(1988) Rekiperasyon Ekonomik an Ayiti: Pèfòmans, Pwoblèm ak Pèspektiv

Report No. 7469-HA Economic Recovery in Haiti: Performance, Issues and Prospects December 23, 1988 Latin America and the Caribbean Regional Office FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized CURRENCY EQUIVALENTS Currency Unit = Gourde (G) G 1 = US$0.20 US$1 = G 5 The Gourde has been pegged to the U. S. Dollar since 1919 at the rate of G 5 = US$1. WEIGHTS AND MEASURES Metric System 1 carreau = 1.29 hectares 1 hectare = 0.78 carreau FISCAL YEAR October 1 -September 30 This report uses FY for fiscal year. Thus FY87 refers to the period from October 1, 1986 to September 30, 1987. This report is based on the findings of an economic mission which visited Haiti in April-May 1988 and additional findings obtained in September 1988. The members of the economic mission were Hassan Fazel (macro-economist and Chief of Mission), Pedro Geraldes (infrastructure), Jacques Hallak (education), Maryvonne Plessis-Fraissard (health), Kanella Vasiliades (industry), Marc Botti (Consultant, education) and Warren Enger (Consultant, agriculture). Salma Cellier provided secretarial support and coordinated the printing of the report. FOR OFFICIL USE ONLI TITLE : ECONOMIC RECOVERY IN HAITIt PERFORMANCE, ISSUES AND PROSPECTS COUNTRY : HAITI REGION : LATIN AMERICA AND THE CARIBBEAN SECTOR : COUNTRY ECONOMIC REPORT TYPE CLASSIF MM/YY LANGUAGES 7469-HA CEM Restricted 12/88 English, Fr.-ch PUBDATE : 8812 ABSTRACT : This report reviews economic developments in Haiti during the country's fiscal years 1986-88 (FY86-88), focusing on the contents and the outcome of an adjustment and recovery program that was initiated early in 1986 following a major change of political regime. An impressive array of economic policy reforms and an improved economic performance in FY86-87 were followed in FY88 by a profound economic setback, including suspension of some vital external aid, brought on by recent political events. Taking into account the currently depressed domestic economic situation and external aid environment facing Haiti, the report recommends a program of short-to medium-term policy and expenditure priorities aimed at averting a further economic backslide. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. ECOPlO 1 4IC RECOVERY IN HAITI: PERFORMANCE, ISSUES AND PROSPECTS TABLE OF CONTENTS Paxe No. ABSTRACT GLOSSARY MAPS COUNTRY DATA SHEET EXECUTIVE SUMMARY SUMMARY AND CONCLUSIONS ................................... ........ i I. INTRODUCTION: THE BACKGROUND TO RECENT DEVELOPMENTS ............. 1 A. Overview ........................... ................. 1 B. The Previous Report: A Background ... .................... 2 Economic Deterioration in 1980-85 ....................... 2 Determinants of Declirse and Disequilibrium ............... 2 Major Policy Recommendations ........ .... ................ 5 II. ECONOMIC POLICIES AND PERFORMANCE, 1986-88 ................06* 7 A. The Setting ......... ... ... o..................... 7 The Initial Policy Environment ............................ 7 The Advent of New Policies. ............................ . 8 B. Recent Economic Developments ..................... ...... 8 Macroeconmic Trends .................. .. ........ ......8 Output and Employment .................................. ..9 Public Finance ........ ... ....... .......... ...... .. 16 Money and Credit ..........PRIORITIES............................. 20 PrA cesonmc *dusmn and Reovery o r.................... 22 Balan ce of Payments and..nst....n...........2........... 34 Conclusion Impemntaio.......... .... ....0 ............. 29 III. DEVELOPMENT POLICIES AND PRIORITIES .......................................... 30 A. Economic Adjustment and Recovery Program .................................... 30 Program Objectives and Instruments ............................... . .. 30 Program Implementation ............................................ 30 B. Current Issues and Priorities ............ * ......... 32 Priority Economic Objectives and Strategy................ 32 C. Macroeconomic Policies ........ ... .................... . 34 Trade Promotion ........ 0.............. 34 Domestic Resource Mobilization ......................... 36 Monetary Policy .............................. . .. 38 D. Selected Sector Policies ......... .... .. ............ . 39 Agriculture ..... * ........... *.... 39 Industry ..........0 ....... *.. 41 Infrastructure ....... 9 ... oo............. *.so*............... 42 Human Resourceseeso ................. ................... *oo...... 47 E. Conclusion and Summary of Recommendations ................. 51 IV. MEDIUM-TERM GROWrH AND BALANCE OF PAYMENTS PROSPECTS ........... 54 STATISTICAL APPENDIX .. ............ ... .... . ..... ..... 62 GLOSSARY AAN Autorite A;roportuaire Nationale (National Airport Authority) APN Autorite Portuaire Nationale (National Port Authority) BCA Bureau de Credit Agricole (Agriculturpl Credit Bank) BCI Banque de Credit Immobilier (Mortgage Bank) BNC Banque Nationale de Credit (National Credit Bank) BNDAI Banque Nationale de Developpement Agricole et Industriel (National Agricultural and Industrial Development Bank) BRH Banque de la Republique d'Haiti (Bank of the Republic of Haiti -Central Bank) CAMEP Centrale Autonome Metropclif;aine d'Eau Potable (Metropolitan Water Authority) CIF Cost, Inaurance and Freight EdH Electricite d'Halti (Electricity company) ENAOL Entreprise Nationale des Oleagineux (edible oil company) EPPLS Entreprise Publique des Logements Sociaux (Publlc Housing Agency) FDI Fonds de D;veloppement Industriel (Industrial Development Fund) FOB Free on Board FY Fiscal Year GDP Gross Domestic Product GNP Gross National Product ha hectare HASCO Haitian American Sugar Company ICA International Coffee Agreement ICOR Incremental Capital Output Ratio IDA International Development Association IHSI Institut Haltien de Statistique et d'Informatique (Haitian Institute of Statistics and Data Processing) ILO International Labor Organization IMF International Monetary Fund MARNDR Ministere de l'Agriculture, des Ressources Naturelles et du Developpement Rural (Ministry of Agriculture, Natural Resources and Rural Development) MSPP Ministere de la Sante Publique et de la Population (Ministry of Public Health and Population) NFS Nonfactor Services OFATMA Office d'Assurance--Accidents du Travail, Maladie et Maternite (Workers' compensation, sickness and maternity insurance agency) ONA Office