## _cr10263 ## Source details **Canonical URL:** [_cr10263](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10263.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10263.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10263.pdf.json) --- ### Post-Earthquake Impact - Damages and losses estimated at 120 percent of 2009 GDP. - Casualties and physical damage: - Over 225,000 persons were killed and 300,000 injured. - Most ministries, hospitals, and schools were destroyed. - Humanitarian situation: about 1.3 million people still in temporary shelters at the start of the hurricane season. - Security/political effects: recent attacks on MINUSTAH troops, rising insecurity, parliamentary elections postponed to November 2010, and an 18-month extension of the state of emergency. - PDNA estimates: - Damages: US$4,237 million (65 percent of GDP). - Losses: US$3,561 million (55 percent of GDP). - Recovery and reconstruction needs: US$3.9 billion for the next 18 months; US$8.9 up to US$11.5 billion for the next three years. ### Donor Pledges, Reconstruction Plan, and Coordination - Donor pledges: US$9.9 billion in support of the authorities’ reconstruction plan. - Near-term disbursement: US$5.3 billion to be disbursed over the next 18 months (as of June 7, 2010). - Pledge composition (aggregate from text table): - Humanitarian aid: 3,047 (total) - Recovery and reconstruction total: 9,922 (total) - Grant component of reconstruction: 7,773 (total) - Budget support within grants: 816 (of which: budget support entries listed) - Loan component: 202 (total) - New debt relief: 802 (total) - Unallocated: 1,144 (total) - Reconstruction objectives: sustainably raise medium-term growth; reduce poverty by creating decentralized economic growth poles; reduce vulnerability to natural disasters; enhance access to basic social services; strengthen state institutions. - Coordination mechanisms: Interim Haiti Reconstruction Commission (IHRC) to set strategic priorities; Multi-Donor Trust Fund (MDTF / Haiti Reconstruction Fund ─ HRF) operated by the World Bank to help channel resources. - IHRC institutional design: co-chaired by Prime Minister Bellerive and UN Secretary General’s Special Envoy Bill Clinton; composed of equal number of Haitian and donor representatives; IHRC to be replaced after 18 months by the Haiti Reconstruction Agency (HRA). ### ECF Program and IMF Financing Rationale - Proposed ECF arrangement: three-year program supported by a new ECF arrangement in an amount equivalent to 50 percent of quota (SDR 40.95 million or US$60.43 million). - Recent ECF augmentation: sixth and last ECF review completed on January 27, 2010, with an augmentation equivalent to 80 percent of quota; a US$102 million ECF augmentation disbursed at end-January to provide liquidity support. - Access and disbursement design: - Total access: 50 percent of quota. - Disbursement schedule proposed: first two disbursements of 10 percent of quota each, followed by five disbursements equivalent to 6 percent of quota each. - First disbursement: SDR 8,190,000 (July 15, 2010). - Rationale for Fund financing: mitigate excessive exchange rate and reserves movements in the context of large and volatile aid inflows; provide a coherent macroeconomic framework to anchor donor support. - Staff proposes relatively low access given grant-dominated medium-term financing needs and high program risks. ### Macroeconomic Outlook, Projections, and Key Indicators - Aid inflow projection: inflows projected to triple to about 15 percent of GDP a year on average in 2010-14 (from an annual average of 5–6 percent of GDP during FY 2005-09). - Near-term growth rebound: growth should rebound strongly to about 9 percent on average over the next two years, driven mostly by reconstruction. - FY projections (fiscal year ending September 30; selected items): - Real GDP growth: 2.9 -8.5 9.8 8.4 6.9 (sequence presented in source tables). - Consumer prices (end-of-period): -4.7 8.5 8.6 7.5 7.0 (sequence presented). - Overall fiscal balance: -4.4 -2.9 -3.9 -4.9 -4.2 (sequence presented). - External grants: 7.4 26.6 20.5 15.5 12.7 (sequence presented). - Net international reserves (program): 439 301 339 425 455 (millions of U.S. dollars; sequence presented). - Liquid gross reserves: 948 1,076 1,140 1,212 1,302 (millions of U.S. dollars; sequence presented). - Reserves in months of imports: 2.9 3.1 3.2 3.2 3.4 (sequence presented). - Staff projections: - Annual inflation projected at 8.6 percent in FY 2011; decline to 7 percent by end-FY 2013. - External current account balance (excl. official grants): -10.6 -28.7 -24.2 -19.7 -16.8 (sequence presented). - Key macro indicators (selected actuals and estimates): - Nominal GDP (2009): US$ 6.56 billion. - GDP per capita (2009): US$ 661. - Real GDP growth (2009/10 actual): -8.5 percent. - Real GDP growth (Proj. 2010/11): 9.8 percent; (Proj. 2011/12): 8.4 percent. - Twelve-month inflation reached 6.4 percent in May; staff projection for end-September inflation is 8.5 percent. - Net international reserves (NIR) grew to US$646 million at end-May (from US$402 million at end-December). - Base money growth (12-month): rose to 28 percent (May), from 11 percent in December. ### Fiscal Policy, Revenue Strategy, and Public Financial Management - Immediate priorities: - Restore tax administration operations after destruction of tax administration building and information systems. - Restore spending execution capacity amid urgent needs. - Revenue targets and reform timetable: - FY 2009 revenue about 11 percent of GDP; comprehensive reforms expected to raise domestic revenue collection above 13 percent of GDP by FY 2013. - Short-run measures: introduce by end-September a tax on incoming international calls and car registration fees (delayed by the earthquake); expected to increase annual revenue by about 0.4 percent of GDP. - By end-September 2010: establish a working group to prepare and submit revised tax laws to Parliament during FY 2011; consolidate new laws into a tax code in FY 2012. - Transparency and tracking measures: - Publish quarterly performance reports and quarterly reports identifying all fiscal expenditures by beneficiary sector starting in September 2010. - Publication of central government transfers to project accounts, project by project (starting June 30, 2010 — prior action). - Publication of central government current transfers and subsidies by beneficiary sector (starting June 30, 2010 — prior action). - Public financial management reforms: - Move progressively to a programmatic budget approach starting FY 2012. - Prepare rolling multi-year public investment programs and monthly reconciled Treasury balances. - Move toward a Single Treasury Account. ### Financial Sector Stability, PCG Scheme, and Complementary Reforms - Pre-earthquake banking: well capitalized and highly liquid; NPL ratio at end-2009 about 8.5 percent. - Post-earthquake banking impact: - NPLs rose from 8.6 percent of total loans in December to 12.1–12.3 percent in March (various source figures). - Authorities estimate that a third of bank loans may have been impaired. - Private sector credit declined by 12 percent between December and May (selected source statements also cite 6.6 percent decline over a period). - Partial Credit Guarantee (PCG) scheme design: - Two pillars: - Pillar 1: restructure viable bank loans impacted by the earthquake and finance business recovery. - Pillar 2: support new lending to SMEs. - Coverage: after a deductible, guarantee up to 50 percent of unpaid balance under Pillar 1 and up to 80 percent under Pillar 2. - Estimated funding required: about US$100 million for Pillar 1 and US$30 million for Pillar 2 (total around US$130 million). - Donor funding to date: about US$25-30 million (insufficient). - BRH temporary guarantee: staff agreed BRH should launch the scheme promptly, setting aside US$70 million of its foreign exchange reserves as initial guarantee (US$50 million for Pillar 1 and US$20 million for Pillar 2). - No payouts expected during first half year because loans must be non-performing for at least six months before claims. - Complementary reforms: - Establish credit bureau, centralized registry for movable collateral, strengthen civil registry and cadastre. - Reform insolvency legislation and introduce insurance regulation framework. - Develop domestic T-bill market and recapitalize BRH. ### Monetary and Exchange Rate Policy - Exchange regime: de jure exchange regime remains a managed float; Haiti has accepted Article VIII, Sections 2, 3, and 4 obligations; system free of restrictions on payments and transfers for current transactions. - Exchange rate dynamics: - Gourde appreciated by about 5.3 percent against the U.S. dollar from end-2009 (selected period). - Real effective appreciation: currency appreciated by almost 90 percent between 2003 and December 2009; modest overvaluation within model error margins. - BRH operations and policy recommendations: - BRH increased net purchases of foreign exchange since the earthquake to smooth exchange rate volatility and rebuild reserves, contributing to rapid monetary growth. - Staff recommended future purchases be at least partly sterilized and for authorities to contain base money growth; authorities commit to tighten monetary policy if needed. - Improvements: regular foreign exchange auctions, development of T-bill market, use of open-market operations, launch of domestic T-bill regular auction calendar (first T-bill issuance envisaged by end-March 2011; structural benchmark). - Recapitalization of BRH and adoption of a modern central bank law to anchor independence and provide for gradual elimination of direct government financing; law to be submitted to Parliament by FY 2011 (source texts vary between FY 2011 and end-September 2011 depending on passage). ### Debt Sustainability, Relief, and Risks - Haiti remains at high risk of debt distress; the earthquake significantly worsened the macroeconomic outlook. - Pre-earthquake relief: US$1.2 billion in debt relief under HIPC/MDRI in June 2009. - Creditors' commitments: - Creditors representing about 92 percent of Haiti’s end-September 2009 debt stock (excluding the Fund) committed to cancelling remaining debt. - World Bank cancelled SDR 24.3 million (about US$36 million as of May 21, 2010). - IDB relief of US$479 million expected to become effective when committed donor financing is available. - Venezuela confirmed debt relief of US$395 million of outstanding PetroCaribe debt. - IMF PCDR Trust: - If the Fund provides full stock debt relief on outstanding debt as of end-January 2010, relief would cover about US$263 million (SDR 178.13 million). - Executive Board approved full cancellation of Haiti’s outstanding liabilities to the Fund, about SDR 178 million (equivalent to US$268 million). - DSA outcomes: - Baseline without additional relief: NPV of debt-to-exports ratio breaches policy-dependent threshold in the medium term (peak 187 percent in 2013; remains above 100 percent until 2022). - Debt relief scenario: debt indicators improve though vulnerability to shocks remains high; financing needs should be covered mostly through grants; new borrowing should be limited and highly concessional. - Debt service to the Fund projected to peak in 2016 at 4 percent of exports of goods and services and 3 percent of domestic revenues; with Fund debt