................................................19 3. Summary Accounts of the Banking System ................................................................20 4. Balance of Payments....................................................................................................21 5. Financial Soundness Indicators of the Banking System..............................................22 6. Indicative Targets and Quantitative Performance Criteria, FY 2008 ..........................23 7. Structural Performance Criteria and Benchmarks for the Fourth Program Review ....24 8. Proposed Schedule of Disbursements..........................................................................25 9: Indicators of Capacity to Repay the Fund, 2007–20....................................................26 10. Status of HIPC Completion Point Triggers (January 2009) ........................................27 11. Indicators of External Vulnerability 2007-09..............................................................28 Figures 1. Recent Economic Developments...................................................................................6 2. Bilateral and Effective Exchange Rates.........................................................................7 Boxes 1. Impact of Hurricanes in 2008 ........................................................................................4 2. Emergency Law and Use of PetroCaribe Resources ...................................................10 Attachments I. Letter of Intent .............................................................................................................29 II. Memorandum on Economic and Financial Policies ....................................................32 III. Technical Memorandum of Understanding .................................................................43 3 Executive Summary Macroeconomic outcomes in the second year of the PRGF arrangement (FY 2008) were weaker than anticipated at the time of the third review. A prolonged political stalemate constrained government operations, while severe natural disasters caused damages estimated at about 15 percent of GDP. Economic growth slowed to 1.3 percent, and end-period inflation picked up to almost 20 percent. Despite these shocks, program performance through end-September 2008 remained satisfactory, avoiding a significant deterioration in macroeconomic stability. The authorities are confronting difficult challenges in FY 2009. Responding to the humanitarian crisis and rebuilding infrastructure will require substantial resources, in addition to already large PRSP spending needs. Growth is expected to remain modest, at 2.5 percent, driven by public sector spending. Haiti’s external position is expected to deteriorate further in FY 2009, prompting the authorities to request a second program augmentation of 30 percent of quota. Given the exceptional magnitude of the shocks, limited reserve coverage, a nd the policy response of the authorities to maintain stability in extremely challenging circumstances, staff supports the request. The proposed augmentation, to be phased in two disbursements, would raise access to the PRGF ceiling of 140 percent of quota. Priorities for the third and final program year are: (i) safeguarding macroeconomic stability in the face of large spending needs; (ii) finalizing outstanding structural reforms; and (iii) facilitating Haiti’s timely progression to the HIPC completion point. Containing central bank financing to the government remains the main anchor of the program. In light of the large spending needs and limited pledged budget support, discussions on the macroeconomic framework for the last program year were more difficult than in previous years. In order to close the fiscal financing gap, the authorities had to scale back their spending plans significantly. Accumulated PetroCaribe resources were used to finance emergency reconstruction spending. Although off-budget, PetroCaribe spending is included in program parameters and will be strictly monitored by the authorities. The overall fiscal deficit is expected to widen from 2 percent of GDP in FY 2008 to 4 percent in FY 2009. Program risks remain significant. Additional donor support to finance PRSP priorities and reconstruction would be crucial to alleviating spending pressures in an increasingly difficult political environment. Parliamentary elections in April 2009 could delay the approval of laws included in program conditionality and HIPC triggers. However, the authorities have demonstrated their commitment to maintaining macroeconomic stability and implementing their reform agenda, even in the face of great challenges. 4 I. INTRODUCTION 1. Haiti recently experienced a series of devastating shocks that threatened macroeconomic stabililty and hindered growth. Riots over rising food and fuel prices prompted the resignation of the Prime Minister in April, leading to a five-month political stalemate that severely constrained government operations. 1 Haiti was also hit by four back- to-back hurricanes and tropical storms in August/September, which have caused extensive food shortages and damages to infrastructure estimated at about 15 percent of GDP (Box 1). Sector Damages & Losses (US$ mn) Total 898 Productive Sectors 443 Agriculture 198 Industry 104 Commerce 119 Tourism 21 Infrastructure 151 Roads 130 Water & Sanitation 18 Social Sectors 222 Housing 178 Health & Education 44 Source: United Nations. Box 1. Impact of Hurricanes in 2008 Four back-to-back storms in August/September caused damages and losses across the country estimated at close to US$900 million (15 percent of GDP), the worst humanitarian disaster to hit Haiti over 100 years. Most affected were agriculture, housing, and transportation infrastructure. Post-disaster needs are about US$763 million, including one-third (US$269 million) needed for immediate relief, with the rest financing recovery of agricultural output and reconstruction of housing and physical infrastructure (Table). The country’s food security situation worsened substantially. A total of 3.3 million people are estimated to be food insecure, with pockets of acute food insecurity in some areas (about 210,000 people). The World Food Program is currently reaching 646,926 direct beneficiaries across the country, and donors are also increasing existing food-for-work and cash-for- work activities. The United Nations launched a flash appeal for humanitarian aid needs amounting to US$127.5 million, for which donors have pledged/disbursed only about 45 percent to date. 2. The impact of the international financial crisis represents another shock in the making. Haiti has extremely shallow financial markets and, thus, has not experienced capital account effects. However, the slowdown in the United States and Canada is already affecting Haiti through lower export demand and fewer remittances. While Haiti’s export sector is relatively small (less than 10 percent of GDP), private consumption is highly dependent on remittances (about 19 percent of GDP in 2008). 