National d'Assurance (Social Security Agency) ONAC Office Nationale de l'Aviation Civile (National Civil Aviation Office) OPRODEX Office de Promotion des Denrees Exportables (Commodity Export Promotion Agency) POCHEP Postes Communautaires d'Hygiene et d'Eau Potable (Community Health and Drinking Water Posts) SEN Societe d'Equipement National (Construction) SEPPRN Service d'Entretien Permanent du Resseau Routier National (National Road Maintenance Organization) SOFIHDES Soci;te Financiere Haltienne de Developpement S. A. (Haitian Development Finance Company) SNEP Service National d'Eau Potable (Natioaal Water Service) SONAPI Societe Nationale des Parcs Industriels (National Industrial Park Company) USAID United States Agency for International Development USN Usine Sucriere du Nord (Nati.onal Sugar Refinery at Citadelle) USND Usine Sucriere Nationale de Darbonne (National Sugar Refinery at Darbonne) TABLES AND SYtBOLS Totals in tables do not always equal the sum of their components due to rounding. Not available Zero or insignificant NA Not applicable #, ,.aisorece IBRD 211431 USA _ -0 .2- -20- 1o, Port de Pcix CUbA --e-n, Rpbe- -- o----- DOMINICN R.A o ton. 0 REPUBLIC M.le St N-I,C,// . H-AI II IJIII P-t t \_ortMorgont 0 Cop Hoitien JAMAICA PuER1O - tICO 0-mnb /Oeee Rn-rb-dop.lin'0 B... d. He--nc--e Ft. L,Bivt6 _______________________________mbudoooisov_____° '-2 a R GosMoren o J . M ^long )s -.4l 'A. -- _s. 0 tetteNenve Los FOt(eo. setz<e uto' jSt S- 0 . c GOnaves St Ropieel '* k V@IIi*t*, - St.~~~~~~ I oe Ecologicol zones: p Very humid Humid C-do,e 5- So -IDe,eqi.-e N Dry k 5 Annual average rainfoll in millimeters Ce.co I S.-. Rivers PeRe~ d. LAr,pb-ntt Main h,ghwoys Secondory roads - ,e",et. ---- Tertiary roods Vtnd - -International boundary I . t ) Z KILOMETERS 0 i1 20 30 40 50 L Lopelbe / 8eIIdt MILtS Q 10 20 QNAVE 30 , D oto delkn of E-ologi-ni 0000s V lo, /lal ony. O LoCeoe R--~ ~ ~~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~- cJeremie CVl/{RO Nome Mo., Moron PORT AU PRINCE _e dn 9ocunos Pe. lt Ion dn N.ppc G G-th-r Source O....,..... PWA-6V- A Agen. A Jm 0' Hoonoir ~ Chood. C' iP6bonville Fend Par,J L., 4O., 10 B-rod-resO PetitF ar=e ' teslto.s ) osL~~~~~~~~~~~~~~~~~0'A,d. Go6ve Tro-n Fg-dVer .tt> Lo Cohonoro CoP M-h Seke 0-O. Arne, rl-r, P0 P-or e mp Vrree Bo MOd _Aoorn 6i Mo oni _ 0 8e.I.oAns!, Th,. j A esxO [eL/e C apes ~s~--OCorsederer 0Eomt oJemlOrod-/ C.Y.~~~~~~~~~~~~~~~~~~~~~~~s Pgshe a Bott... k < v ,77)~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~. Y0 S,A I... 1,IYV6ll .d[f U{0 fcYY Y,.Z v. te 3o*OO,re&oo. 00 05, ore n cOsrrot rio,-rce,ot e 01 50,0t .rr 74 72' SEPTEMBER 1988 Page 1 of 2 liIS' -COUNTYB DATA SHEET Area: 27,800 sq km Population: 6.2 sillioi (1987) Density: 223 per sq kb late of growth: 1.9 (1977-87) Poulatiol eharacteristics Health Cude birth rate (per 1,000): 35 Iafant scrtality (per 1,000 live births): 123 Crude death rate (per 1,00): 13 Population per physician: 8,200 Population per hospital bed: 1,400 Income diotribution Distributioa of land ownership I of natioaal income, blighest quintile: t owned by top 10S of owners: lowest quintile: S owned by smallest 102 lecess to safe water Access to electricity I of population -urban: 73 S of population -urban: 45 -rural: 25 -rural: 3 Nutrition Iducation Calorie intak. as I of requiresents: 80 Adult literacy rate (I) 35 Per capita prote6i intake (W/day): 42 Primary school enrollment (I) of relevant age group: 76 oIP per capita (05$, 1987) 1/ 360 gloSS ITIOAll PRODICT. 187 ANNUAL RATS OF GROWTH (I , Y80 prices) 06$ In 1 FYTS-8O FYBO-85 FY86 FS87 6IP at larket Prices 2230.8 100.0 5.2 -0.9 0.6 0.5 gross Dooestic Investment 280.0 12.6 10.1 -2.1 -14.5 4.6 Gross lational Saving 147.7 6.7 14.0 -3.5 -9.1 -19.6 Currett Account Balance -132.3 -5.9 1xport of Goods, IFS 277.6 12.4 10.3 -1.3 -9.2 -7.0 Import of Goods, IS 449.7 20.2 10.0 -2.9 -6.4 1.0 OU7PUf, IIPLOTIKIT AID PBODUCTIVITY IN FY87 Vala g I dded Labo o loce V. A per Worker S ia I IL 1 Agricalture 728.2 35.4 2.0 66.7 364.1 Industry 498.8 24.2 0.3 10.0 1662.7 Services 830.6 40.4 0.7 23.3 1186.6 Total / Average 2057.6 100.0 3.0 100.0 685.6 Consolidated Public Sector General Coveenment GUL Percept U GOP G is Percent of GDP FY87 FY87 FY82 FY87 FY8T FY82 Corrent Receipts 13761 16.7 17.2 1020.5 9.1 10.1 Current lipendilture 1909.5 17.0 16.6 1218.5 10.8 11.1 Current Surplus -33.4 -0.3 0.6 -198.0 -1.1 -1.3 Capital lEpeaditure 756.4 6.7 9.8 610.8 5S4 8.4 !J lorld Huh Atlas methodology. Page 2 of 2 MAITI -COUNTRY DATA SHEET 03rI!, CRIDIT & PRICIS FT83 FY64 FY85 IY86 FT8t (ID ourdeisoitstanding at end of period) Broad Honey Supply 2118.5 2357.8 2547.5 2835.3 3076.3 Bank Credit to Public Sector 1587.0 1933.9 2150.2 2113.5 2164.9 BaAk Credit to Private Sector 1013.2 1070.3 1164.7 1172.4 1190.0 (Percentage or Indei lumbers) Broad Honey as I of GDP 26.0 26.0 25.4 25.3 27.4 Geaeral Price Index (FY80 100) 127.0 137.1 148.? 160.8 154.5 Annual percentage changes in: General Price Index 8.5 8.0 8.5 8.1 -3.9 Bank Credit to Public Sector 40.3 21.9 11.2 -1.7 2.1 Bank Credit to Private Sector -6.9 5.6 8.8 0.7 1.5 BIALICI Of PAYNENTS IIRCHINDISI IIPORTS (IVBRAGE FY84-87) FY84 FY85 mY86 FY67 .iIS 1.. (millions of 051) Coffee 46.6 21.7 Exports of Goods, NIS 317.3 304.0 291.6 277.6 Cocoa 5.5 2.5 Imports of Goods, HIS 481.6 468.3 423.3 449.7 Essential Oils 4.7 2.2 Resource Gap (deficit -) -164.3 -164.3 -131.7 -172.1 Other Agriculture 7.2 3.3 lanufactured Good. 127.6 59.3 Interest Payments (net) 13.8 8.4 10.5 9.5 Other Commodities 23.7 11.0 Other Factor Payments (net) 6.0 6.2 6.2 6.9 Total 215.1 100.0 let Current Transfers 45.0 48.1 52.0 56.3 Balaace on Current Account -139.1 -130.8 -96.4 -132.3 UEITRNL DEBT. SIPTENER 30, 1987 0sS 0 Direct Pit. for. Investsent 4.5 4.9 4.8 5.0 Public Debt, ncl. Guaranteed 760.0 let ILT Borroving 46.9 39.7 33.0 43.7 Ion- Guaranteed Private Debt Disbarsements 62.6 65.2 43.8 64.5 Total Outstanding I Disbursed 760.0 amortization 15.7 25.5 10.8 20.8 Subtotal (Dir.Iav..Het OLT) 514 44.6 37.8 48.7 IET DEBT SISRICI BJTIO FOR FY87 2/ Other Capital (net) Public Debt, iDCl. Guaranteed -in aod Capital n.e.i. 61i0 81.5 89.8 110.9 lon- Guaranteed Private Debt Increase in Reserves (+) -26.7 -47 312 27.4 Total Outstanding & Disbursed ii9i gross Reserves l/(end-year) 23.4 12.8 15.7 24.3 IBID/ID LINDING (Sept. 30,1987) RIAI of EXCHANGE IBRD IDA Annual Averages [nd Period (US$ In) FY86 FY87 YT88 FT88 Outstanding I Disbursed 0.0 263.3 US$1.00 : 6 5.00 5.00 5 00 5.00 Undisborsed 0.0 82.6 61.00 : S$ 0.20 0.20 0.20 0.20 Outstanding incl.9ndisbursed 0.0 345.9 1/Includes gold holdings. BJ/ Debt service, net of interest earned on foreign exchange reserves, as a percentage of Exports of Goods and H1S. EXECUTIVE SUM4ARY 1. This report examines the evolution of E lvi's economy in the context of policies and government administrative practices which existed before and after the economic reforms undertaken from early 1986. It also highlights the current financial and economic crises, which began in 1987/88, and recommends government economic pollcy and expenditure priorities to avert further economic deterioration. 