relief on end-January 2010 stock, debt service would be significantly lower (0.7 percent of exports and 0.5 percent of domestic revenues in 2019). ### Program Risks, Institutional Priorities, and Staff Recommendations - Principal program risks: - (i) widespread social unrest triggered by delays in reconstruction or elections; - (ii) pervasive capacity constraints amplified by the earthquake; - (iii) high vulnerability to external shocks, particularly natural disasters. - Urgent implementation requirements: - Timely disbursement of aid commitments to proceed with reconstruction and improve living conditions rapidly. - Effective coordination of reconstruction efforts and strengthening of government implementation capacity. - Disbursement of aid through the government budget or the Multi-Donor Trust Fund to enhance coordination and local capacity building. - Close coordination of fiscal, monetary, and exchange rate policies to ensure effective spending and absorption of aid inflows. - Boost investment, improve infrastructure (electricity and roads), remove obstacles to private sector credit, improve business environment and economic governance, and enhance access to basic social services. - Staff appraisal highlights and recommendations: - Support for authorities’ National Action Plan as appropriate anchor for rebuilding; channeling external assistance through budget or MDTF recommended to support coordination and capacity building. - Urgent priorities: prompt disbursement of pledges; facilitate relocation of families; adopt new building code with anti-seismic norms; launch large public works to generate momentum. - Rapid implementation of the PCG scheme essential to restart private sector activity. - Strengthen revenue administration, improve tracking and reporting of public spending, and continue PFM reforms with TA support. - Enhance monetary policy framework: accelerate reform of foreign exchange auctions, introduce Treasury bills, recapitalize BRH, and adopt new central bank law. ### Selected Program Monitoring and Conditionality (quantitative and structural) - Performance criteria include ceilings on net central bank credit to the central government, ceiling on net domestic assets of the central bank, floor on NIRs, zero ceilings on accumulation of external and domestic arrears and on contracting/guaranteeing non-concessional debt. - Indicative targets include base money and net domestic financing of government and a floor on poverty-reducing spending. - Structural benchmarks (selected): - Publish quarterly reports on poverty-reducing expenditures and tax expenditure reporting by end-September 2010. - Set up working group to prepare a new tax code by end-September 2010. - Establish memorandum of understanding between MEF and BRH for T-bill implementation plan by end-September 2010. - Prepare monthly consolidated Treasury balances by end-September 2010. - BRH audited financial statements for FY 2009 to be published by time of first program review. *Source: EXECUTIVE SUMMARY (_cr10263 — IMF staff report).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Post-Earthquake Impact - The January 12, 2010 earthquake caused damages and losses estimated at 120 percent of 2009 GDP. - Casualties and physical damage: Over 225,000 persons were killed and 300,000 injured; most ministries, hospitals, and schools were destroyed. - Humanitarian situation: about 1.3 million people still in temporary shelters at the start of the hurricane season. - Security/political effects: recent attacks on MINUSTAH troops, rising insecurity, parliamentary elections postponed to November 2010, and an 18-month extension of the state of emergency. ### Donor Pledges and Reconstruction Plan - International commitments: donors pledged US$9.9 billion in support of the authorities’ reconstruction plan. - Near-term disbursement: US$5.3 billion are to be disbursed over the next 18 months (Text Table 1; as of June 7, 2010). - Pledge composition (aggregate from text table): - Humanitarian aid: 3,047 (total) - Recovery and reconstruction total: 9,922 (total) - Grant component of reconstruction: 7,773 (total) - Budget support within grants: 816 (of which: budget support entries listed) - Loan component: 202 (total) - New debt relief: 802 (total) - Unallocated: 1,144 (total) - Reconstruction objectives: sustainably raise medium-term growth; reduce poverty by creating decentralized economic growth poles; reduce vulnerability to natural disasters; enhance access to basic social services; strengthen state institutions. - Coordination mechanisms: Interim Haiti Reconstruction Commission (IHRC) to set strategic priorities; Multi-Donor Trust Fund (MDTF / Haiti Reconstruction Fund ─ HRF) operated by the World Bank to help channel resources. ### ECF Program and Macroeconomic Strategy - Proposed ECF arrangement: three-year program supported by a new ECF arrangement in an amount equivalent to 50 percent of quota. - Recent ECF augmentation: the sixth and last ECF review was completed on January 27, 2010, with an augmentation equivalent to 80 percent of quota; a US$102 million ECF augmentation was disbursed at end-January to provide liquidity support. - Rationale for Fund financing: mitigate excessive exchange rate and reserves movements in the context of large and volatile aid inflows; provide a coherent macroeconomic framework to anchor donor support. - Aid inflow projection: inflows projected to triple to about 15 percent of GDP a year on average in 2010-14 (from an annual average of 5–6 percent of GDP during FY 2005-09). - Exchange regime: Haiti has accepted the obligations of Article VIII, Sections 2, 3, and 4; the de jure exchange regime remains a managed float with no pre-determined path for the exchange rate; system free of restrictions on payments and transfers for current transactions. ### Recent Developments and Macroeconomic Outlook - Growth and sectoral recovery: agriculture, construction (including debris removal), and textile manufacturing are leading the recovery; economic activity has rebounded rapidly since the earthquake. - Remittances: grew by 12 percent in January-May (year-on-year), supporting consumption and imports. - Trade and inflation: trade deficit is widening although exports are recovering; twelve-month inflation reached 6.4 percent in May; staff projection for end-September inflation is 8.5 percent. - Exchange reserves and money: net international reserves (NIR) grew to US$646 million at end-May (from US$402 million at end-December); the 12-month rate of base money growth rose to 28 percent. - Fiscal execution and aid: tax collections during February-May represented about 80 percent of budgeted amounts; as of end-June, budget support disbursements amounted to only 30 percent of total commitments for the fiscal year ending in September. - Revenue risks: sustaining favorable revenue collection from income taxes will require strengthening controls and audits. - Investment and poverty targets: authorities’ objectives to sustain an annual rate of growth of 5-6 percent over the medium-term and reduce the poverty rate from 54 percent to 40 percent by 2015 are described as ambitious relative to historical performance; boosting investment and improving infrastructure (electricity and roads) are key. ### Fiscal and Financial Sector Issues - Pre-earthquake banking system (end-2009): well capitalized and highly liquid; credit and deposits were growing; liquidity had improved; all banks posted positive earnings; non-performing loan (NPL) ratios had declined. - Post-earthquake banking impact: bank capital negatively affected; NPLs rose from 8.6 percent of total loans in December to 12.1 percent in March (excluding BNC, the NPL ratio rose from ... [text truncated at source]); authorities estimate that a third of bank loans may have been impaired as a result of the earthquake. - Private sector credit: declined by 12 percent between December and May. - Non-bank financial sector vulnerabilities: micro-finance institutions were undercapitalized and largely uninsured; insurance sector gross costs estimated at around US$200 million, with reinsurance covering most reinsured claims and about 75 percent of the total cost. - Financial sector policy support: Fund technical assistance on tax policy and revenue administration, budget preparation and planning, fiscal reporting, Treasury management; assistance on financial sector issues including a Partial Credit Guarantee scheme (PCG Fund) with the World Bank, IDB and U.S. Treasury; development of a domestic Treasury bill market; central bank recapitalization; and design of insurance regulation framework. - Complementary donor capacity building: payroll management, internal and external audits and procurement, anti-corruption and governance (World Bank); debt management (Canada, IDB); energy sector (World Bank, Canada); restoration of IT systems (USAID); European Union supports economic governance and public financial management reforms. ### Program Risks and Institutional Priorities - Program risks: described as high given large and volatile aid inflows and post-disaster environment. - Urgency of reforms: the earthquake highlighted the urgency of moving forward with the unfinished reform agenda and further strengthening institutions and economic governance. - Key implementation requirements: - Timely disbursement of aid commitments to proceed with reconstruction and improve living conditions rapidly. - Effective coordination of reconstruction efforts and strengthening of government implementation capacity. - Disbursement of aid through the government budget or the Multi-Donor Trust Fund to enhance coordination and local capacity building. - Close coordination and enhanced effectiveness of fiscal, monetary, and exchange rate policies to ensure effective spending and absorption of aid inflows. - Boosting investment, improving infrastructure (electricity and roads), removing obstacles to private sector credit, improving the business environment and economic governance, and enhancing access to basic social services. *Source: EXECUTIVE SUMMARY (_cr10263 — IMF staff report).