Haiti Fourth ECF Review

© 2012 International Monetary Fund August 2012 IMF Country Report No. 12/220 June 26, 2012 Lapse-of-time June 8, 2012 Haiti: Fourth Review Under the Extended Credit Facility—Staff Report and Press Release In the context of the fourth review under the Extended Credit Facility, the following documents have been released and are included in this package:  The staff report for the Fourth Review Under the Extended Credit Facility, prepared by a staff team of the IMF, following discussions that ended on June 8, 2012, with the officials of Haiti on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on July 5, 2012. 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 Press Release summarizing the views of the Executive Board. The documents listed below have been or will be separately released. Letter of Intent sent to the IMF by the authorities of Haiti* Updated Memorandum of Economic and Financial Policies by the authorities of Haiti* Technical Memorandum of Understanding-Update* *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 Extended Credit Facility Prepared by the Western Hemisphere Department (In consultation with Other Departments) Approved by Gilbert Terrier (WHD) and Taline Koranchelian (SPR) July 5, 2012 Background. The political crisis triggered by the resignation of Prime Minister Conille in February has now been resolved. A new government, under the leadership of Prime Minister Lamothe, took office on May 15. Economic activity is recovering, albeit at a slower pace than anticipated, and inflation has decelerated. The fiscal deficit has been well below program target, reflecting a strong revenue performance and lower-than-planned domestically-financed capital spending. The external position has continued to strengthen, with gross international reserves above 5 months of imports at end-March. Discussions. The team comprised B. Loko (Head), A. Bessaha, and A. Brousseau (all WHD); E. Bova (FAD); L. Nielsen (SPR). J. Bouhga-Hagbe (Resident Representative) also assisted the mission, and K. Florestal (OED) joined the discussions. A parallel mission comprising E. Mathias and B. Feys (all LEG) was also in Port-au-Prince to work on anti money laundering and combating the financing of terrorism (AML/CFT) issues. The mission met with Prime Minister Lamothe, Minister of Economy and Finance Jean Marie, Minister delegate in charge of Human Rights and the Fight against Extreme Poverty Auguste, Governor of the Bank of the Republic of Haiti Castel, other senior officials, banking sector executives, and development partners. Program performance. All end-March 2012 performance criteria were met. Implementation of structural reforms has also continued, although two out of three end-March 2012 structural benchmarks were not observed. SDR 4,914 million will be made available to Haiti upon completion of the fourth review under the ECF-supported arrangement, bringing the total amount disbursed this far to SDR 31,122 million. Policies for the remainder of FY2012 and for FY2013. The stance of macroeconomic policy and the reform agenda remain broadly unchanged, and will continue to focus on consolidating macroeconomic stability, mobilizing higher revenue to allow increased spending in critical areas, enhancing spending efficiency, and strengthening cash management. Structural reforms will also seek to modernize the financial sector and improve the business environment. Publication. The authorities have consented to the publication of the Staff Report, Letter of Intent, and Memorandum of Economic and Financial Policies for the fourth ECF review. 2 Contents Page I. Economic Context ..................................................................................................................3 A. Background and Program Implementation ...............................................................3 B. Recent Economic Developments ..............................................................................4 C. Outlook and Risks .....................................................................................................5 II. Policy Discussions.................................................................................................................6 A. Fiscal Policy and Reforms ........................................................................................6 B. Monetary, Exchange Rate, and Financial Sector Policies .......................................10 C. Other Structural Reforms ........................................................................................11 III. Program Monitoring...........................................................................................................12 IV. Staff Appraisal ...................................................................................................................12 Tables 1.  Selected Economic and Financial Indicators 2008/09-2012/13 .......................................14  2a. Central Government Operations, 2008/09-2012-13 (in millions of gourdes) ..................15   2b. Central Government Operations, 2008/09-2012/13 (in percent of GDP) ........................16   3. Summary Accounts of the Banking System, 2008/09-2012/13 .......................................17  4. Balance of Payments, 2008/09-2012/13 ..........................................................................18  5. Aggregate Financial Soundness Indicators of the Banking System, 2003-2001 .............19   6. Indicators of External Vulnerability, 2008/09-2012-13 ...................................................20  7. Indicators of Capacity to Repay the Fund, 2013-2023 ....................................................21  8. Proposed Schedule of Disbursement, 2010-2013 ............................................................22  Figure 1. 2010-12 Contributions to Recovery Efforts as of March 2012 ..........................................3 Box 1. New Poverty Reduction Initiatives and Coordination with NGOs ...................................8 Appendices I.  Letter of Intent .................................................................................................................23   II. Updated Memorandum of Economic and Financial Policies ..........................................25  III. Technical Memorandum of Understanding-Update ........................................................37  3 I. ECONOMIC CONTEXT A. Background and Program Implementation 1. The political outlook remains challenging. A new government under the leadership of Prime Minister Lamothe, who also remains Minister of Foreign Affairs, was formed on May 15. In the policy statement delivered at the time of his inauguration, the new Prime Minister highlighted continuity and commitment to the program and the associated reform agenda. He underscored the high priority that the new government attaches to accelerating the reconstruction and establishing a business environment conducive to investment and private sector-led growth. Passage of key legislation in support of reforms can, however, be expected to remain protracted, given the President’s lack of a majority in Parliament and the busy upcoming electoral cycle. 1 The overall security situation remains fragile. 2. Haiti’s post-earthquake reconstruction is continuing, albeit slowly on account primarily of weak capacity and political uncertainty. Tangible progress include the reduction by more than half of the 1.3 million of people leaving in camps, the removal of more than 50 percent of earthquake-related debris, and the reconstruction of several schools. However, donors’ disbursements, particularly with respect to pledges made at the March 2010 New York conference, remain slow, reflecting the political transition and Haiti’s limited administrative and absorptive capacity (Figure 1). 3. Program performance has been sound. All end-December 2011 indicative targets were met, with the exception of the floor on poverty-related spending, which was impacted by the overall under-execution of public spending. End-March 2012 quantitative 1 Originally scheduled to begin in November 2011, the new electoral cycle is now expected to start in November 2012, It will cover the elections of 1/3 of the Senate (10 new senators), and the renewal of 142 municipality councils, 565 sector officers, and several city delegates. 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 New York conference Other recovery fund Humanitarian - earthquake Humanitarian - cholera Total USD millions Text Figure 1. 2010-12 contributions to relief and recovery efforts as of march 2012 (excl. debt relief) Pledged Disbursed Source: UN Office of the Special Envoy for Haiti: www.haitispecialenvoy.org/ 4 performance criteria were observed, but the floor on poverty-related spending still was not met. All structural benchmarks from the previous reviews were met, except two. For the structural benchmarks related to the fourth review, two out of three were not met (Tables 2b and 2c of the MEFP). However, implementation of the four remaining structural benchmarks is well advanced (Text table). The final version of the public debt law is ready and is expected to be sent to parliament at the latest by mid-August, after the submission of the draft FY2013 budget. The structural benchmark related to the creation of a debt unit was not observed because its completion is predicated on the reorganization of the Ministry of Economy and Finance, which has been delayed by the political transition. The new government has indicated that steps will be taken to accelerate submission to parliament of the legislation needed for the reorganization of the Ministry of Economy and Finance by mid-summer. B. Recent Economic Developments 4. The economic recovery has been uneven, in the context of a tighter-than- projected fiscal stance and strong bank credit growth:  Growth. Despite the rebound in agriculture (accounting for about 25 percent of GDP) from last year’s contraction and buoyancy in manufacturing, commerce and services, economic activity has been weaker than anticipated notably in construction as the recent political crisis has slowed the pace of execution of public investment spending significantly. Structural Benchmarks Timing Status Launch the bids for the selection and hiring of the international consulting agency that will assist UCP and other project implementation units in the government End-June 2011 Not met. The firm has been selected and the contract is being finalized. Prepare a plan of action / operational manual describing: a. Modalities to recruit staff with project management skills and responsibility for ordering payments for project work orders. b. A defined set of information, project lists and accounts to be regularly published online to ensure full transparency on project execution and planning. c. Clear practices to ensure the coordination between the UCP, the Procurement Commission (CNMP) and the Ministry of External Cooperation and Planning (MPCE), in full compliance with national budget execution rules. Strengthen the debt unit with fully operational middle and back office functions; Preparation of annual debt sustainability analyses. End-March 2012 Not met. Because of the delayed creation of the Directorate General of Treasury, under which this new unit is expected to operate. The creation of such unit is part of the project to reorganize the Ministry of Economy and Finance (MEF). The reorganization decree of the MEF is expected to be submitted to Parliament during mid-summer. Submit to Parliament a public debt law that would establish a sound legal and institutional framework for public debt management. End-March 2012 Not met. Draft finalized and expected to be sent to Parliament by mid-August. Haiti: Status of Implementation of Delayed Structural Reform Measures in 2011 and 2012 End-September 2011 Not met. The final version is ready. 5  Inflation. Reflecting a deceleration in international food prices and the recovery in agriculture, consumer price inflation receded to 5.2 percent in May 2012 (down from a peak of 10.4 percent in September 2011).  Fiscal position. The fiscal outcome was better than programmed. This reflects continued strong revenue mobilization and under-execution of domestically-financed investment spending owing to a range of factors, including weak capacity and institutions, and political uncertainty. In contrast, current spending was in line with program targets.  External position. The balance of payments outcome for the first semester of 2012 was broadly in line with expectations. A small overall balance of payment surplus allowed for a US$0.1 billion increase in gross international reserves, to US$2.1 billion (5.5 months of imports) by end-March 2012.  Credit and banking sector. Year-on-year credit to the private sector grew by close to 30 percent through end-March. This expansion was mainly fueled by a rising demand for short-term trade credits, as political uncertainty continue to adversely affect long- term private sector investment. Deposit and credit dollarization remain high. At the same time, nonperforming loans are low, and key stability indicators suggest that the financial sector is relatively liquid and profitable. On a 12-month basis, the Gourde depreciated slightly against the dollar (4.1 percent through end-May 2012). C. Outlook and Risks 5. The recent political stalemate has impacted economic growth but the outlook for the rest of 2012 remains relatively favorable. Domestic demand is expected to continue driving activity in manufacturing, commerce, and services. However, the envisaged acceleration in public investment during the last quarter of FY2012 is unlikely to offset the loss of value added recorded in construction and other associated sectors during the first half of the year. On balance, staff and the authorities agreed to revise the growth target to 4.5 percent in 2012, down from 7.8 percent. On the inflation side, the downward trend in international food and energy prices and the recovery in agriculture have eased pressures on domestic food prices. Barring any trend reversal, staff and the authorities concurred on the need to adjust the twelve-month inflation objective for end-FY 2012 (September 2012) to 6 percent. The external current account deficit will likely be somewhat larger than programmed on account of a slump in exports observed at the beginning of this year because of the loss of a textile order from a U.S. retailer. However, given over-compliance at end- March, the gross international reserves target for FY 2012 remains well within reach. 6. The outlook for 2013 remains generally positive and broadly unchanged from the last ECF review. An expected pickup in the reconstruction efforts and the planned acceleration in the implementation of several major projects, particularly in transportation and services, would boost real GDP growth to 6.5 percent. Inflation would remain in the low single digits. Exports, particularly textiles, are projected to rebound but higher reconstruction-related imports would widen the external account deficit by about one percentage point of GDP to about 5.3 percent. Gross official reserves would decline slightly, 6 to about 5 months of imports. The authorities broadly agreed with staff’s outlook but were somewhat more optimistic about real GDP growth and the investment forecast. 