(2021-S1) Haiti Macro Poverty Outlook

120 MPO Apr 21 Key conditions and challenges Haiti’s most critical challenge is solving its protracted political crisis. Also high on the reform agenda, however, are improving governance and the justice system, up- grading basic infrastructure to eliminate spatial frictions that impede movement of goods and disconnect rural communities from urban markets, and creating a more enabling business environment. The export base is narrow, with textiles representing over 90 percent of total ex- ports. In addition, Haiti’s extreme vulner- ability to natural hazard shocks has con- strained its capacity to sustain growth. Fiscal dominance has led to rapid mone- tary growth and high inflation. The con- tinuous fiscal deficits have led to increas- ing debt/GDP ratios, and a weakened ex- ternal position. Despite agreements each year between the monetary and fiscal au- thorities aimed at controlling spending and limiting the monetary financing of deficits, they are seldom met. The lack of a clear, articulated, and credible policy framework erodes confidence and impairs economic agents’ ability to plan for the long term and raises the cost of capital. COVID-19 has compounded these issues, making poverty reduction even more difficult. As of May 2020, nearly half of those employed prior to COVID-19 lost jobs due to a halt in business activity. Disruptions in basic services, namely health and education, are undermining human capital. The negative impacts on early childhood development and educa- tional attainment have long-term nega- tive effects on the earning potential of future adults. Haiti’s Post COVID-19 Economic Recov- ery Plan 2020-2023 (PREPOC) intends to tackle these challenges by relaxing the structural constraints that hinder growth through, inter alia, boosting human capi- tal, strengthening governance, and im- proving resilience to natural hazard shocks. However, the HFY2021 budget is not clearly aligned with PREPOC’s stated intentions. The budget prioritizes security and electricity generation over the PREPOC’s above-mentioned pillars. Recent developments Both the COVID-19 pandemic and Haiti’s protracted political crisis took a toll on economic activity during HFY2020, with GDP estimated to have contracted by 3.4 percent. Output of all three sectors de- clined. The pandemic’s impact on the Hai- tian economy was less severe compared to other Caribbean countries because Haiti’s tourism sector is small. The contraction of GDP resulted in job and income losses. The poverty rate at the international pov- erty line (US$1.90 per day, 2011 PPP) is estimated to have risen to 25.1 percent in 2020, from 23.6 percent in 2019, in line with the economic slump. The health emergency measures enacted to curb the spread of the virus were lifted at the end of HFY2020. However, the political crisis HAITI The COVID-19 pandemic and political turmoil took a toll on the Haitian econo- my, with GDP estimated to have con- tracted by 3.4 percent in the Haitian fiscal year (HFY) 2020. Disruption of essential health services and school closures have undermined human capital with potential long-term welfare effects. Economic recov- ery will require containment of the pan- demic and, especially, political stability as well as transition towards a more diversi- fied economy and greater resilience to natural hazard shocks. FIGURE 1 Haiti / Real GDP growth and sectoral contributions to real GDP growth FIGURE 2 Haiti / Actual and projected poverty rates and real GDP per capita Sources: Haiti Statistical Office (IHSI). Sources: World Bank. Notes: see Table 2. 121 MPO Apr 21 started intensifying in Q1 HFY2021, keep- ing economic activity subdued. The current account turned positive in HFY2020 (5.8 percent of GDP) thanks to a 26.1 percent decline in imports, and a 13.5 percent rise in remittances which offset the 16.3 percent drop in exports. This does not, however, signal a turnaround in Hai- ti’s structural trade deficit (18.2 percent in HFY2020), which is to be tackled via im- provement in productivity across all sec- tors and by broadening the export base. Due to monetization of large government deficit the local currency (gourde) depre- ciated by over 23 percent during the first eleven months of HFY2020. This prompt- ed the central bank’s intervention in the forex market, as well as a freeze of gov- ernment spending, to stabilize the gourde, to tame runaway inflation and quell social discontent. In the last month of the HFY the gourde strengthened, closing 2020 with a 7.5 percent year-on- year appreciation against the US dollar. This destabilized the main anchor on which the private sector bases its expec- tations, with negative impacts on invest- ment planning and long-term growth. The sharp appreciation translated into fewer local currency to households rely- ing on remittances. Nonetheless, appreciation of the gourde proved fleeting after government spend- ing and imports resumed. The gourde depreciated by 13.5 percent between No- vember 2020 and January 2021. Excessive volatility, as experienced recently, can be a destabilizing factor. The large government deficit (4.1 percent of GDP in HFY2020 compared to 2.2 percent of GDP in FY2019) and low productivity of the agricultural sector fueled inflation that reached 22.8 percent on average during HFY2020. However, as a result of the strong gourde policy and the pass-through effect, CPI inflation declined to 19.2 percent in December 2020 after peaking at 27.8 per- cent in August. While this reversal can help improve households’ purchasing power, it is nonetheless still elevated and will contin- ue to erode any savings. Outlook As Haiti remains engulfed in political turmoil, GDP is expected to contract for a third consecutive year, by 0.7 percent in 2021. A return to pre-pandemic GDP levels is not envisioned until after 2023, under the proviso of a return to some political stability. Under this scenario, the poverty rate is projected to increase further to 25.6 percent in 2021 as econom- ic opportunities remain limited. The strong gourde policy is set to boost imports, particularly consumer goods, while discouraging exports, turning the current account surplus into a deficit in 2021. Over the long term, efforts to diver- sify the export base and reform the busi- ness environment to attract foreign invest- ment could improve the external position. While control of budgetary spending sug- gests a narrowing of the fiscal deficit to 3.4 percent of GDP in HFY2021, fiscal pres- sures are expected to mount as the gov- ernment embarks on the PREPOC that has a total cost of 24.4 percent of GDP over a three-year period. PREPOC’s cost in the first year of implementation is 6.9 percent of GDP, with a 3.2 percent of GDP financ- ing gap. This is likely to be filled via mon- ey creation, potentially further fueling inflation and hurting the poor the hardest. As COVID-19 vaccines become more available and the global economy re- bounds, this could help boost demand for Haiti’s products. However, the path ahead remains fraught and exposed to ongoing political instability that could continue to hinder economic recovery. TABLE 2 Haiti / Macro poverty outlook indicators (annual percent change unless indicated otherwise)