* ### 3.8 percent to 6.5 percent over the same period. ### _cr10263 - 3.8 percent to 6.5 percent over the same period. ### Haiti’s National Action Plan for Recovery and Development (Box 2) - Ten-year action plan presented March 31, 2010; first 18-month period aims to start economic recovery and reconstruction while providing emergency support and prioritizing humanitarian and rehabilitation needs ahead of the hurricane season. - Short-term measures: - Reopen schools and universities. - Stabilize the financial system and restore SMEs access to credit to restart economic activity and create jobs. - Four pillars of the longer-term development and growth strategy: - Territorial rebuilding: - Decentralize economic activity from the capital by developing regional economic centers. - Improve transport and communication infrastructure. - Implement a land settlement strategy with a reliable land registry. - Economic rebuilding: - Treat agriculture and private sector development as main growth engines. - Improve agricultural yields via distribution of agricultural inputs and development of irrigation and rural road networks. - Promote private sector development through: (i) strengthening legal and regulatory framework for doing business; (ii) facilitating establishment of manufacturing industries, tax-free zones, industrial areas, and tourism development; (iii) attracting private investment by eliminating red tape; (iv) boosting credit to the private sector, particularly to SMEs; and (v) seeking public-private partnerships (PPPs) for large infrastructure projects. - Social rebuilding: - Aim to reduce poverty rates from 54 percent in 2009 to 40 percent by 2015 (share of the population living under 1 U.S. dollar per day). - Promote employment and social inclusion; enhance basic public services and social safety nets. - Institutional rebuilding: - Improve political, economic, and social governance; support democratic institutions and seek political consensus. - Institutional arrangements: - Interim Haiti Reconstruction Commission (IHRC) co-chaired by Prime Minister Bellerive and UN Secretary General’s Special Envoy Bill Clinton to oversee reconstruction for 18 months; composed of equal number of Haitian and donor representatives. - IHRC to be replaced after 18 months by the Haiti Reconstruction Agency (HRA). - Multi-Donor Trust Fund (MDTF) or Haiti Reconstruction Fund (HRF) managed by the World Bank to support the reconstruction plan; all HRF-financed projects must be approved by the IHRC. ### Haiti’s Growth Challenges (Section A) - Historical performance and social context: - Real GDP per capita has contracted by 30 percent since the 1960s. - Growth remained below the PRSP objective (4 percent). - 72 percent of the population living under US$2 a day (Text Figure 1 and Text Table 3). - Haiti ranks 149th over 182 in the 2009 Human Development Report. - Key structural and institutional barriers deterring private investment and credit: - Need to consolidate progress in governance, democratic processes, and security; organizing a fair and free general election 10 months after the earthquake is critical. - Access to basic social services, particularly health and education, must be further enhanced; living standards deteriorated since the earthquake. - Infrastructure deficits: energy supply inadequate, expensive and unreliable; roads, ports, airports, irrigation systems need repair or reconstruction. - Property rights enforcement problems: civil and land registries unreliable and incomplete; judiciary weak and 80 percent of this system in Port-au-Prince adversely affected by the earthquake. - Doing business is expensive and difficult: 2010 World Bank Doing Business indicators show it currently takes 180 days to start a business. The Center for Facilitation of Investments (CFI) needs transformation into an efficient one-stop shop for foreign investors. - Staff and authorities’ outlook: - Authorities confident implementation of Action Plan will boost GDP growth to about 6 percent a year by 2015 and significantly reduce poverty. - Staff recommended clear priorities, further articulation of growth strategy, focus on most effective interventions, and prioritization/coordination of donor-funded projects by the Reconstruction Commission. - Decentralization is central: creating new economic growth poles implies developing infrastructure, housing, and business-related services in the provinces. - Staff support for PPPs in ports and airports, with emphasis on strong legal and regulatory frameworks and avoiding discriminatory tax exemptions. - Urgent measures to jumpstart decentralization and growth: introduce/enforce new building code; strengthen cadastre and property rights; boost credit to small businesses; launch major public and infrastructure works to create jobs and momentum. - Reforms to enhance non-price competitiveness over the medium term critical to preserve export competitiveness and absorb large aid inflows; authorities revising legal and financial regulation to meet international FDI standards to enable Haiti’s textile export sector to benefit from the HELP Act. ### Macroeconomic Outlook (Section B) - Overall uncertainty: outlook for FY 2010–13 highly uncertain and dependent on the path of aid disbursements. - Aid projections: - Official grants projected to average about US$1.5 billion a year (over 20 percent of GDP) until 2013. - Near-term projection: - Growth should rebound strongly to about 9 percent on average over the next two years, driven mostly by reconstruction. - Annual inflation projected at 8.6 percent in FY 2011 due to supply and transport bottlenecks and strong demand; inflation to decline to 7 percent by end-FY 2013. - Medium-term assumptions: - Aid inflows effectively spent and absorbed; widening fiscal and current account deficits associated with reconstruction spending and imports to be sustainably covered by grants. - Net international reserves (NIR) coverage would remain at about 3 months of imports throughout the period. - By 2013, fiscal deficit and current account (excluding grants) projected to converge to levels consistent with fiscal and external sustainability (referenced in debt sustainability analysis and staff’s exchange rate assessment). - Key projections and indicators (Text Table 4; fiscal year ending September 30): - GDP at constant prices: 2.9-8.5 9.8 8.4 6.9 - Consumer prices (end-of-period): -4.7 8.5 8.6 7.5 7.0 - Overall fiscal balance: -4.4 -2.9 -3.9 -4.9 -4.2 - Overall fiscal balance (excl. grants and externally financed projects): -4.4 -6.8 -5.7 -4.1 -3.0 - Central bank net credit to the central government: 0.2 0.1 0.0 0.0 0.0 - External current account balance (incl. official grants): -3.2 -2.1 -3.7 -4.1 -4.1 - External grants: 7.4 26.6 20.5 15.5 12.7 - External current account balance (excl. official grants): -10.6 -28.7 -24.2 -19.7 -16.8 - Net international reserves (program): 439 301 339 425 455 - Liquid gross reserves: 948 1,076 1,140 1,212 1,302 - In months of imports of the following year: 2.9 3.1 3.2 3.2 3.4 - External risks: - Remittances are more countercyclical and resilient than in the region and are projected to continue to grow, albeit at a slower pace than in recent months. - Weaker-than-anticipated remittances and exports, or natural disasters, could derail growth. ### Fiscal Policy, Tax Administration, and Public Financial Management (Section C and subsequent) - Immediate fiscal priorities post-earthquake: - Find adequate office space and restore basic tax administration functions after destruction of tax administration building and information systems. - Restore spending execution capacity amid massive urgent needs. - Medium-term fiscal objectives: - (i) Raise domestic revenue through tax reform and building modern efficient tax and customs administrations. - (ii) Align the budget and financing to reconstruction priorities within a programmatic framework. - (iii) Continue strengthening public financial management to enhance the quality and transparency of spending. - Revenue targets and reforms: - Comprehensive tax reform and stronger revenue administration expected to raise domestic revenue collection above 13 percent of GDP by FY 2013 (FY 2009 revenue about 11 percent of GDP). - Authorities intend to increase revenue by broadening the tax base, combating fraud, and reducing exemptions. - Strategy for rebuilding tax administration: refocus tax and customs administration on performance and fiscal missions; step up verification and controls; publish quarterly performance reports (MEFP ¶11). Design and implementation supported by Fund and other partners’ technical assistance. - Tax policy measures and timetable: - Focus on reviewing VAT, excises, and income taxation and preparing a new tax code. - Plan to establish, by end-September 2010, a working group to prepare and submit revised tax laws to Parliament during FY 2011; consolidate new laws into a tax code in FY 2012. - Short-run measures: introduce (by end-September) a tax on incoming international calls and car registration fees delayed by the earthquake; expected to increase annual revenue by about 0.4 percent of GDP. - Authorities to continue reviewing exemptions and to publish quarterly reports identifying all fiscal expenditures by beneficiary sector starting in September 2010 (MEFP ¶11, Table 2). - Fiscal transparency and donor coordination: - Strengthening fiscal institutions could attract additional budget support resources. - Main budget support donors and authorities agreed on a revised set of priority measures to enhance economic governance; these measures will form the basis for future budget support disbursements. - Program conditionality in fiscal area to be based on common matrix including measures on budget preparation and execution, revenue mobilization, payroll and treasury management, controls and audits, corruption prevention, and measures to increase and track poverty-reduction spending. - Short-term transparency enhancements to include publication of data on: (i) quarterly spending on poverty-reducing expenditures; (ii) monthly transfers to investment project accounts, including PetroCaribe projects; and (iii) monthly subsidies and cash transfers by beneficiary entity (MEFP ¶13–14). - Strengthening public financial management: - Progressive shift to a programmatic budget approach starting with key line ministries in FY 2012. - Prepare rolling multi-year public investment programs informed by better recording and tracking of investment spending. - CARTAC and FAD technical assistance supporting establishment of a macro-fiscal unit at the Ministry of Finance to strengthen planning and better reflect spending priorities. - Budget planning supported by preparation of monthly reconciled Treasury balances and quarterly plans for liquidity management. - Progressive move to a Single Treasury Account to complement reforms (MEFP ¶14). *Source: _cr10263 - 3.8 percent to 6.5 percent over the same period.