Public Information Notice No. 98/68

Public Information Notice: IMF Concludes Article IV Consultation with Haiti

September 10, 1998

On July 20, 1998, the Executive Board concluded the Article IV consultation with Haiti¹.

Background

In the first years of the 90's, economic and social conditions in Haiti worsened sharply as the security situation deteriorated. In particular, gross national saving turned negative and domestic investment and output shrunk, while inflation surged and the fiscal situation deteriorated. Following the return of constitutional rule toward the end of 1994, the security situation improved and progress was made in strengthening tax collections and central government finances generally. Also, financial distortions were reduced, the economy was opened, and relations with external creditors were normalized. As a result, during FY 1994/95–FY 1995/96 output began to recover and inflation declined as the exchange rate appreciated in real effective terms from the exceedingly depreciated levels of the previous years. Although Haiti’s external current account deficit widened with the recovery of imports, this was more than financed by large official aid and private capital inflows, and official international reserves rose.

The administration that took office in March 1996 began implementing a three year economic program (FY 1996/97–FY 1998/99) in October 1996, with substantial international financial and technical support, including an Enhanced Structural Adjustment Facility (ESAF) arrangement from the IMF. The medium-term program aimed to reduce inflation gradually, strengthen the external accounts and increase output growth to 4–5 percent a year, based on an increase in infrastructure investment and an expected recovery of private investment and output in agriculture, construction and the manufacturing assembly sectors. The program relied on the implementation of prudent macroeconomic policies. It also envisaged a reform of the tax system to boost tax collection so as to allow greater spending on justice and security, health and education, and economic infrastructure. At the same time, the public administration and the civil service were to be restructured to enhance efficiency in the delivery of essential services, while the main public enterprises were to be privatized, and trade and financial sector reforms were to be implemented to bolster market efficiency.

Performance under the FY 1996/97 economic program fell short of expectations as a deepening political crisis (which led to the resignation of the Prime Minister in June 1997 and the failure to appoint a replacement since then) adversely affected the implementation of structural reforms, and the disbursement of external aid flows and economic recovery. Output growth slowed to 1 percent as investment remained low and a severe drought affected agricultural output. Twelve month inflation moderated only slightly to 17 percent in September 1997 because of a rapid expansion of credit to the private sector in the context of an economy plagued with supply bottlenecks. Despite a further appreciation of the real effective exchange rate, the external current account deficit (excluding official grants) declined sharply as import growth slowed reflecting fiscal compression and continued weak domestic investment, while exports and private remittance inflows were bolstered by strong economic conditions in North America. As a result, official international reserves rose to close to programmed levels despite a much lower than programmed level of official loans and grants and some private capital outflows (including errors and omissions).

The public finances strengthened in FY 1996/97 as tax collections were bolstered by the unification of the sales tax rate and improvements in tax administration, and government expenditure was restrained as the FY 1996/97 budget was not approved until May 1997. At the same time, the state-owned enterprise sector is estimated to have been in approximate overall balance (compared with a large deficit in the previous year) as capital outlays were reduced.

In FY 1996/97, progress was made in implementing financial reforms to improve the efficiency of financial intermediation and strengthen the supervision and regulation of the financial system. However, the difficult political climate adversely affected the implementation of envisaged structural reforms and impeded submission of the draft FY 1997/98 budget to parliament.

While discussions continued toward a political settlement, in early 1998 the authorities introduced a short-term economic program covering the period through September 1998, with a view to making further progress toward economic stability, while advancing on structural reforms. The program, which is being monitored by the IMF staff, is predicated on moderate output growth, and envisages a further decline in inflation and the maintenance of an overall balance of payments equilibrium by pursuing prudent fiscal and credit policies in the context of the existing floating exchange rate regime.

Progress has been made toward implementing the program. A tight credit policy and a prudent fiscal policy since February 1998 have helped reduce 12-month inflation to 11 percent in June1998, though official net international reserves have declined slightly since September 1997. At the same time, output is now projected to grow at a somewhat faster pace than earlier envisaged and the external current account deficit is expected to decline further in FY 1997/98 based on strong export growth and the buoyancy of private remittances from abroad. In the structural area, steps have been taken to strengthen the banking system (including by starting the restructuring of the large, troubled state bank), and preparations for the restructuring/privatization of the main public enterprises and for civil service downsizing are advancing.

Executive Board Assessment

Executive Directors commended the authorities for the progress made toward macroeconomic stability over the past year under very difficult political and economic circumstances. They noted that along with the improved domestic security situation, public finances have strengthened and exports and remittances from abroad have increased. However, Directors expressed concerns over the adverse impact of the continuing political crisis on the implementation of structural reforms, the disbursement of external assistance, and the recovery of output. In this connection, Directors underscored the importance of reaching, through a democratic process, a political settlement that would facilitate the implementation of sound financial policies to lower inflation further and promote structural reforms to support sustained economic development and poverty reduction.

Directors emphasized that the key issue in the short term is the establishment of macroeconomic stability. In this context, they were encouraged by the progress made thus far in the implementation of a staff-monitored program for FY 1997/98. Directors noted, however, that the economic situation remains very fragile and there are risks of slippages in the fiscal and structural areas. They stressed that steadfast implementation of the staff-monitored program would help mobilize donor support and facilitate an early resumption of discussion on the second-year ESAF, once the new government is installed.

Directors urged the authorities to reinforce steps to secure the attainment of the program’s target for the public finances, which would be essential for lowering inflation, taking pressure off interest rates, and supporting the expansion of investment and output. On the revenue side, Directors encouraged the authorities to step up efforts to reduce tax arrears, improve tax and customs administration, and tighten the granting of tax exemptions. They also stressed that institutional strengthening of the tax and customs agencies was needed to bolster revenue collection in the medium term. On the expenditure side, they urged the authorities to implement procedures to contain government expenditure to estimated revenues and available financing as envisaged in the program. They stressed the importance of resisting pressures for substantial wage increases, eliminating fraudulent wage payments, tightening the procedures for the hiring of government employees, and cutting capital outlays with low returns, while still maintaining adequate budgetary allocations for social spending.

Directors welcomed the authorities’ prompt action to tighten credit conditions through open market operations and to restrain credit expansion by the state-owned banks. They urged theauthorities to continue their restrained credit policy until there are clear signs that fiscal adjustment is taking place and inflation is declining as programmed.

Directors emphasized the importance of implementing policies aimed at lowering domestic production costs, raising productivity, and bolstering the competitiveness of the sectors producing tradables. In this regard, Directors stressed that progress in the implementation of Haiti’s structural reform agenda and improved governance, especially in respect of enforcement of the tax code and reform of the judiciary, is essential to promote sustainable economic growth and improve living conditions, particularly for the poorest. They urged the authorities to adhere to the staff-monitored program’s targets for downsizing the civil service (essential for fiscal consolidation), and to implement sectoral policies aimed at improving government efficiency in the delivery of essential services, such as security and justice, health and education, and infrastructure rehabilitation and maintenance. Directors noted that the improvement of management and administration of the public investment program is urgently needed to speed up the execution of the public investment projects.

Directors encouraged the authorities in their efforts to seek rapid progress in the restructuring and privatization of the main public enterprises, as well as the approval of legislation to strengthen public finances. They also emphasized that, to strengthen the health and efficiency of the financial system, it is essential that the authorities make rapid progress in the restructuring of the troubled state-owned banks, the phasing-in of financial sector regulations consistent with international standards, and the strengthening of supervision over financial intermediaries. Directors urged the authorities to redouble their efforts to upgrade the quality of monetary, fiscal, external, and real sector statistics with technical assistance from the IMF and other donors.