(2023) Ayiti - Premye revizyon nan pwogram sivèlans ekip travay la

© 2023 International Monetary Fund IMF Country Report No. 23/48 HAITI FIRST REVIEW UNDER THE STAFF-MONITORED PROGRAM—PRESS RELEASE; AND STAFF REPORT In the context of the First Review Under the Staff-Monitored Program (SMP), the following documents have been released and are included in the package: •A Press Release •The Staff Report prepared by a staff team of the IMF for the Executive Board’s information following discussions that ended on December 8, with the officials of Haiti on economic developments and policies underpinning the First Review Under the Staff-Monitored Program. Based on information available at the time of these discussions, the staff report was completed on December 22. The documents listed below have been or will be separately released. The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents. Copies of this report are available to the public from International Monetary Fund • Publication Services PO Box 92780 • Washington, D.C. 20090 Telephone: (202) 623-7430 • Fax: (202) 623-7201 E-mail: publications@imf.org Web: http://www.imf.org Price: $18.00 per printed copy International Monetary Fund Washington, D.C. January 2023 PR23/14 IMF Management Completed the First Review of the Staff Monitored Program with Haiti FOR IMMEDIATE RELEASE Staff Monitored Programs (SMPs) are informal arrangements between national authorities and IMF staff to monitor the authorities’ economic program. As such, they do not entail endorsement by the IMF Executive Board. SMP Staff reports are issued to the Board for information •Management of the International Monetary Fund (IMF) approved the first review of Haiti’s Staff-Monitored Program (SMP) on December 21, 2022. The SMP will help the government restore macroeconomic stability and lower inflation―a key goal given the burden of high inflation on the poor. •The SMP seeks to advance decisive governance reforms to enhance accountability. In particular, it emphasizes greater accountability through stronger public finance management, revenue administration, transparency, and anti-corruption measures. •The program comprises realistic measures suited to Haiti’s fragility to help the authorities build a track record of policy implementation. Washington, DC – January 23, 2023: Management of the International Monetary Fund (IMF) approved on December 21, 2022 the first review of Haiti’s Staff-Monitored Program (SMP). Discussions for the review took place during October-December, 2022 1 . The SMP takes into account Haiti’s fragility and capacity constraints. It was designed to support the authorities’ economic policy objectives and build a track record of reform implementation. Haiti is mid-way through a SMP that has been an important anchor for Haitian policymakers, despite one of the most challenging economic environments in many years. Haiti is faced with many difficulties, which have been worsened by higher food and fuel prices stemming the war in Ukraine, which have increased its economy’s fragility. The external shocks and deterioration of the security situation have resulted in a macroeconomic outlook worse than at the time of the program’s approval by IMF management in June 2022. Despite the more difficult macroeconomic conditions and downside risks, recent data and progress on structural reforms suggest that the authorities are making meaningful efforts to ease the country’s multiple challenges. In this difficult context, the authorities have committed 1 The SMP was approved on June 17, 2022 and runs through May 31, 2023. SMPs are arrangements between country authorities and the IMF to monitor the implementation of the authorities’ economic program but are not accompanied by financial assistance. 2 to continue implementing policies that would begin to restore macroeconomic stability and growth, strengthen governance, and to provide relief to the most vulnerable households. The SMP has been instrumental in catalyzing forthcoming external financing and its implementation has been broadly satisfactory, despite obstacles in meeting quantitative targets due to a less favorable environment than initially anticipated. The Haitian authorities have adopted a budget for FY2023 that is consistent with agreed targets under the SMP and in the context of a medium-term budget. They ensured that a meaningful budget allocation is used to protect the most vulnerable and are implementing public financial management systems to monitor the use of public funds. The authorities are committed to reduce central bank financing of the deficit to levels consistent with low inflation and limit foreign exchange intervention to smoothing excess volatility. In line with the reforms under the SMP, the authorities took measures aimed at raising domestic revenues, approving in December a new tax code and following through with the adoption of the customs and tax administration reforms. In particular, the tax code—a primer in the country’s history—entails the rationalization and simplification of the personal income tax and corporate income tax, including through the broadening of the tax base and elimination of many exemptions. Progress on governance is key to ensure inclusive growth. The authorities have taken steps to strengthen accountability in the collection and use of public resources and have boosted the transparency of public procurement for emergency resources. They are working to bring AML/CFT laws up to international standards supported by Fund’s capacity development. IMF staff will continue to work closely with the authorities to support implementation of their program and help them build public support. Indeed, most elements of the authorities’ program are underpinned by ongoing IMF technical assistance. The Fund will also continue to coordinate closely with Haiti’s other development partners to leverage efforts in support of common objectives. SMP are only subject to formal IMF management review. HAITI FIRST REVIEW UNDER THE STAFF-MONITORED PROGRAM EXECUTIVE SUMMARY Context: Haiti is faced with many difficulties, which have been worsened by higher food and fuel prices stemming from Russia’s war in Ukraine. Because of this global shock and a deterioration of the domestic security situation, the economy has become even more fragile, and the macroeconomic situation and outlook are more challenging than in June 2022, when the Staff Monitored Program was approved by IMF Management. In line with global trends, growth has been weaker than expected and inflation higher. Despite the more difficult macroeconomic situation and downside risks, recent data and progress on structural reforms suggest that the authorities are making meaningful efforts to ease the country’s multiple challenges. Program implementation: The implementation under the SMP has been broadly satisfactory—despite obstacles in meeting quantitative targets (QTs) due to a less favorable environment—and it has been instrumental in catalyzing forthcoming external financing. The authorities met one end-June QT and missed three other targets. They met two of three continuous QTs on arrears. They also met the two recurrent structural benchmarks. Of the five end-September structural benchmarks, although none was met on time, four were completed with some delay. Staff proposes to reset one structural benchmark that was not completed as well as the end-December and end-March structural benchmarks, and to adjust QTs to reflect the less favorable environment. The review focused on identifying corrective actions to support program implementation. Policy recommendations: • Adopt a budget for FY2023 that is consistent with agreed targets under the SMP and in the context of a medium-term budget framework for FY2023–25. • Ensure a meaningful budget allocation to protect the most vulnerable and implement public financial management systems to monitor the use of public funds. • Reduce central bank financing of the deficit to levels consistent with low inflation and limit foreign exchange intervention to smoothing excess volatility. • Sustain recent efforts to boost revenue collection, including by following through with the adoption of the tax code and customs and tax administration reforms. • Address the Fund’s safeguards recommendations, including on strengthening the central bank ’s law and transitioning to International Financial Reporting Standards. December 22, 2022 HAITI 2 INTERNATIONAL MONETARY FUND Approved By Patricia Alonso-Gamo (WHD) and Andrea Schaechter (SPR) Discussions began in person during the week of the Annual meetings (October 10-15), continued with weekly virtual meetings in November, and concluded from Washington during a remote mission during December 1-8, 2022. The team comprised Ms. Tumbarello (Head), Mr. Noah Ndela, Mses. Bhattacharya and Aliperti (all WHD), Ms. Osorio-Buitron (FAD), Mr. Shenai (SPR), and Messrs. Duvalsaint and Wata (Port-au- Prince office). Ms. Coquillat (WHD) assisted with logistics and document preparation. Mr. Saraiva and Ms. Florestal (OED) joined the discussions. The team met with Mr. Michel Patrick Boisvert (Minister of Finance), Mr. Jean Baden Dubois (Governor of the Bank of the Republic of Haiti, BRH), Mr. Pierre Ricot Odney (Minister of Social Affairs and Labor), other senior officials, and throughout the process with the international community. CONTENTS CONTEXT AND RECENT ECONOMIC DEVELOPMENTS _________________________________________ 4 PROGRAM IMPLEMENTATION UNDER THE SMP ______________________________________________ 5 OUTLOOK AND RISKS ___________________________________________________________________________ 6 REACHING THE OBJECTIVES OF THE SMP _____________________________________________________ 7 A. Fiscal Policy ____________________________________________________________________________________ 8 B. Social Assistance _______________________________________________________________________________ 9 C. Monetary and Exchange Rate Policies ________________________________________________________ 11 D. Financial Sector Policies ______________________________________________________________________ 13 E. Governance and Safeguards __________________________________________________________________ 13 PROGRAM MONITORING ______________________________________________________________________ 14 STAFF APPRAISAL ______________________________________________________________________________ 15 FIGURES 1. Real Sector Developments, 2015–22 __________________________________________________________ 17 2. Fiscal Sector Developments, 2015–22 _________________________________________________________ 18 3. Monetary Sector Developments, 2015–22 _____________________________________________________ 19 4. Financial Sector Indicators, 2015–22 __________________________________________________________ 20 5. External Sector Developments, 2015–22 ______________________________________________________ 21 6. Social Indicators _______________________________________________________________________________ 22 HAITI INTERNATIONAL MONETARY FUND 3 TABLES 1. Selected Economic and Financial Indicators, FY2019–25 ______________________________________ 23 2a. Non-Financial Public Sector Operations, FY2019–25 (In millions of gourdes) ________________ 24 2b. Non-Financial Public Sector Operations, FY2019–25 (In percent of GDP) ____________________ 25 3. Summary Accounts of the Banking System, FY2019–25 _______________________________________ 26 4a. Balance of Payments, FY2019–25 (in millions of US$) ________________________________________ 27 4b. Balance of Payments, FY2019–25 (in percent of GDP) ________________________________________ 28 5. External Financing Requirements and Sources, FY2019–25 ____________________________________ 29 6. Financial Soundness Indicators, June 2020 – March 2022 _____________________________________ 30 APPENDIX I. Letter of Intent _________________________________________________________________________________ 31 Attachment I. Memorandum on Economic and Financial Policies ______________________________ 34 Attachment II: Technical Memorandum of Understanding _____________________________________ 44 HAITI 4 INTERNATIONAL MONETARY FUND CONTEXT AND RECENT ECONOMIC DEVELOPMENTS 1. Haiti is at a critical juncture. It has been strongly impacted by the spillovers of Russia’s war in Ukraine, which heightened the economy’s fragility. While Haiti’s population was already experiencing malnutrition before the war in Ukraine, its suffering has been compounded by the surge in food prices, leading to acute hunger. 2. Political uncertainty and the security crisis persist. Prime Minister Henry, who has faced several months of widespread protests, has pledged to hold elections as soon as it is safe to do so. Violence escalated sharply in recent months with internal displacement of thousands of Haitians. The security situation constrained economic activity, particularly during September and October, hampering efforts to control the recent cholera outbreak. 1 The UN Security Council approved a sanction regime targeting gang leaders, followed by the Central Bank of Haiti’s instructions to financial institutions to support its implementation. 3. Against this backdrop and a deteriorating global outlook, macroeconomic conditions remain challenging. Real GDP likely contracted for the fourth consecutive year in FY2022, ending in September, by about -1.5 percent. Year-on-year inflation reached 38.7 percent in September 2022, driven by high international food and import prices, drought-related supply disruptions, and monetary financing of the budget deficit (Table 1). The non-financial public sector (NFPS) fiscal deficit (including grants) is estimated to have expanded slightly—to 2.2 percent of GDP relative to 1.5 percent envisaged at the time of the SMP approval. This was due to budget strains linked to the cost of petroleum product subsidies prior to the price increase in September. Despite the riots in September, recent data suggest that domestic revenue in FY2022 was 90 percent of the value expected in June (Tables 2a and 2b). The current account deficit is estimated at 2.4 percent of GDP in FY2022. The gourde and the foreign exchange market came under pressure in the summer, partly because of a temporary slowing in remittance inflows that aggravated the shortage of foreign exchange. Gross international reserves are still estimated at 4.6 months of projected imports, but net international reserves have declined, by some US$240 million since the end of FY2021. 