Haïti: Septième revue dans le cadre de la Facilité élargie de crédit

©2014 International Monetary Fund IMF Country Report No. 14/105 HAITI SEVENTH REVIEW UNDER THE EXTENDED CREDIT FACILITY, REQUESTS FOR WAIVER OF NO NOBSERVANCE OF PERFORMANCE CRITERION, AND MODIFICATION OF PERFORMANCE CRITERIA— STAFF REPORT; PRESS RELEASE; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR HAITI In the context of the Seventh Review Under the Extended Credit Facility, Requests for Waiver of Nonobservance of Performance Criterion, and Modification of Performance Criteria, the following documents have been released and are included in this package:  The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on March 26, 2014, following discussions that ended on January 24 , 2014, with the officials of Haiti on economic developments and policies underpinning the IMF arrangement under the Extended Credit Facility. Based on information available at the time of these discussions, the staff report was completed on March 12, 2014.  A Press Release including a statement by the Chair of the Executive Board.  A Statement by the Executive Director for Haiti The documents listed below have been or will be separately released. Letter of Intent sent to the IMF by the authorities of Haiti* Technical Memorandum of Understanding * Debt Sustainability Analysis* *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 Price: $18.00 a copy International Monetary Fund Washington, D.C. April 2014 HAITI SEVENTH REVIEW UNDER THE EXTENDED CREDIT FACILITY, REQUESTS FOR WAIVER OF NONOBSE RVANCE OF PERFORMANCE CRITERION, AND MODIFICATION OF PERFORMANCE CRITERIA KEY ISSUES Program. A three-year arrangement under the Extended Credit Facility (ECF) in an amount of SDR 40.95 million (50 percent of the quota) was approved on July 21, 2010. The arrangement was extended for one year on August 2, 2013, with no augmentation of access. The program expires on August 29, 2014. Macroeconomic performance in FY2013 was favorable. GDP growth was 4.3 percent (vs. 3.4 percent in the program) and headline inflation fell from 6.5 percent to 4.5 percent (y/y), amid a modest depreciation of the gourde. International reserves remained at over five months of imports. However, the overall fiscal deficit widened, reflecting larger-than- programmed investment spending and subsidies to the electricity sector. Performance under the ECF-supported program was broadly satisfactory. All but one performance criteria (PC) for end-September 2013 were met as well as one out of the three indicative targets, and progress was made in key structural reforms. A contracting of repos by the Central Bank led to the breaching of the continuous PC on the contracting or guaranteeing by the public sector of non-concessional external debt with maturities up to and including one year. Staff supports the granting of a waiver for the nonobservance of the PC. The program for FY2014 aims at consolidating macroeconomic stability and sustaining progress in structural reform. GDP growth is expected to reach 3–4 percent, and inflation to remain in single digits, with gross official reserves covering more than five months of imports. Supporting policies include continued prudent monetary policy, the stabilization of the overall fiscal balance, and the continuation of structural reforms in the areas of public financial management, international reserve management, and the electricity sector. Risks to the program stem from Haiti’s dependence on remittances and foreign assistance, including increasing vulnerability to developments in Venezuela, as well as from the fragile socio-political environment. In view of the program performance, staff recommend the completion of the seventh review under the ECF arrangement, the modification of performance criteria, and the granting of a waiver. March 12, 2014 HAITI 2 INTERNATIONAL MONETARY FUND Approved By A. Cheasty (WHD) and B. Traa (SPR) Discussions were held in Port-au-Prince during November 5-15 and during January 20-24. The staff team consisted of Messrs. Di Bella (head), Ntamatungiro, Norton (all WHD), Ms. Bova (FAD), Mr. Daan (STA), and Mr. Camard (resident representative). It met with Prime Minister Lamothe; Minister of Economy and Finance Laleau; Central Bank Governor Castel; other senior government officials; representatives of the private sector; and development partners. Ms. Florestal (OED) participated in the policy discussions. CONTENTS CONTEXT AND PROGRAM PERFORMANCE ____________________________________________________ 4 MACROECONOMIC DEVELO PMENTS, OUTLOOK, AND RISKS _________________________________ 5 SEVENTH REVIEW DISCUSSIONS _______________________________________________________________ 7 A. Fiscal Policy ____________________________________________________________________________________ 7 B. Debt Sustainability ____________________________________________________________________________ 11 C. Monetary, Exchange Rate, and Financial Sector Policies _______________________________________ 12 OTHER ISSUES _________________________________________________________________________________ 13 STAFF APPRAISAL _____________________________________________________________________________ 14 BOXES 1. Apparel Exports to the U.S. ____________________________________________________________________ 32 2. Foreign Assistance and Growth ________________________________________________________________ 34 3. Petrocaribe in Haiti ____________________________________________________________________________ 36 4. The Electricity Sector: A Drag on the Budget and a Bottleneck to Growth _____________________ 38 5. Public Investment and Growth ________________________________________________________________ 39 FIGURES 1. Program Performance, 2012-13 _______________________________________________________________ 28 2. Recent Economic Developments, 2009-13_____________________________________________________ 29 3. Fiscal Developments, 2009-13 _________________________________________________________________ 30 4. Monetary and Financial Market Developments, 2009-13 ______________________________________ 31 TABLES 1. Selected Economic and Financial Indicators, 2009/10-2013/14 ________________________________ 17 2a. Central Government Operations, 2009/10-2013/14 __________________________________________ 18 2b. Central Government Operations, 2009/10-2013/14 __________________________________________ 19 HAITI INTERNATIONAL MONETARY FUND 3 3. Summary Accounts of the Banking System, 2009/10-2013/14 _________________________________ 20 4. Balance of Payments, 2009/10-2013/14 _______________________________________________________ 21 5. Financial Soundness Indicators of Individual Banks, September 2010-September 2013 _______ 22 6. Indicators of Public Debt and External Vulnerability, 2009/10-2013/14 ________________________ 23 7. Proposed Schedule of Disbursements, 2014 ___________________________________________________ 24 8. Indicators of Capacity to Repay the Fund, 2012/13-2023/24 __________________________________ 25 9. Indicative Targets and Quantitative Performance Criteria, September 2013-June 2014 ________ 26 10. Prior Actions and Structural Benchmarks through June 2014 ________________________________ 27 ANNEXES 1. Risk Assessment Matrix ________________________________________________________________________ 41 2. Debt Sustainability Analysis ___________________________________________________________________ 42 APPENDIX 1. Letter of Intent ________________________________________________________________________________ 62 ATTACHMENT 1. Technical Memorandum of Understanding-Update ___________________________________________ 72 HAITI 4 INTERNATIONAL MONETARY FUND CONTEXT AND PROGRAM PERFORMANCE 1. Four years after the earthquake some aspects of life are slowly returning to normal, against the backdrop of a stable security situation. While the number of people living in camps has been sharply reduced, there remains an acute housing shortage, and many buildings have not yet been rebuilt. The national police is being staffed and trained by the U.N. stabilization force (MINUSTAH), whose mandate has been extended through October 2014. 