(2021-S2) Èspektiv Makroekonomik ak Povwte - Ayiti

120 MPO Oct 21 Key conditions and challenges Haiti faces deep structural challenges which are difficult to solve in the context of a lingering political and institutional crisis. The non-enabling business environment, an ongoing security crisis, a very slow vac- cine rollout, and weak governance under- mine growth. The export base is narrow, with textiles representing over 90 percent of total export revenue. Uncertainty surrounding the political pro- cess and vulnerability to natural hazard shocks and climate change will continue to undermine growth, hurting the poor and the vulnerable. Political instability is exac- erbated by the rising insecurity caused by violent gangs that occasionally control large swathes of Port-au-Prince, the capital city, keeping economic activity subdued. This has consequences on job creation and economic opportunities, constraining pov- erty reduction. In addition, most jobs are informal and insecure, with earnings in- sufficient to escape poverty. Domestic revenue mobilization remains weak at 7.0 percent of GDP on average over the past ten years, and untargeted fuel subsidies limit the fiscal space. The mone- tary and fiscal authorities struggle to com- ply with limits on monetary financing of deficits, as permitted by law. The lack of a credible policy framework erodes confi- dence and impairs economic agents' ability to plan for the long term, it also generates chronic inflation that mainly affects the poor as they typically cannot hedge infla- tion risk. In this context, according to a World Bank High Frequency Survey (HFS), roughly two-thirds of households in July 2021 reported a decrease in total income relative to February 2020. Recent developments After dipping 3.3 percent in 2020 due to a protracted political crisis exacerbated by the COVID-19 pandemic, GDP expanded by 0.9 percent during H1 FY2021, boosted by the service sector. The COVID-19 im- pact has been relatively mild in Haiti so far and its economic repercussions have been less severe compared to other Carib- bean countries. At the time of writing, about 21,000 positive cases have been re- ported. Fatality rate, however, is high at 2.8 percent. Vaccination was rolled out only in July 2021 and about 0.2 percent of the population have been vaccinated so far despite a large donation of vaccines through COVAX. On July 7, President Jovenel Moïse was assassinated, further deepening political tensions. A transition government was established on July 19 and mandated with the organization of peaceful and credible elections. On August 14, just one month after the assassination, a magnitude 7.2 earthquake devastated Haiti’s southern peninsula. The earthquake killed more than 2,000 people and caused damages estimated at US$ 1.1 billion or 7.0 percent of 2020 GDP. While the economic impact HAITI Challenges posed by the COVID-19 pan- demic for Haiti, were further aggravated by the assassination of the President on July 7th and the earthquake that devastat- ed part of the country on August 14th, followed by tropical storm Grace two days later on August 16th, disrupting health and education services, further affecting human capital formation, and contrib- uting to low productivity. Political stabil- ity, credible institutions, and an economic plan to support sustainable economic growth and poverty reduction seem more elusive than last year. 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 Source: Haiti Statistical Office (IHSI). Source: World Bank. Notes: see Table 2. 121 MPO Oct 21 is expected to be lower than the 2010 earthquake, human suffering has intensi- fied given existing high poverty and vul- nerability levels; limited resources for rebuilding livelihoods; and constrained mobility as a result of the pandemic. The southern peninsula was hit by Hurricane Matthew in 2016, and the recent earth- quake may deepen spatial inequalities in the country. The strong gourde policy engineered by the authorities at the end of fiscal year 2020 continued to favor imports during the first half of FY2021, but the current account balance (CAB) remains in equilib- rium thanks to increases in remittances and higher exports during that period. Fiscal dominance and ensuing monetiza- tion of the government deficit continue to weaken the effectiveness of monetary pol- icy. At the end of August, the fiscal deficit had already reached 3.6 percent of GDP, financed by the central bank (BRH). To limit the resulting inflationary pressures, the BRH intervened to mop up excess liquidity in the banking sector, potentially crowding out the private sector. Headline, consumer price inflation is on a downward trend. After closing at an aver- age 22.9 percent in 2020, CPI inflation started to slow at the beginning of fiscal year 2021 to close in July at 12.3 percent. Outlook The lack of consensus on the solution for the political crisis, the August earthquake, and the flooding caused by tropical storm Grace are projected to lead to a GDP con- traction in 2021; this is despite strong ex- pansion of government consumption in support programs to affected households in the earthquake-hit area and prepara- tions for elections. As a result, poverty is expected to increase in 2021 leaving al- most 52 percent of the population living on less than the lower middle income pov- erty line ($3.2 per day, 2011 PPP) and 26 percent below the international poverty line ($1.90 per day, 2011 PPP). The economy is expected to rebound to 3.2 percent in 2022, driven by private con- sumption supported by increasing re- mittances from abroad. The rebound also assumes reconstruction efforts mainly supported by aid from the international community. Poverty is therefore expected to decrease mildly in 2022, but access to basic services will remain a challenge. Imports will continue to grow, especially after the earthquake. However, stronger remittances growth from the two main remittances senders to Haiti, namely the USA and Canada, will help stabilize the CAB at about -1.5 percent of GDP over the medium term. Since Haiti imports two-thirds of con- sumption goods, the pass-through effect from last year's strong gourde policy will help lower inflation, which is expected to close at 16.0 percent on average. However, because the earthquake and the flooding from tropical storm Grace mostly dam- aged rural infrastructure including agri- cultural, and with the perennial lack of investment to boost productivity in the agricultural sector, there will be additional pressure on food prices and on inflation in outer years. The recent earthquake and flooding war- ranted additional spending in government programs to support the affected house- holds, prompting the authorities to draft a supplemental budget with a higher deficit. The fiscal deficit is therefore expected to widen reaching about 4.7 percent of GDP in 2021, financed mainly by money crea- tion, hurting the poor more severely. The path ahead remains fraught and par- ticularly exposed to ongoing political tur- moil that could continue to hamper eco- nomic recovery and delay implementation of critical reforms needed to put Haiti on the path towards sustainable growth and poverty reduction. TABLE 2 Haiti / Macro poverty outlook indicators (annual percent change unless indicated otherwise)