Public Information Notice No. 01/01

Public Information Notice: IMF Concludes Article IV Consultation with Haiti

January 5, 2001

On November 22, 2000, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Haiti.¹

Background

Since the onset of a prolonged political crisis in the spring of 1997, the Fund has been monitoring Haiti's economic policies through staff-monitored programs (SMPs). The main purpose of the SMP's are to assist in maintaining sound macro-economic policies and in implementing structural reforms, with the aim of facilitating the disbursement of some external budget support as well as establishing a track record. The latter would help starting intensified discussions for a Fund-supported arrangement under the Poverty Reduction and Growth Facility, once the political crisis has been resolved and following the presidential elections and the installation of a new cabinet.

During SMPs covering FY 1997/98 and FY 1998/99, the fiscal deficit was kept under control, inflation was reduced, and official net international reserves rose, but real GDP per capita stagnated. Some progress was made on structural reforms, including downsizing and streamlining the civil service and, in the financial sector, improving the supervisory capacity of the central bank and strengthening the regulatory framework of the banking system. During FY1999/00, the SMP negotiated with the Haitian authorities could not be approved by the Fund's management because of significant fiscal slippages and the lack of progress on structural reforms.

Economic performance weakened during FY 1999/2000. The overall central government deficit increased to 2.2 percent of GDP, up from 1.3 percent of GDP in FY 1998/99. With no net external financing, the deficit was financed by an expansion of credit from the central bank. The increase in the fiscal deficit, continuing political uncertainties, and the rise in the world price of oil led to recurrent pressure on the exchange rate, domestic prices, and official reserves. Government revenue declined by almost 1 percent of GDP to 7.8 percent of GDP. This mainly reflected the sharp increase in the world price of oil, and the resulting decline in excise tax collections on gasoline, diesel, and kerosene. To address the decline in fiscal revenue, the government raised administered domestic prices of gasoline, diesel, and kerosene by about 45 percent in early September 2000. Total spending remained at about 10 percent of GDP; higher capital expenditure, especially on public works projects, was offset by a decline in the wage bill. During FY 1999/2000, the central bank sought to slow the depreciation of the gourde by tightening monetary policy and by occasional intervention in the foreign exchange market. Nevertheless, the gourde depreciated by about 32 percent with respect to the U.S. dollar from end-September 1999 to mid-September 2000. Owing to the tightening of monetary policy and weakening economic activity, inflation (twelve-month increase in the CPI) rose only moderately from 9.9 percent in September 1999 to 12.5 percent in August 2000. Net official reserves declined by about US$40 million to a level of US$170 million (equivalent to 1.8 months of imports of goods and services and 15 percent of broad money).

Progress was achieved in the financial sector. The central bank's supervisory capacity and the regulatory framework continued to be strengthened. Advances were made in restructuring the troubled state-owned bank, Banque Nationale de Credit (BNC). Significant additional preventive steps to combat money laundering and drug trafficking were undertaken. Virtually no progress was achieved during FY 1999/2000 toward restructuring/privatizing key public enterprises. As a result, crucial infrastructure continued to deteriorate.

Executive Board Assessment

Directors expressed concern that economic performance had deteriorated during the past year owing to external and internal shocks, with falling real GDP growth, an increase in the fiscal deficit, rising inflation, and recurrent pressure on the currency, against the backdrop of continued political uncertainties. Directors also noted that there was little progress on structural reforms in crucial areas such as justice and security, and privatization of public enterprises.

Directors expressed concern about the effects of the prolonged political impasse on external assistance, investment, and the implementation of structural reforms. They urged the government and all political parties to make strenuous efforts toward a political settlement so that the momentum of economic development can be restored and living standards substantially improved, with support from the international community.

Directors welcomed the government's intention to redouble efforts to implement an economic program during fiscal year 2000/01 (to be monitored by the Fund staff) that would be designed to reestablish macroeconomic stability during the political transition. They urged the authorities to implement the program resolutely, and noted that the establishment of a track record of good performance under the staff-monitored program would be one precondition for beginning formal discussions on a PRGF arrangement.

Directors endorsed the authorities' intention to reduce the fiscal deficit during fiscal year 2000/01, permitting a substantial reduction in domestic financing to the public sector. They welcomed the decision in September 2000 to increase administered petroleum product prices, and the intention to adjust these prices regularly in line with the changes in world prices and the exchange rate, to protect this important source of excise tax revenue. Directors called on the authorities to contain expenditures by restricting use of the ministerial discretionary accounts, while containing wage increases. This would help to make room for increased spending on basic education and health, and justice and security.

On monetary policy, Directors welcomed the authorities' intention to continue adjusting credit conditions mainly through the placement of central bank bonds at market rates of interest. If there were clear signs that fiscal adjustment was taking place and inflation had been restored to a declining path, there should be some room for a reduction in interest rates and in required reserve ratios.

Directors welcomed measures that had been taken during the past year to improve the supervision of the banking system, and they encouraged the authorities to continue phasing in new and strengthened prudential regulations. They urged the authorities to accelerate the preparation and passage of new banking and central bank laws to bring them into conformity with international standards. Directors welcomed the steps taken to strengthen detection and prosecution of money laundering and drug trafficking.

Given current uncertainties, Directors emphasized the importance of maintaining a floating exchange rate regime, under which the rate would be determined by market forces. They stressed that additional efforts to enhance competitiveness should be stepped up through the implementation of structural reforms aimed at reducing domestic production costs, increasing productivity, and attracting foreign investment. Directors emphasized that a comprehensive program for privatization of the state-owned port, airport, electricity, telecommunication, and water companies, developed in consultation with the new government, would constitute a crucial advance toward higher investment and provision of services in these vital sectors. They welcomed the authorities' intention to maintain Haiti's open trade policy and their recent entry into CARICOM.

Directors commended the authorities' efforts to address weaknesses in macroeconomic and social sector data, but stressed that efforts needed to be intensified. In view of Haiti's severe resource constraints, they emphasized the need to mobilize technical assistance from the Fund and other sources, both to upgrade the quality of statistics and, more generally, to help with the implementation of structural reforms.