1 2. Tensions in the political environment in the second half of 2013 have eased somewhat. The draft budget for FY2014 was rejected by the Senate in September 2013, during a period of discussions between the President and the Parliament over long-delayed parliamentary elections. Political dialog resumed after the passing of a new electoral law in early December and the agreement to hold legislative elections in 2014. Budget discussions have resumed, with the aim to arrive at a consensus budget that would win rapid approval in Parliament by end-March 2014. 3. Most quantitative performance criteria at end-September 2013 were observed. The net international reserve (NIR) floor and the ceiling on net credit to the government from the central bank (BRH) were observed. The indicative target on net domestic financing to the central government was not observed, given the larger-than-programmed central government deficit. 2 The zero ceiling on the contracting or guaranteeing by the public sector of non-concessional external debt with maturities up to and including one year was breached in the context of the contracting by the BRH of repurchase operations (repos) for reserve management. Preliminary and incomplete information for December suggests that some indicative targets may not be observed, in particular due to some delays in the placement of treasury bills by the central government. 4. Staff’s view is that progress in the key structural areas targeted by the ECF is adequate to support the completion of the review. Capacity constraints and inadequate physical infrastructure continue to pose significant challenges to structural reforms. The authorities are working to overcome crucial impediments, and the Fund is collaborating, including through technical assistance. Some actions of the structural agenda were implemented, including the allocation of office space to the medium-sized taxpayer office by the tax department (DGI), and the establishment of a task force to review the Public Investment Program (PIP) by the Ministry of Finance. Some progress was observed in strengthening debt management, and on Treasury Single Account (TSA) implementation, although not enough to meet the corresponding structural benchmarks. With respect to the latter, a prior action involving the establishment of Accounting Center No. 1 was successfully implemented (paragraph 21). The proposed modification of end- March 2014 performance criterion on BRH credit to the central government reflects updated projections of the timing of budget financing, including external grants and net Treasury bill 1 MINUSTAH (in Haiti since 2004) remains one of the largest U.N. peace-keeping operations worldwide, though with plans to significantly reduce its size in the coming years. 2 The indicative target on monetary base expansion was not observed given that the program did not reflect the effect of the increases in legal reserve requirements in February and June 2013 on bank reserves. HAITI INTERNATIONAL MONETARY FUND 5 placement. In turn, the proposed modification of the performance criterion on BRH net domestic assets reflects updated monetary base projections. MACROECONOMIC DEVELO PMENTS, OUTLOOK, AND RISKS 5. Economic activity continued to advance in FY2013, despite negative weather events early in the fiscal year. Better-than-expected farm output pushed headline real GDP growth to 4.3 percent, higher than the 3.4 percent projected in the sixth review. Non-farm real output increased by 4.2 percent, as services saw strong growth, public investment continued to support construction, and increased apparel exports pushed manufacturing. 6. Inflation declined and the gourde depreciated moderately. Against the backdrop of controlled domestic oil prices and broadly stable international food prices, inflation decreased to 4.5 percent (y/y) at end- FY2013, from 6.5 percent at end-FY2012. 3 The gourde depreciated by 3.4 percent (y/y) against the U.S. dollar through September, in the context of increased intervention by the Central Bank. 7. The current account deficit deteriorated to 6.5 percent of GDP (from 5.4 percent in FY2012), and was financed mainly by inflows from Venezuela. Goods exports increased by 11 percent as apparel sales to the U.S. continued to grow in the context of the HELP/HOPE acts (Box 1). Imports increased by nearly 8 percent, mainly in oil and food. 4 Remittances increased significantly and the service balance improved. Net official transfers decreased, as post- earthquake humanitarian assistance declined (Box 2). The deficit continued to be mainly financed by inflows from Venezuela in the context of the Petrocaribe initiative (Box 3), as well as by some FDI flows and a 3 After reaching record highs in the first half of 2013, following various shocks (including Hurricanes Isaac and Sandy), food prices fell back to near five-year averages. Bean and maize prices are about 30 percent lower than in January 2013, due to good crop yields. This improved food availability in most of the country. 4 Official import figures are significantly lower than those declared by partner countries. This likely explains part of the large errors and omissions in Haiti’s balance of payments. HAITI 6 INTERNATIONAL MONETARY FUND decrease in net foreign assets. 8. The fiscal deficit increased to 6.7 percent of GDP in FY2013 due to a gasoline price freeze that dented revenues and on transfers to the electricity sector. While domestic tax revenues were slightly below program targets, current spending was larger than programmed to finance the deficit of the state-owned electricity company (EDH). Larger-than-expected levels of domestically-financed public investment pushed capital spending up. 9. The BRH tightened monetary policy and increased intervention in the foreign exchange market in FY2013. In response to foreign exchange market pressures, the BRH increased net dollar sales in FY2013 to US$120 million (from US$72 million in FY2012). The BRH also tightened monetary policy through an increase in legal reserve requirements, although the return on Central Bank bonds remained negative in real terms. Pressures in the foreign exchange market were mainly the consequence of the larger-than-programmed fiscal deficit and rapid private sector credit growth. Compared with their level in FY2012, gross international reserves declined by US$262 million through end-FY2013, and at end-December 2013 they remain adequate at about 5 months of prospective imports. 5 10. The evolution of monetary aggregates reflected government policies and some de- dollarization, while the banking system remained well capitalized and profitable. The monetary base grew by nearly 16 percent on account of a surge in reserve deposits, mainly reflecting higher legal requirements. Broad money grew by about 7 percent, with dollar deposits growing less than in gourdes. Credit to the private sector increased by 16 percent in FY2013 (y/y), down from 30 percent in FY2012. Non-performing loans remained low at less than 3 percent. Credit dollarization fell, but deposit dollarization remains high. According to the BRH, all banks maintain capital adequacy ratios above 12 percent, the regulatory minimum. 