4. The authorities have nonetheless demonstrated strong commitment under the SMP and have taken important policy measures. To tackle inflation and prevent further depreciation of the gourde, the Banque de la République d’Haïti (BRH) raised short-term interest rates to 11.5 percent in August (from 10 percent since March 2020); boosted mandatory reserve requirements on liabilities, in US dollar terms, to 53 percent; and increased interest rates on credit lines. The BRH has moved also to ease loan repayment obligations—extending them for three months for households and six months for corporates. The authorities have prepared a detailed strategy to tackle food insecurity and strengthen the social safety net, leveraging ongoing programs. 1 Protests were further inflamed by the government’s announcement on September 14 to raise fuel prices. The announcement was for the kerosene prices to rise from 353 HTG per gallon to 670 HTG and diesel prices from 352 HTG per gallon to 665 HTG―a level that would cover costs, margins, and statutory taxes. The price of gasoline was announced to be increased from 250 to 570 HTG per gallon―implying a subsidy of 60 HTG per gallon (about US$0.80 per gallon). These price increases were passed on to consumers at the pump in November. HAITI INTERNATIONAL MONETARY FUND 5 PROGRAM IMPLEMENTATION UNDER THE SMP 5. Program performance has been broadly satisfactory. Policies, supported by the SMP, have moved in the right direction, notably on the structural front. Progress has not been linear, however, with strong momentum until mid-September, slowing after a deterioration in the security situation, and picking up again in the second half of October. i. Quantitative and indicative targets. The authorities met one June quantitative target (net credit to the government) and missed three other targets, with one missed by a small margin (Appendix 1. Table 1). They met two of three continuous QTs on arrears, missing one on domestic arrears accumulation by a large amount, owing to a build-up of obligations to fuel companies. While data on spending on social programs remain preliminary, spending appears to be below the agreed target of HTG3 billion, owing to institutional bottlenecks. The deteriorating security situation delayed the rollout of excise tax increases, whose collection underperformed through the end of June. At the same time, the rise in world oil prices and weakening of the gourde led to higher-than-expected fuel subsidies and their corresponding tax expenditures. As a result, the authorities missed the end-June indicative target on government tax revenues by about 6 billion HTG (0.3 percent of GDP). ii. Structural benchmarks supported by capacity development. Although the September riots worsened the macroeconomic outlook, the authorities continued to be highly engaged with staff through the high-level Program Monitoring Committee (Comité de Suivi), which met weekly. This Committee has enabled staff to work closely with the authorities and to provide implementation support. The authorities have taken broadly satisfactory steps on structural reforms, capacity building, and governance, meeting the two monthly and quarterly structural benchmarks (SB). The SB for end-June (completion and publication of the financial audit statements of the central bank) was met. The authorities completed four of the five end-September SBs with delay. For the remaining end-September SB, staff proposes to reset it as good progress is underway. Efforts related to one benchmark for end-December and one for end-March are also proceeding and staff proposes to reset them to end-March 2023 and end-April 2023, respectively. Overall, continuous ownership of the SMP has led to real progress in certain areas, notably in strengthening public finance institutions and governance: a. Public financial management (PFM). The FY2023 budget was adopted on December 19, 2022, together with a three-year medium-term framework with the NFPS as the anchor (end-September SB). Technical assistance support from the IMF Fiscal Affairs Department has been critical in providing operational and technical guidance and maintaining momentum. In addition, thanks to IMF support, the coverage of the Treasury Single Account has been expanded and completed in early November. b. PFM/Governance. The authorities re-convened the governing board of the agency Economic and Social Assistance Fund (FAES) and published the first quarterly report on its operations (end-June SB). FAES is an off-budget agency that implements social projects HAITI 6 INTERNATIONAL MONETARY FUND funded with external assistance and some domestic resources. Publication of the reports greatly enhances oversight and accountability, as indicated in earlier audits by the Supreme Audit Court. c. Governance. The authorities have been publishing, on a monthly basis, procurement contracts awarded, including the names of beneficial owners of bidders. With assistance from the IMF Legal Department experts, staff has been reviewing these reports and providing feedback to the authorities. Staff finds that this reform has helped raise the transparency of public procurement and better define the roles of the procurement agency (CNMP) and Supreme Audit Court. The central bank’s external audit, conducted by KPMG, was published. The central bank is revising the Central Bank law with assistance from the IMF Legal Department. A revised draft has been shared with staff in November and the authorities are working to finalize the draft in consultation with IMF staff to strengthen the independence of the central bank. The technical assistance program with the IMF, in coordination with EU assistance, to revise the AML/CFT legal framework (originally set for end-March 2023 SB) is under way. d. Tax and revenue administration. With important technical assistance support from the IMF’s Fiscal Affairs Department (FAD), the consultations on the draft Tax Code and Draft Tax Procedure Code have been completed as of early-September, 2 a meeting to explain to stakeholders the amendments to the codes following their comments took place on December 15, and the codes were adopted by decree on December 19. The authorities produced the nomenclature on the Tax Identification Number (TIN) and national identification, which appear adequate based on preliminary review by FAD experts. In response to a protracted weakening in revenue and possible external pressure, senior management at the revenue agency was replaced; this was followed by an immediate jump in revenue collection in July-August. OUTLOOK AND RISKS 6. The near-term outlook remains challenging. The economy is expected to recover slowly, assuming an improvement in security, and inflation to decline over the medium term, contingent upon adequate macroeconomic policies and continued implementation of structural reforms. Staff 2 The new tax code, a primer in the country’s history, entails the rationalization and simplification of the personal income tax and corporate income tax and broadening their bases by eliminating many exemptions; a new tax system for small businesses; rationalization of excises and small taxes and increases in their rates; the integration of local taxes, of the Investment Code and the Special Economic Zone Regime into the tax code as well as the tax procedure code. HAITI INTERNATIONAL MONETARY FUND 7 assesses a financing gap only in FY2023. 3 Growth is projected at 0.3 percent in FY2023, weaker than 1.4 percent forecast at the time of the SMP approval in June 2022, reflecting mainly the downward revision of the global outlook. A marginal recovery would be driven by a modest security improvement and a small pick-up in key sectors, particularly agriculture (after the recent drought that has lowered harvests); and reach 1.5 percent over the medium term. After surging in 2022, inflation would decline to 21 percent by end-FY2023. A worsening security situation and fuel price increases would keep inflationary pressures high in the first quarter of FY2023, but inflation would moderate gradually as the impact of lower monetary financing of the fiscal deficit comes into effect and world market prices for food and fuel stabilize. The fiscal deficit of the NFPS is projected at 2 percent of GDP in FY2023, 0.3 percentage point lower than envisaged at the time of the SPM approval. Spending would increase due to higher outlays on transfers to provide food to vulnerable households and health expenditure to address the cholera outbreak. The deficit would increase slightly to around 2.7-2.8 percent of GDP over the medium term, driven primarily by capital spending. The current account deficit is expected to narrow only to 0.8 percent of GDP in FY2023 as a result of the food price shock but would narrow further to 0.6 percent of GDP in the medium term. 7. The balance of risks is tilted to the downside. Domestic risks include intensified political instability, gang-related disruptions to activity, public health emergency (further spreading of cholera), and natural disasters. Externally, Haiti is vulnerable to volatile remittance flows, lower-than- expected external financing as well as renewed surges in global food and energy prices. However, the reduction in fuel subsidies is expected to provide some fiscal relief. Should the authorities move to regular adjustments that follow global market conditions, the fiscal outlook would improve, permitting higher public investment and raising growth, while reducing pressures on the public finances. Further normalization of the security situation would also improve the outlook. REACHING THE OBJECTIVES OF THE SMP 8. The overall objectives of the program remain achievable. Discussions focused on identifying corrective actions that will support program implementation and enable the authorities to meet the objectives of the SMP. First, the authorities are committed to sustain recent efforts on revenue collection to reach revenue targets and intensify efforts to implement reforms on revenue mobilization and social spending. Second, the authorities’ fuel price reform (while not part of program conditionality), needs to include mitigating measures that shield the most vulnerable while adopting gradual and automatic pricing mechanisms that limit the reemergence of fuel subsidies—and be supported by an enhanced communication strategy. Third, continued implementation of the monetary and exchange rate framework laid out in the SMP is key to releasing pressures on the markets and preserving Net International Reserves (NIR). Fourth, continuing to strengthen banking supervision by moving to risk-based supervision would also be key. Finally, further advancing reforms on governance would be critical for improving the efficiency and productivity of public resources and maintaining engagement with donors. 3 The authorities are requesting financial assistance under the Food Shock Window (FSW) of the Rapid Credit Facility (RCF). HAITI 8 INTERNATIONAL MONETARY FUND A. Fiscal Policy 9. The FY2023 budget, adopted on December 19, is consistent with the program objective of reducing the monetary financing of the deficit to lower inflation and help restore stability (MEFP, ¶9). The authorities maintain a floor on the primary balance of the NFPS (quantitative target) and target a deficit of 1.5 percent of GDP in FY2023, slightly below staff projections, despite very difficult economic conditions. New spending on food transfers is expected to reach 0.5 percent of GDP, funded by forthcoming external financing. The fuel price increase announced in September has been reflected in the prices at the pump starting in mid-November, as indicated by a recent communiqué by the Minister of Trade and Industry. As a result, net fuel revenues are estimated at 1.1 percent of GDP in FY2023 (vs. -1.5 percent in FY2022), assuming that prices at the pump would remain above their cost and that global oil prices moderate in line with WEO projections. The additional budget space is expected to raise non-fuel transfers to 1.2 percent of GDP and pro-growth capital spending to 3.5 percent of GDP (1.4 percent domestically funded). The authorities agreed to use these resources to limit the monetary financing of the deficit in FY2023 and to compensate those most affected by food price rises, including through their Programme d’urgence, which should be rolled out expeditiously. Sources: National authorities and Fund staff calculations. 1/Non-energy transfers financed from resources from the requested Food Shock Window are estimated at about 0.5 percent of GDP in FY2023. 10. Recent efforts to boost revenue collection should be sustained. Weaker-than-expected revenue collections at end-June, prompted the implementation of administrative measures in August, including strengthening the control of invoices submitted for imported goods and replacing the management of the revenue agency. These measures raised domestic revenues to a monthly average of 6.4 billion gourdes, from an average of 2.2 billion gourdes in April-June to 3.4 billion gourdes in July-August. Despite the authorities’ commendable efforts, worsening security undermined the revenue agency’s capacity to collect taxes in September-October, as a result, monetary financing increased to 2.3 percent of GDP (49.5 billion gourdes)—0.1 percentage point larger than programmed in FY2022. The slippage does not undermine the SMP’s goal of reducing monetary deficit financing to a level consistent with low inflation, after taking into account imported HAITI INTERNATIONAL MONETARY FUND 9 inflation, as the revenue decline was accompanied by meaningful contractions in spending (non-energy sector transfers and public investment)—which, however, was not growth friendly. Staff encouraged the authorities to sustain the measures put in place in August—to help anchor monetary financing—and follow through with the implementation of the tax code (and the tax procedure code) and customs and tax administration reforms. 11. Meaningful progress has been achieved on revenue mobilization and on PFM to increase the transparency of public spending and improve the quality of spending. The authorities finalized the new customs tariffs with help from Fund technical assistance which will be published later in December; worked toward consolidating in the Treasury Single Account (TSA) all bank accounts of the central budgetary units; and also prepared a medium-term budget framework, with the NFPS deficit as the main anchor that will be adopted together with FY2023 budget. These policy reform priorities are meant to simplify the tax and customs systems and enhance transparency, accountability, and audit capacity. The authorities are committed to advance further on the publication of: (i) TIN data and make its use compulsory for finance agencies (SB originally set for end-December), and (ii) customs codes and tariffs to help raise accountability and improve audit capacity (end-September SB). Larger payoffs from these reforms would materialize over the medium term since they require institutional changes at the revenue agency. 