Public Information Notice No. 03/23

Public Information Notice: IMF Concludes 2002 Article IV Consultation with Haiti

March 3, 2003

On January 24, 2003, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Haiti.¹

Background

Over the last two years, the Haitian economy was negatively affected by the continued political stalemate and the ensuing decline in foreign financing and private investment. The 12-month inflation rate declined to 8 percent in January 2002 and accelerated to 12 percent by October 2002, mainly driven by a depreciation of the exchange rate. Real GDP contracted by an estimated 1 percent in FY 2000/01, and economic activity remained weak during FY 2001/02. However, prospects for a recovery of exports in FY 2002/03 appear favorable. While there seems to have been some progress in reducing poverty during the past decade in Haiti—the poorest country in the Western Hemisphere—social indicators worsened again in the past two years as a result of the continued economic deterioration.

Fiscal performance worsened markedly during the last two years, with rising deficits financed mainly by the central bank (BRH), and through an accumulation of external arrears. The overall central government deficit rose to 2.7 percent of GDP in FY 2000/01 (from 2.5 percent in FY 1999/2000) and further to 3 percent of GDP in FY 2001/02. Central government revenue declined to an historically low level (7.3 percent of GDP) during FY 2000/01, but increased to 8 percent of GDP in FY 2001/02 owing in part to enhanced collection efforts. Total budgetary spending rose from 10 percent of GDP during FY 2000/01 to 11 percent of GDP in FY 2001/02, reflecting large expenditures overruns designed to ease the tense social climate.

Monetary conditions remained tight during FY 2000/01, with the BRH maintaining high interest rates on its bonds. However, the BRH allowed net international reserves (NIR) to decline to support the exchange rate. During FY 2001/02, the interest rate on bonds was cut drastically. With monetary policy accommodating the increased fiscal deficit through a substantial increase in central bank financing, NIR further declined and the exchange rate depreciated.

Starting in March 2002, a number of unregulated credit cooperatives offering unsustainably high interest rates reduced or suspended monthly interest payments to their members and some stopped operations completely. A law establishing a new supervisory agency for credit cooperatives under the control of the central bank was enacted in July 2002. The strategy of the government consists in bailing out small depositors for social reasons.

Indicators of external vulnerability show a continued dramatic deterioration in the coverage of imports of good and services by freely usable gross official reserves. NIR declined to US$45 million by November 2002, or about two weeks of imports of goods and services. While the market-determined exchange rate was broadly stable during FY 2000/01, it depreciated by about 48 percent between September 2001 and December 2002, reflecting the expansionary fiscal policy and accommodating monetary policy, increasingly pessimistic private sector expectations owing to the lack of progress on the political front, and lately, rumors of a forced conversion of dollar deposits into gourdes, that led to a significant capital flight. While Haiti remains current on her obligations to the Fund, external arrears are increasing, including to the World Bank and the Inter-American Development Bank.

No progress was made over the last two years toward privatizing nonfinancial public enterprises and the state-owned Banque Nationale de Credit. The anti-money-laundering law enacted in April 2001 was not fully implemented, as a Financial Intelligence Unit has not yet started its operations. Haiti is yet to prepare anti-terrorist financing legislation. Work on a new banking law and central bank law are yet to be finalized.

Executive Board Assessment

Directors expressed deep concern about Haiti's worsening economic and social conditions, and in particular, the widening of the fiscal deficit, the accumulation of external arrears, and the further increase in poverty. Directors urged the authorities to take early and decisive steps—based on the recommendations of the Organization of American States—to restore political stability, avoid a further worsening of macroeconomic and social conditions, and re-establish a basis for growth and improved living standards.

Directors regretted that the political difficulties have deterred the authorities from taking corrective measures aimed at stemming the loss in international reserves, containing inflation, and promoting growth. They considered that progress toward these goals required, at the minimum, prompt action to reduce the fiscal deficit. In this connection, noting the low level of fiscal revenues, Directors welcomed the authorities' efforts to implement legislation geared toward improving revenue performance in FY 2002/03. Additional efforts should include strengthening customs administration, and widening the tax base by cutting back exemptions and incorporating the informal sector under the tax umbrella. Directors commended the authorities for their recent decision to increase domestic fuel prices, but noted that it is essential also to reform the petroleum pricing system on a more permanent basis in order to raise revenue and reduce the budget's vulnerability to fluctuations in world oil prices and the exchange rate. They recommended that the social ramifications of further price adjustments could be addressed through an appropriate safety net.

Directors stressed the need to improve fiscal transparency and accountability. They emphasized the importance of strengthening cash management by restricting the use of discretionary ministerial accounts. It was also important to enhance expenditure management and reporting in ministries, and to publish on a regular basis detailed fiscal and budget data. Directors welcomed the authorities' intention to limit the cost of addressing the failure of credit cooperatives, but cautioned against bailing out unviable and weakly managed cooperatives. There was broad support for ensuring that the modalities of the assistance to these bodies be fully transparent.

Directors agreed that the priorities for monetary policy in 2003 should be the rebuilding of a cushion of reserves and containing inflation. In addition to prompt action in the fiscal area, these goals require the maintenance of market-determined interest rates for central bank bonds, and the prompt passage of legislation that would improve the independence of the central bank. Directors welcomed the authorities' commitment to increased exchange rate flexibility, noting that continued pursuit of this policy would help preserve competitiveness and promote export diversification.

Directors expressed concern that continued political and economic stability could erode the recent progress made in strengthening the finances of the banking system, and urged vigilance in monitoring ongoing developments in credit and liquidity. They encouraged the authorities to step up efforts to improve the supervision and health of banks and credit cooperatives and modernize the financial sector's legislative framework, with technical assistance from the Fund. Directors stressed the importance of full implementation of the anti-money laundering law, and of avoiding further delays in making the Financial Intelligence Unit operational.

Directors underscored the need to begin work on a comprehensive medium-term development plan. They emphasized that raising growth over the medium term would require, in addition to resolving the political crisis, prudent macroeconomic policy and a demonstrated commitment to further structural measures. In this regard, priority was attached to pressing ahead with the privatization program in the energy, telecoms, and transportation sectors, and improving public infrastructure. Directors emphasized that good governance would be an essential element in sustaining a recovery, and that the authorities' cooperation with the World Bank on the initiative to strengthen governance in key public institutions is crucial.

Directors regretted the continued accumulation of arrears to multilateral and other creditors, and stressed the importance of prompt steps to establish a timetable for clearing these arrears. Directors noted that such steps, together with a firm commitment to undertake a sound and comprehensive medium-term economic program, could form the basis, possibly in the context of a staff monitored program, for re-establishing a track record of policy implementation, which could lead to a Poverty Reduction and Growth Facility-supported program.

Directors took note of Haiti's weak statistical infrastructure, which constrains policy-making. They emphasized the need to sustain efforts—in collaboration with Caribbean Regional Technical Assistance Center—to improve the quality of statistics in the real, external, and public sectors, and to strengthen the technical and managerial capacity of the National Statistics Institute.