2. The report's medium-term scenario envisages maintenance of tight but viable financial balances and modest economic growth, averaging 2% per year. To attain this scenario, Haiti should maintain the economic reforms of 1986-87, which are elaborated in Chapter II. Those reforms, moreover, should be consolidated with additional measures, which are listed below and elaborated in Chapter III of the report. 3. The additional macroeconomic measures suggested at present include: (a) A review of export competitiveness to ascertain that the country remains attractive in manufactured exports vis-a-vis its neighboring countries, and to induce the production and exports of other commodities. (b) Introduction, after a necessary study, of a variable levy to replace the existing import licensing system for the seven designated agricultural products. (c) Removal of the residual anomalies in the new Tariff Code regarding the treatment of finished goods and raw materials. (d) Increased mobilization of domestic resources, especially where there is scope (e.g. raising state land rentals to market values, closing wide exemptions in taxes) for doing so without harming production incentives or overburdening consumers. (e) Improved allocation of government expenditures, emphasizing adequate funds for supplies, materials and equipment necessary for public employees and infrastructure to function effectively. (f) Careful monetary management, keeping the banking system's reserve requirements under review to match the demand for private sector credit, and promoting collaboration of commercial banks with the FDI to facilitate term lending to the private sector. 4. For the main sectors of the economy, the following policy and expenditure priorities are proposed: (a) In asgriculture, Haiti should maintain the recent reforms (the elimination of export taxes, removal of direct quantitative restrictions, break-up of trading monopolies) and desist from any other forms of government price intervention. Agricultural investments should emphasize completion of ongoing and initiation of follow-up projects to raise and spread smallholder output, employment and incomes, and export earnings. This applies, in particular, to projects in rice, vegetables, coffee and maroes. The coffee sector being especially important in Haiti, efforts should be made to identify alternative sources of funds to continue the production of improved seedlings previously financed by USAID. Alternative sources of funds should be sought also for the targeted watershed management and secondary roads development projects. (b) In industry, Haiti should act to harmonize the 1985 Investment Code with the recent trade reforms; pursue efficient operation of Customs facilities and procedures; seek financial and technical assistance to effect smooth transition to the liberalized trade regime; and provide adequate supporting infrastructure at competitive rates. (c) Actions needed in the transport and power sectors are adequate operations and maintenance of the roads network; demand management--via peak pricing--before capacity expansion to deal with the passenger traffic load at the international airport in Port-au-Prince; greater use of provincial cabotage ports; investments to lower the average cost of electricity; and elimination of arrears payable to Electricite d'Haiti, the power company. (d) Policies in the water supply, and urban and housing sectors should focus on pricing and management problems. In addition, there are critical requirements for upgrading investments in water supply--and power--to uphold even the present low states of health and industry in Port-au-Prince and the vicinity. In urban housing, a basic change of government strategy is warranted. Instead of limiting itself to low-income housing construction only, Government should focus also on strengthening the urban land market and encourage the private sector to undertake the needed housing construction and finance. (e) The deep-seated management problems of the education and health sectors call for special emphasis on raising the efficiency of resources devoted to these sectors, and for closer monitoring of the progress of the line ministries by the central budgetary authorities. The available resources, furthermore, should be augmented by continuing the systematic involvement of non-governmental organizations in these sectors. 5. Given the severity of Haiti's development problems and its low-income levels, the success of domestic efforts to implement the policies and expenditures suggested above would be limited without the availability of external assistance. Hence, donor support will be essential to enable Haiti to uphold its recent economic nolicy reforms. SUMMARY AND CONCLUSIONS i. This report reviews economic developments in Ha.a'tl during the country's fiscal years 1986-88 tFY86-88), focusing on the contents and the outcome of an adjustment and recovery program that was initiated early in 1986 following a major change of political regime. An impressive array of economic policy reforms and an improved economic performance in FY86-87 were followed in FY88 by a profound economic setback, including suspension of some vital external aid, brought on by a series of largely constitutional crises. Taking into account the currently depressed doinestic economic situation and external aid environment facing Haiti, the report recommends a program of short-to medium-term policy and expenditure priorities aimed at averting a further economic backslide. Such a program at this time would provide a viable base on which to mount a full-fledged recovery program once domestic confidence increases and aid prospects improve. ii. Until the interruption in FY88 of its recovery program, Haiti had pursued a wide-ranging program of