11. For FY2014, staff expect GDP growth, inflation, and the current account deficit to remain at levels similar to those observed last year. Non-farm real GDP is projected to grow by about 4 percent, supported by public investment, remittance-fueled consumption, and apparel exports, with headline GDP expected to rise by 3–4 percent. Given projected declines in international oil and food prices, modest exchange rate depreciation, and only a gradual liberalization of domestic oil prices, inflation would reach 5–6 percent (eop). The current account deficit (as a share of GDP) would decrease somewhat as a lower trade deficit would offset a continued decline in official transfers. Employment in the formal sector will continue to increase, in particular in the apparel sector. Credit to the private sector is expected to remain broadly stable as a share of GDP. 6 12. The macroeconomic outlook and the conditions for policy implementation are subject to a number of downside risks (See Annex I-Risk Assessment Matrix). In particular, 5 This comparison of gross reserve levels excludes the effect of the contracting of repurchase operations for international reserve management purposes. The recording of repos has the effect of increasing gross international reserves. 6 The budget for FY2014 that was rejected by the Senate incorporated a proposal to change a number of import tariffs. Staff is following ongoing discussions closely to assess the possible impact of any changes in domestic prices. HAITI INTERNATIONAL MONETARY FUND 7  On the external front, future aid flows are not assured as a number of donors are concerned at the slow progress in strengthening governance and transparency. Official flows and remittances could also suffer if the recovery in advanced economies falters. The macroeconomic situation in Venezuela remains challenging, casting doubts about Petrocaribe’s sustainability. Finally, commodity price shocks could also stress the domestic economic environment.  On the domestic front, reform momentum could suffer if political tensions resume. Tax revenues could be lower than programmed if progress in strengthening the Medium and Large Taxpayers Offices (MTO and LTO) slows, or if international oil prices increase while the domestic price freeze continues, which would lower excise and custom duties and potentially result in an increase in transfers. In addition, if the pace at which Petrocaribe support is spent remains at the levels of the second half of FY2013, the central government fiscal deficit could increase by 1 percent of GDP. This would reduce the government’s room to maneuver in the face of shocks, as the size of fiscal buffers would be reduced. Ongoing budget discussions may result in a further accommodation of spending pressures. At the same time, failure to pass the FY2014 budget by end-March may result in under-execution of the Public Investment Program (PIP), with some downside risks to growth. SEVENTH REVIEW DISCUSSIONS The mission assessed end-September targets and progress in implementing structural measures, including on the Treasury Single Account, tax administration, public debt management and the public investment framework. It also agreed on fiscal and monetary policies for FY2014 and on an updated path for the structural reform agenda to achieve ECF objectives. A. Fiscal Policy 13. The overall fiscal deficit increased to 6.7 percent of GDP in FY2013 (vis-à-vis 4.8 percent in FY2012 and 5.5 percent in the program), as changes in the oil-price mechanism dented revenues and significant subsidies kept current expenditure high. Domestic revenues (excluding those earmarked for the National Education Fund, NEF) were 12.2 percent of GDP in FY2013, slightly below the program target. This outcome reflected some over-performance of custom duties, which was more than offset by weaker income tax collection given delays in strengthening the LTO. 7 The domestic revenue shortfall vis-à-vis the program was offset by higher-than-programmed budget 7 IMF technical assistance indicates that more consistent implementation of recommendations (including the separation of operation and strategy units, the cleaning of the tax register at the LTO, and improving compliance to about 90 percent of tax payers within the LTO), could have resulted in revenue gains of about 0.3 – 0.4 percent of GDP. (continued) HAITI 8 INTERNATIONAL MONETARY FUND support grants. Fixed prices of oil products at the pump combined with higher import prices have cost around 1 percent of GDP in foregone revenues compared with FY2012. In turn, current spending reached 11.8 percent of GDP (10. 9 percent in the program) on the back of larger-than- programmed transfers to EDH. Capital spending was higher than programmed by around 0.3 percent of GDP, given larger-than-expected levels of domestically-financed public investment. 14. The electricity sector’s performance during FY2013 did not improve as expected. Financial support to EDH comprised on-budget transfers of around 0.6 percent of GDP, and off- budget transfers financed with Petrocaribe-related resources of 0.9 percent of GDP in the form of fuel provision for energy generation. In addition, the Bureau de Monetisation (BMPAD, an autonomous agency of the Ministry of Finance that manages Petrocaribe resources), accumulated claims of about 0.8 percent of GDP vis-à-vis independent power producers (IPPs) for unpaid oil bills (Box 4). 8 15. The budget continued to be mainly financed by external grants and by concessional resources from Venezuela. The use of the latter to finance public investment and EDH’s financing gap has resulted in rising external debt and a decrease in central government deposits in the banking system. In turn, net issuance of treasury bills in FY2013 amounted to 1.3 percent of GDP, of which 0.8 percent of GDP were placed at commercial banks. Staff estimates the central government’s creditor position vis-à-vis the electricity sector increased by 0.9 percent of GDP. 16. The FY2014 budget has not yet been passed by Parliament, but the government is building consensus for approval by end-March. In the meantime, the Constitution maintains all ministries’ expenditure limits the same as in the FY2013 budget (Budget reconduit). Staff urged the authorities to retain the budget envelope agreed at the sixth review, and stressed that delays in passing the budget will complicate spending execution, in particular of investment. The authorities explained that the revised FY2014 budget would be broadly similar to the original version. Reflecting NEF revenue and expenditures in FY2014, fiscal accounts will result in an overall deficit of 6.7 percent of GDP (0.2 percent of GDP lower than programmed). 17. Staff urged the authorities to increase domestic revenues. Revenues (both domestic and at customs) for the first quarter of FY2014 were broadly in line with expectations. Higher-than- programmed budgetary support grants (mainly from the European Union) and efforts in 8 These unpaid oil bills were the counterpart of EDH‘s payment arrears with IPPs. Part of those arrears (about US$13 million, 0.2 percent of GDP), triggered government guarantees, and thus, were paid through a reduction of central government deposits at the BRH. HAITI INTERNATIONAL MONETARY FUND 9 strengthening tax administration are expected to offset the loss (vis-à-vis the program) associated with the continuation of the price freeze of petroleum products (about 1 percent of GDP). In this regard, staff and the authorities agreed on the need for technical assistance to replace the current oil price mechanism with a framework that allows for more focused subsidies and gradual increases in fuel prices. The authorities expect to have a proposal ready (with assistance from the World Bank) by June 2014. 