Haiti and the IMF
Press Release: IMF Executive Board Approves US$15.6 Million in Emergency Post-Conflict Assistance to Haiti
Country's Policy Intentions Documents
Free Email Notification
of Intent, Memorandum of Economic and Financial Policies, and Technical
Memorandum of Understanding
Mr. Rodrigo de Rato
Dear Mr. de Rato:
1. The transition government of Haiti has already made significant progress in stabilizing the economy and restoring law and order, following an internal armed conflict in early 2004. However, major challenges remain in addressing the effects of the conflict, and our efforts toward normalizing the social and economic situation have been frustrated by the devastating floods of May and September. Full restoration of security and rebuilding of administrative and institutional capacity will take time, the balance of payments position remains vulnerable, and there are many longstanding structural issues needing immediate attention.
2. Since March 2004, the government's efforts centered on the restoration of security and on re-starting the economy. A United Nations stabilization mission has been deployed since June to assist in restoring security and the respect of law and order. Its forces should reach the full strength of 8,200 officers before end of this year. We believe that their efforts, in conjunction with the Haitian National Police, will bring about a visible and lasting improvement in security, progress toward disarmament, and restoration of the government's control over Haitian territory. Considerable improvement has been achieved on the economic front. We have implemented a Staff Monitored Program that covered the period April-September 2004, observed all of its quantitative targets, and made substantial progress on key structural measures. Also, the government has designed, together with the donor community, an Interim Cooperation Framework (ICF) to restore security, strengthen political and economic governance and promote national dialogue, and rebuild administrative and institutional capacity. In particular, the government is committed to strengthening economic governance, including dealing with endemic corruption. At the conference in July 2004, donors pledged US$1.1 billion of new assistance in support of the ICF for the period July 2004-September 2006.
3. The attached memorandum describes the government's economic and financial program for FY2004/05. The government's principal objectives are to: (i) strengthen security and the rule of law and prepare national elections in 2005; (ii) consolidate the stabilization gains and create conditions for economic recovery and reconstruction of government and social infrastructure; (iii) enhance governance and institutional and administrative capacity of public administration; (iv) improve access to basic services; and (v) create employment for the unskilled and for displaced populations. The government believes that the policies outlined in the attached MEFP are adequate to achieve the objectives of its economic program, but it will take any further measures that may become appropriate for this purpose.
4. In order to facilitate the implementation of the program, the government of Haiti requests assistance under the IMF's Emergency Post-Conflict Assistance policy in an amount of SDR 10.23 million, equivalent to 12.5 percent of quota, and we strongly hope that Haiti may benefit from an interest rate subsidy on the purchase. We intend to request additional purchases under the IMF's emergency post-conflict assistance within the next twelve months, consistent with our balance of payments needs and with the annual limit of access to EPCA of 25 percent of quota. Requests for these later purchases would also provide a macroeconomic framework that could extend to the time when a program could be prepared that could be supported under the Fund's Poverty Reduction and Growth Facility, on which negotiations could be expected to begin sometime following the national elections that are planned for late 2005.
5. Haiti will consult with the Fund on the implementation of the program and any revisions to the policies contained in the MEFP, in accordance with the Fund's policies on such consultations. The government will communicate to the IMF all the information needed to monitor progress in implementing the program.
1. In recent years, Haiti has suffered from an extended political conflict that led to intensifying civil unrest, an armed uprising in early 2004, and a change in government in mid March. During the months preceding the political changeover, hundreds of people were killed and many injured. Haiti's institutional and administrative capacity was damaged, and the political and military strife resulted in an increased lack of security, looting and destruction of public and private property. In addition, the massive floods in May and September caused further human and property losses, while recent strikes and political demonstrations threatened the already fragile stabilization process.
2. The economic impact of these developments has been severe. Property damage and the cost of disruption in economic activity resulting from the political turmoil in early 2004 are estimated at 5.5 percent of GDP. For the fiscal year 2003/04 as a whole, real GDP is estimated to have declined by 3.5 percent. In addition, the September floods in the north western provinces caused extensive damage to economic and social infrastructure, as well as crops and livestock, estimated at about 3.5 percent of GDP. The floods and the demonstrations and violence in October resulted in output losses estimated at 0.5 percent of GDP. In this setting, the overall poverty situation in the country deteriorated, as low-income households suffered from disruptions in the supply of basic commodities and services.