12. To mitigate fiscal risks, the authorities and staff have formulated a contingency plan. Since the scope for raising revenue could be limited in the near-term, shortfalls in revenue or external budget support need to be offset by cutting back on planned increases in current and capital spending in FY2023, while preserving social spending targeted to the most vulnerable. The authorities agreed to avoid running domestic arrears to finance shortfalls, clear existing domestic arrears, and preserve FX reserves at the current adequate level. 13. The authorities agreed to report transparently on the use of the SDR allocation. Prior to converting about half of their SDR allocation into freely usable currencies, staff engaged with the authorities on best practices as laid out in the Fund Guidance Note. The BRH and Ministry of Finance signed a memorandum of understanding consistent with domestic legal and institutional frameworks, clarifying the obligations of each party arising from the use of the SDR allocation for fiscal purposes. The authorities agreed to communicate publicly any future conversion of their SDR allocation into freely usable currencies on the BRH or MEF websites. B. Social Assistance 14. Fuel price reforms should include mitigating measures to protect the most vulnerable in conjunction with a gradual and well-communicated approach. As discussed at the time of the SMP approval, fuel subsidy reform is essential to ensure medium-term fiscal sustainability. Given the political and social implications, the authorities are taking the lead both in terms of the modalities and timing of the reform. The September ad hoc increases in fuel prices have eliminated fuel subsidies for now, but a comprehensive and transparent policy framework for future price adjustments still needs to be laid out. Thus, while the SMP does not include conditions on the HAITI 10 INTERNATIONAL MONETARY FUND specific timing of the reform, staff continues to underscore its importance, as well as reiterate key good practices, such as the adoption of an automatic pricing mechanism, including that price adjustments should be predictable and take place regularly to reflect global market prices changes, and include a smoothing mechanism (to help dampen volatility). Upward price increases should be accompanied with mitigating measures to protect the most vulnerable and good policy principles. Staff and the authorities agreed that an elaborated communication policy would greatly help the authorities’ reform strategy. Establishing a regulatory framework for the petroleum products sector and strengthening related regulatory institutions should remain amongst the authorities’ reform priorities. 15. The authorities are taking steps to cushion the impact of the shocks on the population. The Ministry of Social Affairs and Labor (MAST) and the Ministry of Economy and Finance have prepared a detailed strategy to tackle food insecurity and strengthen the social safety (see text Table 1), also leveraging ongoing programs. The plan aims to expand programs that improve living conditions and enhance social inclusion, focusing on the most vulnerable groups (children, pregnant women, the disabled, and the elderly). The Ministry of Finance is planning to support workers in the textile sector and to increase cash transfers and food rations for households. The authorities have begun making cash transfers to about 50,000 of the most vulnerable households. They have also begun school feeding programs and providing hot meals for vulnerable households and community restaurants. They also plan to wave school fees and are considering leveraging digital tools for cash transfers, thanks to support from the Word Bank and the Inter-American Development Bank. These measures are in line with Fund advice. Staff welcomed the emphasis on improving the social safety net by increasing social programs—particularly in poorer regions—in line with absorption capacity, while stressing that additional coverage is critical given the widespread poverty. 16. The authorities have increased the transparency of the FAES as a program objective. The governing board of the agency FAES was re-convened, and the authorities published the first quarterly report on its operations. But the report lacked detail and did not follow accounting standards. Staff indicated that significant improvements were needed for subsequent reports (quarterly SB) and shared a template of financial statements for public institutions as an example. The authorities agreed to improve FAES quarterly reports going forward and to communicate on proceedings for future governing board meetings. 17. Missing the floor on social spending reflects structural problems and underscores the need to build a coherent and adequate social safety net. As noted above, the authorities missed the quantitative target on social spending that allocated resources equivalent to 0.15 percent of GDP to social benefits, including under the Programme d’urgence. This illustrates the fragmented social programs and agencies (IMF 2020) and underscores the need to centralize social spending design and execution under the Ministry of Social Affairs and Labor. With respect to the quantitative target, the authorities have taken steps to improve the execution of programs, including on procurements and absorption capacity. Staff urged the authorities to: • implement the governance structure envisaged in the National Policy for Social Protection and Promotion (PNPPS), approved in 2020 but not yet implemented, and HAITI INTERNATIONAL MONETARY FUND 11 • working with IFIs and the Système Informatique du Ministère des Affaires Sociales et du Travail (SIMAST), elaborate by March 2023 an action plan to implement the PNPPS, which includes at least one universal benefit registered in the FY2023 budget and expands the World Bank-supported Projet de Protection Sociale Adaptative pour une Résilience Accrue (PSARA)―targeting households with pregnant women, children under five, and persons with disabilities―to at least one other department (province). Text Table 1. Haiti: Measures to Support Vulnerable Households in FY2023 C. Monetary and Exchange Rate Policies 18. The monetary policy framework has been strengthened and efforts should continue to HAITI 12 INTERNATIONAL MONETARY FUND enhance exchange rate flexibility. Monetary performance at end-June has been looser than programmed, owing mainly to lower-than-programmed liquidity absorption. The BRH met the ceiling on credit to government at the end of June, but the gourde and the foreign exchange (FX) market came under pressure in the summer, in part because of a slowdown in remittance inflows that aggravated the shortage of FX. The BRH acted in August to provide dollars and absorb gourde liquidity. Staff and the authorities agreed that the framework laid out in the SMP remains relevant. This includes greater exchange rate flexibility, a ceiling on credit to the NFPS as the main anchor to limit monetary financing of the deficit to 1.5 percent of GDP, and short-term liquidity operations at a fixed rate with full allotment―including at seven-days―to manage excess liquidity in the banking system and strengthen policy transmission. Staff urged the authorities to raise short-term rates further to spur disinflation, given the large negative real rate at about 15 percent and the cost of inflation for the poor. The authorities reiterated that they stand ready to increase the short-term rate further to stem inflationary pressures but are also taking into account the fallout on an economy that has contracted for the fourth consecutive year and the asymmetric effect of rate hikes on lending and deposit rates. Sources: BRH and Fund staff calculations. 19. The BRH should continue to limit its interventions in the FX market to smoothing excessive or volatile exchange rate fluctuations. The gourde downswing resulted in an increase in the volume of FX interventions, adding pressure to NIR. The BRH managed the exchange rate adjustment gradually using prudential measures, including interest rate increases and reserve requirements. With respect to the QT on the NIR, staff urged the authorities to boost NIR (QT), including through less FX sales while ensuring the exchange rate remains primarily an external shock absorber and reserves are preserved. The unwinding of FX surrender requirements with Circular 114.3 is a positive step. In consultation with the IMF’s Monetary and Capital Market Department (MCM), the BRH considers to: (i) put in place an appropriate mechanism for FX interventions, such as well-designed weekly FX auctions, in lieu of the FX allocation system, (ii) advance its ongoing work on a FX market intervention rule, and (iii) complete the revision of banks’ net open positions (NOP) limits. Staff and the authorities agreed that advancing these reforms would enhance the HAITI INTERNATIONAL MONETARY FUND 13 transparency of interventions and encourage banks to improve their liquidity management in a more forward-looking manner. D. Financial Sector Policies 20. The BRH has advanced on reforms to improve payment systems. With Fund’s technical assistance, the BRH has been strengthening banking supervision to upgrade the regulatory framework and move to risk-based supervision. Reform efforts on the financial sector focus on: • Banking supervision. The BRH has reinforced human capital through external hiring and training of supervisors. It finalized the pre-draft of risk assessment grids and the rating matrix for financial institutions, a step toward risk-based supervision. The authorities are finalizing new regulations on risk concentration, classification, and provisioning of credits, as well as the new chart of accounts for financial institutions. Staff commended recent progress and urged the BRH to continue its work to establish risk-based supervision supported by TA. • Digital money. The BRH has benefited from IMF technical assistance in analyzing key issues related to a central bank digital currency. Staff strongly recommended that the BRH consider all aspects of the project’s desirability and feasibility, including a robust evaluation of costs and risks, before proceeding to the prototype phase. Furthermore, Haiti lacks the regulatory framework and/or updated national payment system needed to facilitate mobile payments and operators. Modernization efforts should include migration toward new international messaging standards, which would support interoperability and financial integrity. • Anti-money laundering. An interim technical assistance report by the IMF Legal Department and detailed comments on the draft AML/CFT bill was produced in late November 2022, with a follow-up mission expected early next year to agree on key amendments and reforms. Given widespread deficiencies in the legal framework and potential correspondent banking relationship pressures, revision of the AML/CFT law should be approved by the Council of Ministers by April 2023 (SB). Progress in meeting the requirements of its Action Plan under the FATF’s International Co-operation Review Group (ICRG) is essential to prevent negatively impact on correspondent banking relationships and remittance flows. E. Governance and Safeguards 21. The authorities have made solid progress on governance, but further efforts are needed. Since the adoption of November 2021 decree on the transparency requirements, the authorities have published public procurement contracts, including the publication of tenders, contracts, and the beneficial owners of successful bidders (monthly SB). They committed to strictly enforce these governance arrangements to procurement contracts awarded on the spending of emergency resources. Staff followed through the implementation of this continuous SB. To monitor the implementation of social programs, the authorities committed to follow good PFM practices, in line with recent technical assistance from the IMF. They agreed to introduce all social expenditure HAITI 14 INTERNATIONAL MONETARY FUND into the budget and all associated financing in the Single Treasury Account at the central bank, in compliance with procurement, execution, and expenditure control procedures. Moreover, they agreed to strengthen transparency and audit capacity in the spending of emergency resources for the most vulnerable households to ensure accountability. To this end, they have activated budgetary mechanisms to carefully monitor, record, and publish all expenditure related to the emergency response and will publish comprehensive monthly reports on the execution of the budget, no later than 45 days after the end of each month, while carrying out internal audits of expenditure by all the ministries concerned with the requested use of the emergency resources provided in the framework of the IMF Food Shock Window. Staff welcomed these measures and stressed that adequate transparency and recording of funding allocation is essential to catalyze further donor support. Finally, staff urged the authorities to finalize the reform of the anti-corruption laws to ensure effective implementation and compliance with the United Nations Convention against Corruption and international best practices. 