3. The easing of international food and fuel prices only partly mitigates these new shocks. Food prices and import needs are still high, with distribution networks impaired by the hurricanes and 60 percent of the fall harvest destroyed. Three new power plants are beginning operations, increasing volumes of fuel imports. 1 The political crisis ended in early September, when Parliament ratified President Préval’s third proposed candidate for Prime Minister, Ms. Michele Pierre-Louis, and her coalition government. 5 II. R ECENT ECONOMIC DEVELOPMENTS 4. As a result of the shocks, macroeconomic outcomes in FY 2008 (October 2007-September 2008) were weaker than anticipated at the time of the third review. Official estimates indicate that real GDP growth slowed to 1.3 percent from 3.4 percent in FY 2007, turning negative in per capita terms (after three consecutive years of positive growth). Twelve-month inflation peaked at 19.8 percent in September 2008, up from 7.9 percent a year earlier, but declined to 10.1 percent by end-December, owing to rapidly falling international food and fuel prices (Table 1 and Figure 1). After some small depreciation earlier in the year, the real effective exchange rate appreciated by about 5 percent during the last quarter of FY 2008, while the Gourde remained broadly stable against the U.S. dollar (Figure 2). 5. Budget execution in FY 2008 was satisfactory . Tax revenue was slightly below target (9.9 percent of GDP vs. 10.6 percent programmed), mostly owing to revenue losses (0.7 percent of GDP) from the temporary suspension of fuel price adjustments in response to rising commodity prices. 2 Food and fuel price subsidies were however discontinued in August-October 2008. Spending capacity improved, with domestically-financed investment outlays exceeding expectations. The overall fiscal deficit (excluding grants and foreign- financed projects) exceeded program projections somewhat (2 percent of GDP instead of 1.7 percent), and was fully financed with external resources (Tables 2a, 2b). 6. Despite sterilization operations, base money increased more than targeted. Base money growth was 14 percent (y/y) by end-September 2008 (compared with 7.9 percent in the program), due to larger than programmed demand for currency (consequence of the higher than programmed inflation rate), as well as an increase in bank reserves that reflected, in part, the PetroCaribe-fueled accumulation of government deposits in commercial banks. In order to sterilize the increase in credit to the government during most of the second part of the fiscal year, and to smooth out exchange rate fluctuations, the BRH sold foreign exchange (about US$52 million), stepped up the placements of bonds by more than G 1.5 billion (almost 20 percent) and doubled nominal interest rates. Credit to the private sector, which expanded in part due to the importers’ increased credit demand to finance rising commodity prices, remained relatively low, at 13.1 percent of GDP (Table 3). 2 The authorities revised real and nominal GDP for FY 2007 and FY 2008, complicating comparisons between the FY 2008 program and preliminary outcomes. Using the program’s nominal GDP, tax revenue in FY 2008 was 10.3 percent of GDP (Table 2b). 6 Figure 1. Haiti: Recent Economic Developments Sources: Haitian Authorities and IMF staff calculations. 6 11 16 21 26 31 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 -20 -10 0 10 20 30 40 50 Headline Food Core Fuel (right) (annual % change) After peaking in September, headline inflation declined, driven by food and fuel prices... 0 10 20 30 40 50 60 70 80 90 100 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Flour Rice Cooking oil (annual % change) ...as lower international prices are passed- through to domestic prices. -3,000 -1,000 1,000 3,000 5,000 7,000 9,000 11,000 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 (in Gourdes m) Revenues Overall balance Current spending Ca pital spending Expenditure execution, including capital spending, is on the rise. -15 -10 -5 0 5 10 15 20 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Currency (annual nominal growth rate) Real interest rate (91 days BRH bonds Currency (annual real growth rate) Nominal interest rates and currency growth have not kept up with inflation. -800 -600 -400 -200 0 200 400 Dec-06 Jun-07 Dec-07 Jun-08 120 125 130 135 140 145 Current account (US$ m) REER index (right) G&S exports G&S Imports Although the current account balance has deteriorated due to the recent price shock... 90 115 140 165 190 215 240 265 290 315 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 NIR (US$ m) Program floor ... NIR targets have been met comfortably, due in part to Petrocaribe-related flows 7 Source: IMF's Information Notice System. Figure 2. Haiti: Bilateral and Effective Exchange Rates Gourdes/US dollars (left axis) NEER (2000=100, left axis) REER (2000=100, right axis) 30 35 40 45 50 55 60 200 6M1 200 6M 3 2006M 5 2006M 7 200 6M 9 2006M 11 2007M1 200 7M 3 200 7M 5 200 7M 7 2007M 9 2007M11 200 8M1 200 8M 3 200 8M 5 2008M 7 2008M 9 45 65 85 105 125 145 165 7. Haiti’s current account deficit widened to 2.6 percent of GDP. The trade deficit deteriorated by 7.5 percentage points of 2007 GDP ($463 million), largely because of higher food and fuel imports (up by $434 million). The improved services balance was offset by lower current transfers than anticipated. The overall balance of payments remained in surplus (US$41.5 million), due in part to PetroCaribe inflows used as budgetary support, but reserve coverage remained below 3 months of imports (Table 4). 8. The financial system, which has not been significantly affected by the financial crisis, remains sound. External credit lines are small and mostly trade-related. Indicators of banking sector soundness remained broadly satisfactory at end-September 2008, with increased net profits and declining non-performing loans, although the financial position of two small banks had weakened further (Table 5). An independent assessment indicated that the BNC (Banque Nationale de Crédit) will need to be recapitalized to accommodate the absorption of Socabank in 2006, and its operational structure reviewed (MEFP ¶23). 