economic policy reforms along the lines suggested in the World Bank's previous economic report on the country (Report No. 5601-HA dated June 10, 1985). The objectives of the program, which received substantial external assistance in FY86-87, were to establish conditions for a viable, growing economy and relieve the average Haitian of the burden of high consumer prices arising from the country's past policies of suppressing competition. iii. Those past policies were symbolized by the inefficient and inequitable economic system in place during FY80-85. The system was based on fiscal and trade regimes employing a variety of instruments (export taxes, excise duties, import quotas and prohibitions, customs tariffs) set at excessively high levels as well as on restrictive institutions and practices, such as trade monopolies, outright closure of provincial ports and discriminatory administration of investment promotion schemes. Large portions of public revenues accruing from that system, and public borrowing, were deployed to administer the system and to undertake capital expenditures that were uneconomic or unaccounted for, rather than to expand efficiently the country's productive capacity or provide essential public services. iv. The economic distortions and the financial drain inherent in Haiti's policies in FY80-85 had resulted in very significant erosions of the country's incomes, living standards and finances. In that period, agricultural output declined by 1.3% per year on average and industrial output by 2.5% per year on average, while unemployment rose from 22% to 30% and inflation accelerated from 6% to 8%. In the same period, real incomes and private consumption per head each declined by 3% per year on average. Public consumption, on the other hand, grew faster than revenues, eroding public sector savings at the same time as public capital expenditures were increased. The overall public sector deficit averaged 9% of GDP in FY80-85 and the external current account deficit, 8% of GDP. The public sector deficit was financed principally by money creation--which, spilling into the balance of -ii - payments, led to loss of international reserves by US$22 million per year on average--and by stepped up credits from overseas suppliers and private banks--which contributed to the increase in the country's external debt, from around US$320 million (22% of GDP) in FY80 to US$690 million (34% of GDP) in FY85. v. To alter the economic system and situation described above, economic policies from March 1986 to November 1987 focused first on macroeconomic stabilization, and, second, on improvement of resource allocation and growth prospects. This was accomplished through reform of taxes, public expenditure, public enterprises, competition and industrial incentives, and agricultural pricing. Both expenditure and taxes were cut by about 2% of GDP, but education and health spending were increased by over 20% in real terms. Taxes on basic food items were reduced, helping to lower prices and raise private consumption among the low-income people. Income taxes were simplified, top marginal rates lowered and measures to strengthen tax collection initiated. The public investment program was pruned and concentrated on completing priority ongoing projects while the public sector's debt to the domestic banking system was reduced. Trade monopolies, both public and private, were dismantled. Of the five public industrial firms, two (the Darbonne sugar factory and the ENAOL vegetable oil mill), which were uneconomic, were closed, and another two (the flour mill and the cement factory) began to be restructured. vi. In a major reform of the trade regime, all but seven of the 111 quantitative restrictions on imports were eliminated. The remaining seven products (rice, maize, millet, beans, sugar, chicken parts and porkmeat parts), representing less than 20% of imports, became subject to import licensing without formal ceilings. Further, specific tariffs were all replaced by ad valorem ones, and the general level of protection was reduced drastically, with a view to both lowering prices and stimulating competitive efficiency, including at public enterprises. The export tax on coffee was phased out and other agricultural export taxes (on cocoa and sisal) were abrogated. vii. The reforms listed above were remarkably extensive and swift, the more so as they were initiated even before all commitments of supporting external aid were made to Haiti. The various measures began to stabilize and restructure the economy during FY86-87: the public sector deficit averaged an equivalent of 6% of GDP, compared to 9% in FY80-85; the external current account deficit averaged 5% of GDP, compared to 8% In FY80-85; the rate of inflation was brought down to 2% per year, compared to 8% per year on average in FY80-85; and the effective exchange rate depreciated by 14% in real terms, compared to a 40% appreciation, in real terms, between FY80 and FY85. At about 7% of GDP, Haiti's national savings remained low in FY86-87 owing to the policy-induced growth of private consumption and a decline in FY87 public sector receipts. The latter reflected, in the main, the difficulties of revenue collection by Customs and public utilities in an atmosphere of elections-related unrest which broke out in the last quarter of the fiscal year. Nonetheless, the overall investment- savings gap in FY86-87 was narrowed to a more sustainable 5% of GDP, compared to 8% of GDP in FY80-85. -iii - viii. Economic growth in FY86-87 averaged slightly under 1% per year, not enough, but better thar. the decline of about 1% per year in FY80-85. In large part, economic growth in FY86-87 was marred by the collapse of coffee export volume and prices, and, in the latter half of 1987, by disturbances related to the electoral process. Also, domestic agriculture and industry, already under expected stress from trade liberalization, had to endure added competition from the upsurge of contraband imports, which intensified when provincial ports, formerly closed, were opened up to international traffic. While such developments entailed hardships for local producers--for example, in the rice and other marketed food growing areas--there were, on the other hand, offsetting factors, such as greater availability of basic wage goods, lower consumer prices, and the opening up of economic and employment opportunities in the trade and transport sectors. ix. Haiti's economic policies