22. With a view to strengthen its governance and operations, the BRH should resume its efforts to implement the remaining overdue 2019 safeguards recommendations. Some recommendations have been implemented, including the publication of the FY 2021 financial statements (end-June 2022 structural benchmark). The BRH also progressed towards an agreement with the MEF on consolidating government debt and the internal audit function plans to verify program monetary data at program test dates, as recommended. The BRH also recently submitted drafting amendments to its organic act for IMF staff’s review (end-September 2022 structural benchmark). While these would improve the Act in some respects, some areas, including on governance arrangements, mandate, and autonomy safeguards, need further strengthening. Moreover, other priority recommendations, such as the adoption of International Financial Reporting Standards and development of a medium-term plan to phase-out BRH’s involvement in development activities, as well as the alignment of the foreign investment strategy with best practices, remain in progress. Staff will continue to monitor the implementation of the recommendations. PROGRAM MONITORING 23. Quantitative targets. Staff proposes to revise the December 2022 quantitative targets (QTs) and March 2023 indicative targets on the NFPS primary balance floor; the NIR floor, BRH net credit to the NFPS ceiling; and a floor on budget allocations to the Ministry of Social Affairs and Labor (the key agency delivering social assistance) to reflect the more adverse economic environment (Appendix 1, Table 1). The continuous QTs will remain in place and consist of a zero ceiling on: non- concessional borrowing (below 35 percent grant element), domestic arrears accumulation, and external arrears accumulation. Staff proposes to slightly lower the indicative target on central government tax revenue, consistent with the improved fiscal outlook (¶9). Given the deterioration of the global outlook and Haiti’s fragility, this will permit some flexibility to support the authorities’ spending capacity, while ensuring they continue to meet the original objectives set out in the SMP. HAITI INTERNATIONAL MONETARY FUND 15 24. Adjustors. The QTs continue to include an asymmetric adjustor on the NFPS primary balance and NIR for shortfalls in external budget support. More specifically, if a shortfall in budget support grants arises, the floors on both the primary balance and NIR target would be reduced by the amount of the shortfall. As the ceiling on BRH financing to the government would not change, the government would need to raise financing from domestic sources or use concessional external financing to cover the lower primary balance. If external budget support grants are above projections, the primary balance and NIR floors would not change. This would permit the government to spend the excess, which is justified by the need to increase spending and Haiti’s debt sustainability. The program started in June 2022 and ends May 31, 2023, with test dates being the ends of June 2022 and December 2022. Provision of timely data for program monitoring has improved and the team will emphasize that efforts should continue. 25. Structural benchmarks (SBs). Staff proposes to reset to end-March 2023 both the end- September SB on the approval by the BRH Board of Directors of draft amendments of the BRH law and end-December SB on a decree making use of TIN compulsory for all finance departments (Appendix 1 Table 2). Staff also proposes to reset the end-March SB on the approval by the council of ministries of the amendments on the AML/CFT law to end April 2023 to allow for additional progress. The team has coordinated closely with Fund’s functional departments, and also with the EU, the Inter-American Development Bank (IDB) the World Bank (WB), and the World Food Program (WFP) on the structural reform agenda related to capacity development. STAFF APPRAISAL 26. Haiti is mid-way through a Staff-Monitored Program that has been an important anchor for policymakers, despite one of the most challenging economic environments in many years. Haiti has been hit by the spillovers from a worsening global outlook and the war in Ukraine, which have increased the economy’s fragility. The external shocks and deterioration of the security situation have resulted in a macroeconomic outlook worse than at the time of the program’s approval and macro slippages. 27. The authorities have nonetheless demonstrated commitment under the SMP, despite the overwhelming circumstances, and have adopted important policy measures. They have adopted measures to boost revenue collection, tightened monetary policy toward tackling rising inflation though real interest rate remained highly negative, and made additional efforts to strengthen the policy framework producing for the first time a medium-term fiscal framework. The authorities should sustain these corrective actions to help restore macroeconomic stability. In addition, in order to strengthen the fiscal framework and improve the spending mix, the fuel price reform should be a top priority of the government. A comprehensive fuel reform strategy is necessary to avoid ad hoc price adjustments and to ensure that the most vulnerable are shielded. 28. Improvements in PFM and revenue administration are welcome and seen necessary to promote macroeconomic stability. The successful completion of the consolidation of central budgetary agencies in one Treasury Single Account and the Medium-Term Budgetary framework will HAITI 16 INTERNATIONAL MONETARY FUND permit greater accountability and transparency in public finances and reduce fiscal dominance. Progress has been made in achieving reforms relating to the tax identification numbers (TIN). 29. Clarification of the monetary policy framework is urgently needed in view of declining net international reserves. The needed reforms will allow greater exchange rate flexibility and permit the central bank to focus on its core policy goals of stabilizing prices while maintaining adequate liquidity and financial stability to support growth. In this respect, staff urged the authorities to finalize the amendments to the central bank’s law. Staff welcomes the authorities’ readiness to raise the policy rate to stem inflationary pressures but urges them to move firmly to meet the program objectives of maintaining NIR levels and reducing monetary financing. 30. Continuing to strengthen the social safety nets will be vital for cushioning the impact of the shocks on the population and alleviating widespread poverty. Staff considers the authorities’ detailed strategy to tackle food insecurity to be a good step forward in enhancing the social safety net, leveraging ongoing programs, with the support of the development partners including the EU, the IADB, the WB, and the WFP. Elaborating an action plan in support of the National Policy for Social Protection and Promotion will further strengthen the social safety net. During the current fiscal year, and in coming years, budget resources to support social spending— including allocations to Ministry of Social Affairs and Labor (MAST) and SIMAST—should increase, as should the efficiency in executing social spending supported by Fund’s capacity development. This will enable the authorities to better assist vulnerable populations. 31. Staff welcomes progress on governance and anti-corruption measures, which are key to ensure inclusive growth and urges the authorities to make steady and continuous progress on reforms to strengthen governance. The authorities have taken steps to strengthen accountability in the collection and use of public resources, including with extra-budgetary agencies, and have boosted the transparency of public procurement for emergency resources. They are working to bring AML/CFT laws up to international standards supported by Fund’s capacity development. The authorities have been publishing, on a monthly basis, awards of procurement contracts, including the names of beneficial owners of bidders. This has helped enhance the transparency of public procurement and better define the roles of the procurement agency (CNMP) and the Supreme Court (La Cour Superieure des Comptes et du Contentieux Administratif). Sustaining progress on governance is paramount for building the trust of the public and of development partners. 32. Based on Haiti’s performance under the SMP, and the authorities’ corrective actions and forward-looking commitments to advance structural reforms, staff supports the completion of the first Review. Staff supports resetting the quantitative targets, the indicative targets and the structural benchmarks as indicated in paragraphs 23 and 25. HAITI INTERNATIONAL MONETARY FUND 17 Figure 1. Haiti: Real Sector Developments, 2015–22 Real GDP continues to contract 1 ... …reflecting, for the most part, a sharp decline in investment and exports... …and negative growth in all key sectors, particularly in agriculture, services… …and construction. Inflation rose sharply reaching 38.7 percent y/y in September. The output gap widened and unemployment increased. Sources: National authorities; World Bank; International Labour Organization (ILO) and Fund staff estimates. 1/ Data on fiscal-year basis, ending on September 30. 2/ Unemployment is ILO estimates. HAITI 18 INTERNATIONAL MONETARY FUND Figure 2. Haiti: Fiscal Sector Developments, 2015–22 Tax revenue has fallen after 2018 1 … …while expenditure has remained stable. The fiscal deficit has been driven by fuel subsidies …. .. and has been largely monetized … … raising also domestic debt. Fuel price adjustments took place in December 2021 and September 2022. Sources: National authorities and Fund staff estimates. 1/ Data on fiscal-year basis, ending on September 30. 2/ External financing includes project loan disbursements and external arrears net of amortization. 3/ Non bank financing includes domestic supplier credits and domestic arrears. HAITI INTERNATIONAL MONETARY FUND 19 Figure 3. Haiti: Monetary Sector Developments, 2015–22 BRH financing to the government… …increased the net credit to the government. Private sector credit picked up in late 2021. Lending rates are volatile and periodically decouple from the BRH policy rate. Dollarization of deposits and credit has been stable in terms of the constant exchange rate… … while excess structural liquidity is rising in the banking system. Sources: National authorities and Fund staff estimates. HAITI 20 INTERNATIONAL MONETARY FUND Figure 4. Haiti: Financial Sector Indicators, 2015–22 The banking system has adequate reported capital buffers... …but relatively high NPLs and related provisions. Profitability has recovered since the exchange rate shock of August 2020 and has been stable since …. … while liquidity conditions remain favorable. Sources: National authorities and Fund staff estimates. HAITI INTERNATIONAL MONETARY FUND 21 Figure 5. Haiti: External Sector Developments, 2015–22 The trade balance improved as imports compressed amid the security crisis… … while remittances (in percent of GDP) returned to pre- pandemic trends. The current account net of grants remained in surplus… …and donor flows increased following August 2021 earthquake. The REER depreciated after its sharp appreciation in September 2020, though it has recently trended up. Foreign reserves coverage remains stable, but NIR has been declining with rising external liabilities to banks. Sources: National authorities and Fund staff estimates. 1/ Data on a fiscal-year basis, ending on September 30. HAITI 22 INTERNATIONAL MONETARY FUND Figure 6. Haiti: Social Indicators Political instability and security problems have taken a heavy toll on Haitian society… …and have reversed since 2018 the small progress made at reducing poverty. The absolute number of people undernourished has reached historic highs… … and the undernourished as percent of the population has been rising in recent years. Sanitation indicators are well below those in Fragile and Conflict-Affected states (FCS)… …although youth literacy is significantly above the FCS average and close to the world average. Sources: International Organization for Migration (IOM) Displacement Tracking Matrix, FAO, World Bank, World Development Indicators, and Fund staff calculations. 1/ Data for Haiti for 2022 is an estimate by IOM as of September 2022. The estimates for 2022 for other countries are not available. 2/ Data was extracted from the World Bank, Macro Poverty Outlook – October 2022. Data is not available from 2013-17. HAITI INTERNATIONAL MONETARY FUND 23 Table 1. Haiti: Selected Economic and Financial Indicators, FY2019–25 (Fiscal year ending September 30) HAITI 24 INTERNATIONAL MONETARY FUND Table 2a. Haiti: Non-Financial Public Sector Operations, FY2019–25 (Fiscal year ending September 30; In millions of gourdes) HAITI INTERNATIONAL MONETARY FUND 25 Table 2b. Haiti: Non-Financial Public Sector Operations, FY2019–25 (Fiscal year ending September 30; percent of GDP) HAITI 26 INTERNATIONAL MONETARY FUND Table 3. Haiti: Summary Accounts of the Banking System, FY2019–25 (Fiscal year ending September 30; in millions of gourdes, unless otherwise indicated) HAITI INTERNATIONAL MONETARY FUND 27 Table 4a. Haiti: Balance of Payments, FY2019–25 (In millions of US$ on a fiscal year basis; unless otherwise indicated) HAITI 28 INTERNATIONAL MONETARY FUND Table 4b. Haiti: Balance of Payments, FY2019–25 (In percent of GDP on a fiscal year basis; unless otherwise indicated) HAITI INTERNATIONAL MONETARY FUND 29 Table 5. Haiti: External Financing Requirements and Sources, FY2019–25 (In millions of US$ on a fiscal year basis; unless otherwise indicated) 1/ HAITI 30 INTERNATIONAL MONETARY FUND Table 6. Haiti: Financial Soundness Indicators, June 2020 – March 2022 (In percent; unless otherwise stated) HAITI INTERNATIONAL MONETARY FUND 31 Appendix I. Letter of Intent Port-au-Prince Ms. Kristalina Georgieva December 21, 2022 Managing Director International Monetary Fund Washington, D.C., 20431 U.S.A. Madam Managing Director: 1. Our country has been hit by multiple shocks in 2022. In particular, Haiti is suffering greatly from the economic spillovers of Russia’s invasion of Ukraine, which has made our economy even more fragile. With the global landscape deteriorating, our domestic structural weaknesses have grown more severe and have tested our resilience. The recent cholera outbreak has compounded the suffering of our people. Owing to external shocks and internal escalation of violence, macroeconomic prospects have become more challenging relative to the outlook on June 17, 2022—the date on which you approved our Staff Monitored Program (SMP). Nonetheless, we are making meaningful efforts to overcome the multiple challenges facing our country and continue to be strongly committed to the purposes and goals of the SMP. 2. We remain even more convinced that the implementation of structural reforms and policies to restore macroeconomic stability and strengthen governance must continue in order to promote stronger and more inclusive growth, restore the population’s confidence, and reassure our development partners. We hope that our satisfactory implementation of the SMP establishes a favorable track record that will facilitate our negotiations with the Fund over a subsequent upper- credit-tranche program. 