* ### Box 3. Haiti: Recent Improvements in Governance ### Box 3. Haiti: Recent Improvements in Governance ### Governance reforms and transparency - Since 2004, the Haitian government has implemented reforms to improve transparency and strengthen governance, with a strong commitment to continue reforms to improve the business environment, boost private investment, and create jobs. - Progress made in several areas (described below), although Haiti continues to rank low in world governance indicators. - Public financial management achievements: - Approval of budgets before the start of the fiscal year and publication in the official journal. - Monthly publication of information on budget execution. - Improvements in budget execution: the share of spending executed without prior authorization fell from 62 percent of non-wage current spending in FY2004 to 3 percent in FY 2009. - Reinforcement of expenditure management and control through the extension of the current spending management system (SYSDEP) to various branches of the government, the deployment of public accountants and financial comptrollers in line ministries. - Establishment of civil service employment verification systems based on attendance lists. - Auditing public accounts, submitting them to Parliament, and publishing audit results. - Passing of a new Procurement law in June 2009. - Public enterprises: - Financial audits of the national port authority (APN), the telecommunications company (TELECO), and the national electricity company (EDH) were completed by international auditing firms in 2005. - TELECO was privatized in May 2010, completing the central bank’s disengagement from commercial activities. - Anticorruption efforts: - Creation of an Anticorruption Unit (ULCC) in 2004. - Adoption and implementation of an asset declaration law for civil servants in 2008. - Adoption of a national anticorruption strategy in March 2009. - Remaining governance challenges and commitments: - Most decrees implementing the Procurement law have yet to be adopted. - Compliance with the asset declaration law among members of the legislative and judicial branch should improve. - Tracking and quality of public investment spending, and overall fiscal transparency, need further enhancement. - Authorities committed to implementing specific measures as part of the common conditionality framework for budget support agreed with key donors. ### Social spending, reconstruction priorities, and poverty objective - Authorities aim to reduce the poverty rate to 40 percent by 2015 and to increase priority social spending by 30 percent by September 2011 (MEFP ¶13). - The earthquake aggravated poverty and food security deterioration, increasing urgency to improve access to social services and reduce vulnerability to natural disasters. - Public investments under the reconstruction plan will focus on: - Improving delivery of public services including education and health. - Establishing basic social safety nets. - Developing transport and communication infrastructure. ### Budget financing and donor coordination - Authorities prefer channeling aid through existing coordination mechanisms: either the budget or the MDTF; staff agreed this strengthens transparency and monitoring. - Agreement to include all donor-financed government projects and previously off-budget resources such as PetroCaribe financing in revised FY 2010 and subsequent budgets and budget execution reports. - Interim Haiti Reconstruction Commission (IHRC) expected to coordinate reconstruction activities and track aid disbursements (MEFP ¶9). - Short-term financing pressures: - Slow start of aid disbursements and difficulties securing adequate budget financing for the next 12-18 months. - Immediate needs: relocation of families in temporary shelters ahead of the hurricane season, provision of basic social services, purchase and distribution of seeds and fertilizers. - Shortfall in revenue caused by the earthquake led authorities to reprioritize spending. - Lower-than-budgeted spending on wages and goods and services created room for higher expenditure on transfers and subsidies and investment spending. - Allocation of a portion of accumulated PetroCaribe resources (up to US$163 million) to emergency relocation and infrastructure projects (MEFP ¶12). - Disbursement status and financing gaps: - So far, only 30 percent of all scheduled budget support financing for this fiscal year has been disbursed; ensuring remainder disbursed before end-September 2010 is a challenge. - Program envisages a financing shortfall of up to US$25 million could be compensated by an ad hoc issuance of T-bills (MEFP ¶19). - Based on projected quarterly budget support disbursements, the first year of the program is fully financed (i.e. through end-June 2011). - Financing gap of about US$50 million remains for the last quarter of the fiscal year ending in September 2011 (Text Table 5). - Text Table 5 (selected figures, in millions of U.S. dollars, unless otherwise specified; FY 2010): - Total Grants: Pre-earthquake Commitments 150.0; Post-earthquake Commitments 104.8; Total 254.7; Disbursed (in percent) 31.4; Total Disbursed 138.6. - IDB: Pre 30.0; Post 20.0; Total 50.0; Disbursed 50.0. - IDA: Pre 27.0; Post 15.5; Total 42.5; Disbursed 29.4; Total Disbursed 20.0. - European Union: Pre 76.2; Post 76.2; Total 152.4; Disbursed 33.9. - CARICOM: 7.8; Disbursed 100.0. - Colombia (UNASUR): 3.4; Disbursed 3.4. - Ecuador: 2.0; Disbursed 2.0; Disbursed (in percent) 100.0. - France: 26.1; Disbursed 26.1. - United States: 10.2; Disbursed 10.2; Total Disbursed 47.1; Disbursed (in percent) 8.6. - Sources: Haitian authorities; and Fund staff estimates. 1 As of June 28, 2010. ### Financial sector policies and Partial Credit Guarantee (PCG) - Restarting private sector credit while preserving financial stability is critical to reconstruction. - Full implementation of financial sector reforms identified by the 2008 FSAP is essential, including measures to lower cost of collateral and ease recovery of non-performing loans. - Central bank (BRH) actions and staff recommendations: - BRH decision to restructure bank loans affected by the earthquake welcomed, provided loans were performing before the earthquake. - Staff encouraged BRH to relax provisioning against NPLs when delays were related to the earthquake. - Importance of introducing regulatory and supervisory framework for the insurance sector, following establishment of a framework for credit unions in FY 2009 (MEFP ¶15). - Partial Credit Guarantee (PCG) scheme: - Two pillars: - Pillar 1: restructuring viable bank loans impacted by the earthquake and financing business recovery. - Pillar 2: supports new lending to small and medium-sized enterprises. - Eligibility: banks and cooperatives compliant with prudential standards and with strong lending procedures. - Cost and coverage: an upfront commission is payable; after a deductible related to bank-specific historic NPLs, the scheme would guarantee up to 50 percent of the unpaid balance of loans under Pillar 1 and up to 80 percent of the loan under Pillar 2. - Access terms same for state-owned and private banks, though donors may require heavier burden of proof for state-owned banks. - Funding status and BRH temporary guarantee: - About US$100 million in capital required for Pillar 1 and US$30 million for Pillar 2 (total around US$130 million). - Donor funding so far only amounts to US$25-30 million, insufficient relative to estimated needs. - Staff agreed BRH should launch the scheme promptly, setting aside on a temporary basis some of its foreign exchange reserves (US$70 million) as initial guarantee. - No payouts expected during first half year of operations because loans must be non-performing for at least six months before claims. - Authorities will need to secure additional resources over time to cover potential future losses and replace temporary BRH guarantee; such financing could be commitments from donors including through the MDTF. - Complementary reforms recommended: - Deepen financial intermediation via credit bureau (building destroyed but efforts rekindled), centralized registry for movable collateral, strengthened civil registry and cadastre (donor funding/technical assistance offered). - Reduce spreads between lending and borrowing rates and improve risk assessment capacity. - Staff recommended reforming insolvency legislation (MEFP ¶17). ### Monetary and exchange rate policy - Real effective appreciation: - Haiti’s currency appreciated by almost 90 percent between 2003 and December 2009. - Despite appreciation, export indicators improved since 2003; Haiti’s export share of U.S. apparel imports rose sharply and market shares increased compared to regional textile competitors (Figure 4). - Staff and authorities agreed pre-earthquake real appreciation represented an equilibrium response to sustained increase in aid and remittance inflows; modest overvaluation uncovered by econometric analysis within model’s error margins (Appendix II). - Challenges from continued aid inflows: - Appreciation trend likely to continue with aid inflows, posing challenges to monetary and exchange rate management. - Lags between lumpy aid inflows and related import demand can lead to exchange rate volatility. - Central bank net purchases of foreign exchange since the earthquake helped smooth exchange rate volatility and rebuild reserves but contributed to rapid monetary growth. - With inflation rising, staff recommended that future purchases be at least partly sterilized. - Authorities aim to contain base money growth and commit to tighten monetary policy if needed (MEFP ¶18). - Improvements to monetary operations framework: - Constraints: high dollarization, underdeveloped money markets, excess liquidity. - Agreed importance of greater exchange rate flexibility and deepening financial markets over the medium term to develop interest-rate transmission mechanisms and enhance open market operations. - Authorities plan to develop regular foreign exchange auctions (instead of fixed price and quantity sales) to facilitate absorption of aid inflows while managing exchange rate fluctuations (MEFP ¶19). - Prospect of replacing BRH bonds with T-bills and using open-market operations as main monetary policy instrument; launch of domestic T-bill market envisaged with publication of a regular auction calendar. - Preconditions for successful T-bill market: improvements in liquidity and Treasury management, inflation forecasting, and debt management; T-bills to be used to gradually securitize outstanding government debt to the central bank and contribute to BRH recapitalization (MEFP ¶19). - Central bank independence and governance: - Implementation of BRH recapitalization plan should be complemented by adoption of a modern central bank law. - New law to be submitted to Parliament by FY 2011; will anchor central bank independence and provide for gradual elimination of direct government financing. - Law will also provide for rotation of external auditors and publication of audited BRH accounts within 6 months after end of fiscal year (MEFP ¶20). ### External debt sustainability - Haiti remains at high risk of debt distress; the earthquake significantly worsened the macroeconomic outlook. - Despite US$1.2 billion in debt relief under HIPC/MDRI in June 2009, Haiti remained at high risk prior to the earthquake. - Earthquake effects: massive reconstruction needs, deteriorated macro outlook, reduced export base, weakened debt management capacity; updated LIC DSA shows NPV of debt-to-exports ratio breaches policy-dependent threshold in baseline for medium-term. - Post-earthquake debt relief commitments: - Creditors representing about 92 percent of Haiti’s end-September 2009 debt stock (excluding the Fund) are committed to cancelling Haiti’s remaining debt. - World Bank cancelled SDR 24.3 million (about US$36 million as of May 21, 2010). - Debt relief for the IDB (US$479 million) expected to become effective in the near future once committed donor financing is available. - Venezuela confirmed it would provide debt relief on US$395 million of outstanding PetroCaribe debt. - DSA scenarios and implications: - If Fund provides full stock debt relief on outstanding debt as of end-January 2010, such relief would cover about US$263 million (SDR 178.13 million). - Alternative DSA scenario including debt relief commitments shows debt-to-exports ratio would breach policy-dependent ceiling between 2014 and 2018 but external debt would then be on a downward path. - Vulnerability to shocks would remain high; financing needs should be covered mostly through grants; any new borrowing should be limited and highly concessional. - Debt management capacity: - Authorities committed to strengthening debt management: operationalizing a debt unit with front, middle, and back-office functions overseeing external and domestic debt. - Legal framework being updated; work on a public debt law underway. - Capacity building efforts focus on developing a medium-term debt strategy