during 1986 and most of 1987 drew significant international support. Capital grant and net loan disbursements from official sources, including use of IMF Credits, increased by 27% in FY86-87 over the average amount of FY80-85. The higher inflows, coupled with lower current account deficits, enabled the country to retire some arrears and accumulate some gross reserves. Consequently, import coverage improved to about two and a half weeks at the end of September 1987, compared to less than one and a half weeks at the end of September 1985. X. While the reforms initiated in 1986 still needed refinements, and many deep-seated problems of longer-term development (such as, the critical situation in health and nutrition, poor agricultural performance and deteriorating natural environment) remained to be tackled, Haiti had made a promising start. The momentum of the original economic reforms was lost, however, by a series of essentially constitutional crises, beginning in the last quarter of FY87 and persisting for over a year, that then compounded the country's economic and financial situation during FY88. xi. Economic developments in FY88 were characterized by work stoppages, investor uncertainties, distraction of government attention from economic policy reforms, shortfalls in public revenue, especially during the first half of the fiscal year, and slower disbursements as well as suspension of vital external assistance. Economic growth was negligible, the rate of unemployment exceeded 30% and inflation accelerated to 6%. In response to the changing domestic and external circumstances, the four different Governments in FY88 made strong efforts at limiting the size of the budget and the external deficits. However, the shortfalls in budget support grants and in gross aid disbursements proved too big for the country to deal with. In the end, there was a fiscal gap of over G150 million (nearly 2% of GDP) financed by monetary expansion, and external payments arrears of about US$20 million were incurred. xii. The political, economic and financial difficulties of FY88 notwithstanding, thus far Haiti has kept in place the basic fiscal and trade reforms that were implemented in 1986-87 (see paragraphs v and vi). The maintenance of those policies, together with additional adjustments outlined in paragraphs xiii to xx below, could form the -iv - basis for a core medium-term program aimed at averting a further economic backslide under the currently depressed state of the economy and unclear prospects for obtaining external aid at FY86-87 levels. The immediate implementation of a core program of priority macroeconomic and sectoral policies would prevent further impoverishment at the moment and lay the foundations on which to build a full-fledged adjustment program when domestic confidence increases and aid prospects improve. xiii. On the macroeconomic front, Haiti will need to review its export competitiveness to ascertain that the country remains attractive in manufactured exports over the medium term vis-a-vis its neighboring countries, and to promote the production and exports of other commodities. In other aspects, Haiti's trade regime already has been liberalized extensively. What is needed at present is to (a) sort out a few residual anomalies in the new Tariff Code regarding the treatment of certain finished goods (e.g. colored fabric) and raw materials (e.g. textile dyes) and (b) introduce a variable levy system to replace the existing import licensing system for the seven designated agricultural products (see paragraph vi), for which a study is required urgently. xiv. Another pressing macroeconomic issue for the medium term is that of increased domestic resource mobilization and improved allocation of government current expenditures. These are needed to substitute for external budget support, the restoration of which remains uncertain, and to provide adequate funds for operations and maintenance--and hence fuller utilization--of existing infrastructure. There is scope for mobilizing additional revenues by raising state land rentals for primary lease holders, who mostly sublease land or sell lease rights at market rates up to twenty or thirty times the primary rates charged by the Government. A study on this subject now under way in Haiti should be completed on time and its proposals followed up. Extra revenues could also be obtained by reducing or eliminating exemptions under the existing laws on income taxes, the general sales tax and Customs duties applicable to private and public enterprises. A good start was made in the August 1988 report prepared by a commission (La Commission d'Etude des Ressources Budgetaires) that had been ._harged to propose revenue measures for FY89. It is important to extend the scope of this study to the medium term. xv. The mobilization of revenues should be accompanied with improved allocation of expenditures, emphasizing adequate funds for non-salary operations and maintenance expenses. For several years now, including FY88, nearly 80% to 90% of government recurrent expenditures have been devoted to salaries, leaving little for supplies, materials and equipment necessary for the public employees and infrastructure to function effectively. A mere increase in funds for supplies and equipment, however, will not suffice. Haiti will also need to review the existing functions and size of its civil service establishment, and eliminate inessential functions. In this regard, an implementable action program should be prepared and undertaken, based on an ongoing study on public service pay and employment. -v - xv3. Finally in the macroeconomic arena, monetary ma.aRement will need to be consistent with balance of payments viability and the demand for private sector credit. Here, the banking system's reserve requirements, although not yet constraining credit to the private sector, should be kept under review in case lending opportunities for viable productive investments increase in the country. The cost and the facilities for term credit, on the other hand, have been perceived as constraints to private investment. The problem, partly, is that commercial banks in the country lack a tradition and specialized practice (e.g. project appraisal) of term lending. The banks, therefore, employ large collateral requirements in addition to wide spreads between deposit and lending rates. One way to deal with this constraint in the near term would be to seek collaboration