18. Staff argued that containing expenditure is essential to ensure that public debt remains sustainable and to preserve needed fiscal buffers. Staff urged the authorities to resist pressures to further increase the wage bill in the revised FY2014 budget as the original bill already accommodated a significant rise with respect to FY2013 (due to an increase in wages and the hiring of teachers, health service workers, and security forces). 9 In addition, staff emphasized the need to contain transfers and subsidies, in particular to the electricity sector. With respect to public investment, staff advised the authorities to keep investment plans in line with prospective resources. In particular, staff recommended setting Petrocaribe-financed capital spending at a level consistent with preserving Petrocaribe-related deposits at commercial banks, which has proved to be an effective buffer against shocks in recent years. This would help to contain fiscal risks, including those relating to weather events or a ‘sudden-stop’ of Venezuela-related concessional flows (see DSA Annex). The authorities explained that as MINUSTAH decreases its presence in the country, plans to expand the national police will likely result in renewed pressures on the wage bill; they agreed on the need to contain subsidies; and shared staff views on the importance of fiscal buffers. With respect to the latter, they however pointed out that Haiti’s needs are so pervasive (in particular in infrastructure) that capital spending needs will continue to be significant through the medium-term. 19. Staff stressed the importance of monitoring and containing quasi-fiscal risks and contingent liabilities, particularly in the electricity sector. Staff discussed prospective transfers to the electricity sector and ways to contain them. Staff stressed that progress in tackling structural problems in the sector would create a better environment for growth and would free up resources for social spending. This will require setting clear, time-bound targets (in terms of theft reduction and improvements in collection, and as a result in the cash-recovery index) for EDH management, coupled with a progressive reduction in government transfers. The ministry of finance committed to strengthen the monitoring of the electricity sector, so as to have a better grasp on fiscal contingencies, as well as better information upon which to base consolidation plans. Staff also urged the authorities to monitor cross debts among participants in the sector, in order to better control the creation of contingent liabilities. 20. The overall deficit for FY2014 will be financed by Venezuela-related flows, Treasury bill net placements, and by decreases in deposits at the banking system. Net external financing will be around 4 percent of GDP, mostly in Petrocaribe flows. Domestic financing will include further issuance of treasury bills (0.9 percent of GDP), use of Post-Catastrophe Debt Relief (PCDR) resources (0.8 percent of GDP), and a decrease in central government deposits (1.7 percent of GDP). Staff 9 As described in the sixth ECF review, part of the increase in the wage bill during FY2014 reflects the effect of an appropriate reclassification of spending. HAITI 10 INTERNATIONAL MONETARY FUND cautioned that the short maturity of treasury bills (of about 3 months) could result in increasingly large roll-over needs unless further placements increase their average maturity. This, in turn, could create an additional source of fiscal vulnerability. The stock of treasury bills at end-January 2014 amounted to 1.3 percent of GDP. 21. Despite impediments to progress in the face of persistent capacity and infrastructure constraints, the authorities advanced the ECF structural agenda. Staff argued that strengthening governance and making the budget process more transparent could promote further donor flows. In this regard, staff urged the authorities to continue to strengthen tax administration, and the governance, transparency, and effectiveness of the public investment framework. In particular,  Strengthening Tax Administration. In September, the tax department (DGI) allocated space to the medium-sized taxpayer office (end-September structural benchmark). The establishment of the new office should contribute to broadening the tax base and increase revenues. Work is also proceeding to strengthen the LTO to ensure better control and compliance, and to resolve some office space constraints. Staff argued that broadening the tax base would help offset the projected medium-term decline in aid flows.  Strengthening Debt Management. The Debt Unit (DU) was relocated from the Budget Directorate to the Treasury, which now has a stronger mandate in designing the government’s financing strategy. While the DU’s Back Office is fully staffed, the Middle and Front offices are not yet functional, and thus the corresponding end-December benchmark was not met. A workshop on Debt Sustainability, co-hosted by the authorities and staff in January 2014, strengthened officials’ capacity to deliver independent DSAs, and discussed the DU’s work program. The U.S. Treasury’s Office of Technical Assistance (OTA) and the World Bank are also assisting the authorities in this area. 10  Setting up a task force to review the Public Investment Program (PIP). A task force was set up at the Ministry of Finance to analyze the framework for implementing public investment decisions. The work of the task force will be complemented by the analysis of a group of international experts (financed by the French government), and will begin during the first quarter of 2014 (end-December structural benchmark). This analysis will help assess why the large investment budget of the past few years did not result in higher economic growth (Box 5).  Treasury Single Account (TSA). Staff and the authorities revised the timetable for the implementation of the TSA, in order to have its first phase in place by end-FY2014, as envisaged at the sixth ECF review. 11 This requires a re-definition of the structural benchmark 10 In February 2013, the President sent to Parliament a public debt law (which assigns debt management responsibilities to the Ministry of Finance), and a law reorganizing the Ministry of Finance (that elevates the Treasury Department to a general directorate in charge of cash and debt management). Approval of these laws is still pending. 