9. Preliminary data for the first quarter of FY 2009 have been relatively positive. The exchange rate remained stable at about G 40 per U.S. dollar. Unadjusted NIR increased to about US$350 mllion, largely reflecting transfers of PetroCaribe-related resources out of commercial banks and into the BRH. Gourde monetary base increased by about 15 percent at end-December (y-o-y), reflecting a fairly constant velocity (as cumulated annual inflation through December reached 10.1 percent while real GDP increased in FY 2008 by about 1.3 percent, as indicated above). Domestic tax collections for the first quarter were in line with expectations, while spending was boosted by higher reconstruction spending, payment 8 of the traditional 13 th salary to civil servants, and higher transfers to the electricity company reflecting higher electricity production. III. P ROGRAM PERFORMANCE THROUGH END-SEPTEMBER 2008 10. Performance against PRGF program targets at end-September was generally satisfactory, but maintaining macroeconomic stability in the face of severe shocks was particularly challenging: • All but one quantitative performance criteria were met. The target for net BRH credit to the rest of the non-financial public sector was missed by G 229 million (about 0.5 percent of end-of-period BRH assets, or less than 0.1 percent of GDP). Staff supports a request for a waiver of this breached quantitative PC, as the deviation was minor and temporary. Preliminary information for Q1 FY 2009 indicates that this deviation is being reversed through a combination of increase d deposits and some gross credit repayment. Performance criteria for net central bank credit to the central government, net domestic assets, and net international reserves were met, primarily due to the transfer of about US$51 million in accrued PetroCaribe resources from commercial banks to the BRH toward the end of the fiscal year (MEFP ¶9, Table 6). • All structural PCs were met, but implementation of end-September benchmarks was mixed. The authorities prepared a strengthened plan to recapitalize the central bank and completed independent assessments of two systemically important commercial banks. Although progress was made on all program benchmarks, only one out of six benchmarks was fully completed (improving the regulatory framework and supervision of credit unions). Two benchmarks are being reset for end-March: (a) the publication of regular reports by the central bank (which has, however, stepped up monetary policy communications through speeches and interviews); and (b) a new organic law for the tax administration agency (DGI) which, although already drafted, has not yet been submitted to Parliament. The remaining benchmarks have been now completed: (i) three customs posts have become operational by end-December; (ii) a plan to improve systemic liquidity forecasting was finalized in January; and (iii) investment spending has been included in the public financial management system SYSDEP (MEFP ¶10 and Table 7). IV. E CONOMIC AND FINANCIAL POLICIES FOR FY 2009 11. Discussions on the FY 2009 program were protracted, in light of significant spending needs and limited resources, including budget support. Already large spending needs to intensify implementation of the PRSP have increased substantially following the natural disasters. With donor support committed so far insufficient to meet Haiti’s needs, the authorities were forced to scale back their original spending plans significantly, and rely on accumulated PetroCaribe funds. A donors’ conference, tentatively planned for early April 9 2009, could help mobilize further resources, but prospects for significant additional commitments are uncertain. Key goals for the third program year will be to support public investment and poverty-reducing spending through increased domestic resources, while safeguarding macroeconomic stability and supporting progress to the HIPC completion point, tentatively scheduled for end-June 2009. Structural conditionality focuses on completing fiscal and financial sector reforms (MEFP ¶11). A. Macroeconomic Outlook 12. The program framework includes revised goals for inflation and growth. End- period inflation has been set at 9.5 percent, and the growth projection has been revised downward from 4 percent to 2.5 percent. The recent drop in world commodity prices has begun to affect headline inflation, but the authorities consider that exchange rate depreciation, market rigidities and the damage to agriculture and to the distribution networks will likely prevent a faster decline (the original program goal was 7 percent). Growth should be boosted by increased public sector spending and investment. A faster pace would be impeded by the damage to infrastructure and agriculture, weaker private consumption reflecting lower remittances, and lower net exports related to the global downturn (MEFP ¶12–13). B. Fiscal Policy 13. The fiscal program focuses on balancing large spending needs with principles of sound financing. The program overall fiscal deficit (excluding grants and foreign-financed projects) is projected to increase by 2 percentage points of GDP to 4 percent compared to FY 2008, with higher investment outlays financed by PetroCaribe resources, lower current spending and strengthened tax administration. For transparency, the program framework combines both on- and off-budget spending (Text Table 1 and MEFP ¶14). 14. Higher projected spending in FY 2009 addresses reconstruction needs as well as PRSP implementation, which should continue to guide fiscal policy in the medium term. However, the fiscal deficit (including grants) should start declining next year toward its more sustainable medium-term level of about 1.5 percent of GDP. Expenditure (excluding foreign- financed projects) is programmed to increase by 2.7 percentage points of GDP to 14.6 percent. This includes 2.9 percent of GDP in off-budget emergency spending (Box 2). Current spending growth is limited. The 0.6 percentage point of GDP increase in the wage bill reflecting hirings of teachers and police, higher salaries for judges, and a one-off 14 th salary payment to civil servants, which was granted in lieu of a genera lized salary increase for FY 2009, and transfers increase by 0.4 percentage point of GDP. Domestically-financed capital spending is projected to increase by 1.8 percentage points of GDP, to 3.9 percent (MEFP ¶15). The FY 2009 budget allocates substantial resources to social sectors and infrastructure. In line with PRSP priorities, total investment outlays focus on transport, lodging, employment, health, and food security. 10 Box 2. Haiti: Emergency Law and Use of PetroCaribe Resources Under an emergency law adopted following the hurricanes’ devastation, the authorities decided to use US$197.5 million in accumulated PetroCaribe resources to finance new off-budget emergency spending (US$220.4 million including the one-off 14 th month salary payment to civil servants). While this spending is to be executed in FY 2009, the authorities already transferred in late September US$51 million of PetroCaribe resources to the government accounts at the BRH to repay outstanding credit. The rest will be transferred in the course of FY 2009. Roughly 75 percent of the emergency spending will be on capital projects (2.2 percent of GDP), with the remainder for current expenditure (0.7 percent of GDP). Under the program, staff and the authorities agreed on specific measures to ensure transparency and oversight of the emergency spending. Purpose % of total Restoring agricultural production (investment) 16.7 Spending for schools (50% investment, 50% transfers) 12.4 Health (investment) 2.4 Support to provinces (investment) 8.1 Purchase of equipment (investment) 36.3 Other investment (roads, sanitation, food, hydraulic and electricity infrastructure, rehabilitation of prisons and police )7.1 14th month salary to civil servants (wages and salaries) 10.4 Other transfers 0.8 Administration (operations) 5.9 Sources: Haitian authorities and IMF staff calculations. 