of commercial barks with the FDI, the country's specialized agency for term lending. xvii. As in the case of macroeconomic policies, the proposals for medium-term sector policies in this report are focused on implementing a core program critical to preventing a further backslide in economic conditions and poverty levels. In agriculture, it will be important to maintain the FY86-87 reforms (the elimination of export taxes, removal of direct quantitative restrictions, break-up of trading monopolies) and to desist from any other forms of government price intervention. Agricultural investments should emphasize completion of ongoing and initiation of follow-up projects to raise and spread smallholder output, employment and incomes, and export earnings. This applies, in particular, to projects in rice, vegetables, coffee and mangoes. The predominantly smallholder coffee sector being especially important in Haiti, efforts should be made to identify alternative sources of funds to continue the production of improved seedlings previously financed by USAID. Alternative sources of funds should be sought also for the targeted watershed management and secondary roads development projects. xviii. The importance of upholding efficient production and employment in Haiti's largely private and labor-intensive industrial sector cannot be overemphasized, especially in view of the high and rising urban unemployment. For this sector, the required core policies include the trade promotion measures suggested earlier on (paragraph xiii), harmonization of the 1985 Investment Code with the recent trade reforms, efficient operation of Customs facilities and procedures, financial and technical assistance to effect smooth transition to the liberalized trade regime, and provision of adequate supporting infrastructure at competitive rates. xix. Based on recent developments and current conditions, the overall assessment of the infrastructure sector in Haiti is that pricing policies, financial performance and management standards are satisfactory in the transport and power subsectorsc The key economic policy issues in these subsectors are the need to ensure adequate operations and maintenance of the roads network; the choice of demand management (e.g., via peak pricing) versus capacity expansion to deal with the passenger traffic load at the international airport in Port- au-Prince; greater use of provincial cabotage ports; and measures to lower the average cost of electricity and to eliminate arrears payable to Electricite d'Haiti, the power company. The water supply, and -vi - urban and housing subsectors, on the other hand, are beset with pricing and management problems. Present policy will need to focus on both these issues. In addition, there are critical requirements for upgrading investments in water supply--and power--to uphold even the present low states of health and industry in Port-au-Prince and the vicinity. Without such investments, private manufacturing output and employment could not be upheld, and the livelihoods of the employees and their dependents (averaging five per employee) would be severely threatened. In urban housing, a basic change of government strategy is warranted. Instead of limiting itself to low-income housing construction only, Government should focus also on strengthening the utban land market and encourage the private sector to undertake the needed housing construction and finance. The Government itself would still have a role in installing urban public utilities and other social services. xx. In the social sectors, despite the higher budgetary allocations for education and health since FY86-87, the deep-seated sectoral management problems persist, calling for special emphasis on raising the efficiency of resources devoted to these sectors, and for closer and regular monitoring of the progress of the line ministries by the central budgetary authorities. Haiti's stuted strategies and policies for these sectors (the Educational Reform Program and the Nouvelle Orientation in health, both descvibed in chapter III of this report) are considered appropriate for the country situation. The core medium-term policy, therefore, should largely seek vigorous improvements of the internal efficiencies of these sectors in public and private facilities. Provided Government acts on this front, the social sectors should be among the priority areas for external aid to Haiti. xxi. The commitments and disbursements of official aid to Haiti had increased substantially in FY86-87, compared to FY80-85. Aid commitments had averaged about US$145 million per year in FY80-8.; these were boosted to average US$225 million per year in FY86-87. Net disbursements of grants and loans from official sources, including use of IMF Credit, had averaged about US$110 million per year in FY80-85; and those rose to US$140 million per year in FY86-87. Aid prospects for the medium-term, however, are not quite clear at present. In view of this uncertainty, the core scenario developed in this report projects new commitments of aid in FY88-92 at the same nominal levels as in FY80-85. Net disbursements of aid in FY88-92 are also projected at the same nominal level as FY80-85, with up to 60% of the loan disbursements in FY88-92 expected on account of past commitments; that is, commitments made prior to October 1987. xxii. While the levels of aid projected for FY88-92 are lower than FY86-87, they are nevertheless predicated on the implementation of core medium-term policies summarized in paragraphs xii to xx above and elaborated in chapter III of the report. If those policies are followed, real GDP growth in the next four years could feasibly average about 2% per year, rising gradually from 0.3% in FY88 to between 22 to 3% in FY92, and accelerate a little thereafter. This rate of total GDP growth implies very modest growth of real income per capita. The growth of private consumption per head, in real terms, is -vii - projected to be smaller than the growth of incomes. Such a restrained growth of consumption will be necessary to establish and maintain a viable macroeconomic balance in the face of lower levels of aid assumed for the medium term compared to FY86-87. xxiii. Barring some major exogenous shocks, the pursuit of appropriate growth and trade policies would avoid deterioration of the external current accoLnt balance, enabling Haiti to cover the current deficits, meet debt repayment obligations and maintain modest