3. Performance under the SMP remains satisfactory overall, given the constraints related to the domestic and international context and the political transition we are undergoing. Although, our macroeconomic performance at the end of June 2022 was less favorable than expected, the Fund’s capacity development has helped us make steady progress on structural reforms, supported by: • Quantitative and indicative targets. At the end of June 2022, we met the quantitative target (QT) for net central bank credit to the non-financial public sector, but we missed the QTs at end-June 2022 for net international reserves (NIR), the floor on social spending, and the primary balance of the non-financial public sector. We met two of three continuous QTs on arrears, missing one on domestic arrears accumulation because of a build-up of obligations to fuel companies. The end-June indicative target (IT) on government tax revenues has not been met, mainly because of rising global oil prices that led to higher-than-expected tax expenditures. We have already taken several correctives measures to boost the country’s macroeconomic performance—including designing a detailed strategy to tackle food HAITI 32 INTERNATIONAL MONETARY FUND insecurity and strengthen the social safety net, making efforts to sustain revenue collection, and raising short-term interest rates in August. • Structural benchmarks. Despite the difficult security situation, we have taken satisfactory steps on structural reform, capacity building, and governance, meeting the two monthly and quarterly structural benchmarks (SBs). We published the financial audit statements of the Banque de la République d’Haïti (BRH). We have also completed four of the five end- September SBs with a slight delay. In particular, we expanded the Treasury Single Account at the central bank to include all central budgetary units and concluded public consultations on the tax codes and tax procedures code and then finalized the codes. We also adopted a medium-term budget framework on December 19 and approved the FY2022-23 budget. We request resetting the SB on the amendments of the Central Bank law to March 2023, resetting the benchmark related to the issuance of the decree making use of TIN compulsory for all finance departments to end March 2023, and we also request resetting the benchmark related to the approval by the Council of Ministers of revisions to the AML/CFT law to end-April 2023. Overall, we are committed to maintaining our active engagement with Fund’s staff through our high-level Program Monitoring Committee (Comité de Suivi), which meets biweekly. This engagement has enabled us to work closely with Fund staff on program implementation. 4. In view of the macroeconomic policies implemented to achieve the program’s objectives, the corrective measures specified in the MEFP taken during the summer and fall 2022, and progress on the structural reform agenda (Tables 1 and 2), the government requests the completion of the first review of the SMP. We commit to limiting monetary financing to 1.5 percent of GDP through a ceiling on credit to the NFPS. The government requests the proposed modification of end- December 2022 QTs for net international reserves (NIR); the primary balance of the non-financial public sector; net central bank credit to the non-financial public sector; and the floor on social spending. We also propose to set new ITs for end-March 2023, as described in the attached Memorandum of Economic and Financial Policies (MEFP, Table 1) and Technical Memorandum of Understanding (TMU). 5. This Letter of Intent (LOI) builds on the previous LOI and the MEFP that you approved on June 17, 2022. The attached MEFP elaborates on the main elements of the government's program and the policies planned by the BRH for FY2023. We are confident that the policies described in the attached MEFP are appropriate for achieving the objectives of our economic and social program, which seeks to strengthen governance and promote a foundation for stronger, sustainable, and inclusive economic growth. We intend to satisfactorily complete Haiti’s International Co-operation Review Group (ICRG) action plan, including measures to strengthen its AML/CFT legal framework with technical assistance from the Fund and the quality of AML/CFT supervision. 6. We remain determined to apply our program rigorously, while being aware of the difficulties posed by domestic and international circumstances. We are ready to take further measures as needed and will consult Fund staff before any revisions are made to the policies set out in the MEFP, in line with IMF practice. HAITI INTERNATIONAL MONETARY FUND 33 7. We are committed to not imposing or intensifying restrictions on making payments and transfers for current international transactions and introducing or modifying multiple currency practices. And we are committed to limiting foreign exchange intervention only to smoothing excess volatility. We will inform the Fund staff of any events or developments that may affect the economic program so that we may jointly examine the consequences and optimal measures to address them, without compromising the program’s objectives. We will provide, in good time, the necessary data and information to enable the Fund’s staff to monitor economic developments and our implementation of the policies set out in the program, in accordance with the attached Technical Memorandum of Understanding or upon request. Please accept, Madam Managing Director, the expression of our highest consideration. ___/s/___ Michel Patrick Boisvert Minister for Economy and Finance ___/s/___ Jean Baden Dubois Governor of the Bank of the Republic of Haiti Attachments: Memorandum of Economic and Financial Policies Technical Memorandum of Understanding HAITI 34 INTERNATIONAL MONETARY FUND Attachment I. Memorandum on Economic and Financial Policies I. Recent Developments and Macroeconomic Outlook 1. Economic growth has been weaker than expected in the fiscal year ending on September 30, 2022. Activity contracted by 1.5 percent relative to the 0.3 percent growth projected when the Staff- Monitored Program (SMP) was approved in June 2022. Russia’s invasion of Ukraine has greatly undermined growth prospects and continues to destabilize the Haitian economy. The conflict has also raised food prices on world markets. This increase has put low-income households around the world in dire straits, particularly in low-income countries like Haiti. In addition to the challenging global environment, lower agricultural production owing to drought, fuel shortages, and the security situation have contributed to the lower-than-expected growth. For FY2022-23, growth is projected at 0.3 percent, lower than the 1.4 percent forecast at the time of program approval, but in line with the downward revision of the global economic outlook. The sluggish recovery is expected to be driven by a modest improvement in security and a slight recovery in key sectors, particularly agriculture. 2. Inflation reached 38.7 percent in September, year-on-year, led by a combination of high global food and fuel prices, monetary financing of the fiscal deficit, exchange rate depreciation, and fuel shortages (that raised black market prices 5-10 times above subsidized prices). After this rebound in 2022, inflation should fall to 21 percent by the end of FY2022-23, higher than the 14 percent projected at the time the program approval. The recent deterioration in the security situation and higher fuel prices are expected to keep inflationary pressures strong in the first quarter of FY2022-23. But inflation should moderate gradually as the impact of lower monetary financing of the fiscal deficit takes effect and world food and oil prices stabilize. 3. Public finances have been under stress in FY2021-22, mainly the result of high fuel subsidy costs and lower tax revenues. Fiscal data suggest that the primary fiscal deficit of the non-financial public sector (NFPS) at the end of June was close to the quantitative target, albeit 0.2 percent of GDP above the programmed level. This was due to lower-than-expected revenue collection from excise and customs duties, which was only partially offset by lower-than-expected spending on goods and services, social programs, and capital investment. In addition, fuel subsidies reached 1.5 percent of GDP at end-September, as against 1.1 percent programmed for FY2021-22, which, given the low revenue collection, crowded out capital and social spending. The end-September indicative fiscal targets were missed, with the NFPS fiscal deficit estimated at 2.2 percent of GDP for FY2021-22 – 0.7 percent higher than planned. We responded in August with measures to boost tax revenue collection. For FY2022-23, the NFPS budget deficit is projected at 1.5 percent of GDP. Expenditures are expected to increase as a result of higher spending on transfers to provide food for vulnerable households and on health to address the cholera outbreak. 4. Fuel shortages weakened the economy and worsened social unrest over the summer. Consumers were forced to turn to the black market, where kerosene, gasoline, and diesel were readily available at prices 5-10 times higher than those set by the government. Given the fuel shortages and budgetary pressures, the government decided that kerosene prices would rise from HAITI INTERNATIONAL MONETARY FUND 35 HTG 353 per gallon to HTG 670 and diesel prices from HTG 352 per gallon to HTG 665–a level that would cover costs, margins, and taxes. At the same time, the price of gasoline would increase from HTG 250 to HTG 570 per gallon, implying a subsidy of HTG 60 per gallon (about US$0.80 per gallon). Protests were further aggravated by the announcement of the fuel price rise on September 14. Armed gangs gained strength and increased their control of the capital, blocking access to the main oil terminal in Varreux until the end of October, exacerbating widespread fuel shortages, temporarily closing hospitals and schools, disrupting food and water distribution, and further hampering efforts to control the cholera outbreak. The government has appealed to the international community and sought international military assistance to restore security, an appeal supported by the UN Security Council. The Council unanimously approved a sanctions regime targeting gang leaders and those who finance them. 5. Monetary policy was tightened in light of fiscal dominance and rampant inflation. The Bank of the Republic of Haiti’s (BRH) net credit to the NFPS remained below the program target at the end of June. However, monetary financing reached 2.3 percent of GDP (HTG 49.5 billion) in FY2021-22 (i.e., 0.3 percent more than planned under the program). This was partly because of the shortfall in tax revenue in August-September (some HTG 5 billion) caused by the deteriorating security situation. To address inflationary pressures, the BRH raised short-term interest rates to 11.5 percent in August (from 10 percent since March 2020), boosted reserve requirements on dollar liabilities to 53 percent, and amended Circular 88-1 to raise interest rates on lines of credit. These actions were aimed at reducing gourde liquidity and discouraging dollar arbitrage by banks and customers using lines of credit. 6. The current account deficit widened to 2.4 percent of GDP in FY2021-22, contrary to program projections. This was due to a sharp increase in imports and higher fuel import costs in FY2021-22, combined with lower regular remittance flows. The current account deficit is projected at 0.8 percent of GDP in FY2022-23, owing to the global food price shock. Gross international reserves remained stable in FY2021-22, accounting for about 4.6 months of imports of goods and services next year. But net international reserves (NIR) are declining and are below forecasts—falling to about US$160,000,000 in November, some US$332,000,000 lower than the end of FY2020-21. The shortfall in NIR is due partly to lower prices for fixed-rate bonds held by the BRH, which are denominated in U.S. dollars and marked to market, following rising interest rates in advanced economies. 7. The financial sector appears relatively stable. Given the recent deterioration in the macroeconomic environment, however, the BRH will continue to monitor the sector closely. The capital adequacy ratio at the end of March 2022 stood at 21.4 percent and bank profitability continued to recover at the beginning of FY2021-22, with stronger credit growth and foreign exchange earnings, while nonperforming loans grew slightly to 8.6 percent of total loans at end- August 2022. Following the deterioration of the economic and security environment during August- October, the BRH eased loan repayment obligations, extending them by three months for households and six months for businesses. These measures will help support banks’ portfolios during the crisis period. Bank liquidity has contracted in recent months although deposit growth remains an important source of funding. HAITI 36 INTERNATIONAL MONETARY FUND II. Performance and Strategy Under the Program 8. We are determined to rigorously implement our SMP to improve the country's socioeconomic situation and put the Haitian economy back on a more sustainable and inclusive growth path. The program’s objectives remain unchanged, namely: to assess and enhance our macroeconomic management capacity, support efforts to contain inflation and stimulate growth, strengthen the fiscal and monetary policy frameworks, address some governance weaknesses, and take concrete action to improve social protection. Performance under the SMP has been generally satisfactory. In this review, we have focused on the following areas: A. Fiscal Policy 9. Fiscal policy in FY2022-23 supports our objective of reducing monetary financing of the deficit by the BRH, with the goal of helping reduce inflation and restore stability. As a result, and despite difficult economic conditions, fiscal policy will aim to limit the primary balance of the NFPS (quantitative target) to a deficit of 2 percent of GDP in FY2022-23. 1 New spending on food transfers is expected to reach 0.5 percent of GDP, financed in part by forthcoming external financing. The fuel price rise announced in September was passed on to pump prices beginning in November. As a result, net oil revenue is projected at 1.1 percent of GDP in FY2022-23 (versus -1.5 percent in FY2021- 22). This additional fiscal space should raise non-fuel transfers to 1.3 percent of GDP and growth- enhancing capital expenditure to 4.5 percent of GDP (2.1 percent financed from domestic resources). We also plan to use these resources to cap monetary financing at 1.6 percent of GDP in FY2022-23 and to support those most affected by rising food and fuel prices, including through a rapid roll-out of our Emergency Program. Additional financing requirements in FY2022-23 could be met through domestic borrowing since the public debt is sustainable. We will update the financing “pacte” between the BRH and the Ministry of Economy and Finance (MEF) in line with these targets. 