11 The timetable comprises three phases: (i) by end-2014, each government entity will be allowed to hold a maximum of three accounts, which will help reducing the total number of accounts to 200; (ii) from October 2014 onwards, the (continued) HAITI INTERNATIONAL MONETARY FUND 11 for end-March 2014, and a new structural benchmark for end-June 2014. Progress towards the TSA is quite advanced in a number of ministries, but is only at a preliminary stage in others. Staff agreed with the authorities that full TSA implementation in the more advanced ministries should proceed as soon as possible. TSA introduction in the remaining ministries should proceed in stages, with priority given to those ministries responsible for the largest share of spending (including the Ministries of Planning, Public Works, Education, and Health). Accordingly, key measures to fast-track TSA implementation in a number of ministries were implemented and Accounting Center No. 1 (comprising the Ministries of Finance, Tourism, Commerce, and Environment) is now fully operational (prior action). The Prime Minister has prioritized TSA implementation in all remaining ministries, although some delays are to be expected, in particular due to the (chronic post-earthquake) lack of office space for the additional Accounting Centers. By end-March, the authorities have committed to fully implement Accounting Center No. 2 (Ministries of Planning, Public Works and Agriculture), and to have around 80 percent of all expenditure covered by the TSA by end- June 2014. B. Debt Sustainability 22. Haiti’s risk of debt distress remains high. The country’s main challenge is to balance the need for fiscal consolidation with large social and investment needs. While a stronger than warranted fiscal adjustment may compromise GDP growth and progress in addressing social needs, too large a primary deficit could affect macroeconomic stability. Following significant post- earthquake debt relief (including US$268 million by the Fund, 4 percent of FY2010 GDP), the DSA’s baseline scenario suggests that Haiti will significantly build up debt over the medium-term, the sustainability of which will be challenged by Haiti’s narrow export base and low revenue. 12 Alternatively, swift progress in the implementation of reforms should result in a stronger fiscal position, an environment more conducive to growth, and lower debt accumulation. While the debt profile in the baseline is vulnerable to shocks to borrowing conditions, to a decrease in the value of the gourde, and to a decline in growth rates, the risk of debt distress would be reduced and vulnerabilities contained in case progress in reform implementation is accelerated (DSA Annex). 23. In particular, a sudden stop of Petrocaribe-related inflows could jeopardize growth prospects and deteriorate public debt indicators in the medium term. A sudden stop of Petrocaribe flows would lead to a substantial fiscal adjustment and a decrease in GDP growth, as it would severely constrain financing of investment spending and of the electricity sector’s deficit. Domestic tax revenues would fall below baseline projections, government deposits (and international reserves) would decrease to partially cushion the shock, and EDH’s deficit would likely number of accounts will be reduced further to three per sector entity; and (iii) by end-September 2015, all government accounts will be consolidated under the main Treasury account at the central bank. The authorities will continue to receive assistance from the Fund, including through a resident advisor financed by Canada, as well as from the U.S. Treasury’s OTA. 12 Debt buildup in the baseline scenario during the next few years is mainly driven by further disbursements of Petrocaribe-related flows at current terms (Box 3). HAITI 12 INTERNATIONAL MONETARY FUND fall (through a combination of higher tariffs, longer blackouts, and collection improvements). Staff believe that it would be difficult to fully substitute Petrocaribe flows with other bilateral concessional resources, at least in the short-term. This would result in the accumulation of (relatively expensive) domestic debt, and thus, in worse public debt indicators through the medium term. C. Monetary, Exchange Rate, and Financial Sector Policies 24. The real exchange rate has drifted slowly upwards during the last few years. In the last Article IV Consultation (March 2013) staff analysis suggested that after sharply appreciating in the immediate aftermath of the earthquake on a surge of aid flows, the gourde has depreciated against the dollar in nominal terms by around 3 percent per year over the past three years. Meanwhile a narrowing of inflation differentials has allowed the gourde to remain broadly unchanged in real effective terms during the last two years. Staff argued that the sustainability of the real exchange rate over the medium-term will depend on structural reforms to boost competitiveness. 25. Staff recommended that foreign exchange market intervention should aim at keeping the exchange rate aligned with economic fundamentals, while avoiding unwarranted volatility. Staff argued that the still-large fiscal deficit expected for FY2014 may result in renewed downward pressure on the exchange rate. Staff also noted that the supply of foreign exchange will likely be reduced as aid flows gradually decline. Against this backdrop, staff sees a need to balance the use of the exchange rate as a nominal anchor, and preserving international reserve buffers. Staff argued that the policy mix should be composed of a parsimonious use of foreign exchange reserves to relieve pressures, and if needed, further monetary policy tightening. This would strengthen the credibility of BRH’s intervention in the foreign exchange market and of monetary policy more generally. Staff acknowledged that the increase in legal reserve requirements in FY2013 contributed to slowing private credit growth, and advised that as reserve requirements are already high, any further needed tightening in policies should occur through increases in rates of BRH bills, which remain negative in real terms. 26. Staff recognized progress in a number of structural areas, but urged the authorities to speed up implementation of pending actions. In particular,  Strengthening the functioning of the Exchange Rate Market. BRH staff explained that they are committed to increase the transparency, efficiency, and depth of the foreign exchange market. BRH staff also argued that the implementation of an electronic platform will contribute to that end, and have requested the Fund a technical expert that will assist the BRH in its design and implementation.  Implementation of Safeguard Assessment Recommendations. Progress in the implementation of the safeguard assessment recommendations continues, although slowly in some areas. The BRH has published its FY2012 audited financial statements and will HAITI INTERNATIONAL MONETARY FUND 13 publish the FY2013 statements by end-July 2014. Staff encouraged the authorities to accelerate the full adoption of IFRS following steps that have been initiated between the BRH and the Ministry of Finance to set up a committee to monitor its implementation. Moreover, the mission urged the BRH to strengthen the Investment Committee’s autonomy from investment operations, and to appoint a compliance officer to monitor foreign reserves policy and observation of investment guidelines.  Strengthening International Reserve Management. Staff and authorities agreed that the BRH will request (before June 2014) Fund support to conduct an assessment of foreign reserve management guidelines. This assistance will result in recommendations tailored to Haiti’s circumstances.  AML/CFT. In November 2013, the President promulgated the AML/CFT law which addresses several outstanding Caribbean Financial Action Task Force (CFATF) recommendations, but further action on the part of the authorities will likely be needed. The sixth follow-up CFTAF report moved Haiti to the second stage of enhanced follow-up. Effective implementation of the AML/CFT framework would also help strengthening governance.  Laws on Financial Cooperatives, and on Microfinance Institutions (MFIs). A Law on MFIs and another on Financial Cooperatives are still pending approval at Parliament. The Ministry of Finance has launched a campaign to win their enactment. 