as basis for annual financing plans (MEFP ¶25). ### ECF arrangement: access, monitoring, and external financing - Access: - Staff proposes relatively low access at 50 percent of quota (SDR 40.95 million or US$60.43 million) given that most medium-term external financing need expected to be covered by grants and program risks are high. - Fund resources intended to help central bank smooth exchange rate and reserve fluctuations from volatile aid. - Staff proposes total access set at 10 percent of quota each for first two disbursements, followed by five disbursements equivalent to 6 percent of quota each. - Program reviews linked to end-March and end-September test dates (in line with Haiti’s fiscal year) (Table 9). - Monitoring and performance criteria: - Performance criteria: zero ceiling for net central bank credit to central government; ceiling on net domestic assets of central government; floor on NIRs; zero ceilings on accumulation of external and domestic arrears and on contracting/guaranteeing non-concessional debt. - Indicative targets to monitor net domestic financing of government and base money growth. - Indicative floor on poverty-reducing spending set in close consultation with the World Bank (MEFP Table 1). - Structural reform objectives for FY 2010-11: improve revenue collection; enhance efficiency and tracking of government spending; develop a T-bill market; promote transparent and regular reporting of poverty-reducing expenditures (MEFP Table 2). - External financing and capacity to repay the Fund: - Program assumes continuing budget support in the order of about US$100 million a year starting in FY 2012. - Includes a US$50 million external financing adjustor to offset delayed disbursement of already-identified budget support; associated domestic financing expected to unwind when budget support is received and be fully repaid within one year (TMU ¶36). - Reserve coverage would average 3.2 months of imports throughout the program period. - Debt service to the Fund projected to peak in 2016 at 4 percent of exports of goods and services and 3 percent of domestic revenues. - Debt service capacity expected to remain manageable throughout program period and would be significantly improved once committed debt relief materializes (Table 10). - If the Fund provides debt relief on outstanding debt as of end-January 2010, debt service to the Fund would be significantly lower: 0.7 percent of exports of goods and services and 0.5 of domestic revenues in 2019. *Source: _cr10263 - Box 3. Haiti: Recent Improvements in Governance* ### 44. Safeguards. A safeguards assessment should be completed at the time of the first ### _cr10263 - 44. Safeguards. A safeguards assessment should be completed at the time of the first ### Safeguards assessment - A safeguards assessment should be completed at the time of the first review. - The last safeguards assessment was completed in September 2008. - The updated assessment would be based on: - the progress of the external audit of the BRH’s financial statements for the fiscal year ending September 20, 2009, and - the documents provided by the BRH for review. - Authorities’ progress since the 2008 safeguards assessment update: - Revised reserve investment guidelines have been adopted. - An investment committee has been appointed. - The external audit of BRH accounts for FY 2008 has been published. - NIR data for FY 2009 have been verified by the external auditors. - The authorities committed to publishing the BRH audited financial statements for FY 2009 by the time of the first program review (MEFP Table 2). ### Key program risks - Principal risks identified: - (i) widespread social unrest, triggered by delays in the start of reconstruction activities, and/or the elections; - (ii) pervasive capacity constraints, amplified by the earthquake; - (iii) high vulnerability to external shocks, in particular natural disasters. - Mitigating factors and external roles: - The international community should deliver on commitments made at the New-York conference and assist with the organization of peaceful elections. - Visible improvements in fiscal transparency and governance under the program would help mitigate political and social risks. - The comprehensive TA strategy implemented by the Fund and other development partners aims at building capacity and strengthening institutions. ### Staff appraisal — macroeconomic damage and outlook - The January earthquake: - caused damages and losses estimated at 120 percent of GDP, - affected one-third of Haiti’s population, - constituted one of the largest natural disasters in recent history. - The earthquake destroyed human and physical capital, creating a massive immediate need for recovery and reconstruction resources and radically altering the macroeconomic outlook. ### Staff appraisal — policy assessment and recommendations - Recovery strategy and coordination: - The National Action Plan for Recovery and Development provides an appropriate anchor for rebuilding economic structure and institutions and promoting more transparent and effective policies. - Implementation will require close coordination and tracking of interventions of all development partners by the IHRC. - Channeling external assistance through the government’s budget or the MDTF would support coordination and local capacity building. - Immediate priorities: - Disbursement of amounts pledged in New-York should start and reconstruction should begin promptly to reduce risks of widespread social unrest. - Authorities should facilitate relocation of families, adopt a new building code with anti-seismic norms, and launch large public works programs to generate reconstruction momentum. - Growth and structural reforms: - Medium-term growth objectives are ambitious but attainable if measures to boost private credit and investment are implemented. - Rapid implementation of the PCG scheme is essential to restart private sector activity. - The post-earthquake reform momentum presents an opportunity to implement structural reforms to improve the business environment. - Development of infrastructure (transport and energy) in partnership with the private sector would boost investment. - Improvements in civil and land registries and simplification of administrative procedures are essential. - Fiscal support and credibility: - Securing adequate support to finance the budget is critical to address urgent needs (relocation of displaced families, hurricane prevention, preparations for planting season and school year starting in September). - Absence of budget support would seriously undermine government credibility and reconstruction efforts. - Public financial management and revenue: - Steps to strengthen revenue administration and improve coverage, quality, tracking, and reporting of public spending are welcome and could help attract further budget support. - Investments to restore public service delivery, generate private-sector-led growth and employment, and improve security and humanitarian conditions are particularly urgent. - Ongoing PFM reforms, supported by technical assistance, are essential to enhance transparency of spending and sustain aid inflows. - Efforts to increase domestic revenue collection will enhance state credibility and capacity to mobilize domestic resources for reconstruction. - Monetary and exchange-rate policy: - Further improvements in the monetary framework are critical to ensure absorption of aid inflows while avoiding excessive inflationary pressures. - The widening external trade deficit associated with large reconstruction needs appears sustainable as it is financed by aid and remittance inflows. - The central bank has stepped up foreign exchange purchases to mitigate excessive exchange rate volatility and rebuild reserves; balance sheet considerations have prevented sterilization of purchases. - Essential measures to enhance monetary policy effectiveness: - Accelerating reform of foreign exchange auctions, - Introducing Treasury bills, - Recapitalizing the central bank. - Competitiveness effects of real appreciation from foreign inflows should be addressed mainly through structural policies: reducing supply-side bottlenecks, expanding the export base, and improving the business environment. - Debt and financing: - Delivery of committed debt relief should substantially reduce the risk of debt distress. - Haiti’s risk of debt distress remains high after the earthquake because of a worsened macroeconomic outlook, weakened capacity, and a lower export base. - Even with delivered debt relief, external debt would remain vulnerable to shocks, underscoring the importance of covering financing needs mostly through grants. - Fund support: - Staff supports the authorities’ request for a new three-year arrangement under the Extended Credit Facility. - Fund resources, while limited due to low debt-carrying capacity and large post-earthquake external grant commitments, will help smooth macroeconomic volatility associated with large and lumpy aid disbursements. - Consultations: - It is proposed that the next Article IV consultation with Haiti be held in accordance with the July 15, 2002 decision on consultation cycles. *Sources: Haitian authorities; and IMF staff calculations.* ### 8. Enforcing Contracts ### 8. Enforcing Contracts ### Macroeconomic performance - Nominal GDP (2009): US$ 6.56 billion - GDP per capita (2009): US$ 661 - Population (2009): 9.9 million - Real GDP growth (2009/10 actual): -8.5 percent - Real GDP growth (Proj. 2010/11): 9.8 percent - Real GDP growth (Proj. 2011/12): 8.4 percent - GDP deflator (2009/10 actual): 6.3 - Consumer prices (period average, 2009/10 actual): 5.1 - Consumer prices (end-of-period, 2009/10 actual): 1.0 ### Fiscal operations (central government) - Total revenue and grants (2009/10 Est.): 37,901 (millions of gourdes) - Domestic revenue (2009/10 Est.): 26,849 (millions of gourdes) - Grants (2009/10 Est.): 11,052 (millions of gourdes) - Total expenditure (2009/10 Est.): 45,680 (millions of gourdes) - Current expenditure (2009/10 Est.): 26,935 (millions of gourdes) - Capital expenditure (2009/10 Est.): 18,745 (millions of gourdes) - Wages and salaries (2009/10 Est.): 11,716 (millions of gourdes) - Interest payments (2009/10 Est.): 1,768 (millions of gourdes) - Overall balance (2009/10 Est.): -7,778 (millions of gourdes) - Overall balance (in percent of GDP, 2009/10 Act.): -4.4 percent - Overall balance (in percent of GDP, proj. 2012/13): -4.2 percent - Total revenue and grants (in percent of GDP, 2009/10 Act.): 17.9 percent - Central government revenue (in percent of GDP, 2009/10 Act.): 11.2 percent - Central government expenditure (in percent of GDP, 2009/10 Act.): 22.3 percent - External net financing (2009/10 Est.): 6,786 (millions of gourdes) ### Money and banking system - Base money growth (2009/10 Est.): 9.3 percent (12-month change) - Broad money (incl. foreign currency deposits) growth (2009/10 Est.): 10.0 percent (12-month change) - Credit to private sector (2009/10 Est.): 12.8 percent (12-month change) - Credit to the nonfinancial public sector (net, 2009/10 Est.): 63.7 (percent change) - Net foreign assets (BRH, 2009/10 Est., in millions of U.S. dollars): 597 - Net international reserves (program) (2009/10 Est.): 439 - Base Money (levels, 2009/10 Est.): 31,080 (millions of gourdes) - Broad money (M3) (levels, 2009/10 Est.): 