10. We intend to continue strengthening tax revenue collection. As a result of lower-than- expected revenue collections at end-June 2022, we implemented such administrative measures as increasing control of the invoices submitted for imported goods and the appointment of a new revenue agency’s management. These measures expanded tax revenue to a monthly average of HTG 6.4 billion in July-August (from HTG 2.2 billion in April-June). We plan to maintain this monthly revenue level in FY2022-23. We also plan to eliminate several customs exemptions, compensate for delays in the collection of registration fees, further strengthen controls, and identify measures to combat tax and customs fraud—including at the border with the Dominican Republic—to achieve a slight increase. 11. Mobilizing revenue remains a government priority, notably through the adoption of the Tax Code (and the Tax Procedure Code) which was approved on December 19 and reforms of customs and tax administration. The simplification of the tax system proposed in the General Tax Code and 1 The program includes an asymmetric adjustor to the floor of the NFPS primary balance and to net international reserves (NIR) if external budget support is lower than projected. HAITI INTERNATIONAL MONETARY FUND 37 the tax administration reforms are priorities given the need to broaden the tax base. We will make progress with revenue administration reforms, particularly by publishing key data on the taxpayer identifier and making its use mandatory for all financial agencies (structural benchmark). We will also publish the Customs Code (structural benchmark). 12. We will continue our long-standing efforts to strengthen public financial management (PFM) and improve the quality of public spending. On the budget side, we adopted on December 19, 2022, a budget for FY2022-23 in line with the SMP goals and finalized a medium-term budget framework for FY2023, FY2024, and FY2025, with the deficit of the NFPS as the fiscal anchor (structural benchmark). This will help us formulate the annual budget and allow for an increase in public investments while remaining on a path consistent with their sustainability. 13. Before converting about half of the allocation of SDRs into freely usable currencies, we discussed with IMF staff best practices as set out in the IMF Guidance Note. We established a Memorandum of Understanding between the BRH and the Ministry of Economy and Finance in accordance with Haiti's legal and institutional frameworks, clarifying the obligations of each party and governing the use of the SDR allocation for budgetary purposes. We intend to report on the use of the SDR allocation in a transparent manner on the BRH or MEF websites. B. Social Protection 14. We are quickly implementing necessary measures to mitigate the negative impact of rising food and petroleum prices on vulnerable groups. The Ministry of Social Affairs and Labor (MAST) and the Ministry of Economy and Finance (MEF) have prepared a detailed and focused strategy to combat food insecurity and strengthen social security, also building on ongoing programs. This strategy seeks to expand programs that improve living conditions and strengthen social inclusion, focusing on the most vulnerable (children, pregnant women, people with disabilities, and the elderly). We also plan to support textile workers and increase cash transfers and food rations for vulnerable households. We have initiated cash transfers to about 50,000 of the most vulnerable households, launched school meal programs, and provided hot meals to vulnerable households and community restaurants. We also plan to waive some school fees. We intend as well to leverage digital tools for cash transfers, with the support of the World Bank and the Inter-American Development Bank. This will integrate other functions into the SIMAST database and enable the MAST to eventually make automated, secure, and transparent payments through mobile operators or other means. 15. In this context, we have increased the transparency of the Economic and Social Assistance Fund (FAES) as a program objective. The regular functioning of the FAES Board of Directors has been restored with quarterly meetings and we are publishing the consolidated quarterly financial statements of the FAES (quarterly structural benchmark). As a follow-up to the guidance provided by the IMF expert on the consolidated quarterly financial statements of the FAES of June 2022, which called for improvements in future reporting, we are considering preparing the consolidated quarterly financial statements of the FAES in accordance with the model financial statements for public institutions. HAITI 38 INTERNATIONAL MONETARY FUND 16. We intend to implement the governance structure envisaged in the National Policy for Social Protection and Promotion (Politique Nationale de Protection et de Promotion Sociale (PNPPS))– approved in 2020–before the end of the SMP (May 2023). The under-utilization of social spending recorded by the end-June 2022 social spending floor (including an allocation equivalent to 0.15 percent of GDP under the Emergency Program) may reflect structural problems in implementing social programs. Specifically, the fragmented nature of the programs and agencies (IMF 2020) underscores the need to centralize the design and implementation of social spending under the responsibility of the MAST, in line with the government’s current plan. To this end, we will ensure that the ongoing revision of the organic laws of the ministries guarantee the central role of the MAST (established by the Organic Law of November 24, 1983) to better coordinate the management of social programs and improve their governance and efficiency. In addition, in collaboration with donors and using the SIMAST partial registry, we plan to complete the development of the action plan to implement the National Policy for Social Protection and Promotion by the end of March 2023. We also intend to further increase the budget allocation to the MAST in line with the floor set (excluding transfers to the population) in the SMP. This floor corresponds to the sum of the budget allocation (or expenditure implemented, if lower) for all social programs in the MAST budget (quantitative target)—including resources allocated and implemented by the FAES, the Emergency Program (2022), the Klere Chimen project--and the activities of the Office of the State Secretary for the Inclusion of Persons with Disabilities (BSEIPH). 17. As discussed at the time of approval of the SMP, fuel subsidy reform is essential to ensure medium-term fiscal sustainability but given the social implications we would follow a home-grown reform approach in terms of the modalities and timing of the reforms, though guided by good policy principles: price adjustments will take place regularly to reflect global market prices changes, and a smoothing mechanism could help dampen volatility and lessen the need for very large adjustments. We are committed to elaborate a communication policy to explain our reform strategy. Any upward price increases will be accompanied with mitigating measures to protect the most vulnerable. C. Monetary and Exchange Policy 18. We have already taken steps to strengthen the monetary and exchange rate policy frameworks in the context of a more flexible exchange rate regime. We confirm our objectives of: (i) a ceiling on BRH credit to the NFPS to serve as the main anchor for limiting monetary financing of the budget deficit (quantitative objective); and (ii) short-term liquidity absorption operations with the aim of reducing potential inflationary pressures and strengthening monetary policy transmission. 2 The central bank’s net credit to the NFPS was below the end-June target, but above the end- September target. To this end, we plan to limit monetary financing to 1.5 percent of GDP–a level estimated non-inflationary–by adopting a ceiling on the BRH’s credit to the NFPS. Any surplus reserves will be sterilized through liquidity absorption. We are prepared to raise short-term interest rates further to initiate disinflation, given the increased inflationary pressures and the significant negative real interest rate (about 15 percent). The implementation of reforms to deepen the 2 Please see the Technical Memorandum of Understanding, Attachment II. HAITI INTERNATIONAL MONETARY FUND 39 government securities market, strengthen the monetary policy framework through new facilities, and review foreign exchange regulations is ongoing. We requested IMF technical assistance to support these reforms. The deepening of the government securities market will provide an alternative source of funding to the treasury and a more effective conduit for monetary policy. 19. The BRH will continue to limit its interventions in the foreign exchange (FX) market to smoothing excessive volatility of the exchange rate. To this end, the BRH plans to increase the NIR (quantitative target), including by reducing foreign exchange sales, while ensuring that the exchange rate remains primarily an absorber of external shocks through greater flexibility and that reserves are preserved. The phasing out of the foreign exchange repurchases requirements with Circular 114.3 is a positive step. In consultation with MCM, the BRH is also considering: (i) putting in place an appropriate FX intervention mechanism, such as well-designed weekly FX auctions in lieu of the foreign exchange allocation system; (ii) advancing its ongoing work on an FX market intervention rule; and (iii) completing the revision of the limits on banks’ net open foreign exchange positions (NOP). Finally, we commit to not imposing or intensifying restrictions on the making of payments and transfers for current international transactions and introducing or modifying multiple currency practices. D. Banking Regulation and Financial Policies 20. The BRH continues to strengthen risk-based supervision and improve payment systems and to combat money laundering. To this end: • The BRH has strengthened its human resources through external hiring and training of supervisors to strengthen the supervision of non-bank financial institutions. It finalized the preliminary draft risk assessment grids and the rating matrix for financial institutions–a step toward risk-based supervision. The BRH will finalize new regulations on risk concentration, credit classification and provisioning, and the new chart of accounts for financial institutions. • The BRH has received assistance from the IMF’s Capital Markets Department to analyze the main issues related to a central bank digital currency. It plans to examine all aspects related to the feasibility and appropriateness of the project, including a solid assessment of the costs and risks, before moving to the prototype phase. Considering the fact that Haiti does not have an updated regulatory framework and national payment system necessary to facilitate mobile payments and operators, our modernization efforts should include migration to new international messaging standards, which would promote interoperability and financial integrity. • We undertook reforms to put in place a sound legal framework for anti-money laundering (AML) and combating the financing of terrorism (FT). An interim technical assistance report from the IMF’s Legal Department and detailed comments on the draft AML/CFT Law are expected by the end of November, with a possible follow-up mission in early 2023 to agree on key amendments and reforms. Given the many shortcomings in the legal framework, the risk of grey-listing, and the potential stresses on correspondent banking relationships, the revision of the AML/CFT Law is expected to be approved by the Council of Ministers by April 2023 (structural benchmark). In HAITI 40 INTERNATIONAL MONETARY FUND addition, we intend to satisfactorily complete Haiti’s International Co-operation Review Group (ICRG) action plan, including measures to strengthen its AML/CFT legal framework, with technical assistance from the Fund, and the quality of AML/CFT supervision. E. Governance and Safeguards 21. Most of the reforms in our program aim to strengthen governance with a view to reassuring the public and our international partners. We will ensure the implementation of all the provisions of the decree of November 2021 mandating transparency requirements for public procurement, including the requirements on publication of the beneficial owners of successful bidders in all public contracts and concessions (monthly structural benchmark) and start preparations for a comprehensive reform of the procurement law. We will also ensure that the law governing the Supreme Court of Auditors and Administrative Disputes (CSCCA), which is currently being revised, guarantees the functioning of that court in accordance with the standards applicable to supreme audit institutions. We also call for a Governance Diagnostic to be led by IMF staff and commit to publishing the Diagnostic report and to integrating its recommendations into the reforms of the second review of our SMP. Finally, we will work to finalize the reform of the anti-corruption laws to ensure effective implementation and compliance with the United Nations Convention against Corruption. 22. To monitor the implementation of social programs, we will follow proper PFM practices, in line with recent IMF technical assistance. This includes recording all social expenditures in the budget and all associated financing in the treasury single account (TSA) at the central bank, in compliance with procedures on procurement and implementation and control of expenditure. We intend to strengthen transparency and audit capacity in the expenditure of emergency resources for the most vulnerable households in order to ensure accountability. To this end, we have activated budgetary mechanisms to carefully monitor, record, and publish all expenditures related to the emergency response. Proper transparency and recording of funding allocations is important to catalyze additional donor support. In addition, the governance provisions regarding the publication of awarded procurement contracts–see above–will be rigorously applied. In order to do this, we will publish comprehensive monthly reports on budget implementation, no later than 45 days after the end of each month and conduct internal audits of expenditures by all ministries involved in the use of emergency resources provided under the IMF’s Food Shock Window, should the IMF Board approve our request. 