3. In light of the critical security, economic and social situation, the transition government requested international assistance to support its efforts to stabilize the country. A United Nations stabilization mission (MINUSTAH) has been deployed in Haiti to assist the government in restoring security and the respect of law and order. To stabilize the economy and provide a framework for economic assistance by the international community, the government successfully implemented a six-month Staff Monitored Program (SMP), covering the period April-September 2004. In collaboration with the international community, the government has prepared a broad reform and development program, detailed in the Interim Cooperation Framework (ICF), aimed at restoring security and promoting national dialogue, strengthening key institutions and governance, promoting economic recovery, and improving access to basic services. Based on the ICF, donors have pledged US$1.1 billion in new external assistance for July 2004-September 2006.
4. With the support of the international community, the government intends to build on the stabilization gains achieved to date and to implement policies conducive to national reconciliation and sustained economic recovery. A macroeconomic program supported by the IMF under the Emergency Post-Conflict Assistance (EPCA) policy will be a critical element of the recovery effort.
II. Recent Economic Developments and Performance under the SMP
5. The economy has stabilized in recent months, private sector activity has begun to recover and external trade is returning to pre-crisis levels. Inflation has shown signs of abating and the gourde remains stable at around G37/US$.
6. In line with our commitments, all quantitative objectives of the SMP have been observed. We have met both end-June and end-September quantitative targets by wide margins (Table 1). The government reduced its BRH debt by G99 million (0.1 percent of GDP) during April-September 2004, while the program allowed for BRH lending of G1.2 billion (0.8 percent of GDP). By end-September, NIR was US$34 million above the program floor.
7. The key structural benchmarks agreed under the SMP that were implemented include: (i) the interim budget for April-September 2004 was approved by the government and published in the Official Journal in July 2004; (ii) the 2004/05 budget was approved by the government in September 2004, before the beginning of the fiscal year, and published in October 2004; (iii) outlays through current accounts were kept under 10 percent of budgetary credits for nonwage current spending by September 2004; (iv) the pre-shipment inspection firm (SGS) and all customs directors were informed that, as of October 1st, all imports entering Haiti require pre-shipment certification by SGS; and (v) the Anti-Corruption Unit was established in the Ministry of Economy and Finance in September 2004.
8. The ongoing structural commitments include: (i) the census of public sector employment was completed in 14 ministries and 29 autonomous public sector entities; however, the census of the remaining ministries and public sector enterprises was delayed due to limited administrative capacity and the security situation; (ii) the pre-audit of the telecommunications company, Teleco, has been completed; however, the audits of the remaining public sector enterprises could not proceed until external donor financing was identified; (iii) nomenclature for tax revenues and current expenditures was implemented in the 2004/05 budget; however, we were not able to implement the nomenclature for capital expenditures as the externally-financed projects and their components were not readily available.
III. The Post-Conflict Program for 2004/05
9. The government's program for 2004/05 focuses on addressing Haiti's economic and financial difficulties and laying the basis for a sustained improvement in living conditions. The principal objectives of the program are to: (i) strengthen security and the rule of law and prepare national elections in 2005; (ii) consolidate the stabilization gains and create conditions for economic recovery and reconstruction of government and social infrastructure; (iii) enhance governance and institutional and administrative capacity of the government; and (iv) improve access to basic services; and (v) create employment for the unskilled and for displaced populations. These objectives have guided the preparation of the central government budget for FY2004/05 that was approved last September. The government is determined to implement this program and requests support from the IMF under its emergency post-conflict assistance policy, as well as support from other development partners that pledged assistance in July under the ICF.
A. Objectives and Macroeconomic Framework
10. The key objectives of our economic program underpinning the EPCA are to promote macroeconomic stability and strengthen administrative and institutional capacity, which are necessary to sustain economic recovery and reduce poverty. Our macroeconomic framework for 2004/05 targets real GDP growth at 2.5 percent, a decline in consumer price inflation to about 12 percent (end of period), and NIR increasing to US$85 million. To achieve these targets, budget discipline will be essential to ease the burden on monetary policy and thereby make room for a decline in interest rates and the recovery of credit to the private sector. Accordingly, we are committed to raising fiscal revenues, prioritizing budget spending to support key social and investment programs, and enhancing transparency and accountability of public sector operations, including those of the public sector enterprises. The key economic objectives of the program are as follows:
11. Macroeconomic stabilization in 2004/05 and sustained growth over the medium term will require that security conditions are significantly improved, fair and safe elections are held on schedule, and donor assistance is disbursed as envisaged.
