Public Information Notice No. 05/78

Public Information Notice: IMF Executive Board Concludes 2005 Article IV Consultation with Haiti

June 17, 2005

On May 16, 2005, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Haiti.¹

Background

Economic and social conditions in Haiti deteriorated significantly during the early 2000s as the continued political stalemate undermined external financial support and private investment, and structural reforms came to a halt. This resulted in economic stagnation, high inflation, and widespread unemployment. The political turmoil in early 2004 and the devastating floods in May and September compounded these difficulties and led to a contraction of real GDP by 3¾ percent in 2003/04.

The transition government that was formed in early 2004 prepared a broad social and economic strategy that gained support of the international community and substantial pledges of financial assistance during a July 2004 donors' conference. The government's macroeconomic policies were framed in the context of a Staff-Monitored Program (SMP) with the Fund covering the period April-September 2004, and from October 2004 were supported by the Fund's Emergency Post-Conflict Assistance (EPCA), which was approved by the Fund's Board on January 10, 2005.

The authorities' program for 2004/05 aims to: (i) strengthen security and the rule of law in preparation for national elections in 2005; (ii) create conditions for economic recovery and reconstruction of government and social infrastructure; (iii) enhance governance and the institutional and administrative capacity of the government; (iv) improve access to basic services; and (v) promote employment opportunities for the unskilled and for displaced populations.

Performance under the SMP and the EPCA-supported program has been satisfactory. Financial stability has been largely restored; the exchange rate has stabilized; inflation has declined; and net international reserves have increased. However, partly owing to slower-than-anticipated project disbursements by donors, economic recovery in the first two quarters of 2004/05 appears to have been weaker than expected, as indicated by exports and fiscal revenue performance, as well as stagnant credit to the private sector. This suggests a risk that the GDP growth objective of 2½ percent for 2004/05 may not be attained, especially in view of the still unsettled political situation and the lifting of quotas under the Agreement on Textiles and Clothing.

Progress has also been made in implementing structural reforms. The expenditure approval process has been streamlined and the discretionary use of ministerial current accounts was sharply reduced. In addition, the Anti-Corruption Unit became operational by end-2004, pre-audits of the state-owned telephone and electricity companies were initiated, and requests for offers for audits of three other key public sector enterprises were published. In the financial sector, the IMF safeguards assessment and the external audit of the Bank of the Republic of Haiti (BRH) accounts have been largely completed.

Executive Board Assessment

The Executive Directors welcomed the progress achieved by the Haitian authorities toward restoring macroeconomic stability and implementing structural reforms, and were encouraged by Haiti's performance under the program supported by the Fund's EPCA policy, which is broadly on track. They noted in particular that, despite difficult political and security conditions and the devastating floods in 2004, the authorities have been successful in stabilizing the exchange rate, bringing down inflation, and strengthening international reserves. Directors observed that the key challenge is to put in place policies that would promote faster growth and generate adequate fiscal revenues for improving social services, institutional capacity, and infrastructure, and for bringing down poverty.

Directors considered that the actions taken by the authorities to reengage donors, clear arrears to the World Bank, and increase the Fund's involvement in Haiti have been important steps toward a medium-term development program aimed at raising the rate of growth and reducing poverty.

Directors noted the urgency of reviving economic activity and restoring confidence ahead of the elections scheduled for November 2005. In this context, they recognized the need for a supplementary budget for April-September 2005 that would help safeguard social and security expenditures in the context of lower-than-envisaged revenues and donor disbursements. Directors supported the authorities' efforts to secure additional assistance from the international community to help close the financing gap in 2004/05 and to fully cover the cost of elections, noting that such assistance should be in the form of highly concessional loans or grants and be well-coordinated with the authorities' development strategy. They encouraged the Haitian authorities to continue to cooperate closely with donors, including through regular information sharing, on the implementation of the social and economic agenda agreed at last year's donor conference, and welcomed the steps being taken to accelerate donor disbursements and advance the preparation of projects for next year's budget.

Directors welcomed the authorities' intention to prepare the 2005/06 budget in time to allow for consultations with political parties and civil society, noting that a newly elected government would begin its term in the middle of the fiscal year, and the importance of aligning donor support with the budget priorities. Key objectives for the budget will be to strengthen revenue collection and administration, including through broadening the tax base, in order to help meet urgent expenditure demands. Directors welcomed the government's objective to avoid funding expenditures with central bank financing. They looked forward to the adoption of measures to improve budget management and expenditure control, and supported Fund technical assistance in this area.

Directors welcomed the staff's analysis of debt sustainability and agreed that Haiti's debt burden is high and could become a source of vulnerability. They noted the authorities' efforts to clear debt service arrears, and recommended that nonconcessional debt be avoided and new official assistance be provided either on highly concessional terms or through grants. Directors looked forward to a joint Fund-Bank preliminary analysis of Haiti's Heavily Indebted Poor Country (HIPC) eligibility to be undertaken later in 2005. A few Directors expressed their willingness to support initiatives toward granting debt relief under the HIPC Initiative if Haiti was found to be eligible.

Directors underscored the need to tighten monetary policy and absorb the excess liquidity in the banking system to safeguard the monetary and external objectives under the EPCA-supported program. They supported a rapid implementation of the intended change in the auctioning mechanism for auctioning central bank bonds, in line with the recommendations of the Fund's recent technical assistance mission. Directors expressed concern about the significant operational losses of the central bank, and welcomed the authorities' intentions to include a plan for strengthening its financial position in next year's budget. They also welcomed the completion of the IMF safeguards assessment mission, and encouraged the publication of the interim audit report of the central bank. Directors supported the authorities' request for a Financial Sector Assessment Program (FSAP) mission to assess the condition of the financial sector and identify remaining weaknesses. Directors agreed that a flexible exchange rate regime has served Haiti well, and supported the objective of increasing net international reserves over the medium term.

Directors welcomed the progress achieved in the first half of the fiscal year in implementing the structural reform agenda and stressed the importance of the authorities' completion of their remaining commitments as agreed under the program. In particular, Directors encouraged the authorities to complete the survey of domestic arrears, the census of government employment, and publish information on budget execution. While Directors acknowledged the importance of sustaining electricity supplies, they also underscored the need to ensure that government transfers to the state-owned electricity utility are used appropriately and carried out in a transparent manner. They called for strengthened expenditure control mechanisms in the electricity company, and for competitive bidding procedures for all energy-related contracts.

Directors noted the challenge of raising Haiti's economic growth rate over the medium term. This would require achieving broad domestic consensus on the social and economic strategy, progress toward national reconciliation, and actions to improve the security situation. In addition, it will be essential to maintain prudent macroeconomic policies, speed up the implementation of reforms, particularly those related to strengthening capacity in the public sector, and improving governance and transparency. Directors reiterated the Fund's readiness to continue its support to Haiti through a further drawing under the EPCA-supported program and continued technical assistance. A satisfactory track record of policy implementation under the EPCA program, and progress on a Poverty Reduction Strategy Paper (PRSP) would provide a basis for discussions on a future Poverty Reduction and Growth Facility (PRGF) supported program.

Directors urged the Haitian authorities to take decisive steps to improve the quality and timeliness of statistical data reporting to the Fund, and in particular to take advantage of further technical assistance in this respect.