23. We will continue to implement the recommendations of the 2019 Safeguards Assessment. We are working with staff to refine the draft amendments to the Law on the Central Bank prepared in consultation with IMF technical assistance. The external audit of the BRH for the year ended September 30, 2022, conducted by KPMG, was completed and the audited financial statements published on June 30, 2022. We will ensure that we fully reestablish the Audit Committee of the BRH board, including the revised charter of the committee, by end-2022. The BRH will also accelerate the transition to International Financial Reporting Standards (IFRS) and strengthen its investment strategic asset allocation in line with safety and liquidity principles. HAITI INTERNATIONAL MONETARY FUND 41 III. Monitoring of the Program 24. We intend to take all the necessary measures agreed under the SMP with the IMF, as set out in Tables 1 and 2 of this Memorandum (see below). Our program-monitoring committee will maintain regular engagement with IMF staff. This committee will request participation from other sectors as appropriate and will meet at a minimum every quarter with the Minister of Economy and Finance and the Governor of the Bank of the Republic of Haiti to present a progress report on the implementation of the SMP. We request changes to the quantitative targets at end-December 2022 for the NIR, the primary balance of the NFPS, the net credit of the central bank to the NFPS, and the social spending floor, as well as the new indicative targets at end-March 2023, as defined in Table 1. The quantitative and indicative targets are defined in the attached Technical Memorandum of Understanding (Annex II), which also includes the list and frequency of data to be provided for monitoring of the program. We will focus on the timely provision of this data for the program monitoring. 25. We will undertake internal and external communication campaigns and engage the various state institutions and other national actors (representatives of civil society, non-governmental organizations, media, and other stakeholders) in order to strengthen the level of ownership and public support for the program’s reform agenda. We undertake to publish this Memorandum, as well as the accompanying IMF staff report online on the website of the Ministry of Economy and Finance and the BRH, as soon as the first review of the SMP has been approved by the IMF Management and before the end of January 2023. Appendix 1. Table 1. Haiti: Quantitative Targets, June 2022-March 2023 1/ (In millions of gourdes, unless otherwise indicated) 42 INT E RNATIONAL MONETARY FUND HAITI HAITI INTERNATIONAL MONETARY FUND 43 Appendix 1. Table 2. Haiti: Proposed Structural Benchmarks for the SMP HAITI 44 INTERNATIONAL MONETARY FUND Attachment II. Technical Memorandum of Understanding 1. Haiti’s performance under the 12-month Staff-Monitored Program (SMP) ending May 31, 2023, will be assessed based on quantitative targets (QTs) and structural benchmarks (SBs). This Technical Memorandum of Understanding (TMU) defines the QTs established by the Haitian authorities and the staff of the International Monetary Fund (IMF) for monitoring the program. It also defines the arrangements for the transmission of data that will permit staff to monitor program implementation. A. Definitions 2. Central Government. Unless otherwise indicated, central government refers to the central administration of Haiti and excludes local administrations (municipalities), the central bank (BRH), and other public financial institutions, autonomous state organizations of an administrative, cultural, or scientific nature, and state-owned enterprises. Central government expenditures are financed by domestic taxes and other domestic levies and by foreign donors, through, inter alia, foreign grants, ministerial accounts (comptes courants), and domestic and foreign public debt. 3. Special funds and programs. These include the Road Fund (Fonds d’entretien routier, FER) and the resources mobilized to finance the Universal, Free, and Compulsory Schooling Program (PSUGO) for education, in addition to Treasury transfers. Under the Staff-Monitored Program, the resources levied to finance FER and PSUGO (through the National Education Fund, FNE) will be recorded as central government revenues. 4. Economic and Social Assistance Fund (FAES). FAES is an autonomous state financial entity, currently under the supervision of the Ministry of Economy and Finance. The mission of the FAES is to fund short-term, labor-intensive projects aimed at improving the living conditions of poor people in urban and rural areas and increasing their productive potential. It is responsible for implementing social programs financed by the public Treasury and foreign donors. 5. Office for Monetization of Development Assistance Programs (BMPAD). The BMPAD is an autonomous state administrative organization under the supervision of the Ministry of Economy and Finance. The BMPAD ensures the implementation of grant and/or loan agreements concluded between the government and a donor or foreign lender, as part of the monetization of development aid programs in Haiti. In particular, it finances and monitors approved programs and projects from the funds generated by the monetization of aid in kind. 6. Electricité d’Haïti (EDH). EDH is a state-owned enterprise that produces, supplies, and distributes electricity. Flows between EDH and the Central Government (CG) include (i) CG transfers to EDH (including through sales taxes collected on electricity consumption and not devolved to the CG, and the payment of fuel purchase bills); (ii) the payment of letters of credit in favor of independent power producers to settle power generation bills unpaid by EDH; (iii) the HAITI INTERNATIONAL MONETARY FUND 45 payment of bills from independent producers for the purchase of fuel, which are the counterpart of EDH arrears for unpaid generation bills. Under the Staff-Monitored Program, transfers from central government are recorded under operations “above the line,” while letters of credit and financial receivables are entered under the operations “below the line.” 7. Non-financial public sector (NFPS). The NFPS includes the central government, special funds and programs (defined in paragraph 3), other autonomous state organizations of an administrative, cultural, or scientific nature, including the FAES and the BMPAD (paragraphs 4 and 5), EDH (paragraph 6), the Civil Service Pension Plan and the National Old Age Insurance Office (ONA), and local governments. 8. Public sector (PS). The public sector comprises the nonfinancial public sector, state- owned banks, and nonbank financial SOEs (enterprises over 50 percent state-owned), and the BRH. 9. Budgetary grants. Budgetary grants are grants received from Haiti’s bilateral or multilateral partners (including the European Union, the Inter-American Development Bank, the World Bank, the Caribbean Development Bank, and bilateral donors) for general or sector budget support purposes. B. Quantitative Targets (QT) 10. The implementation of the program will be monitored using the following indicators. Unless otherwise indicated, all QTs will be assessed in terms of cumulated flows from a reference date set at the end of the previous fiscal year (e.g., for fiscal year 2021-22 the reference date is end-September 2021), as specified in Table 1 of the Memorandum on Economic and Financial Policies. 11. Program exchange rates. For the purposes of the program, all assets, liabilities, and flows denominated in foreign currency will be valued “at the program exchange rates,” as defined below, with the exception of elements that affect the government’s budgetary accounts, which will be evaluated at current exchange rates. For the purposes of the program, it has been agreed to use the following exchange rates: HTG 100.0123/US$ (BRH reference rate as at December 16, 2021), US$1.133600/EUR and SDR 0.7154070/US$ (rates as at December 16, 2021 published by the IMF on its website - https://www.imf.org/external/np/fin/data/param_rms_mth.aspx). Net Central Bank Credit to the Nonfinancial Public Sector 12. Net central bank credit to the nonfinancial public sector is defined as the difference between BRH assets and liabilities vis-à-vis the nonfinancial public sector (net claims on the public sector) according to Standardized Report Forms 1SR or 2SR reported by the BRH to the IMF. This includes the net BRH credit to central government and net BRH credit vis-à-vis the rest of the nonfinancial public sector. The calculation of the net BRH credit to the nonfinancial public sector is shown below as of September 30, 2021, June 2022, and September 2022. HAITI 46 INTERNATIONAL MONETARY FUND Appendix 1. Table 3. Haiti: Components of Net Central Bank Credit to the NFPS (In millions of gourdes) September 2021 June 2022 September 2022 Net central bank credit to the nonfinancial public sector 160,047,059.23 202,143,310.10 216,907,796.47 Net credit on central government 162,196,977.99 181,732,827.46 194,641,384.26 Claims on central government 200,791,090.44 257,194,431.71 269,884,127.20 Deposits by government 38,777,196.75 75,461,604.26 75,242,742.94 Deposits in current accounts 26,730,369.21 36,813,575.11 31,796,307.42 Sight deposits (HTG) 7,073,003.48 11,406,902.81 10,720,115.47 Sight deposits (US$) 19,657,365.73 25,406,672.30 21,076,191.95 Securities seized UCREF 594.75 594,748.67 594,748.67 Sundry accounts payable 636,307.08 6,097.41 7,233.00 Certified checks 329,125.56 371,109.60 286,815.46 Certified bank checks 25,041.45 25,041,448.88 25,043,228.88 Foreign Debt Special Fund 55,669.97 194,883.78 117,742.54 3,037,241.08 Treasury special accounts 6,762,697.60 10,361,354.81 12,201,556.37 Civil pension – investments transaction 375,029.84 561,067.48 583,394.69 IMF debt relief after disaster 2,410,591.87 1,907,738.95 1,965,245.23 Minus: Deposits from autonomous agencies (ONA) 276,996.07 390,420.44 390,990.39 Net credit to the rest of the nonfinancial public sector -2,149,918.76 -5,200,078.71 -3,346,147.14 Claims on the rest of the nonfinancial public sector 610,420.96 1,274,612.09 1,563,886.60 Deposits by the rest of the nonfinancial public sector 2,760,339.72 6,474,690.80 4,910,033.74 Deposits by autonomous agencies (ONA) (HTG and US$) 276,996.07 390,420.44 390,990.39 Local government deposits (sight deposits and certified checks) 489,202.33 967,138.58 747,632.79 Deposits by state-owned enterprises (sight deposits in gourdes and US$ and certified checks) 1,994,141.32 5,117,131.78 3,771,410.56 HAITI INTERNATIONAL MONETARY FUND 47 Net International Reserves 13. The gross international reserves of the central bank are those external assets that are readily available to and controlled by monetary authorities for meeting balance of payments financing needs, for intervention in exchange markets to affect the exchange rate, and for other related purposes such as maintaining confidence in the currency and the economy and serving as a basis for foreign borrowing. Reserve assets must be foreign currency assets and assets that actually exist. All contingent assets are excluded. Underlying the concept of reserve assets are the notions of ‘availability for use’ and ‘control’ by the monetary authorities. 1 The gross international reserves reported by the BRH from Standardized Report Forms 1SR or 2SR must conform to this definition. They include monetary gold, liquid assets, including holdings of Special Drawing Rights (SDRs), and IMF reserve position. Swaps in foreign currency with domestic financial institutions and pledged or otherwise encumbered reserve assets are excluded from gross international reserves. 14. The net international reserves of the BRH are defined as the gross international reserve of the BRH, minus (i) gross external liabilities excluding allocations of special drawing rights and liabilities related to Haiti’s participation in the capital of international financial institutions, (ii) foreign currency deposits of commercial banks at the BRH (sight deposits in US dollars and euro from BCM to BRH, and the CAM transfer), (iii) commitments related to foreign currency swap transactions, (iv) special foreign currency accounts, and (v) project accounts, all from Standardized Report Forms 1SR or 2SR with the exception of the balances of the IMF accounts (SDR holding, reserve position in the IMF, and liabilities to the IMF), which come from the IMF Finance Department. The calculation of BRH net international reserves is illustrated below, as of September 30, 2021, June 2022, and September 2022. 1 See Balance of Payments Manual, http://www.imf.org/external/pubs/ft/bop/2007/bopman6.htm and Guidelines for a Data Template http://www.imf.org/external/np/sta/ir/IRProcessWeb/pdf/guide2013.pdf. Appendix 1. Table 4. Haiti: Calculation of BRH Net International Reserves (In thousands) September 2021 (gourdes) September 2021 (US$) 1 June 2022 (gourdes) June 2022 (US$) 1 September 2022 (gourdes) September 2022 (US$) 1 BRH gross international reserves Gold holdings 9,880,753.71 98,795.39 11,973,510.09 119,720.38 11,412,086.84 112,977.20 Foreign currency 5,998,299.64 59,975.62 3,648,143.51 36,476.95 4,626,623.31 45,802.57 Foreign sight deposits 24,302,710.70 242,997.22 19,972,438.93 199,699.83 16,450,821.02 162,859.58 Investments abroad 189,797,159.80 1,897,738.18 196,580,981.41 1,965,568.05 193,091,082.97 1,911,560.11 SDRs holdings (according to IMF books) 13,972,219.51 139,705.01 15,047,009.07 150,451.59 14,514,617.83 143,691.59 IMF reserve position (based on IMF books) 2,818,820.50 28,184.74 3,161,513.40 31,611.25 3,094,766.71 30,637.52 Minus: Foreign liabilities 70,137,904.62 701,292.79 75,598,035.47 755,887.38 77,193,778.83 764,201.77 Of which: Foreign liabilities (excluding liabilities related to Haiti’s participation in the capital of international financial institutions) 8,518,510.82 85,174.63 1,645,925.76 16,457.23 1,652,381.92 16,358.22 Debt service payment to PDVSA 42,558,855.10 425,536.21 53,576,083.08 535,694.94 55,708,098.82 551,498.17 Off-balance-sheet foreign currency liabilities 1,460,675.36 14,604.96 1,738,342.54 17,381.29 1,765,326.81 17,476.35 Liabilities to the IMF (based on IMF books) 17,599,863.34 175,976.99 18,637,684.09 186,353.92 18,067,971.28 178,869.02 Minus: Deposits in foreign currency 129,098,781.43 1,290,829.04 139,537,396.50 1,395,202.36 148,557,706.71 1,470,689.28 Minus: Foreign currency swap transactions 6,002,703.60 60,019.65 7,088,348.85 70,874.77 7,370,423.81 72,965.61 Minus: Special accounts in foreign currency 133,391.45 1,333.75 139,470.08 1,394.53 132,421.50 1,310.94 Minus: Project accounts 67.74 0.68 71.34 0.71 68.92 0,68 Net international reserves of the BRH 41,397,115.02 413,920.24 28,020,274.18 280,168.28 9,935,598.92 98,360.29 1 Exchange rate: HTG 100,0123/US$ 48 INTERNATIONAL MONETARY FUND HAITI HAITI INTERNATIONAL MONETARY FUND 49 15. Interventions of the BRH in the foreign exchange market are defined in the Memorandum of Economic and Financial Policies. 