amounts of gross reserves with the external capital inflows projected on the assumptions specified in paragraph xxi. The projected capital disbursements have been assumed to consist of grants and concessional loans only; in other words, no medium-term commercial borrowing has been assumed. Provided this is adhered to, the projected debt service payments relative to GDP, export receipts and public revenues would remain manageable. As the old Stand-by Credits of the IMF are paid off, the debt service ratio would decline, from 15% in FY87 to 9% in FY92. As a proportion of projected public revenues, external debt service payments in FY92 would be about 25%, the same as in FY87. xxiv. The analysis of medium-term outlook for this report has explored the economic consequences in case the proposed core policies are not undertaken. As might be expected in such a case, Haiti's economy would stagnate or decline further and its financial situation exhibit large and growing deficits. Such a scenario would bring about major dislocations in the economy and perpetuate, if not worsen, the misery of a large part of Haiti's population. The preferable way out of the current situation, especially in view of the lower levels of aid anticipated at present, would be to consolidate the economic policy reforms already in place so as to attain at least a little economic growth while maintaining viable financial balances. This is an approach that would retain a base on which to found an enhanced adjustment program when one becomes feasible. xxv. Finally, given the severity of Haiti's development problems and the constraints imposed by low-income levels on the potential for generating domestic savings, the success of domestic efforts would be limited without the provision of external support. Hence, as Haiti itself acts to consolidate its recent economic reforms, external assistance, in the form of concessional aid, will be essential to promoting the country's economic and social development. Chapter I INTRODUCTION: THE BACKGROUND TO RECENT DEVELOPMENTS A. Overview 1.1 After an improved economic performance in 1986 and most of 1987,1 Haiti at present is experiencing a profound economic setback brought on by a series of largely political crf-ea. 2 In contrast to the improvements which had begun in 1986-87. the current economic situation is characterized by stagnant output, a dangerously high and increasing level of open unemployment, especi.ally in the urban areas, rising prices, large budgetary and balance of payments gaps, and rapidly deteriorating provision of economic and social services. This situation will have to be addressed as the political climate facing Haiti becomes clear. 1.2 In view of the ultimate necessity to deal with economic conditions, this report recommends some short-to medium-term policy and expenditure priorities for Haiti, taking into account the current economic situation. Broadly, following a review of recent economic developments, this report contends that, with requisite external assistance, Haiti will need to consolidate the public sector management measures and the growth-oriented policy reforms which it had been pursuing most recently. This is essential to avert a major economic backslide. Once domestic confidence is increased, and aid prospects improve, an enhanced adjustment and growth program should be worked out and backed with firm and adequate external assistance. Until the unfortunate interruption in 1988 of its adjustment and recovery program begun in early 1986, the country lived up to its economic policy undertakings. The economic reforms it pursued in FY86-87 were supported by various donors (see paragraph 3.3 in Chapter III), and were solidly along the lines suggested in the World Bank's previous economic report on Haiti. 3 1/ Haiti's annual economic statistics are compiled on the basis of the country's fiscal year, which runs from October 1 to the following September 30. Wherever calendar year notations are used in this report, the convention adopted is to identify fiscal years by the calendar years in which they end. Thus, 1986 means Haitian FY1985/86; 1987 means Haitian FY1986/87. 2/ From July 1987, there had been intermittent civil disturbances associated with the electoral process, culminating in a cancellation of elections at the end of November 1987 amidst violence on election day. Fresh elections were held in January 1988 and a new civilian Government assumed office in February. Four months later, a military Government took over, lasting three months till it too was replaced. These political crises over the past year have impeded economic performance by way of loss of investor confidence, work stoppages, distraction of Government attention from economic policy reforms and slow disbursements as well as suspension of vital external assistance. 3/ World Bank, "Haiti: Policy Proposals for Growth," Report No. 5601-HA, June 10, 1985. -2 - B. The Previous Report: A Background 1.3 The thrust of the last report on Haiti was to propose a mix of fiscal, agricultural, and industrial policy reforms aimed at short- term stabilization, efficient resource allocation, and revival of economic growth. The policy proposals were based on analyses of the extent to which the Haitian economy had deteriorated in 1980-85 compared to 1975-80, the major factors underlying the economic stagnation and the financial disequilibrium that had set in, and the country's long-term potential for sustained growth of output and employment. Economic Deterioration in 1980-85 1.4 The deterioration of economic performance in FY80-85, compared to FY75-80, is illustrated in Table 1 below, whicn shows that production in all sectors, trade, incomes, employment and private consumption each declined very markedly. While the overall rate of investment was maintained in FY80-85, a large portion of public investment went into acquisition or establishment of uneconomic state manufacturing enterprises. With public capital expenditures increasing while savings were falling, the overall public sector deficit rose absolutely and as a proportion of GDP. The deficit was financed principally by money creation--which, spilling into the balance of payments, led to substantial loss of reserves--and by stepped up credit from overseas suppliers and private banks--which contributed to the increase in the country's external debt between 1980 and 1985. Determinants of Decline and Disequilibrium 1.5 As identified in