27. Staff underlined the need to strengthen bank supervision. In particular, staff suggested that stress testing should be implemented more systematically. Authorities noted that banks’ portfolios were mainly allocated to commercial credit, with consumer and mortgage lending accounting for less than 20 percent of the total, and that risks were contained. Staff emphasized that credit concentration could represent a risk, and noted that the banking system also remains concentrated (with the top three banks accounting for about 80 percent of assets and deposits). Authorities underscored that banks remain profitable. Staff and authorities agreed that further financial deepening could be supportive of growth, but that careful monitoring of attendant risks was needed. OTHER ISSUES 28. Poverty Reduction Strategy Paper (PRSP). The authorities have recently published a three-year investment program as part of the “Strategic Plan for the Development of Haiti” (PSDH), which establishes a framework for growth and poverty reduction. The Ministry of Social Affairs is finalizing a document that elaborates on the poverty reduction objectives laid out in the PSDH. A new PRSP progress report, based on the PSDH, was circulated to the Board. The last progress report had been circulated to the Board in early 2012. 29. Improving economic data remains essential. The government has requested technical assistance from the IMF to strengthen national accounts and external statistics. This would entail, inter alia, revising the base year and improving source data (including on the informal sector). Strengthening external accounts would require improving data collection for inward direct investment, trade, remittances, foreign aid, and services. HAITI 14 INTERNATIONAL MONETARY FUND 30. The authorities indicated interest in a follow-up Fund-supported program. They envisage that a follow-up program would permit them to consolidate gains in macroeconomic stabilization, while allowing them to pursue a structural reform agenda focused on lifting obstacles for growth. Staff indicated that the mission to discuss the eight (and final) ECF review would be a good opportunity to start discussing these issues. The current ECF expires in August 2014. STAFF APPRAISAL 31. Program performance is broadly satisfactory. GDP growth in FY2013 was better than expected, inflation decreased, and external reserve buffers remained adequate. The breach of the performance criterion on the contracting of non-concessional debt by the public sector resulted from an unintentional oversight. Staff believe that the granting of a waiver of nonobservance is warranted given the implementation of timely corrective action. There has been progress on structural reforms since the sixth review, although its pace has been in part constrained by capacity and infrastructure limitations. 32. Speeding up the implementation of reforms should support higher growth. Consistent progress in the implementation of the structural agenda would contribute to debt sustainability, improve competitiveness and growth prospects, strengthen the control over fiscal policy, promote additional donor support, and lay the basis for more effective social and growth-enhancing spending. Sustained trade access to the U.S. should contribute to further job expansion and increased investment in export-related activities (Box 1). More readily-available information of effectiveness of investment projects (both government and donor-financed), should allow for better coordination, and a higher impact of public investment on growth (paragraph 39). 33. The macroeconomic outlook and the conditions for policy implementation are subject to significant downside risks. On the external front, slow progress in strengthening governance and transparency, a slower-than-expected recovery in advanced economies, or a further deterioration in the macroeconomic situation of Venezuela, could all result in lower external grants and concessional flows. Commodity price shocks could also be a source of stress, particularly to the energy bill. On the domestic front, reform fatigue in tax administration, and renewed spending pressures (including for Petrocaribe-related spending) could further worsen the fiscal picture. This would reduce fiscal buffers and the room to react in case of shocks. On the structural front, reform momentum could slow if political tensions resume. 34. In particular, a sudden stop of Venezuela-related flows would be detrimental to growth and debt sustainability. The shock would result in decreases in public investment and problems to finance the electricity sector’s deficit, thereby jeopardizing growth prospects. The resulting lower concessionality in financing would also worsen Haiti’s debt indicators. Mitigating this risk requires increasing domestic revenues (paragraph 36), containing expenditure growth (in particular of transfers) (paragraph 35), and advancing decisively in reducing EDH’s deficit (paragraph 37). 35. Fiscal policy during FY2014 and in the next few years needs to slow debt accumulation. The DSA highlights that Haiti’s external debt continues to be at a high risk of debt distress, but that vulnerabilities could be contained by swifter reform implementation. The challenge HAITI INTERNATIONAL MONETARY FUND 15 in the next few years will be to strike a balance between needed social and investment spending and the imperative of reducing the primary deficit to keep it consistent with debt sustainability. Against this backdrop, it is crucial that the revised FY2014 budget is in line with that agreed at the sixth ECF review, and that spending pressures remain contained. Increases in short-term domestic debt should be limited to those agreed within the ECF, and fiscal buffers should be preserved. 36. Increasing revenues is essential. About one half of central government expenditures were financed by external flows during the last three years, but some of these flows will decline in the medium term and some may be drastically reduced if risk events materialize. Enlarging the tax base through strengthened tax administration (in particular through an effective MTO and LTO), and combating evasion at customs are crucial to build a domestic revenue base that could offset expected decreases in external flows. Moreover, the continuation of the fuel price freeze has been too costly (around 1 percent of GDP), and its replacement with a framework that allows for more focused subsidies and a gradual increase in prices is urgent. 37. The electricity sector is a drag on the budget and poses contingent fiscal risks that need to be contained. Higher transfers (in particular to the electricity sector) explained most of the deviation vis-à-vis the program in the primary deficit for FY2013, and transfers are projected to remain elevated in FY2014. Progress in tackling structural problems in the sector, in particular in the state-owned EDH, would create a better environment for growth, and would free up resources for social spending. In this regard, clear, time-bound targets aimed at improving performance should be established for EDH management. Staff supports the efforts of the World Bank, the IDB and the U.S. in this area. 38. The TSA needs to be implemented. Centralization of government accounts is vital for spending control, and for more effective policy implementation. The authorities have made headway on TSA implementation, but efforts have sometimes been constrained by lack of capacity and adequate physical infrastructure. Pushing forward to include the larger line ministries (Planning, Public Works, Education, and Health) in the TSA will result in better coordination, stronger expenditure control, and more efficient cash and debt management. It will be important that the public debt law and the law reorganizing the ministry of finance are passed by Parliament. 