15. The budget proposes to finance higher expenditures through a combination of strengthened customs and tax administration, and ex ternal support. Total revenue is projected to increase to 10.5 percent of GDP (from 9.9 percent of GDP in FY 2008). The introduction of the SYDONIA WORLD system to strengthen customs controls in the first half of FY 2009 (operational since December 1, 2008 in Port-au-Prince) and technical assistance from Canada and other development partners are projected to have a partial year effect in improving tax and customs administration (MEFP ¶17). Following widespread opposition by telecommunication companies, parliamentarians and the public, the authorities withdrew proposals for new telecommunications taxes and an increase in imports tariffs from the FY 2009 budget law, that would have increased revenue by an additional G 3 billion (almost 1 percent of GDP). 3 The automatic fuel price adjustments to international prices were restored in October 2008. This was reflected in revenue projections for FY 2009, but lower world oil prices would result in a net decrease in the intake. Already committed budget 3 The authorities intend to propose a revised package of tax measures as part of a supplementary budget in late Spring, following further studies and extensive consultations with stakeholders. 11 support amounts to 3.1 percent of GDP (including PetroCaribe resources accumulated during FY 2008), and external project financing is projected at 5 percent of GDP. 16. The program includes US$50 million in external budget support still to be identified, possibly in a donor’s conference tentatively scheduled for early April. This will allow needed spending to get underway, while the authorities work to mobilize additional resources. If some or this entire amount does not materialize, a program adjustor of the same size would allow for limited and temporary new central bank financing to cover the shortfall. The authorities have committed to repay in FY 2010 any new central bank financing arising from shortfalls in budget support in FY 2009. As in the past, the program allows the authorities to spend any additional external resources received (MEFP ¶18). 17. The authorities are committed to strictly monitoring off-budget emergency spending. The off-budget spending will be reported to Parliament and subjected to the same auditing procedures by the national court of accounts. The authorities indicated that they were exploring options to channel new PetroCaribe/ALBA-related inflows during FY 2009 through a private binational Venezuela-Haiti corporation, but that discussions with Venezuela were still at a preliminary stage. In this light, and given uncertainties as to whether such flows will be continued, the program assumes no new PetroCaribe resources for the central government in FY 2009, but the TMU includes new adjusters to net international reserves, net BRH credit to the central government and net banking sector credit to the central government, should such new resources materialize (TMU ¶¶27–28 and MEFP ¶20). C. Monetary Policy 18. Monetary policy will focus on keeping core inflation reined in, as the impact of higher commodity prices wanes. To this end, the indicative FY 2009 target for base money growth was set at 9.3 percent, below projected nominal GDP growth. To help guide inflation expectations, the central bank will publish a quarterly report on monetary policy goals and outcomes beginning in early 2009. The BRH will continue to seek broader participation in the weekly central bank bond auctions and ensure close coordination with the Ministry of Economy and Finance to determine upcoming liquidity needs. The authorities may use reserves in order to smooth out exchange rate adjustment to equilibrate external imbalances caused by the shocks and to sterilize new temporary central bank financing if needed, but they are committed to maintaining a flexible exchange rate regime (MEFP ¶22). 19. Central bank independence is being strengthened. Implementation of the first stage of the central bank recapitalization plan, including higher interest payments by the government on the existing stock of central bank credit, should help increase the independence of monetary policy. Recently, legislation was passed to eliminate the central bank’s legislatively-mandated involvement with SONAPI (industrial parks), APN (the port authority), and BPH, a small state-owned bank (MEFP ¶34). 12 D. External Sector and Debt Sustainability 2007 2008 (a) Fuel Imports -415.0 -602.2 % of GDP -6.8 -8.5 Food Imports -369.8 -616.9 % of GDP -6.0 -8.7 Machinery and Transport Imports -234.8 -187.7 % of GDP -3.8 -2.6 Net Services -443.6 -385.3 % of GDP -7.2 -5.4 Assembly Exports 180.6 165.1 % of GDP 2.9 2.3 Remittances 1,125.7 1,369.7 % of GDP 18.3 19.3 Total Current Account Impact % of 2009 GDP Sources: Haitian authorities; and Fund staff estimates. Text Table 1. Haiti: Natural Disaster and Glo (In million U.S. dollars unless noted othe Impact on Key Balance of Payments 2009 2009 vs. 2008 (b) (b) - (a) -426.4 175.8 -5.6 -588.7 28.1 -7.8 -393.3 -205.6 -5.2 -474.1 -88.8 -6.2 168.5 3.4 2.2 1,215.3 -154.4 16.0 -241.4 -3.2 bal Slowdown rwise) Items 20. Haiti’s overall balance of payments is expected to turn negative in FY 2009 for the first time since FY 2003. The projected deficit of about 2.2 percent of GDP reflects in part a worsening current account deficit (from 2.6 percent of GDP to 4.4 percent), as lower commodity prices are expected to be offset by a sharp increase in imports to address food shortages, infrastructure rehabilitation, and reconstruction needs. The economic downturn in the U.S. and Canada is expected to affect remittance and export receipts (Text Table 1 provides a detailed breakdown of key current account items from 2007 through 2009 while Table 4 shows how the balance of payments has deteriorated relative to projections at the time of the third review). The capital and financial account is also assumed to weaken, primarily due to lower projected public sector loan disbursements. 4 Private investment is expected to be very low, because of the global environment and the more uncertain domestic and external situation of the country. Under the program, the authorities would be allowed to use up to US$50 million in NIR to sterilize central bank financing in the event of delays in external budget support. 