Statement by the IMF Mission Chief for Haiti at the Donors' Conference on Haiti
November 30, 2006By the IMF Mission Chief for Haiti, Przemek Gajdeczka
International Monetary Fund
Madrid, Spain, November 30, 2006
1. The achievements of the past two and a half years have been remarkable. We welcome the progress in restoring political and macroeconomic stability, and steering Haiti back onto the path of sustainable economic development. We have seen solid performance under successive programs supported by Emergency Post-Conflict Assistance (EPCA), under which macroeconomic stability was restored through fiscal discipline and improved economic governance. As a result, economic growth has resumed, the currency stabilized, inflation has been halved, and international reserves have increased significantly.
2. On the basis of this solid performance, the IMF Executive Board approved a new three year PRGF arrangement to support Haiti's macroeconomic program, and the Boards of the Fund and the World Bank approved Haiti's decision point for the enhanced HIPC Initiative, starting the flow of interim debt relief. Also, the IDB announced its intention to provide debt relief in the context of the HIPC Initiative and future additional debt cancellation, with the details of these operations to be decided at a later date. In mid-December, the Paris Club will consider interim debt relief for Haiti.
3. The Haitian authorities have set out their developmental strategy in the Interim Poverty Reduction Strategy paper, and have issued a proposed framework for coordination, seeking to better align efforts by donors to support Haiti's home-grown strategies to improve security, increase growth, and bring about high living standards. We commend the authorities for taking the initiative to improve aid coordination to support true ownership of the challenging reform agenda ahead.
Recent Economic Developments
4. Strong macroeconomic performance. Since taking office, the new authorities have made concerted efforts to continue the strong performance, building on the progress achieved by the transition government. As a result, economic growth is estimated to have reached 2.5 percent in FY2006, inflation has fallen to around 12 percent, and central bank reserves were increased to $126 million, all exceeding expectations. Similarly, fiscal discipline was sustained, and there was no reliance on central bank financing and use of ministerial current accounts remained limited.
5. Significant structural reform. Since 2004, a number of important structural reforms were implemented. These include preparation and approval of government budgets prior to the fiscal year, passage of a new organic budget law and adoption of a new budget classification and chart of accounts, accounting rehabilitation and financial audits of key public sector enterprises, audits and publication of financial statements of the central bank, and implementation of a monitoring mechanism for fiscal transfers to the electricity sector.
II. PRGF and Debt Relief
6. IMF financial support. The three year program was approved by the IMF Executive Board on November 20. Total program access is about US$110 million, with an immediate disbursement of US$42 million, part of which the authorities intend to use to repay outstanding less concessional loans to the IMF. Its main objective is to set the country on a path to sustained economic growth and improved living standards. Despite all the recent progress, however, there remain enormous political, technical, and institutional challenges to achieving these objectives.
7. Medium term objectives. Over three years, the program focuses on increasing fiscal revenues, and improving budgetary management and transparency in public enterprise operations to enable public investment needed for private sector-led growth, and poverty-reducing spending. It also will carry forward financial sector reform to strengthen the banking system through better supervision and a new banking law, modernize monetary policy instruments, and strengthen the central bank by addressing its financial losses and divesting its stake in non-core operations. By the end of three years, the program aims to support an increase in GDP growth to 4 percent, a reduction in inflation to 6 percent, and an increase in foreign exchange reserves to 2.5 months of imports. The PRGF-supported program is aligned with the authorities' priorities outlined in their poverty reduction strategy.
8. Program for FY 2007. The macroeconomic framework for FY 2007 targets real GDP growth of 4 percent, inflation reduced below 9 percent and an increase in gross international reserves to nearly two months of imports by end-September 2007. Total central government expenditure is budgeted to increase by 2½ percent of GDP, owing mostly to higher public investment. Current expenditure will expand to allow for an increase in government wages, in part to compensate for past inflation, and new hiring for security and social services. In order to reduce inflationary expectations, the BRH will keep base money growth below the growth rate of nominal GDP, with net international reserves accumulation as the main source of monetary expansion. In addition, the central bank will keep its key policy interest rate positive in real terms.
9. Technical assistance. To help meet quantitative and structural conditions in the PRGF program, the IMF will provide substantial technical assistance, particularly for increasing revenues, further improving management of public finance, recapitalization of the central bank, revising the banking law, improving monetary policy instruments, and improving banking supervision. Moreover, the IMF and World Bank are planning to conduct a comprehensive Financial Sector Assessment in 2007. We are looking forward to continued coordination of technical assistance provided by all donors.
10. HIPC and MDRI. The HIPC Initiative should result in debt relief of approximately US$140 million in net present value terms, or approximately 15 percent of Haiti's total external debt. Haiti could reach its floating completion point within the next two years, following the preparation of a full PRSP and its implementation for at least one year, as well as satisfactory performance under the PRGF-supported program, and the implementation of measures in the area of public finance management and governance, structural reforms, key social sectors, and debt management. Upon reaching its floating completion point, Haiti would be eligible for MDRI relief from IDA of some US$243 million in net present value terms. Haiti does not have any IMF debt eligible for MDRI relief. Assuming the IDB's participation in HIPC and MDRI, total debt relief under these two initiatives could significantly reduce Haiti's debt service burden, from 8.4 percent in 2005/06 to under 3 percent of exports of goods and services in 2010/11.
11. FY2007 financing needs. Haiti' financing requirements are expected to remain substantial, but the already identified assistance appears adequate to close the gap for the first year of the program. Gross financing requirement is US$184 million, of which net cash support, after debt service payments, is estimated to be only US$73 million, including the Fund. The European Union is expected to provide about half of this, and the Fund and bilateral creditors to provide roughly the remaining half This financing plan does not incorporate two aspects. The operating costs of the newly elected local and municipal governments were not included in the FY2007 budget. As soon as they are estimated, the authorities will propose how to meet these costs, possibly drawing on additional donor support or by re-allocating funds within the budget. Also, resources from the PetroCaribe agreement were not included in the FY2007 budget, but the authorities have committed to spend these resources only for investment purposes, in consultation with parliament. Both of these items are expected to be included in the FY2008 budget.
12. FY2008 financing needs. For FY2008, our preliminary estimates suggest a fiscal gap of US$125 million. Future financing needs will need to be addressed at a donor conference next year.
13. Haiti has taken impressive first steps to move away from political and economic instability. While there are obvious risks, the government is doing all it can to deal with them and continued international support will be vital. It is imperative that, to maximize its effectiveness, international assistance be well-coordinated, predictable, and closely aligned with the authorities' own economic and social priorities. In view of the vast reform agenda and Haiti's severe capacity constraints, technical assistance will also be crucial. For its part, the IMF remains closely engaged and stands ready to help in areas of its expertise.