B. Fiscal Policy
12. The 2004/05 budget, which was approved by the cabinet in September 2004, targets an overall deficit of 6 percent of GDP to be financed by external resources. Government revenues and external assistance will permit to increase the provision of key public services and boost public investment, while eliminating the need for central bank financing.
13. Last September, the government allocated resources for addressing the impact of the conflict in early 2004 and for promoting economic activity and employment creation. In particular, G360 million were transferred to recapitalize the Industrial Development Fund and enable it to support economic recovery in the conflict affected areas, and G50 million were allocated to provide guarantees for small businesses that suffered from arson in June 2004. The government is committed to ensuring full transparency and accountability of these operations and has published the regulations regarding the eligibility and the implementation mechanism; the government will also make public any additional resources transferred to these operations and any new financing schemes made available to the private sector. The government will also publish monthly listings of all entities and the financial benefits they received from these resources. In addition, the government intends to implement during 2004/05 the emergency projects (largely reconstruction and job creation) totaling G445 million that were included in the 2003/04 supplementary budget but not executed during the last fiscal year.
14. The government is committed to improving budget management and expenditure control and has requested technical assistance from the IMF in this area. We intend to strengthen and unify the budget formulation process using the new budget nomenclature, with clear identification of strategic spending priorities. To allow proper planning and coordination with donors, the budget preparation process for 2005/06 will begin in the first quarter of CY2005, with a view to completing the draft budget by end-June. We will strengthen our capacity to produce quality and timely monthly fiscal data to track specific expenditures, especially those that reduce poverty. To limit recourse to ministerial current accounts, we will also improve the expenditure approval process. Finally, we will enhance the execution of public investment activities by providing adequate financial resources and strengthening the institutional capacity of governmental agencies and through a newly established mechanism for coordination with donors of externally financed budget expenditures.
15. During the fiscal year, the government will consult with IMF staff on measures to offset revenue shortfalls, including through expenditure cuts (primarily lowest-priority current expenditure on goods and services, transfers to public sector entities), and by deferring wage increases and new hiring. We will use revenue in excess of the programmed levels to increase high-priority investment, maintenance and social projects. Any additional external project financing exceeding the programmed levels will be incorporated into the budget.
C. Monetary and Exchange Rate Policy
16. Our monetary program targets a decline in inflation to 12 percent (end of period) in 2004/05 from 22.5 percent in 2003/04. The BRH has established ceilings on its net domestic assets and it will adjust interest rates and issue its bonds, as appropriate, to control liquidity consistent with this objective. To reduce vulnerability to external shocks, the program targets an increase in official reserves to US$271 million by end-September 2005. However, this will still leave our gross official reserves at only 1.7 months of imports. The BRH will avoid foreign exchange market intervention, except for meeting its NIR target. The BRH will consult with IMF staff on foreign exchange market developments and central bank policies.
17. The government's strategic objective is to strengthen the BRH by addressing its losses and increasing its independence. In order to prepare for future reinforcement of the legal, operational, and financial autonomy of the central bank, its legal basis will be modernized and its role and relations with the government properly defined. To this end, a draft of a new central bank law that would establish the independence of the central bank would be revised by September 2005. A new code will be introduced to transform the status of the insurance companies into financial institutions. Markets for financial instruments, in particular those of monetary control, also need to be modernized to provide clear signals about market conditions. We have requested an MFD Technical Assistance mission, which will review the monetary policy framework (including the appropriateness of broad money as the operational target) and assess the financial condition of the central bank. We also plan to complete an IMF safeguards assessment and will publish the interim audit of the BRH.
18. To communicate the orientation of monetary policy and receive feedback, the BRH has since July 2004 introduced monthly briefing sessions between the BRH and the banking system, and similar quarterly briefings for the rest of the private sector will begin shortly. We intend to complete the draft of a new banking law and the above-mentioned central bank law by October 2005 so that they can be considered once a new parliament is constituted. The BRH will continue to monitor the financial condition of commercial banks and will strengthen surveillance of cooperatives, including by expanding on-site inspections.