21. To help cover the projected balance of payments gap, the authorities are requesting a second program augmentation equivalent to 30 percent of quota (SDR 25 million). Reserve coverage, which reached 2.9 months of imports in 2008, would fall to 2.6 months in the absence of the additional assistance requested from the Fund, and to 2.5 months without the Fund augmentation and the additional budget support highlighted in Text table 2. The Fund augmentation and this additional budget support would bring reserve coverage to 2.8 months of imports in 2009. The proposed augmentation would be provided in two tranches: 20 percent of quota upon completion of the current review, and the rest upon completion of the fifth review (Table 8). These purchases would bring Haiti to the normal maximum PRGF access level of 140 percent of quota. 4 The sharp drop in public sector loan disbursements shown in Table 4 is partly explained by the absence of PetroCaribe flows to the government in 2009. There has also been a shift in external support from loans to grans, but the increase in official transfers in 2009 only partly offsets lower levels of official lending. 13 Additional Support Pledged Total FY2009 support Total Pledges 193.5 654.4 Budget support 1/ 36.4 92.4 Project financing and humanitarian aid 157.1 562.1 1/ Petrocaribe budget support is booked in the BOP in FY2008. Text table 2. HaitiBurdensharing by Donors (In million U.S. dollars) 22. The proposed augmentation would complement the budget support, project financing, and humanitarian assistance already committed by other stakeholders, although pledges remain well below estimated needs (Text Table 2). In response to the hurricanes, the IDB and the European Union intend to increase their budget support for 2009. 5 The World Bank has committed additional grants of US$25 million (of which US$5 million in budget support), and bilateral donors have committed substantial aid, mainly for humanitarian relief. 23. Haiti’s capacity to repay the Fund will remain adequate despite the proposed increase in access. Debt service to the Fund will equal 0.23 percent and 0.20 percent of domestic revenues and exports of goods and services, respectively, on average over the next four years, and should remain manageable through 2020 (Table 9). 24. An update of the LIC debt sustainability analysis suggests that the PetroCaribe resources received in FY 2008 and the proposed augmentation of the PRGF arrangement will adversely affect the debt trajectory, but not alter the main conclusions of the last LIC DSA. The NPV of debt-to-exports ratio remains over the threshold in the baseline and shock scenarios, but all other indicators remain below their respective thresholds. This reflects Haiti’s relatively small export sector: the current account is generally financed through transfers. The NPV of debt-to-exports ratio remains below the relevant threshold when HIPC/MDRI relief is assumed, but with little cushion in the likely event of future shocks. E. Structural Policies 25. The structural agenda in the final program year will focus on finalizing pending reforms initiated earlier in the program. The proposed four structural PCs and five benchmarks are critical for achieving the program objectives of strengthening fiscal governance and soundness, fostering banking sector stability, and increasing the independence of monetary policy (MEFP Table 3). 26. The authorities are working on completing a few remaining HIPC triggers to reach the completion point by mid-2009 (Table 10). The main challenge will be to secure 5 The IDB will provide additional interim debt relief of close to US$15 million in 2009. The debt relief estimate in the balance of payments remains roughly unchanged from the last review, because the World Bank cannot provide further interim relief in FY 2009. Haiti already benefited from an increase of the limitation of World Bank interim relief from one third to 50 percent of the maximum NPV amount following satisfactory progress in completion point triggers’ implementation. 14 prompt approval of the new procurement law, which will be submitted to Parliament in January 2009, as a six-month implementation period of the approved law is needed to meet the trigger. Staff anticipates that all other triggers will be met. F. Program Monitoring 27. The program monitoring framework has been altered to take into account the use of PetroCaribe resources. Part of the PetroCaribe resources received in FY 2008 (about US$200 million) were transferred in FY 2008 (US$51 million) and the remainder will be transferred in FY 2009 (US$149 million). In both years, the transferred resources are treated as external budget support for program purposes. The TMU has been revised to ensure that any such future use for central government spending (on- or off-budget) is treated as budget support, and thus counts as part of the adjustment for net program external financing (TMU ¶29–30). Furthermore, the performance criteria on NIR and net domestic banking sector credit to the government are adjusted to take into account the drawdown in PetroCaribe deposits at the Central Bank (TMU ¶27–28–31). 28. The FY 2009 program will use the same quantitative performance criteria as in the first two program years (MEFP, Table 2). The program will be monitored on a quarterly basis, with test dates at end-March and end-September 2009 for NIR, NDA, central bank financing to the public sector, concessionality of external debt, and domestic and external arrears accumulation. The program provides some room for BRH credit to the government in the first two quarters, which are likely to be the most critical from a humanitarian and reconstruction perspective. The BRH credit is programmed to be reversed by end-September. Similarly, use of NIR for the fiscal year will be frontloaded to allow flexibility for the BRH in addressing volatility in the foreign exchange market and sterilize— if needed—temporary BRH financing. V. P ROGRAM RISKS 29. Despite the authorities’ strong track record and commitment to prudent macroeconomic policies, program risks are substantial and have increased since the last review. Safeguarding the significant macroeconomic gains of the past four years will not be easy amid high external vulnerability (Table 11). The main risks are: • Political and social instability and weather-related shocks, that are ever-looming. In particular, parliamentary elections in April 2009 and an ongoing constitutional debate during the year may cause further delays in approval of key reform legislation; • the uncommitted budget support may not be forthcoming; • the downturn in the United States and Canada could lead to a sharper decline in exports and transfers; and 15 • spending pressures may emerge if programmed spending is insufficient to cover needs, and/or in the run-up to parliamentary elections in April 2009. The early withdrawal of the proposed new taxes sets an unfavorable precedent in terms of the authorities’ capacity to introduce further revenue measures. VI. S TAFF APPRAISAL 30. Performance in the second program year was satisfactory, but maintaining macroeconomic stability was difficult amid the severe shocks. Economic growth has been weaker than expected, challenging the authorities’ ability to implement prudent fiscal and monetary policies. Nevertheless, spending and core inflation were kept broadly under control. Implementation of structural measures slowed as a result of the shocks, although progress was made in all areas. 