102,794 (millions of gourdes) - Commercial Banks' Credit to Private Sector (percent of GDP, 2009/10 Est.): 15.4 percent ### Financial soundness indicators (banking system) - Total assets (2009/10 Dec.): 107,913 (millions of gourdes) - Total assets (in millions of U.S. dollars, 2009/10 Dec.): 2,583 - Total Deposits (2009/10 Dec.): 92,460 (millions of gourdes) - Credit/GDP (2009/10 Dec.): 13.3 - Regulatory capital to risk-weighted assets (2009/10 Dec.): 16.4 percent - NPLs to gross loans (2009/10 Dec.): 8.5 percent - Net Earnings/Assets (ROA, 2009/10 Dec.): 1.4 percent - Net Earnings/Equity (ROE, 2009/10 Dec.): 20.5 percent - Interest rate spread in gourdes (2009/10 Dec.): 19.5 ### External sector and balance of payments - Current account (2009/10 Est., US$ million): -210.8 - Current account (excluding grants, 2009/10 Est., US$ million): -698.2 - Trade balance (2009/10 Est., US$ million): -1,486.0 - Exports of goods (2009/10 Est.): 490.8 (US$ million) - Imports of goods (2009/10 Est.): -2,037.2 (US$ million) - Current transfers (net, 2009/10 Est.): 1,727.7 (US$ million) - Gross liquid international reserves (2009/10 Est.): 947.5 (US$ million) - Gross liquid international reserves (in months of next year's imports, 2009/10 Est.): 3.0 months - Current account balance (in percent of GDP, 2009/10 Est.): -3.2 percent - Liquid gross reserves (Proj. 2012/13): 1,212.0 (US$ million) - Liquid gross reserves (Proj. 2012/13, in months of imports): 3.2 months ### Debt and external vulnerability - External public debt (end-of-period, 2009/10 Est.): 16.6 percent of GDP - Total public debt (end-of-period, 2009/10 Est.): 24.8 percent of GDP - External public debt service (in percent of exports of goods and nonfactor services, 2009/10 Est.): 10.0 percent - External debt service (in percent of GDP, 2009/10): 0.8 percent - Total external public debt (in percent of GDP, proj. 2012/13): 21.6 percent - External debt service (in percent of exports, proj. 2012/13): 6.0 percent - Current account balance (US$ million, proj. 2012/13): -429.6 ### Medium-term scenario key aggregates - Real GDP growth (Proj. 2010/11): 9.8 percent - Inflation (CPI end-of-period, Proj. 2010/11): 8.5 - Total revenue and grants (in percent of GDP, Proj. 2010/11): 29.1 percent - Central government overall balance (incl. grants, Proj. 2010/11): -2.9 percent of GDP - Growth in broad money (M3, Proj. 2010/11): 18.8 percent - Trade balance (in percent of GDP, Proj. 2010/11): -31.7 percent - External grants (in percent of GDP, Proj. 2010/11): 20.5 percent - Current account (incl. official transfers, Proj. 2010/11): -2.1 percent of GDP ### Social indicators and Millennium Development Goals (selected) - Employment to population ratio, 15+, total (2008): 56.0 percent - Malnutrition prevalence, weight for age (% of children under 5, 2000): 18.9 percent - Poverty headcount ratio at $1.25 a day (PPP): 55.0 percent - Immunization, measles (% of children ages 12-23 months, 2008): 55.0 percent - Mortality rate, under-5 (per 1,000, 2008): 84.0 - Improved sanitation facilities (% of population with access, 2008): 19.0 percent - Improved water source (% of population with access, 2008): 58.0 percent - Mobile cellular subscriptions (per 100 people, 2008): 5.0 ### IMF financing and capacity to repay (selected schedule items) - Executive Board approval of the three-year arrangement under the ECF: SDR 8,190,000 (July 15, 2010) - Observance of performance criteria for September 2010 and completion of the first review under the ECF arrangement: SDR 8,190,000 (January 15, 2011) - Subsequent scheduled disbursements listed in Table 9: SDR 4,914,000 on multiple review dates (July 15, 2011; January 15, 2012; July 15, 2012; January 15, 2013; July 15, 2013) *Source: _cr10263 - 8. Enforcing Contracts (IMF PDF content provided).* ### 1. The earthquake that struck Port-au-Prince and surrounding areas on January 12, 2010 ### 1. The earthquake that struck Port-au-Prince and surrounding areas on January 12, 2010 ### Immediate impact and context - The earthquake is described as a major setback for Haiti after satisfactory performance under the previous ECF-supported arrangement; the sixth and last review was concluded on January 27, 2010. - Total damages and losses amount to 120 percent of GDP. - Casualties and destruction: - About 225,000 people were killed. - Most ministries, hospitals and schools were destroyed. - About 1.3 million people are still living in temporary shelters (as of the reporting). - International response: - The international community’s response was swift and generous. - Humanitarian situation is improving only slowly; the hurricane season is starting. - Pre-earthquake achievements highlighted: - Progress with essential structural reforms and critical improvements in governance allowed for HIPC/MDRI debt relief in 2009. ### Reconstruction strategy and development objectives - The National Action Plan for the Reconstruction and Development of Haiti aims at raising long-term growth and reducing poverty by: - creating decentralized poles of economic growth; - reducing vulnerability to natural disasters; - enhancing access to basic social services; - strengthening state institutions. - An Interim Commission for Haiti’s Reconstruction was established to oversee implementation for the first 18 months. - Commitment to transparency in use of donor and internal resources; reforms in fiscal governance are being implemented with technical support from development partners. ### IMF support request and program design - The Government requests Fund support under a new three-year ECF arrangement in the amount of SDR 40.95 million, or 50 percent of quota. - Program period: July 2010–June/July 2013. - Financing and disbursement: - First disbursement: SDR 8.19 million. - Six semi-annual disbursements thereafter. - Request to frontload access: first two disbursements of 10 percent of quota each in the first year, followed by five disbursements equivalent to 6 percent of quota each in the following years. - Program focus: - Provide coherent macroeconomic framework to support the Action Plan and ensure efficient spending and absorption of aid inflows. - Technical assistance to rebuild key economic institutions and strengthen administrative capacity. - Improve quality and efficiency of public spending and increase revenue through tax policy and administration reforms. - Boost absorptive capacity and enhance credit growth while maintaining financial sector stability. - Improve business environment and encourage private credit and investment. ### Short-term developments (post-earthquake) - Economic activity: - Agricultural production anticipated higher than last year due to clement weather, increased irrigated areas, and distribution of seeds and fertilizers. - Construction (including debris removal) has picked up. - Textile exports to the United States recovered to pre-earthquake levels by March 2010. - Revenue and spending: - Revenue collection trending upward since January; collections during January–May represent about 83 percent of budgeted amounts. - Spending remained low due to capacity constraints, weak revenue, and low budget support disbursements. - Wages and operational expense payments were partially covered through central bank financing: US$35.3 million during January and February, fully repaid by end-May. - As of end-May, only 30 percent of budget support committed for the year had been disbursed. - External sector and money: - Trade deficit rose to more than 8 percent of GDP in January–March, compared to 5 percent of GDP last year. - Exports were 25 percent lower compared to the same period last year; imports grew by more than 35 percent. - Remittances were up by 11.7 percent during January–May (year-on-year). - Net international reserves (NIR) rose to US$646 million at end-May, from US$402 million at end-December. - The gourde appreciated by 5.3 percent against the U.S. dollar from end-2009. - Twelve-month base money growth rose to 28 percent, from 11 percent in December. - Inflation and prices: - In May, inflation stabilized to 6.4 percent. - Annual inflation: 18 percent for rent and utilities; 7.5 percent for transportation. - Monthly food prices decreased by 0.1 percent; high oil prices and supply-side bottlenecks remain a concern. - Banking sector: - Deposits increased by 10 percent between December and May. - Credit to the private sector declined by 6.6 percent over the same period. - Average return on assets dropped to 0.1 percent during January–March, compared with 1.4 percent in the same period of last year. - About a third of bank loans is estimated to have been impaired. - Non-performing loans (NPLs) rose from 8.5 percent of total loans in December to 12.3 percent in March. - Provisioning for NPLs dropped from 66.7 percent of total NPLs in December to 59.8 percent in March. ### Medium-term macroeconomic framework and projections - Aid inflows and macro policy coordination: - Flow of donor resources expected to peak over the next 2-3 years, requiring careful coordination of fiscal, monetary, and exchange rate policies. - Growth and sectoral outlook: - After a decline of 8.5 percent in FY 2010, annual GDP growth is expected to peak at about 9 percent in FY 2011–12, driven mostly by reconstruction. - Medium-term growth sustained at about 6 percent with higher activity in assembly, tourism, and agriculture. - Private sector credit and investment, a Partial Credit Guarantee Scheme, and business environment measures are expected to support reconstruction. - Inflation: - Annual inflation projected to rise to 8.5 percent in FY 2010 and to decline to about 7 percent by FY 2013. - External current account (excluding grants): - Projected to widen to about 29 percent of GDP in FY 2010 and to decline to about 17 percent by FY 2013. - Exports expected to recover to pre-earthquake value by FY 2011 and grow at an average of 11 percent through FY 2013. - Reconstruction-related imports to grow strongly through FY 2013, financed by aid inflows. - Current account deficit including grants should average about 3.2 percent during the program period. - Fiscal outlook: - Fiscal deficit (excluding grants and foreign-financed projects) projected to rise to close to 7 percent of GDP in FY 2010 (from 4.4 percent in FY 2009). - Comprehensive tax policy and administration reform targeted to narrow fiscal deficit to about 3 percent of GDP by FY 2013. - Official grants projected to average about US$1.5 billion a year (over 20 percent of GDP) until 2013. - Non-recourse to central bank financing over the program (except temporarily) remains a fiscal anchor. - Planned introduction of T-bills by March 2011 as an alternative source of domestic financing. - Domestic public debt path to be established based on an updated debt sustainability analysis. ### Policy and structural reform agenda — Fiscal strategy and revenue measures - Fiscal objectives: - Enhance quality and effectiveness of reconstruction spending. - Rebuild a modern and efficient tax administration to raise domestic resources. - Gradually implement a multi-year fiscal framework anchored on debt sustainability. - Increase resources available for reconstruction through higher revenue collection, more efficient spending, and introduction of a domestic T-bill market. - Budget coverage and transparency: - Plan to expand budget coverage to include resources