the last report, the major fantors underlying Haiti's economic stagnation and financial disequilibrium in 1980-1985 were the pressure of population on land leading to decreasing agricultural productivity, the effect of protection on domestic industry, and the inadequacy and poor allocation of public resources. The deterioration of Haiti's agriculture was, and remains, a long-term phenomenon explained by, among other factors, relentless pressure of population on the country's roughly one million hectares of cultivated land, mostly marginal hillside farms, on which an estimated two million peasants and a ricultural workers app2.ied extremely backward cultivation practices. Much of the state and 4J Indicators of worsening population pressure on land in Haiti include data such as: (a) increasing population density per square kilomeser of agricultural land; this density rose from 296 in 1965 to 408 in the mid-1980s; (b) decreasing farm sizes, revealed by the fact that the proportion of farms of 1 carreau (1.29 ha) or less rose from 39% in 1950 to 71% in 1971, the year of the last agricultural census; (c) rapid increases in the value of land between 1975-81, when prices of poor land rose at 15% per year in nominal terms, and those of fertile lands at much higher rates, sometimes as much as 752 per year; and (d) declining agricultural value added per worker, from G926 in 1965 to G858 in 1985, both measured in constant 1976 prices. [... middle sections omitted for long document ...] -100 - Table 9.2: AVIRAGE BRTAIL PRICES OF PRINCIPAL FOOD PRODUCTS --------- AND CHARCOAL, FY83-88 Fiscal Year and Ground Ground Goat Quarter a R Rice Raise Billet Beans Beef beat Fish Chicken Eggs Charcoal ------------------------(Gourdes per lb)-------------------------- (G/3 eggs) (G/bag) FY83 2.40 1.10 1.10 1.70 8.10 .. 8.00 .. 1.50 22.95 FY84 2.40 1.30 1.20 2.05 8.20 .. 8.00 .. 1.75 25.40 FY85 2.60 1.30 1.35 2.55 9.35 .. 8.00 6.65 1.80 27.55 I 2.40 1.25 1.20 2.10 8.50 .. .. 6.10 1.80 27.15 II 2.50 1.25 1.20 2.15 8.85 9.95 .. 6.70 1.80 27.50 III 2.75 1.25 1.30 2.80 9.80 10.50 .. 6.70 1.85 28.05 IT 2.80 1.40 1.70 2.90 10.10 10.50 .. 7.05 1.70 27.50 FY86 2.80 1.50 1.60 3.05 10.25 10.50 8.05 7.70 1.95 32.30 1 2.80 1.50 2.00 3.10 10.10 10.50 .. 7.50 1.90 31.40 II 2.80 1.50 1.60 3.15 10.30 10.50 .. 7.90 1.90 34.70 III 2.80 1.50 1.45 2.90 10.40 10.50 .. 7.80 2.00 31.50 IV 2.80 1.40 1.40 3.00 10.20 10.50 .. 7.60 2.00 31.50 FY87 1.80 1.20 1.15 2.20 10.20 10.00 8.20 7.70 2.00 33.50 I 2.05 1.10 1.20 2.60 10.15 10.10 .. 7.70 2.00 34.00 II 1.70 1.20 1.10 2.60 10.25 10.00 .. 7.60 2.00 34.45 III 1.80 1.25 1.15 2.25 10.25 10.00 .. 7.70 2.00 32.90 IT 1.80 1.15 1.15 2.00 10.25 10.00 .. 7.80 2.00 33.40 FY88 2.25 1.19 1.11 2.28 10.30 10.00 .. 7.49 1.90 29.98 1 1.80 1.05 1.05 2.15 10.30 10.00 .. 7.70 1.90 29.60 II 2.05 1.25 1.10 2.40 10.30 10.00 .. 7.50 1.90 30.30 III 2.25 1.25 1.15 2.25 10.30 10.00 8.50 7.15 1.90 30.00 IV 2.90 1.20 1.15 2.30 10.30 10.00 8.50 7.60 1.90 30.00 a/ Haitian fiscal year quarters. Sources: IBSI, BRH. -101 - Table 9.3: MINIMUM WAGE RATES, FY8O-87 Nominal Real a! Real Wage Fiscal Wage Rate Wage Rate Index Year ( G/day ) (FY80 G/day) (FY80=100) FY60 11.0 11.0 100.0 FY81 13.2 11.5 104.2 FY82 13.2 11.3 102.3 FY63 13.2 10.3 94.1 FY84 13.2 9.6 87.1 FY85 15.0 10.0 91.3 FY86 15.0 9.3 64.1 FY87 15.0 10.4 94.6 ---------------------------------------------------------------- a/ Nominal wage rate deflated by consumer price index for the Port-au-Prince Metropolitan Area. Sources: Ministry of Social Affairs; IHSI; and Bank staff ------- calculations. -102 - Table 10.1: NU11ER OF PUPILS IN PRIHARY AND SECONDARY SCHOOLS, FYB0-87 PRINARY SCHOOLS TOTAL URBAN RURAL Total Public Private Total Public Private Total Public Private FY90 580,127 277,450 302,669 275,604 131,098 144,5B6 304,443 :46,360 158,083 FY81 642,391 277,269 365,123 294,023 131,457 162,866 348,369 146,111 202,257 FY82 659,102 282,366 375,736 305,630 134,909 170,721 352,472 147,457 205,015 FY93 723,041 293,328 429,329 389,699 163,816 225,883 333,342 129,512 203,930 FY84 783,000 325,600 457,400 423,300 192,000 241,700 359,700 142,600 216,100 FY85 819,600 337,800 491,800 442,6001 184,8001 257,9001 377,0001 153,0001 224,0001 FY86 972,500 363,400 510,100 471,2001 195,8008 275,4001 401,3001 166,6001 234,7001 FY97 921,5001 379,9008 541,6001 497,5003 209,3008 208,2001 424,0001 170,6008 253,4001 SECONDARY SCHOOLS Total Public Private FY80 87,680 18,341 69,339 FY81 96,596 17,293 79,303 FY92 98,570 15,968 92,702 FY93 117,081 19,253 97,929 FY84 134,300 19,400 114,900 FY85 154,300 20,400 133,900 FY86 176,900 21,100 155,900 FY87 203,0001 28,500t 174,5001 I Estiaates by DRH, Direction des Etudes Economiques. Source: Ninistry of National Education, Direction de la Planification. -103 - Table 10.2: NUMBER OF TEACHERS IN PRIMARY AND SECONDARY SCHOOLS, FY80-87 PRIMARY SCHOOLS TOTAL URBAN RURAL Total Public Private Total Public Private Total Public Private FY80 13,401 5,101 0,300 7,487 3,106 4,381 5,914 1,995 3,919 FY81 14,581 5,359 9,222 7,647 3,191 4,456 6,934 2,168 4,766 FY82 14,927 5,487 9,440 7,691 3,272 4,419 7,236 2,215 5,021 FY93 16,986 5,643 11,343 9,956 3,448 6,508 7,030 2,195 4,035 FY84 18,483 6,311 12,172 10,752 3,910 6,942 7,731 2,401 5,330 FY85 20,302 6,922 13,380 11,332 1 4,705 6,627 8,9701 2,217 6,753 FY86 23,200 8,200 15,000 12,963 t 5,198 7,765 10,2371 3,002 7,235 FY87 24,299 8,659 15,840 13,699 $ 5,489 8,200 10,810 3,170 7,640 SECONDARY SCHOOLS Total Public Private FY80 3,637 679 2,958 FY81 4,034 730 3,304 FY82 4,239 807 3,432 FY83 5,367 803 4,564 FY84 5,781 1,087 4,694 FY85 6,106 967 5,139 FY86 6,900 1,000 5,900 FY87 7,280 1 1,166t 6,1141 I Estimates by ORH, Direction des Etudes Economiques. Source: Ministry of National Education, Direction de la Planification. -104 - Table 10.3: RNUBIR Of PRIBIAY SCHOOLS, IY8O-83, AND SECONDARY SCHOOLS, FY80-87 PRIMARY SCHOOLS T OT SA L O R B A UA 0 B A L Total Public Private Total Public Private Total Public Private nY80 2,996 958 2,038 1,197 335 862 1,799 623 1,176 FY81 3,271 994 2,277 1,283 344 939 1,988 650 1,338 FY82 3,221 1,000 2,221 1,245 348 897 1,976 652 1,324 FY83 3,241 1,000 2,241 1,348 381 967 1,893 619 1,274 SICORDARY SCROOLS Total Public Private FY80 205 24 181 FY81 228 24 204 FY82 244 25 219 Fy83 290 26 464 FY84 314 26 288 FY85 360 26 334 FY86 407 27 380 FY87 423* 32* 391t t Estivates by BRB, Direction des Etudes Economiques. Source: Ministry of National Iducation, Direction do la Planification.