16. If budgetary grants are lower than expected the floor on net international reserves will be adjusted downwards by the amount of the difference in question. Conversely, the floor will not be adjusted upwards by the amount of budgetary grants exceeding the expected levels mentioned in the table below. Projected Budgetary Grants (In millions of US dollars) Cumulative flows since end-September 2021 Cumulative flows since end-September 2022 Dec. 2021 March 2022 June 2022 Sept. 2022 Dec. 2022 March 2023 June 2023 Sept. 2023 - - 9.1 18.1 0.0 18.8 - - Primary Balance of the Nonfinancial Public Sector 17. Domestic arrears of the central government refer to expenditure accepted by the Treasury and unpaid after 90 days, despite the delivery of the corresponding goods and services. Domestic arrears of central government do not include unpaid off-budget government commitments. 18. Unpaid off-budget central government commitments refer to liabilities incurred outside the budgetary process (from ministries or other public bodies), which may give rise to contingent claims against central government resources. 19. Net domestic financing of the nonfinancial public sector (NFPS) corresponds to the sum of the following elements: (i) net central bank credit to the NFPS; (ii) net credit from domestic commercial banks to the NFPS (as reported in the Standardized Report Form 2SR), which includes changes in NFPS deposits and the net issuance of Treasury bills and other NFPS securities to commercial banks; and (iii) net nonbank credit to the NFPS, which includes the net issuance of Treasury bills and other NFPS securities to nonbank institutions, the change in the net position of the NFPS vis-à-vis the electricity sector (including independent power producers), and the net change in suppliers’ credit and domestic arrears of central government. 20. Net external financing of the nonfinancial public sector (NFPS) corresponds to the sum of (i) new external loan disbursements (excluding IMF loans) and (ii) the net change in external arrears minus external loan amortizations. 21. For the purposes of the program, the primary balance of the nonfinancial public sector (NFPS) corresponds to the sum of the following: net domestic financing of the NFPS and net external financing of the NFPS, after deducting interest payments on public debt. If budgetary grants do not reach the expected levels, the floor on the primary balance of the NFPS 49 INTERNATIONAL MONETARY FUND 49 INTERNATIONAL MONETARY FUND HAITI 50 INTERNATIONAL MONETARY FUND includes an asymmetric adjuster. More specifically, if the amounts of budgetary support are in deficit, the floors on the primary balance will be reduced by the amount of those deficits. Conversely, if external budget support exceeds projections, the floor on the primary balance will not change. Budget Allocation to the Ministry of Social Affairs and Labor 22. The budget allocation to the Ministry of Social Affairs and Labor (MAST) for social expenditure is defined as the sum (excluding transfers to the population) of the budget allocation (or expenditure implemented if lower) for all social programs of the MAST budget, including the resources allocated and implemented by the FAES, the Emergency Program (2022), Klere Chimen, and the activities of the Office of the State Secretary for the Inclusion of Persons with Disabilities (BSEIPH). It should be noted that this does not prevent other government entities from supporting the implementation of MAST programs. The floor on the QT applies to the sum of the allocations mentioned. New Contracting or Guaranteeing by the Public Sector of Non-Concessional External Debt 23. Definition of debt. The definition of debt is set in paragraph 8 of the Guidelines on Public Debt Conditionality in Fund Arrangements, adopted by Decision No. 16919-(20/103) of the Executive Board (October 28, 2020). For the purpose of these guidelines, the term “debt” will be understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows: i. loans, i.e., advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers’ credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements); ii. suppliers’ credits, i.e., contracts where the supplier permits the obligor to defer payments until sometime after the date on which the goods are delivered or services are provided; and iii. leases, i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purpose of these guidelines, the debt is the PV (at the inception of the lease) of all HAITI INTERNATIONAL MONETARY FUND 51 lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair, or maintenance of the property. 24. Gross public debt is debt owned by Nonfinancial public sector and comprised the advances by the Banque de la République d’Haiti (BRH) to the government. 25. Debt guarantees by the public sector. For the purposes of the program, a debt guarantee by the public sector means an explicit legal obligation to service a debt in the event of non-payment by the borrower (in return for payment in cash or in kind). 26. Concessional debt. An external debt is considered concessional if it includes a grant element of at least 35 percent. 7 27. External public debt. This is the debt of the public sector which is contacted or serviced vis-à-vis non-residents. It includes, where applicable, debt issued domestically by the government and held by non-residents. This TMU assumes that non-residents do not hold debt issued domestically by the public sector. The stock of external debt will be adjusted if new information becomes available. 28. The central government undertakes not to contract or guarantee any new non- concessional external debt. This quantitative target also applies to domestic debt. It also applies to any private debt guaranteed by the central government that constitutes a contingent liability. Excluded from the ceiling are short-term (with a maturity of less than one year) import-related credits, rescheduling arrangements, borrowing from the IMF, non-resident purchases of treasury bills, and gourde-denominated BRH bills that are indexed to the exchange rate. This quantitative target will be monitored continuously by the authorities and any non-observance will be immediately report to the Fund. Public Sector External Arrears Accumulation 29. Arrears on external debt of the public sector. They include all debt-service obligations (principal and interest) on loans contracted or guaranteed by the public sector that are due to non-residents but not paid on the due date as set out in the loan contract; they exclude those arising from obligations being renegotiated with external creditors and (or) those that are litigious. For the purpose of assessing the quantitative target on the non-accumulation of new external debt arrears by the public sector, arrears resulting from non-payment of debt service due to international sanctions preventing payments to the creditor are excluded from the previous definition. This quantitative target will be monitored continuously by the authorities and any non-observance will be immediately report to the Fund. 7 A tool to calculate the grant element of a wide range of financial packages is available at: http://www.imf.org/external/np/pdr/conc/calculator/ HAITI 52 INTERNATIONAL MONETARY FUND Domestic Arrears Accumulation of the Central Government 30. Arrears on domestic debt of the central government. They include all debt-service obligations (principal and interest) on loans contracted or guaranteed by the central government that are due to residents but not paid 90 days after the due date set out in the loan contract. The quantitative target on domestic arrears accumulation will be monitored continuously by the authorities and any non-observance will be immediately report to the Fund. C. Reporting of Data for the Monitoring of the Program 31. In order to facilitate monitoring of the program, the government will provide IMF staff with the information set out in the following summary table. Any data revisions will be promptly communicated to IMF staff. 32. The authorities will inform IMF staff in writing at least 10 working days (excluding public holidays in Haiti) before any change in economic and financial policies that may affect the outcome of the program. Such policies include, for example, changes in tax or customs legislation, wage policy, and support for public or private enterprises. With respect to continuous QTs, the authorities will report any non-observance to the IMF promptly. HAITI INTERNATIONAL MONETARY FUND 53 Appendix I. Table 5. Haiti: Summary of Data to be Provided Sector Type of Data Frequency Reporting Deadline Real Sector National accounts Annual Year-end + 3 months Quarterly economic indicators (economic cycle) Quarterly Quarter-end + 2 months Consumer price index (including breakdowns) Monthly Month-end + 3 weeks Public Finances Fiscal revenues (internal, external, other) Monthly Month-end + 1 week (4 final weeks final data) Expenditures on Cash Basis (wages and salaries, goods and services, external debt, current accounts) Monthly Month-end + 1 week (4 final weeks final data) Table of government financial transactions (TOFE) Monthly Month-end + 2 weeks Balance on current accounts and operation of projects Monthly Month-end + one month Table Underlying TOFE, which enables the determination of checks in circulation and balance on investment project accounts Monthly Month-end + one month Table on budget implementation with breakdown by ministry and other bodies and by type of expenditure Monthly Month-end + one month Total monthly amount of expenditure executed by transfer letters Monthly Month-end + one month Report on Revenue Collection of DGI (progress report) Monthly Month-end + one month Tables of revenue collection of AGD (port activity indicators, analytical report of customs receipts on import) Monthly Month-end + one month Table of revenue collected and authorized expenditure (TEREDA) Monthly Month-end + one month Detailed revenue and expenditures of BMPAD Quarterly Quarter-end + one month Report on social protection expenditures Quarterly 30-day lag (final data) Table on the implementation of the PSUGO program Quarterly 30-day lag (final data) Dashboard of the state electricity utility EDH showing monthly information on the production of electricity, making explicit the composition of production by independent electricity producers, EDH, and by region. Monthly 30-day lag (final data) EDH commercial data allowing the calculation of EDH's billing and collection rates Monthly Month-end + one week EDH cash data including all revenues and all expenditures (operating, investment, and other) Monthly Month-end + one month Information on any off-budget claims presented for payment Monthly Month-end + one month HAITI 54 INTERNATIONAL MONETARY FUND Appendix I. Table 5. Haiti: Summary of Data to be Provided (Continued) Sector Type of Data Frequency Reporting Deadline Stock of unpaid off-budget central government liabilities Monthly Month-end + one month Data on all fuel shipments per product giving the CIF import price, the full price structure (including stabilization margin) and import and consumption quantities. Data on actual collections for each month with a breakdown per product and tax type. Monthly Month-end + one week Table of import prices of petroleum products, by arrival Monthly Month-end + one month Table of imported quantities of petroleum products Monthly Month-end + one month “Stabilization margin” table of the Directorate of the Tax Inspectorate Monthly Month-end + one month “Petroleum product tax” table of the Directorate of the Tax Inspectorate Monthly Month-end + one month Details of the stock of all government borrowing and debt securities (interest rate, maturity, creditor if known) Annual End of financial year + 3 months Full amortization table of domestic and external government debt Annual End of financial year + 3 months Statement of stocks and flows of repayment of suppliers’ credits and payment arrears Monthly Month-end + one week Monetary and Financial Data Exchange rate Daily Day-end + one day Monetary base and sources thereof and currency in circulation. Weekly Week-end + one week Aide Memoire Table containing, inter alia: (i) stock of BRH bonds; (ii) deposits at commercial banks; (iii) credit to private sector (in gourdes and U.S. dollars); (iv) details of inflows and outflows of foreign exchange reserves, including budget support received; (v) volume of foreign exchange transactions, including BRH sales and purchases; (vi) gross and net international reserves; (vii) net BRH credit to central government and the non-financial public sector; and stocks and interest rates of BRH bills. Weekly Week-end + one week Tables of monetary statistics showing, inter alia, the balance sheet of the BRH (Table Standardized Report Form-1SR) and the consolidated banking sector (Table Standardized Report Form -2SR) Monthly Month-end + one month IMF Weekly Tables showing, inter alia, the average and weighted interest rates on gourde and U.S. dollar-denominated deposits and credit, and the excess reserves in the banking system. Monthly Month-end + one month HAITI INTERNATIONAL MONETARY FUND 55 Appendix I. Table 5. Haiti: Summary of Data to be Provided (Concluded) Sector Type of Data Frequency Reporting Deadline Monetary and financial statistics. Standardized reporting form, balance sheets of the Central Bank and other depository corporations. Monthly Month-end + one month Information on the composition of gross reserves. Monthly Month-end + one month Banking supervision statistics and commercial indicators on commercial banks. Quarterly Quarter-end + one month The calendar and planned placements of BRH gourde-denominated dollar-indexed bills, including in banks and nonbanks. Quarterly Quarter-end + one month Audited financial statements of the BRH Annual Year-end + 3 months Balance of Payments Balance of payments (first version) Quarterly Quarter-end + 6 weeks Revised balance of payments Quarterly 3 months after the first reporting BRH FX cash flow table; quarterly projections through end of fiscal year. Quarterly Quarter-end + one month External Debt External debt report prepared by the BRH showing monthly disbursements; debt service, debt forgiveness and rescheduling, arrears, and debt stocks. Monthly Month-end + one month Details of any external public debt and debt guaranteed by the State Monthly Month-end + one month Data on stocks, accumulation, and repayment of external arrears Monthly Month-end + 6 weeks Table of complete amortization of external debt Annual End of financial year + 3 months International Investment Position (IIP) Annual Year-end + 3 months