7. Risks facing Haiti are diverse. Persistent weaknesses in administrative and absorptive capacities, continued political instability with a new round of elections, and delays in implementing critical reforms to enhance transparency, governance, and public financial management could reduce international support, complicate program execution, and put the reconstruction and economic recovery at risk. Additionally, Haiti continues to be vulnerable to natural disasters and to global downside risks which could reduce grants from donors, exports, and remittances. Finally, debt vulnerabilities remain a risk, as the last DSA (IMF Country Repot 12/74) concluded that Haiti’s debt continues to be assessed as high risk. However, the current level of official reserves which is relatively high, covering more than five months of imports, could provide a reasonable buffer. Moreover, a further pick up in the reconstruction effort, together with a steady implementation of the public investment program and ongoing structural reforms, could pave the way for higher growth. II. P OLICY DISCUSSIONS 8. Sustaining high and inclusive economic growth, while building resilience to natural and external vulnerabilities, remain Haiti’s main challenges. Against this background, discussions focused on policies and structural reforms to maintain macroeconomic stability, boost revenue mobilization to increase spending in social sectors and infrastructure, strengthen economic governance, improve the quality of public spending, and enhance the business environment to promote private investment. A. Fiscal Policy and Reforms 9. The 2012 fiscal deficit is likely to be about half as high as programmed, at 3½ percent of GDP. Domestic revenues are slightly below projections on account of lower custom duties; similarly, current spending is also less than forecast, mainly due to lower transfers. Regards capital spending, staff and the authorities agreed that, notwithstanding any effort to accelerate disbursement, the level of domestically-financed capital expenditure would not exceed 2/3 of the initially budgeted amount, or 6.4 percent of GDP. Budget support has been revised to US$55 million, down from US$114 million, as a result of the protracted political situation and associated delays both in the passage by parliament of the FY2012 budget, and in implementing disbursement-related prior actions. 2 10. The fiscal stance for FY2013 will continue to be supportive of the reconstruction in a context of medium-term sustainability. Continued efforts to strenghen tax and customs administration would boost domestic revenue to 13.9 percent of GDP (up from 13.5 percent in FY2012). On the spending side, the wage bill is projected to decline slightly, 2 Disbursement of Spain and World Bank support which are linked (US$13 million and US$30 million, respectively) has been delayed. This is attributable to both non implementation of prior actions (mostly on procurement and electricity sector) as well as ongoing discussions to redefine the contents of the World Bank development policy grant. 7 to 5.1 percent of GDP, notwithstanding new hiring to improve absorptive and administrative capacity and the delivery of basic public services (MEFP, ¶9). Transfers and subsidies to the energy sector (mostly to the electricity company EDH) are expected to be curtailed to 1.9 percent of GDP, down from 2.7 percent of GDP in FY2012. As a result, total current spending would fall by 0.8 percentage points of GDP, to 10.5 percent. Domestically-financed capital spending is forecast to rise to 8.9 percent of GDP, up from 6.4 percent in FY2012, on the assumption of higher PetroCaribe- and PCDR-related project spending. 3 The first tranche of the latter will cover the initial phase of the revenue administration reform, including acquisition of equipment and space as well as training of staff. Reflecting these parameters, the overall deficit target would reach 4.7 percent of GDP, to be financed primarily by foreign resources. 4 In the event of a shortfall in external budgetary support, the authorities could slow down some domestically-financed capital spending (without affecting the overall execution and the consistency of the investment program) and/or issue additional Treasury bills. 11. Efforts to strengthen project implementation capacity are crucial. Staff reiterated the need to move faster to enhance project management within the implementation units in line ministries; improve coordination between government agencies in charge of project design and implementation; and finalize the recruitment of an international firm to assist in project management. These efforts are critical to ensure that public investment targets are met, especially in those priority sectors emphasized by the authorities- infrastructure (including reconstruction of public buildings), education, agriculture, health, and energy- to sustain broad-based growth and poverty reduction. 12. The authorities and staff agreed on the importance of protecting and ramping up social spending. They have launched major initiatives that could quickly have a significant impact on the most vulnerable groups of the population (Box 1 and MEFP, ¶21). Staff welcomed these initiatives as they pave the way for a more coherent institutional framework to help the poor but underscored at the same time the need for closer coordination with NGOs and other stakeholders to help better target social spending, and make inroads in poverty alleviation. The authorities pointed out that, while NGOs provide acutely needed services to large segments of the poor population, they also tend to complicate macroeconomic management and, at times, slow down the process of reconstruction. They argued that large financial flows linked to ONG activities bypass government institutions, in some cases undermining government actions and institutions. Moreover, most striking to the authorities is that many NGOs do not coordinate their actions with them and are often in direct competition with the government and the local private sector in the domestic labor and goods and services markets. Hence, the authorities are exploring initiatives to improve their work with NGOs and ensure that their projects are consistent with the sectoral priorities and long-term developments needs of the country. 3 Resources freed by debt stock relief under the PCDR trust amounting to US$268 million have remained largely unused because of the protracted political transition since the presidential elections. 4 Budget support for FY2013 is projected to reach US$80 million, including US$27 million from the IDB, US$30 million from IDA, €8 million from the EU, and US$13 million from Spain. 8 Box 1. New Poverty Reduction Initiatives and Coordination with NGOs Government efforts to protect the poor have been recently stepped up, as evidenced by (i) the creation of a new Ministry delegate in charge of Human Rights and the Fight against Extreme Poverty; and (ii) the launching of three key programs, together with an action plan to develop in close coordination with civil society. Three new initiatives to help the most vulnerable groups of the population:  Education (Programme de Scolarisation Universel Gratuit et Obligatoire or PSUGO). The objective is to bring about 508,000 children aged 6-12 to school for free, over a period of four years (about 25 percent each year). Forty percent of these children will be sent to public schools, and the remaining ones to private schools, which will receive government subsidies. During 2011-12, about 165,500 children have been sent to school under this initiative. For each child enrolled under this program, the government gives about US$90 to private schools and about US$6 dollar to public schools. The program is expected to cost about US$43 million a year.  Conditional cash transfer (“Ti-manman-cheri”). The objective is to help women in very poor neighborhoods in the Port-au-Prince area. Under this pilot project, which will be extended to the whole country if successful, every month the government will transfer about US$10 to each woman who sends one child to school, US$15 for two children, and US$20 for three children or more. The program would reach about 100,000 mothers and cost around US$15 million.  Food production and distribution (“Aba grangou”). This multisectoral program aims at helping poor neighborhoods better deal with natural risks and at promoting agricultural projects as well as food distribution programs. It would also provide better educational and health services in these neighborhoods. It is expected to cost about US$15 million. Initiatives for greater coordination with NGOs are under way:  There are more than 10,000 NGOs in Haiti today, reflecting in part the international response to the January 2010 earthquake. These NGOs: (i) provide acutely needed services to large segments of the poor populations; (ii) account for more about than 2/3 of the country’s total expenditure on economic and social development; (iii) supply close to 50 percent of the foreign exchange; and (iv) employ large numbers of local staff.  Recent data suggest, however, that only 5 percent of NGOs are officially registered with the Ministry of Planning, and very few share their progress reports with the authorities. Initiatives under consideration to ensure that NGOs’ actions and operations strengthen capacity building and contribute effectively to the development of the country include:  Launching a survey to record the NGOs in operation and work under monitoring systems put in place by the government.  Channeling the actions of the NGOs in the context of sector programs defined by the government and in line with a platform that will lead the national government to be in a position to provide services to its own citizens.  Enhancing the regular reporting of all NGOs that are registered. 9 13. The government’s medium-term fiscal strategy hinges on a further increase in the domestic revenue intake. Reforms toward more robust tax and customs administrations include: (i) the adoption of an electronic system for tax declaration (e-declaration); (ii) a tightening in controls of revenue collections; and (iii) the establishment of two tax units, in charge of NGOs and SMEs, respectively (MEFP, ¶14). On tax policy, the authorities plan (i) to establish a unit to coordinate related reforms; (ii) reduce and eliminate tax expenditure in line with current laws and regulations and thorough analysis of their impact and motivation; and (iii) initiate work to overhaul the legal framework for taxation. Staff and the authorities look forward to the upcoming tax strategy mission (September) that will assess ways to rationalize tax exemptions and expand revenue. The authorities also intend to modernize and strengthen customs administration, particularly through actions that include the full implementation and use of the ASYCUDA WORLD system in major customs offices all over the country, improvements in import valuation processes and risk management, and the reinforcement of customs controls. 14. To improve the quality of public sector spending, further efforts are needed in the areas of public financial management and economic governance. The transition to a Treasury Single Account (TSA) to improve cash management is well on track, as the execution of the first phase, related to the closing of all identified government’s dormant accounts in the banking system, is moving on schedule (MEFP, ¶16). Also, the introduction of the new tracking and reporting mechanism for capital spending execution (SYSGEP) is an important step towards enhancing administrative and absorptive capacity to improve investment budgeting, spending, and execution (MEFP, ¶15). However, continued diligence and strong political commitment will be needed to make the system fully operational and effective. In particular, staff stressed the importance of reinforcing the network of units in charge of projects assessment and programming (UEP) and of technical execution (UTE) in line ministries, as they form the backbone of the whole reporting system. Staff also strongly encouraged the authorities to apply current regulations that tie disbursements of subsequent tranches of a project to properly documenting and reporting on the execution of the initial ones. 15. The authorities expressed their determination to combating corruption and improving transparency in the use of public resources. They agreed with staff that a speedy resolution of the issue involving several contracts signed 5 after the earthquake (that did not meet the provisions of the procurement code) will send a strong signal of their commitment to better governance. To that effect, in a letter sent to the World Bank and the donors’ community early June, Prime Minister Lamothe expressed his commitment to cancelling all contracts that would be confirmed unlawful by the Haitian High Audit Court 5 An audit launched by former Prime Minister Gary Conille has concluded that 41 contracts (amounting to about US$450 million) were unlawfully awarded by the previous administration under Haiti’s post-earthquake emergency law in 2010/11. 10 (Cour des Comptes). 6 Looking forward, there is an urgent need to improve public procurement and enhance external and internal supervisory and control institutions. In that respect, it will be critical to strengthen the authority, capacity, and resources of the Commission Nationale des Marchés Publics (CNMP) with technical and financial assistance from donors. It is also important to ensure that the bulk of public contracts is submitted in a timely fashion to the scrutiny of the CNMP, in line with a national procurement plan. 16. The restructuring of the electricity company EDH is critical to reducing budgetary transfers and improving electricity supply. A Memorandum of Understanding to strengthen the electrical sector was agreed between the government and key partners, including the U.S., IDB, and the World Bank. In addition, a managing director and four directors were appointed at EDH to improve management of the company, reduce production and distribution losses, and raise bill payments proceeds (MEFP, ¶18). Progress has so far remained slow. However, the Council of Ministers announced recently that it will soon agree on a strategy and policy paper for the electricity sector, which will be discussed with donors (including US, IADB, WB) in July. Staff strongly encouraged the government to accelerate efforts to fully restructure the company and bring it back to financial sustainability over the medium term while gradually allowing for a reliable supply of energy. 17. Efforts are underway to strengthen debt management. The new public debt law still needs to be supplemented by a medium-term strategy. There was a common view on the importance of an early creation of the debt unit with operational middle and back-office functions. Staff noted that, until this reform is in place, the focus should be on strengthening the capacity of the current Debt Directorate, including by providing adequate training to staff, conducting front and back office operations (MEFP, ¶19), and enhancing capacity to conduct debt sustainability analyses. B. Monetary, Exchange Rate, and Financial Sector Policies 18. Price stability remains the main objective of monetary policy. Monetary policy has been neutral in recent months, with no change in the policy rate since early 2011. Looking forward, the authorities and staff agreed that the BRH should be ready to adjust monetary policy stance to contain inflationary pressures and achieve its inflation target for 2013, barring any commodity prices spikes. Both parties concurred that relatively high financial dollarization and structural excess bank liquidity weaken the effectiveness of the monetary transmission mechanism. Successful dedollarization will ultimately hinge on continued implementation of appropriate policies to maintain macroeconomic and price stability. Staff welcomed the recent measures (MEFP, ¶10) taken by the BRH to contain dollarization and encouraged close monitoring of risks from the rise in dollar-denominated loans, including tightening of prudential regulations as deemed necessary to preserve financial stability. The authorities intend to step up their capacity to conduct stress testing and have requested further TA from the IMF to improve their methodology while developing a credit model using loan-by-loan information. Developing domestic financial markets will 6 The final report has been submitted to the High Audit Court in June 2012. 11 also help improve liquidity management and strengthen market-based monetary operations. In this context, close coordination between the fiscal and monetary authorities, including through systematic information-sharing on planned fiscal and monetary operations, would enhance monetary management. 19. The BRH reaffirmed its commitment to exchange rate flexibility. The authorities continue to view exchange rate flexibility as an important instrument of external adjustment and remain committed to improving, deepening, and modernizing the FX market (MEFP, ¶11). Accordingly, they plan to request TA from the Fund to help gradually introduce a system of single price foreign exchange auctions. A first step toward deepening the FX market would be to allow more participants, including exporters. The authorities reiterated that the BRH intervention in the FX market will continue to aim at smoothing excessive temporary volatility and not at resisting fundamental developments. 