and spending channeled through the Multi-Donor Trust Fund (MDTF). - The MDTF, managed by the World Bank, started operating in June. - IHRC to coordinate reconstruction activity and track aid disbursements; an IHRC-managed database will support reporting and transparency. - Revenue prospects and targets: - Revenue collection expected to reach 10 percent of GDP in FY2010, equivalent to about 75 percent of budgeted amounts. - Medium-term target: boost revenue collections to 13 percent of GDP by FY 2013 through comprehensive tax reform and improved administrations. - VAT productivity cited as about 32 percent (compared with an average of 70 percent in the region), indicating scope to more than double VAT revenue by tackling evasion and broadening the base. - Specific tax policy measures and timelines: - By end-September 2010: start publishing tax expenditure reports by beneficiary sectors (structural benchmark). - Set up a working group to prepare a new tax code and establish a work program with milestones by September 2010 (structural benchmark); request IMF technical assistance. - Submit a proposal to reform the VAT, excise taxation and the income tax to Parliament by end-FY 2011. - Finalize the new tax code during FY 2012. - Keep regime of exemptions for non-governmental organizations under review, aiming to narrow eligibility to a small and well-defined group by end-December 2010. - Introduce a telecommunication tax and car registration fees by September 2010 (delayed because of the earthquake); these are expected to yield about 0.4 percent of GDP per year over the program period. - Tax and customs administration overhaul strategy: - Reorganization focusing on: (a) fiscal missions; (b) segmentation of taxpayers; (c) computerization and rationalization of local and regional networks; (d) tighter controls; (e) greater monitoring and accountability via design and publication of performance indicators. - Intensify tax verification program to combat fraud. - Publish reports on tax system performance, including revenue collections and cost of exemptions, on the Ministry of Economy and Finance website starting in September 2010 (structural benchmark). *Source: Haiti: Memorandum of Economic and Financial Policies and accompanying letter requesting IMF support under a new three-year ECF arrangement (excerpt).* ### 12. Following the earthquake, we have re-prioritized spending to focus on providing ### 12. Following the earthquake, we have re-prioritized spending to focus on providing ### Humanitarian spending and budget re-prioritization - During January-April, spending remained low due to capacity constraints, the shortfall in revenue, and slow budget support disbursements. - For the remainder of this year, plan to accelerate priority expenditures on housing, hurricane prevention, and education. - Allocated US$163 million (2.5 percent of GDP) of available PetroCaribe resources to large infrastructure projects in the provinces to create jobs for the population displaced by the earthquake. - Preparing a revised budget for FY 2010 to incorporate updated spending allocations and emergency fund resources. - Intend to include projects to be financed under the MDTF in the revised budget for this year and in future budgets. ### Social services, poverty, and PRSP update - The earthquake led to a sharp deterioration in food security and poverty levels; hospitals and schools have been destroyed. - Determined to reduce poverty by focusing public investments on improving delivery of public services, social safety nets, educational and health care systems, transportation, and communication infrastructure. - Preparing a PRSP update for no later than September 2011. - Will resume publication of reports on execution of social expenditures (health, education and agriculture) by end-June 2010 (prior action). - Goal: raise priority social expenditures by at least 30 percent by September 2011. ### Public financial management (PFM) and economic governance - Remaining weaknesses in budget preparation, execution and controls, and in cash management to be addressed in line with IMF technical assistance. - Key measures summarized in a common conditionality matrix; will strengthen: - Framework of annual budget preparation: - Establishing a macro-fiscal unit at the Ministry of Economy and Finance, with assistance of an external consultant. - Intend to gradually move toward a programmatic budget approach, starting with key line Ministries in FY 2012. - Budget execution and reporting: - More accurate and transparent reporting of budget execution; focus on monitoring and reporting of investment spending and current transfers and subsidies. - Beginning on June 30, 2010, publish central government transfers to project accounts, project by project, including PetroCaribe projects (prior action). - Beginning on June 30, 2010, publish central government current transfers and subsidies by beneficiary sector (prior action). - Starting in March 2011, publish investment execution from SYSGEP with attention to education, health, agriculture, and road sectors (structural benchmark). - Treasury management: - Move toward a Treasury Single Account (TSA). - Prepare comprehensive monthly Treasury balances by end-September 2010 (structural benchmark). - Make an inventory of all government and donor accounts at the BRH and commercial banks (structural benchmark). - By March 2011, publish quarterly cash plans including PetroCaribe spending and financing needs (structural benchmark). ### Financial sector policies - Earthquake affected banks via destruction of physical assets and personnel and via loan portfolio quality deterioration; banks reluctant to provide new credit. - Capital position of three banks, representing 27 percent of total banking sector assets, needs to be strengthened. - Plan to establish a Partial Credit Guarantee (PCG) scheme; technical proposal prepared with IMF and World Bank staff support. - PCG will require between US$200 and 250 millions, and will comprise two pillars: - Pillar 1 (finite life): restructure bank and microcredit loans impacted by the earthquake and finance business recovery. - Pillar 2: support new lending. - Estimated capital required to start: - About US$100 million in capital for Pillar 1. - About US$30 million for Pillar 2. - Plan to set aside up to US$70 million in central bank reserves to fund the initial guarantee: US$50 million for Pillar 1 and US$20 million for Pillar 2. - Aim to launch the scheme rapidly by mid-July 2010 while continuing to seek additional grant resources from donors. - Under the scheme, no payouts during the first six months because loans must be non-performing for six months before claims can be made. - Complementary reforms to support credit expansion and strengthen supervision: - Establishment of a credit bureau and a centralized registry of security collateral and a cadastre. - Introduce comprehensive insolvency legislation in Parliament. - Introduce a regulatory and supervisory framework for nonbank financial institutions; insurance sector framework to be set up in FY 2011. ### Monetary policy and exchange rate management - Surge in reconstruction-related aid inflows and higher remittances could lead to real exchange rate appreciation and volatility due to lags between inflows and imports. - BRH plans to continue buying foreign exchange to strengthen its foreign exchange position, ensuring availability for reconstruction-related import demand and mitigating nominal appreciation. - Enhance BRH intervention strategy, liaise with major donors and NGOs, improve communication on BRH operations, and encourage development of the interbank foreign exchange market. - BRH stands ready to drain excess reserves and tighten monetary conditions if domestic demand exceeds absorptive capacity; will continue to aim at containing base money growth as intermediary monetary policy target. - Improvements to operations framework to absorb aid inflows: - Establish a predetermined public auction calendar for T-bills by end-March 2011 (structural benchmark) with objective of organizing first T-bill issuance by end-March 2011. - If a small fiscal financing gap remains, a first issue of T-bills limited to US$25 million of net new borrowing could take place before end-September 2010. - During FY 2010–11, steps to enhance BRH independence: - Recapitalization plan of the BRH updated by end-March 2011 as part of the T-bill implementation project (structural benchmark). - Prepare calendar for securitization of BRH claims on the government with first tranche scheduled for end-March 2011 (structural benchmark). - Prepare and submit a new central bank law to Parliament by end-September 2011 to enshrine central bank independence and strengthen external audit and reserves management. - Safeguards and transparency: - Investment committee established and reserve investment guidelines adopted (prior action). - Strive to publish annual audited financial statements within six months after fiscal year end. - FY 2008 audited accounts published by end-June 2010 (prior action). - FY 2009 accounts to be published by end-September 2010 (structural benchmark). ### Promoting private sector activity and investment - Reforms to strengthen competitiveness by reducing transaction costs, improving the business environment, facilitating access to credit, and simplifying establishment of new businesses. - Decentralization strategy to implement large projects in transportation and energy infrastructure and create jobs in provinces; establish legal framework for Public-Private Partnerships with IMF assistance. - Preparing new construction guidelines for residential buildings and establishing/enforcing a new building code for commercial buildings. - Strengthening framework for business and investment: - Simplify legal and regulatory framework for investments in export-processing zones with donor support. - Revamp the investment promotion office as an effective one-stop shop. - Develop a cadastre focused on development zones with a timetable for surveying and establishing specialized cadastres. ### Debt management - Prior to the earthquake, progress made: centralization of public external and domestic currency debt in a single database; SYGADE software installed; regular debt reports produced. - To rebuild debt management capacity, intend to: - Prepare a progress report on steps toward legal and institutional framework for public debt management by end-September 2010. - Operationalize the debt unit at Ministry of Economy and Finance by March 2011; middle and back office functions to be fully operational (structural benchmark). - Submit a public debt law to the Council of Ministers by end-September 2011 (structural benchmark). - Prepare a medium-term debt management strategy based on comprehensive analysis of sustainability of total public debt in FY 2012. ### Program monitoring - First year of the ECF-supported program covers July 2010–June 2011. - Program monitored using quarterly quantitative benchmarks and semi-annual quantitative performance criteria and structural benchmarks, with test dates at end-September and end-March. - Quantitative targets cover: - Net international reserves, - Net domestic assets of the central bank, - Net central bank credit to the central government and to the entire nonfinancial public sector, - Public sector external arrears