31. The recent devastating natural disasters compounded by the global slowdown present numerous challenges for macroeconomic policies. The program is pragmatic in terms of safeguarding economic stability while maintaining a focus on continued economic and social progress in Haiti. The authorities are encouraged to make the most of the donor support for strengthening tax administration, and should work closely with donors to mobilize additional external assistance. Higher projected spending in FY 2009 addresses reconstruction needs as well as intensified PRSP implementation. Staff urges the authorities to ensure full transparency and close monitoring of off-budget emergency spending, and to resist pressures for further spending unless additional domestic revenue or external financing becomes available. 32. Monetary policy should focus on containing core inflation and preventing excessive exchange rate volatility. Headline inflation could decline fairly rapidly if WEO commodity price forecasts materialize, but the authorities will need to monitor closely developments in core inflation. They should also be prepared to sterilize temporary central bank financing to the government as needed. The banking sector appears generally sound, but the impact of recent natural disasters and slowdown of the economy pose risks to the quality of credit portfolios that need to be closely monitored. 33. Further efforts will be needed to safeguard debt sustainability. Given the limited margin below the threshold even after anticipated debt relief, maintaining debt sustainability over the medium-term will require that the authorities take a prudent approach to borrowing, even on concessional terms, and adopt policies to promote growth and export diversification. 34. Program risks have risen, but continued Fund involvement is justified by the authorities’ commitment and will help safeguard the hard-won and significant gains of the past four years. The proposed augmentation and additional commitments from other institutions can help the country get through the exceptionally difficult current circumstances, 16 and reach its HIPC completion point. Staff urges the authorities to ensure a timely implementation of remaining completion point triggers. 35. Staff supports the requested conclusion of the fourth review, waiver, and augmentation of access under the arrangement. Performance has been satisfactory, and the deviation under the performance criterion has been minor. Given pressure on the balance of payments caused by the devastating natural disasters and the global slowdown, low reserve coverage, the government’s past strong performance and commitment to the program, the manageable level of outstanding Fund credit, and Haiti’s track record of repayment, the staff believes that an augmentation of access under the PRGF arrangement by 30 percent of quota is appropriate. 17 (Fiscal year ending September 30) Nominal GDP (2008): US$ 7.11 billion GDP per capita (2008): US$728 Population (2008): 9.76 million Adult literacy (2008): 53 percent Share of pop. living with less than $1 a day (2003): 54 percent Unemployment rate (2003): 27 percent 2006 2007 Prog. (Third PRGF Review)Prog. w/Rev. GDP Prel. Prog. 2009 (change over previous year unless otherwise stated) National income and prices GDP at constant prices 2.3 3.4 2.5 2.5 1.3 2.5 GDP deflator 16.6 10.7 14.5 14.5 17.0 12.0 Consumer prices (period average) 14.2 9.0 14.5 14.5 14.4 12.8 Consumer prices (end-of-period) 12.4 7.9 16.0 16.0 19.8 9.5 External sector Exports (f.o.b.) 7.7 5.7 -6.0 -6.0 -6.2 1.8 Imports (f.o.b.) 18.3 4.5 24.3 24.3 30.2 1.7 Real effective exchange rate (+ appreciation) 10.5 14.9 ... ... ... ... Central government Total revenue and grants 20.2 30.7 29.9 29.9 9.0 29.1 Total revenue excl. grants 23.7 15.4 21.3 21.3 15.7 22.1 Current expenditure -0.7 -2.0 54.5 54.5 41.5 24.3 Total expenditure 13.4 14.6 44.4 44.4 32.7 34.5 Money and credit Credit to the nonfinancial public sector (net) 1/ -4.9 -6.9 0.0 0.0 -29.8 48.2 Credit to private sector 5.5 10.8 12.3 12.3 25.2 15.4 Base money 5.5 7.6 7.9 7.9 13.9 9.3 Broad money (incl. foreign currency deposits) 10.0 4.8 10.6 10.6 17.7 11.6 (in percent of GDP, unless otherwise stated) Central government Overall balance -1.7 0.2 -1.6 -1.6 -2.8 -3.9 Overall balance (excl. grants) -4.9 -4.8 -7.8 -7.6 -6.8 -9.1 Overall balance (excl. grants and externally-financed projects) -0.5 0.3 -1.7 -1.7 -2.0 -4.0 Overall balance (excl. ext.-financed projects and project grants) -0.2 1.5 0.0 0.0 -0.7 -2.8 Central bank net credit to the central government -0.2 -0.4 0.0 0.0 0.0 0.1 Savings and investment Gross investment 28.9 27.7 27.7 26.9 26.0 31.0 Gross national savings 27.4 27.4 24.7 24.0 23.4 26.5 Of which: Central government savings 0.8 3.1 1.7 1.6 1.3 1.1 External current account balance (incl. official grants) -1.4 -0.3 -3.0 -2.9 -2.6 -4.4 External current account balance (excl. official grants) -9.3 -6.6 -10.0 -9.7 -8.6 -11.9 External public debt (end-of-period) 29.7 29.1 23.6 22.9 26.7 25.5 Total public debt (end-of-period) 2/ 33.5 32.9 27.0 26.3 30.2 27.3 External public debt service (in percent of exports of goods and nonfactor services) 3/ 7.5 8.3 9.4 9.2 8.2 9.6 (in millions of US$, unless otherwise stated) Overall balance of payments 79.1 163.4 -49.9 -49.9 41.5 -158.3 Net international reserves (program) 4/ 92.7 269.1 244.7 244.7 287.4 237.4 Liquid gross reserves 5/ 337.1 544.7 578.1 578.1 707.8 696.0 In months of imports of the following year 1.7 2.3 2.4 2.4 2.9 2.8 Exchange rate (gourdes per dollar, end-of-period) 39.1 36.4 ... ... ... ... Nominal GDP (millions of gourdes) 200,456 229,538 264,722 271,971 271,971 312,222 Nominal GDP (millions of U.S. dollars) 4,836 6,137 6,966 7,108 7,108 7,589 Sources: Ministry of Economy and Finance; Bank of the Republic of Haiti; Fund staff estimates; and World Bank. 1/ In FY2008 it reflects accumulation of Petrocaribe-related resources; in FY2009, it reflects the use of Petrocaribe-related resources accumulated in FY2008. 2/ Includes external public sector debt, outstanding central bank bonds, and credit from commercial banks to the NFPS. It does not reflect possible completion point debt reduction in 2009. 3/ Based on originally scheduled debt service, not incl debt relief. 4/ Excluding commercial bank forex deposits, letters of credit, guarantees, and earmarked project accounts. 5/ Gross Liquid International Reserves for FY2009 assume the disbursement of the proposed US$ 37 million augmentation. 