20. The authorities are committed to further improving the stability of the financial sector. To that effect, they intend to: (i) strengthen the operations of the Partial Credit Guarantee Fund, including with the launching of a second pillar aimed at boosting lending to investors; (ii) update the financial legislation and improve regulation and supervision; and (iii) reinforce the insurance sector, notably through the submission of an insurance law to Parliament and the setting up of a regulatory authority (MEFP, ¶20). 21. The authorities will continue to implement the recommendations of the January 2010 Safeguards Assessment follow up mission. In addition to completing the FY 2011 audit, which is progressing albeit with some delays, a package of measures aims at strengthening the accounting, financial reporting, and auditing capacities of the central bank (MEFP, ¶12) including: (i) the disposition of all BRH subsidiaries; (ii) the conversion of central bank credit to the Haitian government into securities; (iii) the full adoption of IFRS along with the establishment of a special committee to monitor its implementation; and (iv) the reconstitution of the Investment Committee as an independent oversight body and the appointment of an officer to monitor compliance with investment guidelines. 22. The authorities are committed to further improving compliance of the anti- money laundering and combating the financing of terrorism (AML/CFT) framework with the financial action task force (FATF) standards, and to follow a risk-based approach to ensure its effective implementation. Discussions centered on an action plan to: (i) amend the AML/CFT legal framework in line with FATF standards; (ii) focus the implementation of the AML/CFT regime on elements critical for program performance (e.g., enhance revenue collection, increase the transparency of the procurement system, prevent financial sector abuse). In this respect, a number of critical measures have been identified, namely the creation of a reliable system for the identification of citizens, the enhancement of the anti-corruption legal framework, and the improvement of the capacity of law enforcement authorities. C. Other Structural Reforms 23. Continuing structural reforms are critical for sustaining economic growth, reducing poverty and unemployment, and addressing imbalances. The action plan to implement “Doing Business” reforms is underway with major initiatives to streamline Haiti’s 12 numerous, complex, and cumbersome regulations over the next two years. Staff and the authorities concurred that further progress would also be needed, including through measures aimed at uplifting the legal regime for collateral and establishing a registry for the use of movable assets as collateral. Preparing a new law aimed at strengthening microfinance (MEFP, ¶17) will also be a critical element of the authorities’ program. Staff underscored that, while mostly outside the core area of expertise of the Fund, these reforms were critical to boosting private sector growth and reducing poverty. III. P ROGRAM MO NITORING 24. Program design and monitoring remain broadly unchanged. Quarterly quantitative benchmarks and semi-annual quantitative performance criteria (PCs) in place since the inception of the program will continue to be used to monitor program implementation. Understandings were reached on revised end-December 2012 indicative targets, end-March 2013 quantitative performance criteria, and new indicative targets for the remainder of FY2013 (Table 1 attached to the MEFP). In the structural area, the authorities proposed to include two critical new benchmarks seeking to improve cash management and transparency in accounting (Table 2c attached to the MEFP). In particular, the authorities intend to: (i) reduce the number of domestically-funded imprest accounts to three by ministry or institutions (for revenue collection, capital spending, and other transactions, respectively), deploy the network of public accounting offices at the line ministries level and gradually grant signature authority on these accounts to public accountants appointed by the MEF (end- March 2013); and (ii) roll-out in all ministries the GL-software and start to record projects and imprest accounts expenditure when they are effectively paid, and no longer when the replenishment of the account is made (end-March 2013). IV. S TAFF APPRAISAL 25. Despite political instability, the steady implementation of appropriate policies has continued to deliver on program objectives. Economic activity has picked up, albeit at lower-than-planned pace, and inflation has decelerated. Credit growth has continued, and banking sector indicators remain sound. The fiscal adjustment is in line with medium-term sustainability. Business environment reforms are underway, although the current pace is slower-than-anticipated and structural challenges remain in the way of higher growth and poverty reduction. 26. Recent tax revenue performance suggests that revenue administration reforms are paying off. The positive results registered in recent years should not, however, give rise to complacency. There is ample scope for improving collections through reforms aimed at broadening the tax base, reducing tax expenditures, and further improving the efficiency of tax and customs administration. 27. Going forward, there remains a pressing need to provide additional fiscal space for priority spending to boost growth and reduce poverty. The ramping up of capital spending must be accompanied by further improvements in public expenditure management. Staff encourages the authorities to take all steps to ensure that the recently-introduced tracking system SYSGEP is populated at all times with timely and credible data so as to 13 make the best use of it and enhance transparency. Staff would also caution that ongoing efforts to improve public financial management will be of little effect if the procurement system, typically a major source of corruption, is not durably improved. These actions, together with other steps to enhance cooperation with NGOs, would help make headway in improving implementation capacity. The restructuring of the public electricity company EDH will be critical to reducing budgetary transfers and improving electricity supply. So far, progress in reform efforts has remained slow and disappointing. Staff therefore strongly encourages the authorities to accelerate those efforts to fully restructure the company and bring it back to financial sustainability and allow for an efficient provision of electricity. 28. The monetary policy stance is broadly appropriate. Its effectiveness, however, continues to be constrained by relatively high financial dollarization and excess liquidity in the banking system. In this context, staff welcomes measures to gradually promote dedollarization in the banking system and improve liquidity management. Developing the domestic financial market and making greater use of market-based monetary operations would also help. 29. Sound macroeconomic policies will need to be accompanied by structural reforms to achieve the competitiveness gains needed for sustained economic growth and job creation. There are still large pockets of potential growth in the economy. Government initiatives to address structural impediments to private investment, reduce excessive regulation, improve transparency, and frame those actions in an overall strategy are welcome. 30. Staff recommends completion of the fourth review under the ECF arrangement in view of the good performance so far and the authorities’ commitment to the rest of the program. 14 Nominal GDP (2011): US$7.4 billion Population (2009): 9.9 million 2012/13 Act. Act. Prog. (EBS/11/63) Rev. Proj. Prog. (EBS/12/22) Rev. Proj. Prog. A National income and prices GDP at constant prices 2.9 -5.4 8.6 5.6 7.8 4.5 6.5 GDP deflator 3.4 4.7 6.2 5.9 7.2 5.7 5.3 Consumer prices (period average) 3.4 4.1 7.0 7.4 7.7 6.8 5.9 Consumer prices (end-of-period) -4.7 4.7 9.1 10.4 8.0 6.0 5.0 External sector Exports (f.o.b.) 12.4 2.2 10.7 36.3 23.9 0.0 22.8 Imports (f.o.b.) -3.6 38.3 7.2 7.3 15.1 0.0 12.0 Real effective exchange rate (end of period; + appreciation) 2.1 0.8 ... 1.6 ... n.a. n.a. Money and credit Credit to the nonfinancial public sector (net) 24.5 -122.7 -91.7 229.4 -107.4 -0.2 -6.3 Of which: Net credit to the central government 35.7 -104.3 ... 930.9 -157.3 8.0 -5.2 Credit to private sector 14.7 -5.6 21.6 24.5 16.8 18.6 18.0 Base money 9.5 31.2 15.2 6.0 11.2 9.0 10.9 Broad money (incl. foreign currency deposits) 11.0 22.7 20.3 10.4 16.1 11.2 13.0 Central government Overall balance -4.6 2.4 -6.2 -3.7 -7.7 -3.6 -4.7 Overall balance (excluding grants and externally-financed projects) -4.6 -5.0 -7.4 -4.7 -8.8 -4.1 -5.4 Domestic revenue 11.2 11.9 11.8 13.1 13.6 13.5 13.9 Grants 6.7 16.5 16.3 16.8 15.9 14.4 13.0 Expenditures 22.5 26.0 33.8 33.5 37.3 31.5 31.7 Current expenditures 11.7 11.3 11.0 11.8 11.4 11.3 10.5 Capital expenditures 10.8 14.7 22.7 21.7 25.9 20.3 21.2 Savings and investment Gross investment 27.4 25.4 38.9 28.0 32.6 27.0 29.0 Of which: public investment 10.8 14.7 … 21.7 25.9 20.3 21.2 Gross national savings 24.0 22.9 34.6 23.8 28.1 22.7 23.7 Of which: central government savings 1.0 4.0 3.0 2.4 3.5 3.0 4.4 External current account balance (including official grants) -3.5 -2.5 -4.2 -4.6 -4.5 -4.3 -5.3 External current account balance (excluding official grants) -9.5 -29.8 -23.3 -24.2 -22.9 -21.2 -21.0 Public Debt External public debt (end-of-period) 19.0 13.2 8.8 8.9 12.4 13.1 16.4 Total government debt (end-of-period) 27.7 17.3 14.9 11.7 15.1 16.6 20.1 External public debt service 1/ 3.9 1.6 0.9 0.6 0.7 0.8 1.4 Overall balance of payments -109 1,028 -273 167 -181 38 -105 Net international reserves (program) 2/ 416 1,095 772 1,177 979 1,221 1,057 Liquid gross reserves 948 1,792 1,539 2,000 1,843 2,060 1,970 In months of imports of the following year 2.8 5.2 4.1 5.8 4.7 5.5 5.0 Nominal GDP (millions of Gourdes) 266,559 264,039 308,335 297,687 345,680 328,807 368,630 Nominal GDP 6,552 6,551 7,620 7,388 8,335 7,895 8,529 TSREF TSREF TSREF TSREF TSREF 1/ In percent of exports of goods and nonfactor services. Includes HIPC, MDRI, and PCDR debt relief. 2/ SDR allocation (liability) is not netted out of NIR. (In millions of U.S. dollars; unless otherwise indicated) (In percent of GDP; unless otherwise indicated) (Change over previous year; unless otherwise indicated) Sources: Ministry of Economy and Finance; Bank of the Republic of Haiti; Fund staff estimates and projections; and World Bank estimates. Table 1. Haiti: Selected Economic and Financial Indicators, 2008/09 - 2012/13 (Fiscal year ending September 30) 2008/09 2009/10 2010/11 2011/12 15 2012/13 Act. Act. Prog. (EBS/11/63) Prov. Prog. (EBS/12/22) Rev. Proj. Prog. Total revenue and grants 47,717 75,004 86,794 88,801 102,066 91,786 99,386 Domestic revenue 29,881 31,425 36,459 38,893 46,950 44,516 51,411 Domestic taxes 19,954 19,393 22,133 24,460 28,810 29,387 33,861 Customs duties 8,958 11,394 13,512 13,672 16,190 15,000 16,908 Other current revenue 970 638 814 761 1,950 129 642 Grants 17,836 43,579 50,335 49,907 55,116 47,270 47,975 Budget support 3,873 8,966 6,875 3,492 4,728 2,291 3,458 Project grants 13,962 23,924 43,460 46,416 50,388 44,979 44,517 Total expenditure 1/ 60,030 68,704 104,100 99,811 128,847 103,677 116,861 Current expenditure 31,136 29,849 33,997 35,231 39,452 37,089 38,537 Wages and salaries 13,396 14,563 16,590 14,809 18,027 17,066 18,671 Net Operations 2/ 7,655 7,040 10,237 7,525 10,454 9,822 11,401 Other current expenditures 0 1,023 8,559 0 0 0 0 Interest payments 2,242 1,569 1,394 1,272 1,394 1,335 1,625 External 1,106 452 154 153 229 230 397 Domestic 1,136 1,118 1,241 1,119 1,165 1,105 1,228 Transfers and subsidies 7,844 6,677 7,454 11,626 9,576 8,866 6,840 Of which: energy sector 4/ 0 3,793 3,945 8,232 4,583 4,492 1,843 Capital expenditure 28,894 38,855 70,103 64,579 89,395 66,588 78,324 Domestically financed 10,959 14,689 25,335 17,621 38,007 21,025 32,942 Of which: Treasury 2,225 13,475 24,102 16,431 36,859 21,025 32,942 Of which: not related to PetroCaribe spending 2,225 9,390 11,215 8,027 16,000 10,500 17,000 Of which: related to PetroCaribe spending 0 2,991 9,874 7,479 16,113 9,500 14,442 Of which: Counterpart funds 3/ 1,899 1,214 1,233 1,190 1,148 0 0 Foreign-financed 17,934 24,166 44,767 46,958 51,388 45,563 45,382 Overall balance -12,313 6,299 -18,984 -11,010 -26,781 -11,891 -17,475 Excluding grants -30,149 -37,279 -67,641 -60,918 -81,897 -59,161 -65,450 Excluding grants and externally financed projects -12,214 -13,113 -22,873 -13,959 -30,509 -13,599 -20,068 Adjustment (unidentified spending) -565 1,260 0 1,174 0 0 0 Financing 11,749 -5,040 18,984 12,184 26,781 11,836 17,475 External net financing 8,141 9,050 13,867 13,548 14,661 14,719 15,052 Loans (net) 8,141 9,050 13,867 13,548 14,661 14,719 15,052 Disbursements 9,935 9,356 14,079 13,625 14,685 14,743 15,560 Budget support 5,963 9,114 12,772 13,082 13,686 14,160 14,695 Of which: Petrocaribe 5,963 9,114 12,747 13,214 13,686 14,160 14,695 Project loans 3,980 3,631 1,307 543 999 583 864 Amortization -1,794 -306 -212 -77 -24 -24 -508 Arrears (net) 0 0 0 0 0 0 0 Internal net financing 2,082 -14,090 5,117 -1,363 12,120 -2,882 2,423 Banking system 644 -16,398 3,884 -5,290 12,580 -640 447 BRH 644 -10,679 2,782 -2,926 3,106 1,300 2,116 Excluding Petrocaribe 0 -10,837 0 -2,926 3,106 1,300 2,116 Net T-bills for r ecapitalization 0 0 4,000 0 0 0 0 From PCDR account 0 0 2,782 0 2,370 1,025 1,500 Commercial banks 0 -5,719 1,102 -2,364 9,474 -1,940 -1,669 excl. Petrocaribe 0 300 4,000 -300 4,534 1,416 -1,416 Net purchase of T-bills 0 300 4,000 -300 4,534 1,416 -1,416 Nonbank financing 1,439 2,308 1,233 3,927 -460 -2,243 1,976 Amortization -460 0 -300 -300 -2,112 -2,400 -157 Counterpart funds 3/ 1,899 1,214 1,233 1,190 1,148 0 1,106 Net purchase of T-bills 0 0 0 0 504 157 870 Arrears (net) 0 0 0 0 0 0 0 HIPC interim relief 1,383 0 0 0 0 0 0 Memorandum items Balance of PCDR account (in millions of U.S. dollars) 0 268 199 268 180 225 168 Stock of T-bills at end of year (in millions of Gourdes) 0 300 8,300 0 5,038 1,573 1,027 Transfers to EDH from Petrocaribe resources (million of Go u n.a. n.a. n.a. 3,538 2,488 2,499 0 Sources: Ministry of Finance and Economy; and Fund staff estimates and projections. 1/ Commitment basis except for domestically financed capital expenditure, which is reported on cash basis from 2007 onwards. 2/ Includes statistical discrepancy. 3/ Proceeds from sales of grants received in kind. 4/ Includes transfers from Petrocaribe resources in FY2011. 