Public Information Notice No. 02/07

Public Information Notice: IMF Concludes 2001 Article IV Consultation with Haiti

February 8, 2002

On January 18, 2002, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Haiti.¹

Background

During FY 2000/01, the Fund monitored Haiti's economic policies through a staff-monitored program (SMP). The main purpose of the SMP was to assist in maintaining sound macro-economic policies and in implementing structural reforms that are important for the attainment of macro-economic stability, with the aim of establishing a positive track record. It was hoped that once the political crisis associated with the May 2000 parliamentary elections was resolved and following the presidential elections in November 2000, a satisfactory track record would facilitate intensified discussions for a Fund-supported arrangement under the Poverty Reduction and Growth Facility. To date, though some progress has been made under the auspices of OAS/CARICOM (Organization of American States/Caribbean Community), the political crisis essentially remains unresolved. While donors' humanitarian assistance continued to be channeled through NGOs, budgetary aid remained suspended throughout FY 2000/01 pending the resolution of the political crisis in a manner acceptable by all interested parties.

Performance under the SMP during FY 2000/01 was weak. Real GDP is estimated to have declined by around two percent, reflecting tight monetary conditions and the negative expectations raised by the continuing high fiscal imbalance and central bank financing. Inflation (12-month) remained broadly unchanged at around 16 percent during most of the year and decelerated during the last quarter to reach 12 percent in September 2001. Fiscal performance deteriorated, as the overall central government deficit rose to 2.7 percent of GDP (2.5 percent of GDP in FY 1999/2000). Central government revenue declined to an historically low level (7.3 percent of GDP, against 8.1 percent of GDP in FY 1999/2000). All categories of revenue were below target; in particular, petroleum taxation underperformed, partly as a result of a decision by the authorities not to adjust retail prices to increased landed costs (in contrast to the flexible pricing policy envisaged under the SMP). While total budgetary spending was held at an estimated 9.8 percent of GDP (10.1 percent of GDP in FY 1999/2000), outlays on non-wage current goods and services were well above target. Major problems remain regarding transparency and accountability in budget execution and the use of discretionary accounts remains extensive. The deficit was financed mostly by the central bank.

Tight monetary conditions and crowding out by the public sector combined with the weak economy and continuing political uncertainty all contributed to a sharp decline in credit to the private sector. Net official reserves (program definition) declined to the equivalent of 1 month of imports of goods and services. Faced with negative capital flows, Haiti accumulated external arrears. The IDB withheld new disbursements pending the payment of arrears, and the World Bank cancelled undisbursed loans. The gourde remained broadly stable relative to the U.S. dollar owing to the tightening of monetary policy, the decline in reserves and the accumulation of external arrears.

Executive Board Assessment

Directors expressed deep concern about the continued decline in per capita income and persistence of widespread poverty, the increase in the fiscal deficit and central bank financing, and the accumulation of external debt arrears. Directors urged the government and all political parties to redouble efforts toward a settlement of the political crisis so as to pave the way for restoring the momentum of economic development and poverty reduction, with support from the international community, particularly in the social area.

Directors regretted that discussions on a new staff-monitored program (SMP) could not be concluded. They emphasized that, while continuing to work on the resolution of the political impasse, the authorities should implement a macroeconomic adjustment program aimed at reducing the fiscal deficit, containing inflation, and stemming the loss in reserves. If strictly adhered to, such a program could allow for a prudent lowering of interest rates, which would help prevent a further deterioration of the economy. Directors noted that satisfactory performance under a new SMP, along the lines just mentioned, would be important to initiate fruitful discussions on an eventual PRGF arrangement in support for a medium-term strategy for economic recovery.

Directors welcomed the recent submission of the budget for FY 2001/02 to parliament, the first official budget since 1996. However, they considered that the small reduction in domestic financing of the fiscal deficit will fall short of what is needed to stabilize the economy. Directors, therefore, urged the authorities to take determined additional measures to increase the tax effort through improved tax and customs administration, broadening the tax base, and adoption of an automatic price adjustment mechanism for petroleum products. Budgetary spending should be tightly controlled, with its composition reoriented away from current to capital expenditure.

Directors welcomed the authorities' intention to improve governance by way of enhancing transparency and accountability in budget execution. They urged the authorities to restrict the use of discretionary ministerial accounts exclusively to emergency outlays and to eliminate the discretionary element in revenue collection. Directors also highlighted the importance of enforcing a strong cash management system that would effectively forestall excessive central bank financing and arrears accumulation.

On monetary policy, Directors emphasized the need to continue to restrain credit expansion to facilitate attaining the inflation and net international reserves targets. Noting the risks for inflation and the external value of the gourde from a premature loosening of monetary policy, they stressed that interest rates should be lowered further only if inflation remains under control, in the context of a broadly stable exchange rate and reduced budget deficit.

Directors welcomed the measures to improve the supervision and health of the banking system. They urged the authorities to complete the draft texts for a new banking law and a new central bank charter to bring them into conformity with international standards. The authorities' efforts to combat money laundering and drug trafficking are commendable and should be sustained by making the recently created Financial Intelligence Unit operational. Directors also highlighted the need for legal steps enabling the freezing of terrorist assets.

Directors welcomed the authorities' intention to maintain the floating exchange rate regime and, given the low level of reserves, urged them to refrain from foreign exchange intervention. They encouraged the authorities to step up structural reforms aimed at reducing domestic production costs, increasing productivity, and strengthening competitiveness, and, in this context, they looked forward to the restructuring and privatization of a number of large public enterprises as well as the adoption of a plan for privatizing the Banque Nationale de Credit. Haiti's commitment to an open trade policy was welcomed. Directors encouraged the authorities to clear overdue financial obligations to the international financial institutions.

Directors welcomed the authorities' efforts to improve statistics in the real, external, and public sectors. They emphasized the need to sustain these efforts, with technical assistance from bilateral and multilateral agencies, including directly from the Fund and through the Caribbean Technical Assistance Center.