D. Structural Reforms and Governance
19. We are determined to take forceful steps to improve public sector governance and transparency, and address institutional weaknesses. While several ministries and the central bank have largely preserved their capacity to conduct their work, the administrative and institutional capacity in other ministries and in the provinces has been disrupted, and we expect it to recover gradually as the government asserts control over the country. Nevertheless, we are committed to implementing the following structural measures, some of which had been initiated under the recently completed SMP:
20. We intend to publish the LOI and MEFP for this program to keep the public informed about the government's policies and objectives and to reaffirm our commitment to transparency and economic reform.
E. Financing and Arrears Clearance
21. Haiti's external position has become even more vulnerable after Tropical Storm Jeanne. The disaster assistance and reconstruction of economic and social infrastructure will require a large volume of critical imports, while our gross liquid official reserves are at a precariously low level (six weeks of imports). To meet the projected financing requirements, including increasing the BRH's official reserves, we are requesting financial assistance from the IMF, and are urgently seeking additional support from donors for disaster assistance.
22. We intend to finalize arrangements for regularizing arrears to the World Bank, which are projected at US$52 million as of end-December 2004. Bank staff is preparing an operation with a US$61 million policy-based financing to support a number of reform measures included in our Interim Cooperation Framework. The expected financing from this operation would compensate for the resources we will have used to pay our arrears to the World Bank as well as meeting our remaining financing needs for this fiscal year. It is envisaged that the first tranche of this loan will be disbursed in early January 2005. We expect to finalize arrangements for the needed bridge financing before the loan is submitted for consideration by the Executive Board of the World Bank. We are working to advance preparation of investment projects and programs that could be supported by renewed lending from the World Bank and other donors.
23. In consultation with IMF and World Bank staff, we are developing a comprehensive plan to regularize external payments arrears. Moreover, we have initiated discussions with Paris Club creditors on how to address the outstanding arrears and to start the data reconciliation process.
F. Program Monitoring
24. Performance under the program will be monitored using quarterly indicative targets, structural indicative benchmarks and quarterly reviews. Indicative targets for end-December 2004 and end-March 2005, as specified in Table 1, relate to net international reserves and net domestic assets of the central bank; net domestic banking sector credit to the nonfinancial public sector; net central bank credit to the central government and total nonfinancial public sector; domestic arrears of the central government; and nonconcessional external loans contracted or guaranteed by the central government. The definitions of these indicative targets are provided in the attached Technical Memorandum of Understanding. Given the uncertainty of the amount and timing of disbursement of budgetary assistance, our program includes two adjusters (see TMU). The main policy actions envisaged under the program are listed in Table 2, including those constituting structural indicative benchmarks.
25. The government will not impose restrictions on payments and transfers for international transactions, introduce new or intensify trade restrictions for balance of payments purposes, resort to multiple currency practices, or enter into bilateral payments agreements incorporating restrictive practices with other IMF members. Haiti will consult with the IMF periodically, in accordance with the IMF's policies on such consultations, concerning the progress made by Haiti in the implementation of policies and measures designed to address the country's balance of payments difficulties.
Use the free Adobe Acrobat Reader to view Table 1 (8k PDF file)
Definition of cumulative targets and adjustments
The Ministry of Economy and Finance, the Bank of the Republic of Haiti (BRH), and Fund staff will use the following definitions of indicative targets and adjustments of the indicative targets to monitor the quarterly performance under the program for October 2004-September 2005.
A. Net BRH Credit to the Central Government1
1. The change in net BRH credit to the central government is defined as, and will be measured using:
2. Changes in any other special account (as defined in footnote 2) maintained or established at the BRH will be treated as in 1.b above.
3. The changes will be measured on a cumulative basis from the stock at end-September 2004.
1. The change in net domestic banking sector credit to the nonfinancial public sector is defined as, and will be measured using:
2. Changes in any other special account (as defined in footnote 2) maintained or established in the BRH, BNC, or BPH will be excluded.
3. The changes will be measured on a cumulative basis from the stock at end-September 2004.
1. The change in net international reserves will be measured using:
2. Data will be valued at the corresponding end-period market exchange rate.
3. For definition purposes, net international reserves are the difference between the BRH's gross foreign assets (comprising gold, special drawing rights, all claims on nonresidents, and claims in foreign currency on domestic financial institutions) and reserve liabilities (including liabilities to nonresidents of one-year maturity or less, use of Fund credit, excluding trust funds, and any revolving credit from external financial institutions). Swaps in foreign currency with domestic financial institutions and pledged or otherwise encumbered reserve assets are excluded from net international reserves.