5/ The financing gap is expected to be covered by donor inflows, but no formal pledges have been made. Table 2a. Haiti: Central Government Operations, 2008/09 - 2012/13 (Fiscal year ending September 30; in millions of gourdes) 2008/09 2009/10 2010/11 2011/12 16 2012/13 Act. Prel. Prog. (EBS/11/63) Prov. Prog. (EBS/12/22) Rev. Proj. Prog. Total revenue and grants 17.9 28.4 28.1 29.8 29.5 27.9 27.0 Domestic revenue 11.2 11.9 11.8 13.1 13.6 13.5 13.9 Domestic taxes 7.5 7.3 7.2 8.2 8.3 8.9 9.2 Customs duties 3.4 4.3 4.4 4.6 4.7 4.6 4.6 Other current revenue 0.4 0.2 0.3 0.3 0.6 0.0 0.2 Grants 6.7 16.5 16.3 16.8 15.9 14.4 13.0 Budget support 1.5 3.4 2.2 1.2 1.4 0.7 0.9 Project grants 5.2 9.1 14.1 15.6 14.6 13.7 12.1 Total expenditure 1/ 22.5 26.0 33.8 33.5 37.3 31.5 31.7 Current expenditure 11.7 11.3 11.0 11.8 11.4 11.3 10.5 Wages and salaries 5.0 5.5 5.4 5.0 5.2 5.2 5.1 Net Operations 2/ 2.9 2.7 3.3 2.5 3.0 3.0 3.1 Other current expenditures 0.0 0.4 2.7 0.0 0.0 0.0 0.0 Interest payments 0.8 0.6 0.5 0.4 0.4 0.4 0.4 External 0.4 0.2 0.0 0.1 0.1 0.1 0.1 Domestic 0.4 0.4 0.4 0.4 0.3 0.3 0.3 Transfers and subsidies 2.9 2.5 2.4 3.9 2.8 2.7 1.9 Of which: energy sector 4/ 0.0 1.4 1.3 2.8 1.3 1.4 0.5 Capital expenditure 10.8 14.7 22.7 21.7 25.9 20.3 21.2 Domestically financed 4.1 5.6 8.2 5.9 11.0 6.4 8.9 Of which: Treasury 0.8 5.1 7.8 5.5 10.7 6.4 8.9 Of which: not related to PetroCaribe spending 0.8 3.6 3.6 2.7 4.6 3.2 4.6 Of which: related to PetroCaribe spending 0.0 1.1 3.2 2.5 4.7 2.9 3.9 Of which: Counterpart funds 3/ 0.7 0.5 0.4 0.4 0.3 0.0 0.0 Foreign-financed 6.7 9.2 14.5 15.8 14.9 13.9 12.3 Overall balance -4.6 2.4 -6.2 -3.7 -7.7 -3.6 -4.7 Excluding grants -11.3 -14.1 -21.9 -20.5 -23.7 -18.0 -17.8 Excluding grants and externally financed projects -4.6 -5.0 -7.4 -4.7 -8.8 -4.1 -5.4 Adjustment (unidentified spending) -0.2 0.4 0.0 0.4 0.0 0.0 0.0 Financing 4.4 -1.9 6.2 4.1 7.7 3.6 4.7 External net financing 3.1 3.4 4.5 4.6 4.2 4.5 4.1 Loans (net) 3.1 3.4 4.5 4.6 4.2 4.5 4.1 Disbursements 3.7 3.5 4.6 4.6 4.2 4.5 4.2 Budget support 2.2 3.5 4.1 4.4 4.0 4.3 4.0 Of which: Petrocaribe 2.2 3.5 4.1 4.4 4.0 4.3 4.0 Project loans 1.5 1.4 0.4 0.2 0.3 0.2 0.2 Amortization -0.7 -0.1 -0.1 0.0 0.0 0.0 -0.1 Arrears (net) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Internal net financing 0.8 -5.3 1.7 -0.5 3.5 -0.9 0.7 Banking system 0.2 -6.2 1.3 -1.8 3.6 -0.2 0.1 BRH 0.2 -4.0 0.9 -1.0 0.9 0.4 0.6 Excluding Petrocaribe 0.0 -4.1 0.0 -1.0 0.9 0.4 0.6 Net T-bills for recapitalization 0.0 0.0 1.3 0.0 0.0 0.0 0.0 From PCDR account 0.0 … 0.9 0.0 0.7 0.3 … Commercial banks 0.0 -2.2 0.4 -0.8 2.7 -0.6 -0.5 Excluding Petrocaribe 0.0 0.1 1.3 -0.1 1.3 0.4 -0.4 Net purchase of T-bills 0.0 0.1 1.3 -0.1 1.3 0.4 -0.4 Nonbank financing 0.5 0.9 0.4 1.3 -0.1 -0.7 0.5 Amortization -0.2 0.0 -0.1 -0.1 -0.6 -0.7 0.0 Counterpart funds 3/ 0.7 0.5 0.4 0.4 0.3 0.0 0.3 Net purchase of T-bills 0.0 0.0 0.0 0.0 0.1 0.0 0.2 Arrears (net) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 HIPC interim relief 0.5 0.0 0.0 0.0 0.0 0.0 0.0 Memorandum item: Balance of PCDR account 0.0 4.1 2.6 3.6 2.2 2.8 2.0 Stock of T-bills at end of period 0.0 0.1 2.7 0.0 1.5 0.5 0.3 Transfers to EDH from Petrocaribe resources (million of Gourdes) 1.2 0.7 0.8 0.0 Sources: Ministry of Finance and Economy; and Fund staff estimates and projections. 1/ Commitment basis except for domestically financed capital expenditure, which is reported on cash basis from 2007 onwards. 2/ Includes statistical discrepancy. 3/ Proceeds from sales of grants received in kind. 4/ Includes transfers from Petrocaribe resources in FY2011. 5/ The financing gap is expected to be covered by donor inflows, but no formal pledges have been made. Table 2b. Haiti: Central Government Operations, 2008/09 - 2012/13 (Fiscal year ending September 30; in percent of GDP) 2008/09 2009/10 2010/11 2011/12 17 2009/10 2012/13 Act. Prog. (EBS/11/63) Prov. Prog. (EBS/12/22)Rev. Proj. Prog. Net foreign assets 24,000 64,127 55,236 72,464 66,877 76,597 75,057 (In millions of U.S. dollars) 575 1,606 1,347 1,773 1,592 1,811 1,706 Net international r eser ves (progr am) 1/ 416 1,095 772 1,177 979 1,221 1,057 Commercial bank forex deposits 268 621 689 707 725 702 761 Net domestic assets 7,080 -23,344 -8,254 -29,229 -18,669 -29,471 -22,806 Net credit to the nonfinancial public sector 21,549 9,520 11,811 5,276 9,049 7,244 9,693 Of which: Net credit to the central government 23,118 12,376 14,652 9,466 12,572 10,767 12,883 Of which: T-bills 0 0 4,000 0 0 0 0 Of which: IMF PCDR Debt Relief 0 -10,704 -8,200 -10,954 -7,572 -9,510 -7,378 Liabilities to commercial banks (excl gourde deposits) -20,711 -33,907 -36,756 -35,191 -37,677 -36,938 -38,693 BRH bonds/Open market operations -9,552 -9,210 -8,500 -6,328 -7,241 -7,241 -5,200 Counterpart of commercial bank forex deposits -11,159 -24,697 -28,256 -28,863 -30,437 -29,697 -33,493 Other 6,242 1,043 16,691 686 9,959 223 6,194 Base Money 31,080 40,783 46,982 43,235 48,207 47,126 52,250 Currency in circulation 13,448 17,282 19,671 18,400 20,608 20,796 23,088 Commercial bank gourde deposits 17,632 23,501 27,311 24,835 27,599 26,330 29,163 Net foreign assets 40,537 92,209 86,810 104,575 101,132 111,097 112,264 (In millions of U.S. dollars) 970 2,309 2,117 2,558 2,408 2,626 2,551 Of which: Commercial banks NFA 396 703 770 786 816 816 846 Net domestic assets 62,257 33,942 64,954 34,749 60,615 43,862 62,780 Credit to the nonfinancial public sector 16,461 -3,745 -352 -12,336 912 -12,308 -11,528 Of which: Net credit to the central government 18,101 -776 n.a. -7,996 n.a. -8,636 -8,189 Credit to the private sector 43,002 40,585 49,370 50,526 59,028 59,929 70,705 In gourdes 19,206 21,708 25,472 28,086 32,196 35,358 40,541 In foreign currency 23,796 18,877 23,898 22,440 26,832 24,571 30,164 In millions of U.S. dollars 570 473 583 549 639 581 686 Other 2,794 -2,898 15,935 -3,442 675 -3,759 3,602 Broad money 102,794 126,151 151,763 139,324 161,747 154,960 175,043 Currency in circulation 13,448 17,282 19,671 18,400 20,608 20,796 23,088 Gourde deposits 41,182 48,513 57,221 52,164 60,405 55,392 64,124 Foreign currency deposits 48,165 60,355 74,871 68,760 80,733 78,772 92,058 In millions of U.S. dollars 1,153 1,511 1,826 1,682 1,922 1,862 2,092 Currency in circulation 3.2 28.5 13.8 6.5 12.0 13.0 11.0 Base money 9.5 31.2 15.2 6.0 11.2 9.0 10.9 Gourde money (M2) 9.1 20.4 16.9 7.2 14.8 11.0 11.4 Broad money (M3) 11.0 22.7 20.3 10.4 16.1 11.2 13.0 Gourde deposits 11.2 17.8 25.0 7.5 15.8 10.2 11.5 Foreign currency deposits (U.S. dollars) 13.3 25.3 24.1 13.9 17.4 14.6 16.9 Credit to the nonfinancial public sector 24.5 -122.7 -91.7 229.4 -107.4 -0.2 -6.3 Credit to the private sector 14.7 -5.6 21.6 24.5 16.8 18.6 18.0 Credit in gourdes 19.2 13.0 17.3 29.4 14.6 25.9 14.7 Credit in foreign currency (U.S. dollars) 11.3 -20.7 26.6 18.9 19.6 9.5 22.8 Memorandum items: Foreign currency bank deposits (percent of total) 53.9 55.4 56.7 56.9 57.2 58.7 58.9 Foreign curr. credit to priv. sector (percent of total) 55.3 46.5 48.4 44.4 45.5 41.0 42.7 Commercial Banks' Credit to Private Sector (percent of GDP) 2/ 15.4 14.6 15.2 16.2 16.3 17.5 18.4 Sources: Bank of the Republic of Haiti; and Fund staff estimates and pr ojections. 2/ GDP ratio calculated using nominal program figure for 2009 (numerator) and actual nominal GDP (denominator). Table 3. Haiti: Summary Accounts of the Banking System, 2008/09 - 2012/13 (Fiscal year ending September 30; in millions of gourdes, unless otherwise indicated) 1/ Excluding commer cial bank for ex deposits, letters of credit, guarantees, ear mar ked project accounts and U.S.dollar-denominated bank reserves. The NIR definition has been changed r elative to that of the pr evious pr ogram, with the SDR allocation no longer netted out as a liability. This table reports NIR under the new definition. The revised projection for 2009/10 reflects the IMF debt relief of SDR 178.1 million approved on July 21, 2010. 2008/09 Act. 2010/11 I. Centr al Bank II. Consolidated Banking System (12-month percentage change) 2011/12 18 2009/10 2012/13 Act. Prog. (EBS/11/63) Prov. Prog. (EBS/12/22)Rev. Proj. Prog. Current account (including grants) -226 -163 -323 -339 -375 -341 -453 Current account (excluding grants) -621 -1,953 -1,773 -1,785 -1,905 -1,677 -1,787 Trade balance -1,481 -2,247 -2,384 -2,246 -2,438 -2,246 -2,433 Exports of goods 551 563 626 768 943 768 943 Of which: Assembly industry 511 523 583 714 891 716 885 Imports of goods -2,032 -2,810 -3,010 -3,014 -3,381 -3,014 -3,376 Of which: Petroleum products -385 -546 -630 -770 -815 -815 -871 Services (net) -393 -1,035 -793 -891 -864 -838 -813 Receipts 379 239 340 249 308 308 341 Payments -772 -1,274 -1,133 -1,140 -1,172 -1,146 -1,154 Income (net) 13222941334340 Of which: Interest payments 1/ -18-7-4-4-6-6-9 Current transfers (net) 1,635 3,097 2,826 2,757 2,894 2,700 2,753 Official transfers (net) 395 1,790 1,450 1,446 1,530 1,336 1,334 Of which: budget support 94 225 169 87 114 55 80 Private transfers (net) 1,241 1,307 1,376 1,311 1,364 1,364 1,419 Capital and financial accounts 501 1,003 50 592 194 379 348 Capital transfers (HIPC/MDRI/PCDR) 2/ 1,069 1,360 486 656 3 3 3 Debt stock reduction (HIPC/MDRI) 2/ -1,092 -334 -486 -486 0 0 0 Public sector capital flows (net) 3/ 288 218 342 340 351 351 351 Loan disbursements 225 224 347 341 354 354 360 Amortization 1/ -38-6-5-2-3-3-9 Foreign direct investment (net) 38 150 107 181 101 101 112 Banks (net) 4/ 57 -307 -67 -83 -30 -30 -30 Other items (net) 142 -84 -333 -16 -231 -46 -88 Errors and omissions -384 188 0 -86 0 0 0 Overall balance -109 1,028 -273 167 -181 38 -105 Financing 109 -1,028 273 -167 181 -38 105 Change in net foreign assets -48 -1,031 273 -167 181 -38 105 Change in gross reserves -259 -828 253 -211 157 -60 90 Liabilities 211 -203 20 44 24 23 15 Utilization of Fund credits(net) 61 -146 21 13 23 23 15 Other liabilities 149 -57 0 31 1 0 0 Debt rescheduling and debt relief 157 3 n.a. 0 0 0 0 Memorandum items: Current account (in percent of GDP) -3.5 -2.5 -4.2 -4.6 -4.5 -4.3 -5.3 Excluding official transfers -9.5 -29.8 -22.8 -24.2 -22.9 -21.2 -21.0 Exports of goods, f.o.b (percent change) 12.4 2.2 10.7 36.3 23.9 0.0 22.8 Imports of goods, f.o.b (percent change) -3.6 38.3 7.2 7.3 15.1 0.0 12.0 Debt service (in percent of exports of goods and services) 3.9 1.6 0.9 0.6 0.7 0.8 1.4 Gross liquid international reserves (in millions of U.S. dollars) 2/ 948 1,792 1,539 2,000 1,843 2,060 1,970 (in months of next year's imports of goods and services) 2.8 5.2 4.1 5.8 4.7 5.5 5.0 Sources: Bank of the Republic of Haiti; and Fund staff estimates and projections. 1/ Includes HIPC/MDRI debt relief beginning in 2010. HIPC/MDRI interim debt relief in 2009 is reflected below the line. 2/ Includes operations under the HIPC/MDRI in 2009, PCDR in 2010, and debt cancellations by IDB, World Bank, and Venezuela in 2010-11. 3/ In 2009, including an SDR allocation of $101 million. 4/ Includes NIR and commercial banks' foreign currency deposits with the BRH. Table 4. Haiti: Balance of Payments, 2008/09 - 2012/13 (In millions of U.S. dollars on a fiscal year basis; unless otherwise indicated) 2008/09 Act. 2010/11 2011/12 19 End- December End-March End-June End- September 2008/09 2009/10 Size and Growth Total assets (in millions of Gourdes) 107,913 137,937 140,814 146,247 149,851 153,995 o/w central bank bonds 9,552 9,249 9,099 9,120 8,294 6,328 o/w total loans 35,405 30,901 32,457 32,877 34,659 40,076 Total assets (in US$ millions) 1/ 2,583 3,454 3,531 3,656 3,746 3,850 Total Deposits (in millions of Gourdes) 92,460 119,253 122,261 127,149 131,099 135,549 Net Profits (loss) (in millions of Gourdes) 359.8 862.7 465.8 474.8 455.3 612.1 Credit/GDP 13.3 11.6 12.2 12.3 13.0 15.0 Deposits/GDP 37.8 44.7 45.8 47.6 49.1 50.8 Credit growth (net) from year before 2/ 14.2 -12.7 -9.5 7.3 15.8 31.5 Capital adequacy Regulatory capital to risk-weighted assets 3/ 16.4 13.4 16.4 … … … Capital (net worth) to assets 6.7 6.2 6.5 6.4 6.1 6.2 Asset quality and composition Loans (net) to assets 30.9 21.3 22.1 21.6 22.3 25.1 NPLs to gross loans 8.5 5.7 5.4 4.8 5.0 3.7 Provisions to gross loans 5.9 4.8 4.2 3.9 3.8 3.4 Provisions to gross NPLs 69.6 84.1 77.5 80.0 76.5 93.1 NPL less provisions to net worth 12.6 3.2 4.3 3.4 4.5 1.1 Earnings and profitability (annualized) Net Earnings/Assets (ROA) 1.4 2.6 1.3 1.3 1.2 1.6 Net Earnings/Equity (ROE) 20.5 41.9 21.0 20.5 19.7 26.3 Net interest income to gross interest income 87.3 86.6 90.9 91.3 91.5 91.7 Operating expenses to net profits 74.1 57.7 68.0 67.0 68.5 67.6 Efficiency Interest rate spread in Gourdes 4/ 19.5 20.0 20.0 … … … Interest rate spread in US dollar 4/ 10.9 11.4 11.4 … … … Liquidity Liquid assets to total assets 5/ 46.9 51.0 51.1 51.1 50.2 49.5 Liquid assets to deposits 5/ 44.4 51.3 51.5 … … … Market Risk Foreign currency loans to total loans (net) 68.9 60.1 59.7 59.0 56.8 55.7 Foreign currency deposit to total deposits 56.9 60.3 60.5 61.3 61.7 62.3 Source: Banque de la Republique d'Haiti (BRH); and Fund staff estimates. 2/ Net credit is equaled to gross loans less non performing loans. 3/ The legal requirement is 12 percent. 4/ Defined as the difference between average lending rate and average fixed deposit rate in the banking system. 5/ Liquid assets include cash and central bank bonds. 1/ The figures for all years were converted from Gourdes at the same 12/31/06 exchange rate of 37.5917 Gourdes /US dollar. Table 5. Haiti: Aggregate Financial Soundess Indicators of the Banking System, 2008/09-2010/11 (In percent unless otherwise indicated) Year Ending September 30 2010/11 20 2008/09 2009/10 2010/11 2011/12 2012/13 Prov. Debt indicators Total external public debt (in percent of GDP) 19.0 13.2 8.9 13.1 16.4 Total external public debt (in percent of exports) 2/ 133.7 107.6 64.6 95.8 108.9 External debt service (in percent of GDP) 0.6 0.2 0.1 0.1 0.2 Amortization 0.4 0.1 0.0 0.0 0.1 Interest External debt service (in percent of exports) 2/ 3.9 1.6 0.6 0.8 1.4 External debt service (in percent of current central govt. revenues) 4.9 1.7 0.6 0.8 1.5 Other indicators Exports (percent change, 12-month basis in U.S. dollars) 11.6 -13.7 26.8 5.8 19.3 Imports (percent change, 12-month basis in U.S. dollars) -1.7 45.6 1.7 0.1 8.9 Remittances and grants in percent of gross disposable income 19.9 32.0 27.1 25.4 24.3 Real effective exchange rate appreciation (+) (end of period) 2.1 0.8 1.6 n.a. n.a. Exchange rate (per U.S. dollar, period average) 40.7 40.3 40.3 41.6 43.2 Current account balance (millions of US dollars) 3/ -226.3 -162.7 -338.8 -341.0 -453.0 Capital and financial account balance (millions of US dollars) 4/ 501.2 1003.5 592.3 379.0 348.0 Public sector 287.9 218.2 339.5 350.8 351.3 Private sector 213.3 785.3 252.8 28.1 -3.3 Liquid gross reserves (millions of US dollars) 947.5 1792.0 1999.7 2060.0 1970.0 In months of imports of the following year 2/ 2.8 5.2 5.8 5.5 5.0 In percent of debt service due in the following year 7283 30685 22988 11521 5694 In percent of base money 127.4 175.5 189.1 184.9 165.9 Sources: Bank of the Republic of Haiti; and Fund staff estimates and projections. 1/ Reflects HIPC/MDRI relief. 2/ Goods and services. 3/ Including grants. 4/ Includes in the private sector FDI, short-term capital, and errors and omissions in addition to bank flows. Table 6. Haiti: Indicators of External Vulnerability, 2008/09 - 2012/13 1/ (Units as indicated) Proj. 21 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2022/23 Fund obligations based on existing credit (in millions of SDRs) Principal 0.0 0.0 0.0 1.6 4.3 5.2 5.2 5.2 3.6 1.0 0.0 Interest 0.0 0.1 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 Fund obligations based on existing and prospective credit (in millions of SDRs) Principal 0.0 0.0 0.0 1.6 4.3 6.7 8.2 8.2 6.6 3.9 1.5 Interest 0.0 0.1 0.1 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 Total obligations based on existing and prospective credit In millions of SDRs 0.0 0.1 0.1 1.7 4.4 6.8 8.3 8.2 6.6 3.9 1.5 In millions of U.S. dollars 0.0 0.2 0.2 2.6 6.6 10.3 12.5 12.5 10.0 6.0 2.2 In percent of exports 0.0 0.0 0.0 0.2 0.3 0.5 0.6 0.5 0.4 0.2 0.1 government revenues 0.0 0.0 0.0 0.2 0.33 0.4 0.4 0.3 0.2 0.1 0.0 reserves 0.0 0.0 0.0 0.1 0.3 0.5 0.6 0.6 0.5 0.3 0.1 debt service 0.0 0.5 0.2 3.1 6.2 8.1 8.4 7.6 5.5 3.1 1.1 quota 0.0 0.1 0.1 2.1 5.3 8.3 10.1 10.0 8.0 4.8 1.8 Outstanding Fund credit (end of period) In millions of SDRs 41.0 41.0 41.0 39.3 35.1 28.3 20.1 12.0 5.4 1.5 0.0 In millions of U.S. dollars 62.3 62.3 62.3 59.7 53.2 43.0 30.6 18.1 8.2 2.2 0.0 In percent o f exports 4.9 4.4 4.0 3.5 2.8 2.1 1.4 0.8 0.3 0.1 0.0 government revenues 5.2 4.5 3.9 3.4 2.8 2.1 1.4 0.8 0.3 0.1 0.0 reserves 3.2 3.2 3.2 3.0 2.7 2.2 1.6 0.9 0.4 0.1 0.0 debt service 348.6 180.1 98.6 70.3 49.8 33.6 20.6 11.0 4.6 1.2 0.0 quota 50.0 50.0 50.0 48.0 42.8 34.6 24.6 14.6 6.6 1.8 0.0 Memorandum items: Exports 1/ 2/ 1.3 1.4 1.6 1.7 1.9 2.1 2.2 2.4 2.5 2.7 2.9 Government revenues 1/ 3/ 1.2 1.4 1.6 1.7 1.9 2.0 2.2 2.4 2.6 2.8 3.1 Reserves 1/ 4/ 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 Debt service 1/ 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.2 0.2 0.2 0.2 Quota (in millions of SDRs) 81.9 81.9 81.9 81.9 81.9 81.9 81.9 81.9 81.9 81.9 81.9 GDP 1/ 8.5 9.2 10.2 11.1 12.0 12.9 13.9 14.9 15.9 17.0 18.2 Sources: Haitian authorities; and Fund staff projections. 1/ In billions of U.S. dollars. 2/ Exports of goods and services 3/ Central government domestic revenues. 4/ Gross liquid international reserves, end of period. Table 7. Haiti: Indicators of Capacity to Repay the Fund, 2012/13-2022/23 (Units as indicated) 22 Status SDR 8,190,000 July 15, 2010 Executive Board approval of the three-year arrangement Completed under the ECF. SDR 8,190,000 January 15, 2011 Observance of performance criteria for September 2010 and Completed completion of the first review under the ECF arrangement. SDR 4,914,000 July 15, 2011 Observance of performance criteria for March 2011 and Completed completion of the second review under the ECF arrangement. 