2008 Table 1. Haiti: Selected Economic and Financial Indicators 6/ GDP ratios are calculated using Nominal Program Figures for FY08 (numerator) and actual nominal GDP. 18 Table 2a. Haiti: Central Government Operations (Fiscal year ending September 30; in millions of gourdes) Prog. 2006 2007 Prog. (Third PRGF Review) Prel. 2009 Total revenue and grants 26,558 34,713 44,386 37,843 48,840 Domestic revenue 20,110 23,197 28,146 26,849 32,781 Domestic taxes 12,878 15,740 18,788 18,026 22,035 Customs duties 6,099 6,828 8,622 7,917 10,463 Other current revenue 1,133 629 736 906 284 Grants 6,449 11,517 16,240 10,994 16,060 Budget support 684 2,720 4,600 3,426 3,814 Project grants 5,765 8,797 11,640 7,568 12,245 Total expenditure 1/ 29,890 34,248 48,695 45,442 61,141 Current expenditure 19,242 18,864 28,325 26,697 33,173 Wages and salaries 6,470 8,087 12,566 11,716 15,438 Net Operations 1/ 6,167 3,027 8,022 8,178 8,362 Operations 2/ 4,505 6,322 6,754 7,350 8,362 Interest payments 1,052 2,420 1,141 1,768 2,235 External 209 720 869 928 1,046 Domestic 843 1,700 272 840 1,189 Transfers and subsidies 5,553 5,330 6,596 5,035 7,138 of which Rice subsidy ... ... ... 681 0 Capital expenditure 10,648 15,385 20,370 18,745 27,967 Domestically financed 1,940 3,546 4,314 5,611 12,225 Foreign-financed 8,708 11,839 16,056 13,134 15,742 Overall balance -3,332 465 -4,309 -7,599 -12,300 Excl. grants -9,781 -11,052 -20,549 -18,593 -28,360 Excl. grants and externally financed projects -1,073 787 -4,492 -5,459 -12,617 Excl. project grants and ext. financed projects -389 3,507 107 -2,033 -8,803 Financing 3,332 -465 4,309 7,599 12,300 External net financing 4,038 -106 3,743 6,607 9,793 Loans (net) 3,719 1,620 3,363 6,607 7,736 Disbursements 3,719 3,406 5,156 8,283 9,547 Budget support 776 364 739 2,716 6,050 of which Petrocaribe ... ... ... 1,772 6,030 Project loans 2,943 3,042 4,416 5,566 3,497 Amortization 0 -1,786 -1,793 -1,676 -1,811 External financing to be committed ... ... ... ... 2,057 Arrears (net) 319 -1,726 0 0 0 Internal net financing -706 -1,264 -335 83 1,559 Banking system -634 -1,264 0 -229 349 BRH -344 -949 0 121 349 Commercial banks -290 -315 0 -349 0 Nonbank financing -120 0 -335 312 1,210 Arrears (net) 48 0 0 0 0 Debt rescheduling 0 134 158 163 161 HIPC interim relief 0 771 743 747 787 Unidentified financing (in U.S. dollars) 0 0 10 0 0 Sources: Ministry of Finance and Economy; and Fund staff estimates 1/ Commitment basis except for domestically financed capital expenditure, which is reported on cash basis from 2007 on. 2/ Includes stastical discrepancy. 2008 [... middle sections omitted for long document ...] International Monetary Fund Washington, D.C. 20431 USA Press Release No. 09/34 FOR IMMEDIATE RELEASE February 13, 2009 IMF Executive Board Completes Fourth Review under PRGF Arrangement with Haiti and Approves US$36.6 Million Augmentation and US$35.8 Million Disbursement The Executive Board of the International Monetary Fund (IMF) has completed the fourth review of Haiti’s economic performance under the Poverty Reduction and Growth Facility, and approved an increase in financial assistance of an amount equivalent to SDR 24.57 million (about US$36.6 million) to mitigate the negative effects caused by a series of hurricanes in 2008 as well as the global downturn. The completion of the review enables Haiti to receive an immediate disbursement of an amount equivalent to SDR 23.98 million (about US$35.8 million), bringing total disbursements to SDR 91.3 million (about US$136.1 million). The Executive Board also granted a waiver for the non-observance of a September 2008 quantitative performance criterion related to a minor deviation of net central bank credit to the nonfinancial public sector. The three-year PRGF arrangement was approved in November 2006 in an original amount of SDR 73.71 million (about US$109.9 million) (see Press Release No. 06/258 ). At the same time, the IMF and the World Bank determined that Haiti qualified for debt relief under the enhanced Heavily Indebted Poor Countries Initiative (HIPC) (see Press Release No. 06/261 ). In June 2008, the Executive Board approved the first augmentation under the PRGF arrangement in an amount equivalent to SDR 16.38 million (about US$24.4 million; see Press Release No. 08/145) to help Haiti cope with the impact of high international food and fuel prices. Following the Executive Board discussion, Mr Takatoshi Kato, Deputy Managing Director and Acting Chair, issued the following statement: “The Haitian authorities are to be commended for maintaining macroeconomic stability and advancing with structural reforms during 2008, in spite of a succession of severe shocks to the economy. Higher food and fuel prices and resulting political disturbances severely constrained government operations, while a series of hurricanes and tropical storms caused unprecedented economic losses . 2 “The authorities remain firmly committed to their economic program, which seeks to strike a balance between safeguarding macroeconomic stability and pursuing economic and social development. In view of the large spending needs related to infrastructure reconstruction and poverty-reduction priorities, further efforts to raise domestic revenue are needed. However, the support of the international community will be crucial, and the authorities are encouraged to continue to work closely with donors to mobilize additional aid. “Provided remaining HIPC completion point triggers are implemented in a timely manner, Haiti should benefit from HIPC/MDRI debt relief by mid-2009. Going forward, maintaining debt sustainability will hinge on a cautious approach to new borrowing and the implementation of policies to promote economic growth and export diversification. “Haiti will continue to face difficult challenges in the period ahead. The political and social situation remains fragile, the impact of weather-related shocks lingers on, and the global downturn is expected to negatively affect remittances and exports. The authorities’ impressive performance and firm commitment to the program provide a strong basis for support from the Fund and the international community. Timely and adequate donor support will be crucial to preserve Haiti’s hard-won gains of recent years, implement its poverty reduction strategy, and boost economic growth,” Mr. Kato said. The PRGF is the IMF's concessional facility for low-income countries. PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in the country's Poverty Reduction Strategy Paper. This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5½ -year grace period on principal payments. Statement by Nogueira Batista, Executive Director for Haiti and Ketleen Florestal, Advisor to the Executive Director for Haiti February 11, 2009 The setting within which the PRGF program was implemented during the period under review was exceptionally difficult. The second half of FY08 was a period of protracted political stalemate as it took four months and three nominees for the Parliament to approve the Prime Minister who was to succeed PM Alexis, whose dismissal in April 2008 was set off by the food and oil price crisis. Within the period under review, four tropical storms and hurricanes have caused considerable damage to Haiti’s infrastructure and agriculture and inflicted increased hardship