39. Strengthening the governance and transparency of the budget process will increase the effectiveness of fiscal policy and could promote higher donor flows. Despite large increases in public investment during the past few years, growth has continued to be relatively modest. The analysis of public investment decisions and outcomes should shed light on the apparent low impact of the relatively large investment budget. In particular, given that about one half of public investment is composed of donor-managed and donor-financed projects, more readily-available information of project effectiveness and geographical location should contribute to improved coordination (among donors and with the government) and a higher impact of public investment on growth (Box 2). 40. Central Bank intervention in the foreign exchange market should focus on smoothing volatility while ensuring that the exchange rate remains aligned over time with fundamentals. The still-large fiscal deficit expected for FY2014, and a gradual decline in total external aid flows may result in renewed pressures on the exchange rate. Monetary policy implementation will need to HAITI 16 INTERNATIONAL MONETARY FUND balance the use of the exchange rate as nominal anchor with the need to preserve buffers that could be used in the face of shocks. The use of reserves to relieve pressures should take into consideration long-term trends in the exchange rate market, and if further tightening is needed, it should be implemented through interest rates as legal reserve requirements are already high. Strengthening the functioning of the exchange rate market will contribute to a faster transmission of policy signals. 41. Pending safeguard assessment recommendations should be implemented. Progress in this area has been observed; in particular, the Central Bank’s FY2012 audited financial statements were published, and those corresponding to FY2013 will be published by July 2014. Accelerating IFRS adoption and strengthening the autonomy of the Investment Committee is important. An assessment of foreign reserve management guidelines will help staff and authorities identifying the parameters of optimal reserve levels and their composition. On bank supervision, staff believes that stress testing should be performed more systematically, in view of credit concentration. 42. Some pending financial issues will require action in the coming months. In particular, the CFTAF increased scrutiny over Haiti, and despite the fact that the AML/CFT law promulgated at end-2013 addresses some of the CFTAF recommendations it is likely that further action will be needed. Also the draft laws on Cooperatives and on Microfinance Institutions are still pending approval in Parliament. 43. Staff recommend the completion of the seventh review under the ECF arrangement, the modification of performance criteria, and the granting of a waiver of nonobservance of performance criterion HAITI 17 INTERNATIONAL MONETARY FUND HAITI INTERNATIONAL MONETARY FUND 18 HAITI 19 INTERNATIONAL MONETARY FUND [... middle sections omitted for long document ...] Statement by Mr. Nogueira Batista, Executive Director for Haiti, Ms. Florestal, Government-Provided Advisor, and Mr. Simon, Government-Provided Advisor March 26, 2014 1. On behalf our Haitian authorities we would like to thank staff for maintaining a constructive dialogue. The staff’s has made commendable efforts to understand the domestic post-earthquake context and ensuing constraints. 2. The staff report is relatively balanced and rich in information. Our authorities particularly appreciate the highlighting of the constraints inherent to the way foreign assistance is being delivered in Haiti. As we have stated on previous occasions, the fact that aid is provided largely outside the budget and often directly executed by NGOs and private firms weakens coordination and efficiency. After observing that “some analysts suggest that aid disbursed by some donors may have had to pass multiple layers of sub-contracts and sub- grants before reaching the intended group”, staff rightly asserts that circumventing the public sector may have weighed negatively on government effectiveness. We welcome staff’s recognition of a point the authorities have been making for some time and hope that this will contribute to a better coordinated delivery of aid. 3. The staff report covers extensively program performance and recent macroeconomic and financial developments. Hence, we will focus primarily on the structural agenda for achieving sustainable and inclusive growth. Recent developments and outlook 4. Growth performance in FY13 was better than programmed in spite of the impact of several external shocks including the devastating cyclone Sandy that led to extensive damages in the agricultural sector. Macro stability was maintained with inflation subdued due to stable international prices of basic goods, the freezing of domestic petroleum prices and the measures taken by the central bank to limit the depreciation of the gourde. The supply of locally grown agricultural products quickly picked up as a result of the government’s timely measures in support of the sector. Stronger exports also played an important part in keeping economic recovery on track. 5. Haiti’s development requires substantial investments, public and private. However, external support which had been relatively abundant since the tragedy of 2010 is being phased out. PetroCaribe funds have been financing, on a concessional basis, an increasingly significant part of public investments during the past fiscal years. Our authorities are very 2 appreciative of the support they receive from Venezuela but are conscious of the need to diversify sources of financing and to carefully balance the use of loans with debt sustainability. Recently, they have explored with the Venezuelan government the possibility of repaying part of the PetroCaribe debt in kind through exports of goods. 6. Another constraining factor is the late approval of the FY14 budget that could prevent the government from fully implementing its growth and investment policies. That said, efforts to increase tax collection and combat fraud are redoubling and results at the level of customs receipts are already being felt. 7. The other binding aspect of the financing constraint may be the inability of the government to increase the maturity of treasury bills considering that the domestic market seems unresponsive to the issuance of instruments with tenors of six months or more. Challenges in achieving sustainable structural change 8. As indicated in the staff report, performance under the program is broadly satisfactory although progress on structural reforms is constrained by capacity and infrastructure limitations. Some elements of the political context also need to be factored in to better project and understand future outcomes. For example, the FY14 budget is only approaching approval now – six months into the fiscal year – following a negative vote by Parliament in September 2013 and several subsequent negotiation rounds. 