2/ SDR 4,914,000 January 15, 2012 Observance of performance criteria for September 2011 and Completed completion of the third review under the ECF arrangement. 2/ SDR 4,914,000 July 15, 2012 Observance of performance criteria for March 2012 and completion of the fourth review under the ECF arrangement. SDR 4,914,000 January 15, 2013 Observance of performance criteria for September 2012 and completion of the fifth review under the ECF arrangement. SDR 4,914,000 July 15, 2013 Observance of performance criteria for March 2013 and completion of the sixth review under the ECF arrangement. 1/ Other than the generally applicable conditions for the Extended Credit Facility (ECF) arrangement. 2/ The second and third reviews were combined. Amount Availability Date Conditions for Disbursement 1/ Table 8. Haiti: Proposed Schedule of Disbursements, 2010-2013 23 APPENDIX I. LETTER OF INTENT June 25, 2012 Mrs. Christine Lagarde Managing Director International Monetary Fund Washington D.C. 20431 United States of America Dear Mrs. Lagarde: 1. Implementation of the program supported by an arrangement under the Extended Credit Facility (ECF) has been broadly satisfactory, and all end-March 2012 performance criteria were met. Structural reforms have also been progressing, albeit with some delays. We have completed most of the structural benchmarks not met at the time of the second and third reviews, and made significant progress in implementing the end-March 2012 benchmarks. Tax and customs administrations have been strengthened, resulting in more buoyant revenue mobilization. Public financial management reforms are underway to improve budget transparency and economic governance. 2. The aforementioned delays in the structural reforms were linked to the political transition following the resignation of the former Prime Minister. The uncertainty of the transition period contributed to the under-execution of the domestically-financed capital spending program which was compounded by the lower disbursement of international assistance. Reflecting these unfavorable developments, our growth performance for FY2012 will be lower-than-anticipated. 3. In early May, the new government was formed and the FY 2012 budget approved by Parliament. Going forward, we intend to step up the reconstruction and continue implementing a coherent set of macroeconomic policies in support of inclusive and sustained growth and poverty reduction. In this context, we will make use of all available resources, including those freed by the PCDR, which have remained largely unused because of the political transition. Most importantly, we intend to sustain the good performance of domestic revenue through reforms to further broaden the tax base and strengthen the tax and customs administrations. The structural reform agenda will also focus on enhancing public financial management and economic governance, strengthening the financial sector, and improving the business environment. 4. In support of these policies and in view of the progress made in implementing the program supported by the ECF arrangement, the government requests the conclusion of the fourth review and the approval of the fifth disbursement for an amount equivalent to 24 SDR 4.914 million. The upcoming fifth review, which will assess performance based on end- September 2012 targets, is scheduled for January 2013. The sixth review, assessing performance based on end-March 2013 targets, is envisaged for July 2013. 5. We will regularly update the IMF on economic and policy developments and will provide the data needed for adequate monitoring of the program. The government will continue its policy dialogue with the IMF and is prepared to take any further measures as deemed appropriate to meet its program objectives. We will consult with the Fund ahead of any revisions to the measures outlined in the MEFP, in accordance with the Fund’s policies on such consultation. 6. The Government authorizes the IMF to publish this letter, the attached Memorandum of Economic and Financial Policies, and the related Staff Report, including the placement of these policy documents on the IMF website, following the IMF Executive Board's conclusion of the review. Sincerely yours, /s/ /s/ Marie Carmelle Jean-Marie Charles Castel Minister of Economy and Finance Governor Ministry of Economy and Finance Bank of the Republic of Haiti 25 A PPENDIX II. UPDATED MEMORANDUM OF ECONOMIC AND FINANCIAL POLICIES I. INTRODUCTION 1. This Memorandum of Economic and Financial Policies (MEFP) supplements and updates the MEFPs that have preceded it since July 2010. It reviews recent economic developments and progress in implementing the macroeconomic and structural program of the Government of Haiti (GoH) under the Extended Credit Facility (ECF) arrangement, approved by the IMF Board on July 10, 2010. It also sets out macroeconomic policies and structural reforms that the GoH will pursue for the remainder of FY2012 (fiscal year ending in September) and during FY2013. II. POLITICAL BACKGROU ND AND RECENT ECONOMIC DEVELOPME NTS 2. The recent political crisis, which has now been resolved, has extracted a toll on the country. Mr. Lamothe, the former Minister of Foreign Affairs was appointed Prime Minister after winning approval from the Senate in early April and the Chamber of Deputies in early May. The new cabinet took office on May 15. Similar in that respect to the 2011 episode, the recent domestic crisis gave rise to another round of uncertainty that slowed down public investment and, hence, the reconstruction and recovery. 3. The economic recovery has been weak and 12-month inflation has declined. Economic activity has remained buoyant in the manufacturing, services, and commerce sectors. In addition, agricultural output picked up significantly during the main crop season, suggesting a return to normal harvest conditions. In contrast, activity in the construction sector and transportation has remained modest, due in part to the low execution rate of public investment mainly caused by the late approval of the budget. For the year as a whole, the economy is expected to grow by 4.5 percent, against a program target of 7.8 percent. Inflationary pressures from international food prices have receded sharply, and headline inflation declined from a peak of 10.4 percent in September 2011 to 5.2 percent in May 2012. For FY2012, we now expect consumer price inflation to reach 6 percent, compared with an initial target of 8 percent. 4. Fiscal performance is broadly in line with program projections. Revenue collections have remained strong, with domestic revenue up by about 9 percent from the first half of FY2011 and the first half of FY2012. At G 21 billion in the first half of FY2012, revenue, however, was slightly lower than the program target (G 22 billion), reflecting lower- than-projected custom revenues due predominantly to lower imports. Current spending is in line with program targets, but domestically-financed investment spending remains low. Poverty-related expenditure is below the target. 5. The overall balance of payments recorded a surplus in the first semester of 2012. Consequently, gross international reserves rose to US$2.1 billion at end-March (5.5 months of imports). The current and capital accounts outcomes were broadly in line with 26 expectations; however, both merchandise exports and imports were significantly lower than programmed. Textile exports were negatively affected by the loss of a major order from a large U.S. retailer and imports were lower owing to lackluster investment-related demand. On a 12-months basis, the Gourde depreciated by 4.1 percent against the U.S. dollar through end-May 2012. III. PERFORMANCE UNDER THE PROGRAM 6. We have kept the program broadly on track. We have observed all end-March 2012 performance criteria. We have met all end-December 2011 indicative targets, with the exception of the floor on poverty-related spending, which was impacted by the overall under- execution of public spending. We have also made progress in implementing the end-March 2012 structural benchmarks. We have met the benchmark related to the increase in excise tax on tobacco and alcohols, a measure which we included in the recently approved FY2012 budget. We have finalized the public debt law, which will be submitted to parliament at the latest by mid-August. Also, we have not been able to complete yet the third end-March 2012 benchmark, related to the creation of a debt unit, due to a lack of progress in the reorganization of the Ministry of Economy and Finance (which requires Parliament’s approval). In the interval, we are taking all necessary steps to strengthen the current Directorate of Debt and complete the benchmark by 2013. IV. GOVERNMENT PROGRAM FOR THE REMAI NDER OF 2012 AND 2013 7. We are determined to addressing the multiple challenges facing Haiti, including sustaining inclusive high growth, reducing poverty, and strengthening the country’s resilience to external and natural shocks. In this connection, we will continue implementing a set of coherent macroeconomic policies and a reform program aimed at keeping inflation in single digits, increasing the domestic revenue intake, enhancing the quality of spending, and improving governance to attract more investment and promote private sector-led growth. We are, however, aware that some risks remain. On the upside, we note the reversal of the recently rising trend in international food and energy prices; on the downside, we are faced with the possibility of delays in disbursements of international assistance; continued sanitary challenges, notably those associated with the cholera epidemic; the challenging security and political environment; natural disasters; and our weak administrative capacity. A. Macroeconomic Policies Fiscal policy 8. Based on performance through May, the 2012 fiscal deficit is now projected at 3.6 percent of GDP, against an initial target of 7.7 percent. This reflects significantly lower than projected domestically-financed capital spending, taking into account the low 27 execution rate observed in the first half of this year. Domestic revenue and current spending in Gourdes are expected to remain broadly in line with the forecasts. 9. The draft 2013 budget, which we plan to submit to Parliament in June, strikes a balance between supporting the reconstruction and ensuring medium-term debt sustainability. On the revenue side, we will implement a set of revenue administration measures to boost our tax-to-GDP ratio to 13.9 percent of GDP (from 13.5 percent in FY2012). We will continue to contain non priority current spending to make more room for poverty-related and infrastructure spending. The wage bill is expected to decline slightly (by 0.1 percentage points of GDP), notwithstanding new hiring in areas such as education, health, agriculture, and security. Transfers and subsidies to the energy sector will be reduced by 0.8 percentage points of GDP. Consequently, overall current spending will be brought down to 10.5 percent of GDP, from 11.3 percent of GDP in FY2012. We also plan to ramp up domestically-financed capital spending to 8.9 percent of GDP, up from 6.4 percent of GDP in FY2012, on the assumption of higher PCDR- and PetroCaribe-related project spending. Reflecting these parameters, the overall deficit target will be 4.7 percent of GDP, to be financed by domestic (0.7 percent of GDP) and external resources (4 percent of GDP). In the event of a shortfall in external budgetary support, we would delay some domestically- financed capital spending (without affecting the overall execution and consistency of the investment program) and/or alternatively issue additional T-bills. Monetary and exchange rate policies 10. Our monetary policy will continue to aim at price stability. As inflationary pressures are subsiding, we do not see any need for action on the policy rate. We remain, however, vigilant against both upside and downside risks to the economy and stand ready to adjust the monetary policy stance. We are committed to improving the effectiveness of the monetary transmission mechanism, which is currently hindered by structural excess liquidity and high financial dollarization, through stepped up efforts toward improving liquidity management, deepening domestic financial market, and strengthening market-based monetary operations. In an effort to promote de-dollarization, we have, since the beginning of the year, steadily increased the portion of the reserve requirement on foreign currency deposits to be held in dollars up to 100 percent by May 16. We also plan to further safeguard the stability of the banking system and, to that effect, will resume implementation of the 2008 FSAP measures in the near future. 11. We recognize that greater exchange rate flexibility will also help improve the effectiveness of monetary policy. In the short term, we want to exercise caution in view of the exchange rate pass through and accordingly, we intend to take advantage of the current situation characterized by a comfortable level of reserves to initiate a number of reforms with a view to enhancing existing market mechanisms and developing the foreign exchange market. In particular, we will work closely with IMF staff to increase the number of participants in the FX market to allow a gradual and smooth transition to a weekly auction 28 system. Our interventions in the foreign exchange market will continue to aim at smoothing large exchange rate movements, while not resisting fundamental trends. Safeguard assessments and AML/CFT 12. We remain committed to our reform agenda, consistent with the recommendations of the January 2010 Safeguards Assessment follow up mission. With a view to strengthening the independence and integrity of the central bank, work is underway to complete the FY2011 audit and execute the BRH’s plan to dispose of all subsidiaries. We are also taking steps to: (i) finalize the intended conversion of central bank credit to the government into securities; (ii) adopt IFRS, including with the creation of a special committee to monitor its implementation; and (iv) reconstitute the Investment Committee and appoint a compliance officer to monitor compliance with investment guidelines. 13. We will further improve the compliance of our AML/CFT legal framework with FATF standards, and follow a risk-based approach to its effective implementation. To further strengthen the AML/CFT law, we have prepared a number of amendments consistent with the recommendations contained in the 2007 CFATF assessment and the current FATF standards. These amendments will be submitted to Parliament by end-2012. In addition, we are working on an action plan prioritizing the implementation of certain elements of the AML/CFT framework to address risks faced by our economy, particularly with regard to corruption, tax evasion, financial sector abuse, and the absence of reliable identification of citizens. Technical assistance will be critical in supporting our efforts in that area. B. Structural Reforms Revenue administration 14. We remain committed to implementing our comprehensive reform program in the budget area, notably tax and custom administrations reforms, and public expenditure management. To enhance revenue collection, we are planning to implement a set of critical measures that will include: (i) the adoption of an electronic system for tax declaration (e-declaration); (ii) a tightening of controls in revenue collection; and (iii) the establishment of two tax units, one in charge of NGOs and the second responsible for SMEs. Following a review of the progress made in implementing the 2010 action plan and with support from donors, we will introduce corrective measures to improve customs administration, strengthen import valuation, and enhance customs collections. As regards tax policy, we plan to put in place a tax policy unit to coordinate reforms in revenue administration, and help address the issue of tax expenditure, with a view to expand the tax base. We will also move to launch the much-needed work to modernize the legal framework with technical assistance from our partners. 