on the population. In addition, the global financial crisis is likely to impact negatively on the flow of remittances (about 25% of GDP) and exports. Despite these turbulences and severe external shocks, the Haitian authorit ies have managed to maintain macroeconomic stability and move forward with the structural reform agenda, including significant progress in the realization of completion point triggers. This fourth review of the PRGF represents an opportunity to take stock of Haiti’s strong performance under the program and to restate our concerns about the adequacy of the IMF’s response. It is disconcerting that, in spite of Haiti’s track record, it took close to four months of negotiations to bring to the Executive Board the request of access augmentation under the PRGF. Moreover, despite extremely difficult economic, social and political circumstances, repeated external shocks and important balance of payment needs, the augmentation was capped at the present ceiling for normal access under the PRGF (140 percent) and is being disbursed in two tranches. The authorities are strongly committed to respecting the engagements taken for this third year of the program. However, the austerity of the program and the challenges or opposition it may face in its implementation need to be underscored. The program for FY09 leaves very little room to address the urgent post-hurricane reconstruction and humanitarian needs and has the potential to stifle future growth. The Fund should make good on its promise to show flexibility if the impact of the global crisis worsens or other external shocks make it necessary to recalibrate the parameters of the program. The IMF’s traditional catalytic and signaling role also needs to be revisited. The staff report repeatedly and rightly underscores the tininess of donor support relativ e to Haiti’s increased needs following the serious infrastructure and crop destruction caused by natural disasters . Even though the government has scaled back considerably reconstruction and development investments, the financial gap remains substantial for FY09 (US$ 50 million) and the financing of the PRSP continues to be uncertain. The United Nation’s humanitarian flash appeal -- after back-to-back storms and hurricanes that had destroyed infrastructure and crops equivalent to about 15 percent of GDP -- led to the pledging and disbursement of the equivalent of only a little over 1 percent of GDP. Sustained donor support is crucial for maintaining economic, social and political stability, which has been achieved with large- 2 scale financial and technical assistance coupled with strong international political support. We encourage the Fund to strengthen its efforts to disseminate information on Haiti’s impressive performance under the PRGF program and to help secure additional financial assistance. The success of the upcoming donors’ conferences in March and April 2009 will need to be measured not only by the level of new pledges but also by donors’ willingness to realign their programs to the nationally defined priorities and to design efficient aid delivery strategies. The Haitian authorities are thankful to Haiti’s friends who have scaled up their financial and technical support in response to recent disasters. They are particularly appreciative of the IDB’s efforts to double its grant allocation for FY09. We urge bilateral donors as well as regional and multilateral donors (World Bank, IDB, EU) to revisit their traditional allocation benchmarks, to find innovative ways to increase their support to Haiti, and to adapt their aid programs to the new circumstances and the government’s strategy. We encourage the Fund’s management and our colleagues in the Board to stress to donors the need for an increased share of budget support in order to close the program’s financial gap. At the same time, donors should be urged to direct investment funding towards priority sectors defined in the PRSP, which the government is revising in light of the recent shocks. Any reluctance to work within the PRSP framework would not only be costly to Haiti, but could also be considered a setback to the IMF’s (and the World Bank’s) credibility as the PRSP approach has been adopted by Haiti with the support of the Bretton Woods institutions. At the time of the third review of the PRGF, some Directors expressed concerns about the potential risk of Petrocaribe financing to debt sustainability, although these loans are highly concessional. The Haitian authorities are committed to the prudent management of external debt, but they wish to ensure that sound growth and poverty reduction opportunities are not needlessly forgone. It would not therefore be advisable to completely exclude debt contracting, especially when loans are highly concessional. Notwithstanding the important external shocks that hit the economy during the past year and Haiti’s strong track record, assistance in the form of grants has not been sufficiently forthcoming. During the period under review, Petrocaribe’s funds have not only allowed the observance of performance criteria, as staff observes, but have also been the main source of financing of the government’s emergency program to respond to the population’s immediate needs after the natural disasters. It would be important in future Debt Sustainability Analyses (DSAs) to take into account not only the amounts of debt contracted but also the quality of the investments these loans help finance, particularly in terms of offsetting some of the negative impact of shocks. The challenges ahead are numerous and the downside risks to the program are indeed abundant. They stem chiefly from the indefinite length and severity of the global crisis and the unknown outcome of the upcoming donors’ conferences. The impact of the current decline in fuel prices on the flow of resources available through Petrocaribe is also a concern. On the upside, the absorptive capacity has been significantly increased and respectable 3 growth levels can be expected if investment funds are made available and the HOPE initiative is fully exploited. All completion point triggers are projected to be achieved by June 2009, with the exception of the one relating to the procurement law. Postponing the delivery of full debt relief, even if only by two months, will be very costly to Haiti. The delay in the submission of the procurement law to Parliament is mainly due to the political stalemate of 2008, and the authorities expect the draft law to be voted before the end of February. We call on the Boards of the World Bank and the IMF to be flexible on the length of implementation of the procurement law necessary to reach the completion point. It is important to recall that the procurement legislation has undergone significant transformations since 2004. The changes included in the draft legislation pending approval by Parliament are additional improvements the authorities are committed to implement in order to achieve international standards.