9. Some important structural reforms in public financial management depend on parliamentary approval of draft legislation. The new organic law for the Ministry of Economy and Finance is essential for the complete adoption of strengthened structures for debt management and the roll out of the Single Treasury Account (STA). A revision of the law creating the Directorate of Budget is also necessary. The revision will seek to rationalize expenditures and simplify procedures, increase transparency in the execution of the budget and strengthen the responsibility of accountants and managers. 10. Pending the adoption of new legislation, the Government is moving forward with public financial management reforms using all the flexibility offered by the existing administrative and legal framework. For example, ahead of the new organic law for the Ministry of Economy and Finance, commendable progress has been achieved towards adopting the single treasury account (STA), a complex endeavor that requires careful planning and strong coordination between the Ministry and all public sector entities. Beginning in April, the number of accounts per public sector entity will be reduced to only three: one for expenditure, one for resources and another one for investment. The entire process is projected to be completed by end of June 2014 at which time the number of accounts of public entities in local currency will shrink to 237 from 534, according to the Ministry of Economy and Finance. 3 Public private partnerships and the business environment 11. While efforts are being intensified to improve tax collection and reduce dependency on external assistance, the government knows that private investments need to play a crucial role and is continuing to devise ways to promote their participation. Hence, different models of public private partnerships are being formalized. These include the adoption of innovative schemes to encourage the creation of agricultural firms. One key challenge in the agricultural sector in Haiti is the limited number of sufficiently large parcels of land that can allow for some economies of scale and the production of competitive goods. Small farmers are being encouraged to constitute larger production units to facilitate access to credit as well as increase efficiency. 12. Another initiative is the promotion of micro-parks with mixed ownership (private/public) particularly in the government’s chosen four priority sectors including agro- industry and manufacturing. The idea is to pool the supply of public services (e.g., water and electricity) as well as that of plants, machinery and administrative buildings. In this model, technical assistance to upgrade managerial and production skills will be provided by the government. Six such micro-parks in different regions of the country are in preparation. 13. The Haitian government is also planning a complete overhaul of the “doing business” legal apparatus to improve and modernize the business environment and promote entrepreneurship. Following an extensive dialogue with representatives of the private sector, the President of the Republic has designated a high level task force comprising renowned lawyers specializing in business and commercial law to review the code of commerce and all other legislation related to doing business. This task force also has to draft new legislative proposals. Simultaneously, legislation to create the appropriate framework for mining, a sector with recently discovered significant potential, is also being drafted with the support of donors. Phasing out electricity and petroleum subsidies 14. As underlined in the staff report, subsidies to the electricity company and to the consumption of petroleum products have reached prohibitive levels. Forgone taxes from the freezing of domestic petroleum prices for the first six months of this fiscal year are estimated by the Ministry of Finance to have reached 2.8 billion gourdes representing more than half of the Treasury bonds to be issued during the fiscal year. To eliminate fully the subsidy to petroleum consumption, prices would have to be raised by substantial amounts. In practice, only a gradual adjustment with accompanying measures to attenuate the impact on the poor can be considered. With the technical support of the World Bank, the authorities are finalizing plans to establish targeted subsidies and start as soon as feasible a gradual increase of prices at the pump. 4 15. Subsidies to the public electricity company (Electricité d’Haïti - EDH) consume another significant part of budget resources (2.5 billion gourdes for this fiscal year). Even so, the supply of electricity is limited, unreliable and expensive. Hence, the government’s objective is two-prong. On the one hand, it seeks to eliminate the heavy burden of EDH on the budget. On the other, it aims to ensure that energy no longer constrains growth and development. The goal is to arrive at a situation in which the private sector and the population at large have reliable access to electricity at a reasonable cost. The primary challenge in the short term is to bring EDH to financial soundness. This necessarily implies the renegotiation of contractual terms with the independent power producers (IPPs) – a point we believe could have been emphasized in the staff report. These contracts were negotiated under previous administrations and are perceived by the authorities to be very unfavorable to the State. 16. The Haitian authorities are convinced that for the longer term, a new strategic model is needed. It would have to be one in which the State no longer bears all the risks. One avenue is the decentralization of the production and distribution of electricity to increase competition in a sector now characterized by low efficiency and high concentration. A high level commission has recently been created by the Prime Minister to boost energy sector reform. This commission includes representatives of USAID, IDB, WB and IMF. Exchange rate and monetary policy 17. The central bank has retained the accommodative stance adopted since 2011. Two factors have contributed to the continuation of this stance: first, the evolution of commodity prices on the international market and, second, quantitative easing and the low interest rates practiced by the Federal Reserve. However, circumstances have changed and in light of recent fluctuations in the foreign exchange market the central bank decided to begin tightening its stance with the tools at its disposal including interest rates and reserve requirements. 18. The central bank wishes to reaffirm its commitment to an improvement in the functioning of the foreign exchange market. However, the market’s shallowness and the limited number of actors are barriers to the adoption of a single-price auction. To overcome these difficulties the Fund has agreed to provide technical assistance to determine the feasibility of an electronic platform that would favor the deepening of the foreign exchange market. Financial Sector 5 19. The various measures initiated to improve access to credit are starting to bear fruit. The law against money laundering and the financing of terrorism has been adopted by Parliament and promulgated in November 2013. The authorities are confident that the new AML/CFT legal framework is consistent with FATF standards and will be a major step in strengthening governance in the financial sector. Its adoption in conjunction with a new legal framework for microfinance and credit unions offers better perspectives for the expansion of credit and financial deepening. The approval of the draft microfinance law and the new insurance law will also be instrumental in improving the management of risks and consumer protection.