29 Public financial management (PFM) and economic governance 15. We have put in place SYSGEP, a modern tracking and reporting mechanism for capital spending execution. We are aware that its successful operation requires accompanying measures. Accordingly, we are preparing an action plan to: (i) ensure a regular feed of updated information by all project managers; and (ii) reinforce the units in charge of projects assessment and programming (UEP) and of technical execution (UTE) in the line ministries, as they form the backbone of the whole reporting system. These measures, together with the planned introduction of an advanced version of the SYSGEP WORLD and further training of staff, are strongly dependent upon additional budget resources. Additionally, we will reiterate the need for all users of the system to provide appropriate documentation for the use of the initial tranches of disbursement. Noncompliance with this basic rule will trigger the legal dispositions that suspend disbursement of subsequent project tranches. More broadly, we intend to strengthen project implementation capacity by finalizing both the contract with the international consulting firm already selected and the manual on project management. 16. Progress is also being made in the area of public financial management. The first phase leading to the creation of the treasury single account (TSA), notably the closing inactive accounts, is being conducted in a timely fashion. The timetable for the implementation of the subsequent phases of this project is to be agreed upon by September 2012. In particular, we will: (i) reduce the number of domestically-funded imprest accounts to three by ministry or institutions (one for revenue collection, one for capital spending, one for other transactions, including current spending) and deploy the network of public accounting offices at the line ministries level and gradually grant signature on these accounts to public accountants appointed by the MEF (end-March 2013 structural benchmark); and (ii) roll-out in all ministries the GL-software in the offices of the government accountants and start to record projects and imprest accounts expenditure when they are effectively paid and not any more when the replenishment of the account is made (end-March 2013 structural benchmark). 17. We will pursue our reform agenda to improve the business climate. We are moving forward on our action plan seeking to establish a robust legal framework for Public- Private Partnerships, notably in the key areas of infrastructure, public utilities, export industries, and tourism. We also are working toward a simplification of the legal and regulatory framework for investment. A key aim of our strategy is to resolve the current land title issues facing investors, while uplifting the legal regime for collateral and establishing a registry for the use of movable assets as collateral. We will take further steps to prepare a new law aimed at strengthening microfinance. 18. Another key area of our reform agenda is the electricity sector, to which we attach the utmost importance. Accordingly, we have signed a memorandum of understanding with key partners, including the U.S., IDB, and the World Bank to reform the sector. As a first step towards this goal, we have hired an international firm with a view to modernizing and improving the management of EDH. Simultaneously, a plan is being developed with support of other partners to bring EDH back to financial soundness, including 30 reducing production leakages, improving the distribution network, enhancing bill collection, and strengthening energy supply. External debt management 19. We remain determined to strengthen debt management. With the political crisis resolved, we will accelerate the administrative reorganization of the Ministry of Economy and Finance, including the creation of a Directorate General of Treasury that will have authority on the new debt unit (end-March 2012 structural benchmark). We are planning to send to Parliament the draft law reorganizing the MEF by mid-summer. In the interim, we will strengthen the current Directorate of Debt to include fully operational middle and back office functions. We have completed work on the draft public debt law and will send it to parliament by mid-August after the transmission of the draft FY2013 budget law. We are also moving to complete a medium-term debt strategy. Financial sector 20. We will seek to deepen further the stability of the financial sector. To that effect, we plan to: (i) strengthen the operations of the Partial Credit Guarantee Fund, including with the launching of the second pillar aimed at boosting new loans to investors; (ii) accompany the recently-adopted banking law by Parliament, with additional steps to update the financial legislation and improve regulation and supervision; and (iii) step up work to reinforce the insurance sector, notably through the submission of an insurance law to Parliament and the setting up of a regulatory authority. We will also continue our work aimed at creating a private credit bureau. Social policies 21. The protection of the poor remains a central objective of our policies. The government has launched three new initiatives to help the most vulnerable groups of the population and create a coherent institutional framework:  Education (Programme de Scolarisation Universel Gratuit et Obligatoire or PSUGO). It is estimated that about 508,000 children aged 6 to 12 were out of school in 2011 mainly for financial reasons. In line with a constitutional requirement, we have launched a major initiative to bring them all to school for free over a period of four years (about 25 percent each year). Forty percent of these children will be sent to public schools, and the remaining ones to private schools, which will receive government subsidies. During 2011-12, about 165,500 children have been sent to school under this initiative, new teachers have been hired, and new public schools have been built to receive some of them. For each child enrolled under this program, the government gives about US$90 to private schools, and about US$6 to public schools. The program is expected to cost about US$43 million each year. 31  Conditional cash transfer (“Ti-manman-cheri”). We have also launched a conditional cash transfer program in favor of women in very poor neighborhoods in the Port-au- Prince area. Under the pilot project, which will be extended to the whole country if successful, the government will transfer every month G 400 (about US$10) to each woman who sends one of her children to school. She will receive G 600 for two children sent to school, and G 800 for three or more children sent to school. This program is expected to relieve poor families from the financial burden created by the education of their children. The pilot program will last from May 2012 to May 2013. It is expected to reach about 100,000 mothers and cost about US$15 million.  Food production and distribution (“Aba grangou”). The government has also launched a multisectoral program to combat poverty. This program aims at developing poor neighborhoods in way that help them better deal with natural risks and promotes agricultural projects as well as food distribution programs. The program also includes components that would provide better educational and health services in these neighborhoods. It is expected to cost about US$15 million. 22. We will improve coordination with NGOs and other stakeholders to better target social spending, and effectively alleviate poverty. The presence of international NGOs in Haiti is extensive, with particular involvement in the provision of basic services, including access to health care, education, food, and potable water. While NGOs provide needed services to large segments of the poor populations, the government will put in place a better coordination and supervision of their activities. Some issues have been identified as the direct competition of NGOs with the government and the private sector in the domestic labor and goods and services markets and the low level of coordination with public entities. Hence, we are exploring several initiatives to enable NGOs to operate lawfully within guidelines to ensure that their actions and operations strengthen capacity building effectively and are consistent with the long-term developments needs of the country. V. P ROGRAM MO NITORING 23. Our program will be monitored using the definitions, data sources, and frequency of monitoring set out in the accompanying revised TMU. The government will make available to Fund staff all data appropriately reconciled and on a timely basis, as specified in the TMU. Table 1 shows the quantitative performance criteria for monitoring program execution in 2011/12 and 2012/2013. Structural benchmarks, with corresponding dates and status of implementation are identified in Tables 2a and 2b. Structural conditionality for the remainder of the program, including two new benchmarks which are critical to improving cash management transparency in accounting are in Table 2c. In particular, we are committed to: (i) reducing the number of domestically-funded imprest accounts to three by ministry or institutions (one for revenue collection, one for capital spending, one for other transactions, including current spending), deploy the network of public accounting offices at the line ministry level and gradually grant signature on these 32 accounts to public accountants appointed by the MEF (end-March 2013); and (ii) rolling-out for all ministries, the GL-software in the offices of the government accountants and start to record projects and imprest accounts expenditure when they are effectively paid and not any more when the replenishment of the account is made (end-March 2013). The fifth review under the ECF arrangement, assessing end-September 2012 performance criteria, is expected to be completed by January 2013. The sixth review under the ECF arrangement, assessing end-March 2013 performance criteria, is expected to be completed by mid-July 2013. 33 Sept. 2011 June 2012 Sept. 2012 June 2013 Sept. 2013 Actual 1/ Indicative target ( EBS/12/22) Actual PC ( EBS/ 12/22) Actual Indicative target PC Indic ative target ( EBS/ 12/ 22) Proposed new indicative target Indicative target ( EBS/ 12/ 22) Proposed PC Proposed new indicative target Proposed new indicative target I. Quantitative performance criteria Net central bank credit to the non-financial public sector - ceiling 21,549 -16,273 -8,525 -17,318 -7,309 -19,578 -15,926 -12,090 -11,331 -13,776 -10,572 -13,163 -12,551 -11,938 Central Government 2/ 23,118 -13,652 -7,291 -14,127 -6,076 -15,786 -13,434 -7,742 -5,504 -11,904 -2,955 -11,375 -10,846 -10,317 Rest of non-financial public sector -1,569 -2,621 -1,233 -3,191 -1,233 -3,792 -2,697 -1,954 -1,871 -1,871 -1,788 -1,788 -1,704 -1,621 Net domestic assets of the central bank - ceiling 3/ 14,448 -18,309 -15,784 -17,883 -17,448 -20,381 -11,488 -5,383 -3,014 -13,251 -645 -10,323 -7,395 -4,467 Net international reserves of central bank (in millions of U.S. dollars) - floor 416 762 370 786 384 772 683 563 538 764 513 723 682 641 II. Continuous performance criteria Domestic arrears accumulation of the central government 00000000000000 New contracting or guaranteeing by the public sector of nonconcessional external or foreign currency debt (In millions of U.S. dollars) 4/ 033333333333333333333333333 Up to and including one year 00000000000000 Over one-year maturity 033333333333333333333333333 Public sector external arrears accumulation (in millions of U.S. dollars) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 III. Indicative targets Change in base money - ceiling 31,080 12,156 21,352 14,005 20,027 10,481 15,843 17,128 18,497 17,328 19,866 18,609 19,890 21,171 Net domestic credit to the central government - ceiling 5/ 19,540 -19,863 -6,067 -22,785 -6,585 -28,647 -11,361 -6,710 -1,698 -22,221 -509 -21,615 -21,010 -20,404 Poverty reducing expenditures - floor 6/ n.a. 17,794 23,689 17,915 26,808 22,309 20,258 24,313 29,584 31,175 34,855 36,446 41,717 46,988 Memorandum items Change in currency in circulation 13,448 4,953 12,117 8,254 9,728 6,221 6,626 7,161 7,764 7,921 8,368 8,494 9,067 9,640 Net domestic credit to the rest of the non-financial public sector -1,641 -2,688 -17,582 -2,619 -20,539 -4,014 -2,775 -2,032 -1,948 -1,948 -1,865 -1,865 -1,782 -1,698 Government total revenue, excluding grants 29,881 70,319 78,402 81,181 89,649 91,475 104,203 117,269 171,180 127,253 234,025 139,283 151,969 166,245 Government total expenditure, excluding externally-financed investment 42,096 97,390 117,637 111,445 134,584 124,633 167,343 162,735 167,343 171,677 162,735 188,152 207,199 226,645 Sources: Ministr y of Finance, Bank of the Republic of Haiti, and Fund staff estimates. 1/ For performance under the program prior to September 2011, please see the previous staff report (EBS/12/22). 2/ Excluding spending of resources freed by IMF PCDR debt relief. 3/ For program monitoring purposes, NDA is defined as monetary base minus program NIR in gourde terms. Program exchange rate of G40.0 per U.S. dollar for the period June 2010 - September 2013. 4/ Excludes guarantees granted to the electricity sector in the form of credit/guarantee letters. 5/This includes central bank, commercial bank, and non-bank financing to the government. It includes net T-bill issuance for go vernment financing. 6/ Poverty reducing expenditures consist of domestically-financed spending in health, education, and agriculture. Table 1. Haiti: Indicative Targets and Quantitative Performance Criteria, September 2011 - September 2013 (In millions of gourdes, unless otherwise indicated) Actua l stock at end- Sept. 09 Mar. 2012 Dec . 2011 Dec . 2012 Mar. 2013 C um ulative Flow s from Septem ber 2009 34 Macro-criticality Objective Status Prior Actions Safeguards assessment Improve reliability of program data Completion of the audit of foreign reserves to confirm the levels of end-September 2009 and end-September 2010 level of unencumbered reserves. Completed End-September 2010 1-Improve the tracking of poverty-reducing expenditures Publish regular reports on poverty- reducing spending on the MEF website. 1a Continue publishing quarterly reports on poverty-reducing expenditures on the MEF website, including domestically- financed health, education and agriculture spending. Met 2a Start publishing central government monthly transfers to investment project accounts, project by project, including PetroCaribe projects. Met with delay 2b Start publishing central government monthly transfers by beneficiary entity. Met Improve control of budget execution and fiscal reporting. 2c Start preparing monthly consolidated Treasury balances (TMU ¶38). Met with delay Improve cash management. 2d Prepare an inventory of all government and donor accounts at the BRH and BNC (TMU ¶39). Met with delay Strengthen operation of tax and customs administrations. 3a Prepare quarterly reports with monthly data on the performances of the tax system and the tax administration, including the cost of exemptions and revenue collected in the provinces (TMU ¶40). Met Enhance the transparency of the tax exemption policy. 3b Start publishing a quarterly report that identifies all fiscal expenditure by beneficiary sectors. Met Introduce a new tax code that would increase revenue and rationalize the tax system. 3c Set up a working group that would be tasked to prepare a study to simplify the tax system, increase revenue, improve tax productivity, custom and fiscal administration, establish a work program with specific deadlines (TMU ¶37). Met with delay Improve timeliness of external audits of the BRH; enforce rotation of external auditors. 4a Completion and publication of externally audited financial statements for 2008/09. Met 4-Improve the monetary policy framework and its effectiveness Table 2a. Haiti: Status of Implementation of Structural Reform Measures in 2010 Structural Benchmarks 2-Strengthen fiscal discipline and transparency by improving budget preparation, expenditure control and cash management Strengthen the transparency of expenditure policy. 3-Raise government revenue 35 Macro-criticality Objective Timing Status Continued benchmarks Continue publishing reports listed under 1a, 2a, 2b, 2c, 3a, 3b End-March 2011 Met Improve cash management. 2f Start preparing and publishing monthly cash plans including PetroCaribe spending and financing needs. End-March 2011 Met Improve the tracking of investment spending and improve ability to make multi-year investment projections. 