4. The changes will be measured on a cumulative basis from the stock at end-September 2004.
D. Net Domestic Assets of the BRH
1. The change in net domestic assets of the BRH is defined as, and will be measured using:
2. The program definition of net domestic assets of the BRH will use
a program exchange rate of G38 per U.S. dollar for the period October
E. Nonconcessional Loans
1. The definition of debt comprises all instruments, including new financial instruments that share the characteristics of debt, as set forth in paragraph No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No.12274-(00/85), August 24, 2000).
2. Concessional loans are those loans that provide a grant element of at least 35 percent based on the corresponding OECD's Commercial Interest Reference Rates (CIRRs).
3. The indicative target limits exclude conventional short-term import-related credits.
4. The ceilings for contracting nonconcessional loans by the central government will be set at zero throughout the program period.
F. Government Current Accounts
1. Ministerial discretionary accounts are mechanisms for channeling expenditures. In principle, the use of these accounts should be limited to unforeseen emergency outlays.
2. The BRH will be providing monthly information to the Fund staff on the stock of these current accounts for the central government. Central government is as defined in footnote 1.
3. The Ministry of Economy and Finance will be providing monthly information to the Fund staff on transfers to these current accounts for the central government. Central government is as defined in footnote 1.
II. Quarterly Adjustments
The quarterly indicative targets will be adjusted for the following amounts:
A. Adjustment for Domestic Arrears Accumulation
1. The ceilings for net BRH credit to the central government and the net domestic banking sector credit to the nonfinancial public sector will be adjusted downwards for the amount of domestic arrears accumulation.
2. Domestic arrears are defined to include: (i) any bill that has been received by a spending ministry from a supplier for goods and services delivered (and verified) and for which payment has not been made within 45 days after the due date of payment; (ii) wage, salary, and other payment to government employees, including direct and indirect allowances, that were due to be paid in a given month but remained unpaid on the 30th of the following month; and (iii) interest or principal obligations which remain unpaid 30 days after the due date of payment. This definition excludes changes in the stock of arrears on account of interest, penalties and valuation changes.
B. Adjustment for External Cash Budgetary Support
1. The program ceilings on BRH credit to the government and the nonfinancial public sector, and on BRH net domestic assets and the floor on NIR reflect the assumed flow of net program financing, defined as gross disbursements of cash budgetary assistance less the stock of arrears to the World Bank and debt service falling due to multilateral and some bilateral creditors (Canada and the U.S.). Cumulative net program financing by quarter is presented in the table below.
2. If there is a shortfall in cash budgetary assistance, the floor on the NIR will be adjusted downward and the ceilings on BRH credit to the government, the nonfinancial public sector and BRH net domestic assets will be adjusted upward by the amount of this shortfall; the amount of adjustment will not exceed the amount of net program financing, converted into gourdes at the program exchange rate. The adjuster will be calculated on a cumulative basis from October 1, 2004.
3. If external disbursements for cash budgetary support exceed the level of financing assumed in the program by more than US$5 million, the ceilings on BRH financing of the government and of the public sector and on BRH net domestic assets will be adjusted downward, and, accordingly, the floor on the NIR will be adjusted upward, by the amount of excess financing, converted into gourdes at the program exchange rate. The adjuster will be calculated on a cumulative basis from October 1, 2004.
4. The projected external cash budgetary support on a cumulative basis from end-September 2004 is as follows:
III. Provision of Information to IMF Staff
To ensure adequate monitoring of the program, the authorities will provide daily and weekly monetary and fiscal indicators to IMF staff.
Monetary Indicators: (a) Exchange rate; (b) Volume of foreign
exchange transactions, of which BRH sales and purchases; (c) Gross international
reserves; and (d) Net international reserves.
Monetary Indicators: (a) Stock of BRH bonds; (b) Deposits at commercial banks (in gourdes and U.S. dollars); (c) Credit to private sector (in gourdes and U.S. dollars); (d) Credit to public sector (net); and (e) Currency in circulation.
Fiscal Indicators: (a) Receipts and (b) Expenditures.
These data will be reported with maximum five-day lag (four-week final).
1The central government comprises the presidency, prime minister's office, parliament, national courts, treasury, and line ministries. It includes expenditure financed directly by foreign donors through ministerial accounts (comptes-courants).
2Special accounts are transitory accounts of the central government for specific foreign-financed projects or external assistance.
3The NFPS includes the central government, the public enterprises (e.g., Teleco, EDH, APN, AAN, and CAMEP), and foreign-financed projects.