2g Start producing quarterly reports with monthly data of investment expenditure based on SYSGEP and publish them on the MEF website. End-March 2011 Met. Improve the monetary policy framework and its effectiveness Enforce rotation of external auditors to audit BRH accounts. Select an international firm to conduct ISA compliant external audit for the FY 2011 audit, for a period of 3 to 6 years. End-July 2011 Met with delay Strengthen foreign exchange reserves management. Adoption of a global reserves management policy by the investment committee, covering all foreign exchange reserves. End-June 2011 Met Improve the transparency of government transfers to the energy sector 2h Identify and consolidate all sources of tr ans fer s to EDH in r egular monthly repor ts. End-June 2011 Met 2i Launch the bids for the selection and hiring of the international consulting agency that will assist UCP and other project implementation units in the government End-June 2011 Met. 2j Prepare a plan of action / operational manual describing: a. Modalities to recruit staff with project management skills and responsibility for ordering payments for project work orders. b. A defined set of information, project lists and accounts to be regularly published online to ensure full transparency on project execution and planning. c. Clear practices to ensure the coordination between the UCP, the Procurement Commission (CNMP) and the Ministry of External Cooperation and Planning (MPCE), in full compliance with national budget execution rules. Continued benchmarks Continue publishing reports listed under 1a, 2a, 2b, 2c, 2h, 3a, 3b End-September 2011 Met Table 2b.Haiti: Status of Implementation of Structural Reform Measures in 2011 Structural Benchmarks Strengthen fiscal discipline and transparency by improving budget preparation, expenditure control and cash management Strengthen fiscal discipline and transparency by improving budget preparation, expenditure control and cash management Not met. Work on the draft manual is very well advanced. End-September 2011 Enhance the quality of spending of investment projects, including those financed with PetroCaribe resources and PCDR debt relief. 36 Macro- criticality Objective Structural Benchmarks Timing Status Complete the setting-up of the debt unit at the MEF and build capacity to prepare a medium-term debt strategy. Strengthen the debt unit with fully operational middle and back office functions; Preparation of annual debt sustainability analyses. End-March 2012 Not met. Because of the delayed creation of the Directorate General of Treasury under which the new unti would operate. Strengthen the legal framework for debt management. Submit to Parliament a public debt law that would establish a sound legal and institutional framework for public debt management. End-March 2012 Not met. Draft being finalized. Increase revenue Increase the excise tax on cigarettes and alcohol End-March 2012 Met Improve revenue collection Put in place within the Directorate General of Taxes a unit in charge of medium & large enterprises End-September 2012 Macro fiscal management Improve overall macroeconomic management Put in place the fiscal policy unit within the MEF End-September 2012 Cash management Improve cash management and enhance transparency in spending Close all dormant accounts of the central government at the central bank or commercial banks andestablish the list of accounts used by public entities End-June2012 Improve accounting pr ocedur es and enhance tr ansparency Reduce the number of domestically-funded impr est accounts to three by ministry or institutions (for revenue collection, capital spending, and other transactions) and deploy the network of public accounting offices at the line ministries level and gradually grant signature author ity on these accounts to public accountants appointed by the Ministry of Economy and Finance End-March 2013 Enhance accounting for expenditure management Roll out in all ministries the GL-softwar e and star t to record projects and imprest accounts expenditure when they are effectively paid, and no longer when the replenishment of the account is made. End-March 2013 Continued benchmark Improve coordination between fiscal and monetary policy Start publishing on the BRH website reports 10R, 20R and 610R on a monthly basis End-March 2012 Exchange rate management Improve the functioning of foreign exchange market Establish unconstrained single price foreign exchange auctions End-September 2012 Debt management Tax policy and revenue administration Table 2c. Haiti: Status of Structural Conditionality through end-March 2012 and Proposed Measures Through End-March 2013 37 A PPENDIX III: HAITI: TECHNICAL MEMORANDUM OF UNDERSTANDING –UPDATE 1. Haiti’s performance under the program supported by the Extended Credit Facility (ECF) will be assessed on the basis of the observance of quantitative performance criteria as well as compliance with structural benchmarks. This Technical Memorandum of Understanding (TMU) defines the quantitative performance criteria, specification of certain structural benchmarks, and indicative targets for the period July 1, 2010-March 30, 2013, specified in Tables 1 and 2 of the Memorandum on Economic and Financial Policies (MEFP). It also lays down the monitoring and reporting requirements. Performance criteria for end-March 2013 and quantitative indicative targets for end- December 2012 and end-June 2012 have been set.” I. I NSTITUTIONAL DEFINITIONS 2. Central government. The central government comprises the presidency, prime minister’s office, parliament, national courts, treasury, line ministries and “organismes déconcentrés.” It includes expenditures financed directly by foreign donors through ministerial accounts (comptes courants). 3. Non-financial public sector. The non-financial public sector includes the central government plus non-budgetary autonomous organizations, local governments and public sector enterprises (enterprises and agencies in which the government holds a controlling stake of more than 50 percent of the shares). 4. Total public sector. The total public sector comprises the non-financial public sector and the central bank, the Bank of the Republic of Haiti (BRH). II. Q UANTITATIVE TARGETS A. Net BRH Credit to the Non-Financial Public Sector 5. Net BRH credit to the non-financial public sector equals net central bank credit to the central government plus net central bank credit to the rest of the non-financial public sector. 6. The change in net BRH credit to the central government is defined as, and will be measured using: a. Change in net domestic credit to the central government from the BRH according to Table 10R of the BRH. b. Change in the stock of project accounts (“Comptes de projets”) included in Table 10R of the BRH will be excluded from change in net domestic credit to the central government as defined above. 38 c. Change in the stock of Special Accounts (“Comptes spéciaux”) and seized values (“Valeurs saisies UCREF”) included in Table 10R of the BRH will be excluded from the change in net domestic credit to the central government as defined above. 1 7. The change in net central bank credit to the rest of the non-financial public sector, is defined as, and will be measured using: a. Change in “créances nettes sur le secteur public” (i.e, net credit to the non- financial public sector) minus the change in “créances nettes sur l'état” (i.e. net credit to the central government), according to table 10R of the BRH. 8. The changes will be measured on a cumulative basis from the stock at end September 2009. B. Net Domestic Financing to the Central Government 9. Net domestic financing to the central government will comprise the change in net banking sector credit to the central government (defined below) plus the change in nonbank financing which includes amortization, counterpart funds, 2 and the net issuance of Treasury bills and other government securities by the central government to non-banks. Net domestic banking sector credit to the central government is defined as, and will be measured, using: a. The change in the stock of net domestic credit to the central government from the BRH according to Table 10R of the BRH, plus, the change in the stock of net domestic credit of the central government from domestic banks according to Table 20R of the BRH, which will include the net issuance of treasury bills and other government securities by the central government for government financing purposes. Securities issued for the recapitalization of the BRH are excluded from this definition. b. The change in the stock of project accounts (“Comptes de projets”), as defined in 6.b above, will be excluded from the change in net domestic banking sector to the Central Government. c. The change in the total stock of Special Accounts (“Comptes Spéciaux”) and seized values (“Valeurs Saisies UCREF”), as defined in 6.c above, will be excluded from the change in net domestic banking sector to the Central Government. 1 Special Accounts (“Comptes Spéciaux”) refer to U.S. dollar-denominated central government sight deposits at the BRH. The balance of these accounts increases with the proceeds of the sales of in-kind aid (in the form of wheat, maize, rice, etc.) received by the Haitian government; these proceeds are earmarked to finance specific projects and cannot be used by the Central Government without the explicit authorization of respective donors. 2 Counterpart funds are proceeds from sales of grants received in kind. 39 10. The changes will be measured on a cumulative basis from the stock at end- September 2009. C. Net International Reserves 11. The change in net international reserves will be measured using: a. Change in net foreign assets (“Réserves de change nettes” of the BRH Table 10R); 3 b. Minus the change in foreign currency deposits of commercial banks at the BRH (“Dépôts à vue en dollars U.S. et en Euros des BCM à la BRH”, and the “CAM transfer” of the BRH Table 10R). c. Minus the change in the stock of project accounts (“Comptes de projets”) as defined in 6.b above. d. Minus the change in the stock of Special Accounts (“Comptes Spéciaux”) in dollars and Euros (and excluding gourdes), and seized values (“Valeurs Saisies UCREF”), the latter as defined in 6.c above. e. Plus the change in the stock of the Special Drawing Rights (SDR) allocation (“Allocations DTS”) from the BRH Table 10R. 12. Data will be expressed in U.S. dollar terms and valued at the corresponding end- period market exchange rate from the BRH Table 10R. 13. For definition purposes, net international reserves (NIR) are the difference between the BRH’s gross foreign assets (comprising monetary gold, all claims on nonresidents, SDR holdings, and BRH claims in foreign currency on domestic financial institutions) and reserve liabilities (including liabilities to nonresidents of one-year maturity or less, use of Fund credit, and excluding the full SDR allocation, and trust funds). 4 Swaps in foreign currency with domestic financial institutions and pledged or otherwise encumbered reserve assets are excluded from NIR. 14. The changes will be measured on a cumulative basis from the stock at end- September 2009. 3 Letters of credit and guarantee (“Lettres de crédit” and “Lettres de garantie”) are reported in Table 10R as part of BRH foreign liabilities (“Engagements extérieurs”), and therefore are already netted out of NIR. 4 Program NIR does not net out the full SDR allocation on the liability side since it is a long-term liability to the SDR Department (and not the Fund). 40 D. Net Domestic Assets of the BRH 15. The change in net domestic assets of the BRH is defined as, and will be measured using: a. The change in base money (program definition according to Section I. below); b. Minus the change in the U.S. dollar amount of net international reserves (program definition according to section C above), converted into gourdes at the program exchange rate. 16. The program definition of net domestic assets of the BRH will use a program exchange rate of G 40.0 per U.S. dollar for the period June 2010- March 2013. 17. The changes will be measured on a cumulative basis from the stock at end- September 2009. E. PetroCaribe-Related Funds 18. As of March 2012, the outstanding balance of Petro Caribe funds totaled $263 million, with US$1.5 million held in U.S. dollar-denominated sight deposits of the central government at the BRH, and the remaining US$262 million in U.S. dollar-denominated deposits of the central government at domestic commercial banks. 19. The authorities indicated that they were exploring options to channel new PetroCaribe/ALBA-related inflows through a binational Venezuela-Haiti corporation. 5 Until new institutional arrangements are finalized and the statutes of the new societé mixte are published in the “Journal Officiel” (Le Moniteur), PetroCaribe-related inflows will continue to constitute direct external debt of the central government. These resources are under the direct control of the central government, and, for program purposes, will be fully reflected in the fiscal tables underpinning the program. They will be treated as budget support loans, whose proceeds are partly or entirely deposited in government accounts in the banking system (Petro Caribe deposits). Spending from Petro Caribe resources (up to US$400 million in FY 2012), financed with a drawdown of Petro Caribe deposits in the banking system, will also be fully reflected in program tables. 20. Following ratification of the societé mixte, the annual budgets of the company will be published on the MEF website before the beginning of the fiscal year. Audited annual financial statements will be published within six months of the end of each financial year. F. Non Concessional Public Sector External and Foreign-Currency Denominated Debt 21. The definition of debt comprises all forms of debt, including loans, suppliers’ credits, and leases, that constitute current, i.e. not contingent, liabilities, which are created under a 5 ALBA refers to “Alternativa Boliviarana de las Americas”. 41 contractual arrangement through the provision of value in the form of assets (including currency) or services, and which require the obligor to make one or more payments in the form of assets (including currency) or services, at some point in the future, as set forth in Executive Board Decision No. 6230-(79/140),as revised on August 31, 2009 (Decision No. 14416-(09/01)). 22. A ceiling applies to the contracting and guaranteeing by the public sector of new non concessional debt with nonresidents with original maturities of one year of more. The ceiling applies to debt and commitments contracted or guaranteed for which value has not yet been received. This covers private debt for which official guarantees have been extended and which, therefore, constitute a contingent liability of the public sector. 23. For program purposes, the guarantee of a debt arises from any explicit legal obligation of the public sector to service a debt in the event of nonpayment by the debtor (involving payments in cash or in kind). 24. For program purposes, a debt is concessional if it includes a grant element of at least 35 percent, calculated as follows: the grant element of a debt is the difference between the present value (PV) of debt and its nominal value, expressed as a percentage of the nominal value of the debt. 6 The PV of debt at the time of its contracting is calculated by discounting the future stream of payments of debt service due on this debt, based on the currency specific commercial interest reference rates (CIRRs) as laid out by the Organization for Economic Cooperation and Development (OECD). 7 For a debt with a maturity of at least 15 years, the ten-year-average CIRR will be used to calculate the PV of debt and hence, its grant element. For debt with maturity of less than 15 years, the six-month average CIRR will be used. To both the ten-year and six-month averages, the same margin for differing repayment periods as those used by the OECD need to be added (0.75 percent for repayment periods of less than 15 years, 1 percent for 15 to 19 years, 1.15 percent for 20 to 29 years, and 1.25 percent for 30 years or more). 25. Excluded from the ceiling are short-term import-related credits, rescheduling arrangements, borrowing from the Fund, non-resident purchases of treasury bills, and guarantees for the electricity sector in the form of letters of credit. 26. The ceilings for contracting and guaranteeing of non concessional debt by the total public sector (as defined in paragraph 4) will be set at zero continuously throughout the program period. A waiver was granted during the previous ECF arrangement for the US$33 million nonconcessional loan contracted with the Development Bank of Venezuela (BANDES) in the last quarter of 2009. 6 The grant element calculator can be found at http://www.imf.org/external/np/pdr/conc/calculator/default.aspx. 7 The grant element calculations will take into account all aspects of the loan agreement, including maturity, grace period, payment schedule, upfront commissions, and management fees. 42 G. Arrears of the Central Government 27. External payment arrears are defined as overdue payments (principal and interest) to non-residents on debt contracted and guaranteed by the central government, and will be defined according to the terms of indebtedness of each creditor. The criterion of zero accumulation of external arrears will be monitored on a continuous basis. 28. Domestic arrears of the central government are defined to include: (i) any bill that has been received by a spending ministry from a supplier for goods and services delivered (and verified) and for which payment has not been made within 90 days after the due date of payment; (ii) wage, salary, and other payment to government employees, including direct and indirect allowances, that were due to be paid in a given month but remained unpaid on the 30th of the following month; and (iii) interest or principal obligations which remain unpaid 30 days after the due date of payment. This definition excludes changes in the stock of arrears on account of interest, penalties and valuation changes. H. Base Money 29. The change in base money is defined as, and will be measured using: a. The change in the stock of currency in circulation from Table 10R of the BRH. b. The change in the stock of reserve deposits of commercial banks at the BRH, from Table 10R, using gourde sight deposits of commercial banks (dépôts a vue en gourdes des BCM a la BRH) and cash-in-vault of commercial banks (encaisses des BCM). 30. The changes will be measured on a cumulative basis from the stock at end-September 2009. I. Poverty-Reducing Expenditures 31. The growth in poverty reducing expenditure will be measured as the sum of domestically-financed spending for the Ministries in charge of agriculture, health, and education. This will be a flow measured on a cumulative basis from end-September 2009. III. Q UARTERLY ADJUSTMENTS 32. The quarterly performance criteria and indicative targets will be adjusted for as indicated below: A. Adjustment for Domestic Arrears Accumulation 33. The ceilings for net BRH credit to the central government and the net domestic banking sector credit to the central government will be adjusted downwards for the amount of outstanding domestic arrears accumulation. 43 B. Adjustment for Petro Caribe-related Inflows 34. Until the bi-national company expected to administer Petro Caribe-related funds is legally established, any drawdown of Petro Caribe-related deposits will be considered as central government spending for program purposes. 35. The ceiling for net domestic credit to the central government will include movements in Petro Caribe accounts in the banking system and will be adjusted for the difference between the actual stock of Petro Caribe deposits in the banking system and programmed stock of these deposits in the banking system. The ceilings for net BRH credit to the central government, on BRH net domestic assets, and the floor for NIR will also include movements in Petro Caribe accounts at the BRH. They will be will be adjusted for the difference between the actual stock of Petro Caribe deposits at the BRH and the programmed stock of these deposits at the BRH. The adjustor will be calculated on a cumulative basis from October 1, 2009. C. Adjustment for Budgetary Cash Grants in second half of FY2013 36. The performance criteria ceilings on BRH net credit to the central government, net domestic financing to the government, and on BRH net domestic assets, and the floor on NIR reflect expected budgetary donor grants of the equivalent of G3.5billion (about $80 million), including IDB US$27 million, IDA US$30 million, EU €8 million, and Spain US$13 million. If actual grant inflows are lower (higher) than programmed, these performance criteria ceilings will be adjusted upward (downward), and the performance criterion floor will be adjusted downward (upward), by the amount of the difference between actual and programmed inflows.” 37. The adjuster will be calculated on a cumulative basis from October 1, 2009. VI. C LARIFICATION OF STRUCTURAL CONDITIONALITY A. Fiscal Sector 38. As specified in Tables 2a and 2b, the publications of the following items related to benchmarks will continue over the program period: 1a, 2a, 2b, 2c, 3a, 3b, and 2h. Publication should occur on the specified regular basis (i.e. monthly or quarterly), with no gaps or unjustified delays. 39. The structural benchmark on raising government revenue will involve designing and implementing monitorable performance indicators for DGI and AGD (by end-December 2011). These should include detailed information by industry (AGD) and taxpayer segment (DGI) and a set of ratios to verify “tax effort” and efficiency, in line with TA recommendations. The reports should be published monthly on the MEF website. 40. The structural benchmark related to the increase in the excise tax on cigarettes and alcohol will entail the application of stamps (“vignettes”) on tobacco and alcoholic beverages 44 in order to strengthen inspection and fiscal controls, and an upward revision of specific or ad valorem excises, as appropriate, to such product, in order to approach excise duties to the international average for these products. 41. The structural benchmark related to the establishment of a fiscal policy unit within the MEF will require the creation of a separate service within the MEF tasked exclusively with analyzing fiscal measures and simulating their impact on budget balances and the economy as a whole. The perimeter of such unit should be clearly delimited within the MEF, by appropriate written communication of the Minister or the Director General (to be shared with the IMF) nominating the officer in charge of the unit, its staffing and its duties. 42. The structural benchmark related to putting in place within the Directorate General of Taxes a unit in charge of small and medium enterprises will require an official act (to be shared with the IMF) setting up a separate unit within the DGI tasked with dealing with medium taxpayers, follow and streamline the administrative issues related to such taxpayers segment. Adequate staffing and office space should be provided to this unit and the act establishing the unit should include the nomination of the person in charge of it and its immediate aides. 43. The structural benchmark related to the closing of dormant accounts and the establishing of a list of all account of used by public entities entails compiling a census of accounts both at the Central Bank and in commercial banks, and the creation of a permanent set of rules governing the closing of dormant accounts (both list and set of rules to be shared with the IMF). These would include time lags since last activity, threshold on balances and rules on how the sums should be transferred to the Treasury. 44. The structural benchmark on strengthening the debt unit will require permanently providing adequate office space and staffing to such unit; nominating the officer in charge of it and setting up its tasks with an official communication from the Minister or the Director General (to be shared with the IMF); the MEF should, by coordination of its services, produce annual debt sustainability analyses and make them available to the Fund, all MEF services, the BRH and the MPCE. 45. The structural benchmark on submitting a public debt law will require transmission to Parliament (and sharing with the IMF) of a draft debt law in line with international standards and with the recommendations of development partners TA. 46. The new structural benchmark on reducing the number of domestically-funded imprest accounts to three by ministry or institutions (one for revenue collection, one for capital spending, one for other transactions, including current spending) and deploy the network of public accountants offices at the line ministries level and gradually grant signature on these accounts to public accountants appointed by the MEF will imply the identification of all the accounts as well as the names of the officials currently authorized to sign. On this basis, the authorities will reduce the number of accounts as specified in the 45 benchmark and provide signature power to public accountants designated by the ministry of finance. 47. The new structural benchmark on rolling-out for all ministries, the GL-software in the offices of the government accountants and start to record projects and imprest accounts expenditure when they are effectively paid and not any more when the replenishment of the account is made requires providing to all ministries a copy of the software and ensuring it is adequately installed. It also requires a follow up on the recording of expenditure at payment level. B. Monetary Policy and Financial Sector 48. The benchmark on strengthening exchange rate management will involve the development of an exchange rate management strategy also encompassing reform of the foreign exchange market (end-December 2011). IV. P ROVISION OF INFORMATION 49. To ensure adequate monitoring of the program, the authorities will provide daily, weekly and monthly monetary and fiscal indicators to IMF staff, details of any loan contract or guarantee to be ratified by a non-financial public sector entity, including public enterprises, before signature, as well as other data upon request. A. Daily 50. The exchange rate. B. Weekly 51. Monetary Indicators: (a) Stock of BRH bonds; (b) Deposits at commercial banks (in gourdes and U.S. dollars); (c) Credit to private sector (in gourdes and U.S. dollars); (d) Credit to central government and public sector (net); (e) Currency in circulation, (f) base money, (g) details of inflows and outflows of gross foreign exchange reserves, (h) volume of foreign exchange transactions, of which BRH sales and purchases; (i) gross international reserves; and (d) net international reserves (NIR). The NIR data will be reported using the following table format. 46 52. Fiscal Indicators: (a) Revenues (internal, external, other) and (b) Expenditures on cash basis (wages and salaries, goods and services, external debt, current accounts). These data will be reported with maximum five-day lag preliminary data (four weeks for final data). C. Monthly 53. Monthly data  Table 10 R and Table 20 R with a maximum of 30-day lag for final data.  Tableau on the current accounts with a maximum of 30-day lag for final data.  “Project Accounts”, by donor, with a maximum of 30-day lag for final data  Table on foreign currency treasury flows with a maximum of 30-day lag for final data.  Tableau des Operations Financières de l’Etat (within 20 days).  Table underlying the TOFE which enables the determination of checks in circulation and balance on investment project accounts (TOFE-extension).  Set of external debt tables with a maximum 30-day lag for final data.  Report of revenue collection of DGI (Rapport d'activités), with a maximum 30- day lag for final data.  The aide memoire table, which includes monetary policy indicators (foreign exchange interventions, Gourde and foreign currency credit and deposits, monetary financing). A. Gross Foreign Exchange Reserves 2,172.9 B. Gross Liabilities 268.8 C. Net Foreign Assets (=A-B) 1,904.1 D. FX deposits of commercial banks and CAM transfer at the BRH 843.6 E. Project accounts 7.0 F. Special accounts in U.S. dollars and euros 3.3 G. Seized values 0.0 H. SDR allocation (liability) 121.7 J. NIR (=C-D-E-F-G+H) 1,171.9 Source: Haitian authorities; and Fund staff estimates. Haiti: Net International Reserves BRH, End-April 2012 (In millions of U.S. dollars) 47  Tables of revenue collection of AGD (Indicateurs d’activités aux ports, Rapport analytique des perceptions douanières à l'importation), with a maximum 30-day lag for final data.  Balance of Bureau de Monetization accounts, including spending from “fonds de contrepartie” those movements related with flows linked to the ALBA- PetroCaribe agreement. Balance of PetroCaribe/ALBA-related deposits at commercial banks and the BRH, with a maximum 30-day lag for final data. D. Quarterly 54. Report on poverty-reducing expenditures, with a maximum 30-day lag for final data. E. Other Information 55. The authorities will share with staff the by-laws of the new binational (Venezuela- Haiti) entity (as soon as they are enacted), including any and all needed information to assess the nature of such new entity; the authorities will also share with staff the financing terms of any funds received by such entity, including any and all information needed to assess whether any financing flows received by such new entity constitute public debt (direct and/or contingent) of any form. September December March June September December March June September December March June Septembe r 2009 2009 2010 2010 2010 2010 2011 2011 2011 2011 2012 2012 2012 Cu mu lativ e flo ws (G mlns ) ... 1804.3 1520.7 2309.4 3204.9 3623.7 3819.8 5945.3 5269.1 6153.3 7037.5 7921.7 8805.9 in US d o llars (US$ mlns ) ... 42.4 43.2 62.4 84.3 95.1 98.2 150.6 131.8 153.2 174.6 195.9 217.2 Stocks (G mln s ) 3713.2 5517.5 5233.9 6022.5 6918.1 7336.9 7533.0 9658.4 8982.2 9866.5 10750.7 11634.9 12519.1 in US d o llars (US$ mlns ) 88.9 131.3 132.1 151.3 173.2 184.0 187.1 239.5 220.7 242.1 263.5 284.8 306.1 Cu mu lativ e flo ws (G mln s ) ... -90.3 -93.0 -107.2 -109.8 -109.8 -109.8 -109.8 -109.8 -109.8 -109.8 -109.8 -109.8 in US dollars (US$ mlns ) ... -2.2 -2.1 -2.5 -2.6 -2.6 -2.6 -2.6 -2.6 -2.6 -2.6 -2.6 -2.6 Stocks (G mln s ) 171.0 80.7 78.0 63.8 61.2 61.2 61.2 61.2 61.2 61.2 61.2 61.2 61.2 in US d o llars (US$mln s ) 4.1 1.9 2.0 1.6 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 Cu mu lativ e flo ws (G mln s ) ... 1894.6 1613.7 2416.5 3314.8 3733.5 3929.6 6055.1 5378.9 6263.1 7147.3 8031.6 8915.8 in US d o llars (US$ mlns ) ... 44.6 45.4 64.9 86.9 97.6 100.8 153.2 134.4 155.8 177.2 198.5 219.8 Stocks (G mln s ) 3542.2 5436.8 5155.9 5958.7 6856.9 7275.7 7471.8 9597.3 8921.1 9805.3 10689.5 11573.7 12457.9 in US d o llars (US$ mlns ) 84.8 129.4 130.1 149.7 171.7 182.4 185.6 238.0 219.2 240.6 262.0 283.3 304.6 Sources: Haitian Authorities and IMF Staff estimates and projections Haiti. PetroCaribe Deposits Total deposits in government accounts in the banking system Deposits in government accounts at the BRH Deposits in government accounts in commercial banks Press Release No. 12/269 FOR IMMEDIATE RELEASE July 20, 2012 IMF's Executive Board Completes Fourth Review Under Haiti’s ECF Arrangement and Approves US$7.4 Million Disbursement The Executive Board of the International Monetary Fund (IMF) completed the fourth review of Haiti’s performance under the Extended Credit Facility (ECF) arrangement on July 20, 2012. The Board's decision was taken on a lapse of time basis 1 . Completion of the review will enable an immediate disbursement of SDR 4.914 million (about US$7.4 million), bringing total disbursements under the program to date to SDR 31.122 million (about US$46.9 million). Haiti’s ECF arrangement was approved on July 21, 2010 (see Press Release No. 10/299) together with the full relief on the country’s outstanding debt to the Fund of about SDR 178 million (equivalent to US$268 million). The debt relief, financed by the Post- Catastrophe Debt Relief (PCDR) Trust Fund and IMF financing are part of a broad international strategy to support Haiti’s longer-term economic reconstruction plans, following the devastating earthquake of January 12, 2010. 1 The Executive Board takes decisions under its lapse of time procedure when it is agreed by the Board that a proposal can be considered without convening formal discussions. International Monetary Fund Washington, D.C. 20431 USA