accumulation, - Non-concessional external loans contracted or guaranteed by the public sector (all performance criteria). - Indicative targets include base money, net domestic financing by the central government, domestic arrears accumulation of the central government, and a floor on poverty-reducing spending. - Definitions and program adjustors provided in the Technical Memorandum of Understanding (TMU). - Structural benchmarks set for end-March and end-September and listed in Table 2; they are defined in the TMU. - A monitoring committee composed of high-level officials from the MEF to be created by end-June 2010. - Expect first review of the program to be completed by February 2011 and second review by July 2011. *Source: _cr10263 - 12. Following the earthquake, we have re-prioritized spending to focus on providing* ### 27. In accordance with the IMF’s Articles of Agreement, we will refrain from imposing ### _cr10263 - 27. In accordance with the IMF’s Articles of Agreement, we will refrain from imposing ### Quantitative performance criteria (Selected table items) - Net central bank credit to the non-financial public sector - ceiling: 21,549 168 549 370 370 370 - Central Government: 23,118 178 351 171 171 171 - Rest of non-financial public sector: -1,569 -101 98 198 198 198 - Net domestic assets of the central bank - ceiling 1/: 11,562 5,095 6,142 10,193 12,689 13,123 - Net international reserves of central bank (in millions of U.S. dollars) - floor: 439 -36 -25 -138 -128 -119 ### Continuous performance criteria (Selected) - Domestic arrears accumulation of the central government: 0 0 0 0 0 0 - New contracting or guaranteeing by the public sector of nonconcessional external or foreign currency debt (In millions of U.S. dollars) 2/: 0 3 3 3 3 3 3 3 3 3 3 - Up to and including one year: 0 0 0 0 0 0 - Over one-year maturity: 0 3 3 3 3 3 3 3 3 3 3 - Public sector external arrears accumulation (in millions of U.S. dollars): 0 0 0 0 0 0 ### Indicative targets and memorandum items (Selected) - Change in base money - ceiling: 31,080 3,501 5,143 4,671 7,551 8,371 - Net domestic credit to the central government - ceiling 3/: 18,199 -5,793 -4,413 -2,909 -684 -433 - Poverty reducing expenditures - floor 4/: -- 2,399 7,198 9,597 12,716 15,835 - Change in currency in circulation: 13,448 2,404 1,986 2,142 4,768 5,039 - Net domestic credit to the rest of the non-financial public sector: -1,624 -721 451 451 451 45 - Government total revenue, excluding grants: -- 8,961 21,031 26,258 34,167 42,469 - Government total expenditure, excluding ext-fin investment: -- 9,541 31,242 44,239 57,950 70,391 Sources noted in source text: Ministry of Finance, Bank of the Republic of Haiti, and Fund staff estimates. ### Structural reform objectives and proposed measures (Selected, by theme) - Improve the tracking of poverty-reducing expenditures - Start publishing quarterly reports on poverty-reducing expenditures on the MEF website, including domestically-financed health, education and agriculture spending. - Improve timeliness of external audits of the BRH; enforce rotation of external auditors - Completion and publication of externally audited financial statements for 2007/08; and external audit of 2008/09 NIR data. - Completion and publication of externally audited financial statements for 2008/09. - Publish external audits within 6 months after the end of each fiscal year; adopt a policy requiring that external auditors rotate every 3 years. - Strengthen reserves management - Establish an investment committee, and prepare and adopt reserve management guidelines. - Improve control of budget execution and fiscal reporting - Start publishing central government monthly transfers to investment project accounts, project by project, including PetroCaribe projects. - Start publishing central government monthly transfers by beneficiary entity. - Start preparing monthly consolidated Treasury balances (TMU ¶38). - Improve cash management - Prepare an inventory of all government and donor accounts at the BRH and BNC (TMU ¶39). - Start preparing and publishing monthly cash plans including PetroCaribe spending and financing needs. - Strengthen operation of tax and customs administrations - Prepare quarterly reports with monthly data on the performances of the tax system and the tax administration, including the cost of exemptions and revenue collected in the provinces (TMU ¶40). - Start publishing a quarterly report that identifies all fiscal expenditure by beneficiary sectors. - Set up a working group to prepare a study to simplify the tax system, increase revenue, improve tax productivity, custom and fiscal administration, establish a work program with specific deadlines (TMU ¶37). - Introduce a new tax code - Set up working group; later submit revised tax law to Parliament and begin implementation. - Finance the government and develop domestic financial markets - Sign a memorandum of understanding between the MEF and the BRH adopting T-bill implementation plan, including regular public auction calendar (TMU ¶41). - Develop a secondary T-bill market including establishment of a security registry; and start of open-market and repo operations; continue implementation of recapitalization plan until BRH capital is replenished. - Improve exchange rate management to cope with large aid inflows - Develop an exchange rate management strategy encompassing also reform of the foreign exchange market. - Introduce a new central bank law - Submit the new central bank law to Parliament; ensure adoption of central bank law by Parliament and its implementation. - Maintain financial sector stability - Banking law approved by Parliament, implementation begins. - Improve access to financial services; reform legal regime for collateral. - Strengthen debt management - Complete the setting-up of the debt unit at the MEF and build capacity to prepare a medium-term debt strategy. - Debt unit fully operational; Preparation of annual debt sustainability analyses and medium-term debt strategy. - Submit to Parliament a public debt law to establish a sound legal and institutional framework for public debt management. Approval and implementation of the law. ### TMU: Institutional definitions and measurement rules (Selected) - Coverage definitions - Central government: presidency, prime minister’s office, parliament, national courts, treasury, line ministries and “organismes déconcentrés”; includes expenditures financed directly by foreign donors through ministerial accounts (comptes-courants). - Non-financial public sector: central government plus non-budgetary autonomous organizations, local governments and public sector enterprises (government holds >50 percent of shares). - Total public sector: non-financial public sector plus the central bank (BRH). - Net BRH credit to the non-financial public sector - Equals net central bank credit to the central government plus net central bank credit to the rest of the non-financial public sector. - Changes measured using BRH Table 10R; exclude project accounts (“Comptes de projets”), Special Accounts (“Comptes Speciaux”), and seized values (“Valeurs Saisies UCREF”) from changes in net domestic credit to central government. - Changes measured cumulatively from the stock at end-September 2009. - Net domestic financing to the central government - Comprises change in net banking sector credit to the central government plus change in nonbank financing (amortization, counterpart funds, net issuance of Treasury bills and other government securities by the central government to non-banks). - Net domestic banking sector credit measured using BRH Table 10R and Table 20R; securities issued for BRH recapitalization excluded. - Project accounts, Special Accounts, and seized values excluded as specified. - Changes measured cumulatively from the stock at end-September 2009. ### TMU: Reserves, NDA, and exchange rate rules (Selected) - Net international reserves (NIR) measurement - Change in net foreign assets (“Réserves de change nettes” of BRH Table 10R) - Minus change in foreign currency deposits of commercial banks at the BRH (“Dépôts à vue en dollars U.S. et en Euros des BCM à la BRH”, and the “CAM transfer” of the BRH Table 10R) - Minus change in project accounts (“Comptes de projets”) - Minus change in Special Accounts in dollars and euros (excluding gourdes) and seized values - Plus change in the stock of the SDR allocation (“Allocations DTS”) from BRH Table 10R - Data expressed in U.S. dollar terms and valued at the corresponding end-period market exchange rate from BRH Table 10R. - Program NIR definition excludes swaps in foreign currency with domestic financial institutions and pledged or otherwise encumbered reserve assets. - Net domestic assets (NDA) of the BRH - Change in NDA defined as change in base money (program definition) minus change in the U.S. dollar amount of program NIR converted into gourdes at the program exchange rate. - Program exchange rate: G 40.0 per U.S. dollar for the period June 2010- March 2011. - Changes measured cumulatively from the stock at end-September 2009. ### PetroCaribe-related funds (Selected) - As of June 15, 2010, outstanding PetroCaribe balance: US$152.7 million - US$2.0 million held in U.S. dollar-denominated sight deposits of the central government at the BRH - US$150.7 million in U.S. dollar denominated deposits of the central government at domestic commercial banks - Treatment until new institutional arrangements finalized - PetroCaribe-related inflows continue to constitute direct external debt of the central government and will be fully reflected in program fiscal tables. - Treated as budget support loans; proceeds partly or entirely deposited in government accounts in the banking system (Petrocaribe deposits). - Spending from PetroCaribe resources (up to US$163 million in FY 2010), financed with a drawdown of PetroCaribe deposits in the banking system, will be fully reflected in program tables. - Upon ratification of the societe mixte - Annual budgets of the company to be published on the MEF website before the beginning of the fiscal year. - Audited annual financial statements to be published within six months of the end of each financial year. ### Nonconcessional public sector external and foreign-currency denominated debt (Definition) - Debt definition includes all forms of debt: loans, suppliers’ credits, and leases that constitute current (i.e., not contingent) liabilities created under contractual arrangements through provision of value in the form of assets (including currency) or services and which require the obligor to make one or more payments in the form of assets (including currency) or services at some point in the future, as set forth in Executive Board Decision No. 12274, Point 9, revised on August 31, 2009. *Source: Attachment III and Tables from the cited IMF document.* ### 21. A ceiling applies to the contracting and guaranteeing by the public sector of ### 21. A ceiling applies to the contracting and guaranteeing by the public sector of ### Ceiling on contracting and guaranteeing of new nonconcessional debt - A ceiling applies to the contracting and guaranteeing by the public sector of new nonconcessional debt with nonresidents with original maturities of one year or more. - The ceiling applies to debt and commitments contracted or guaranteed for which value has not yet been received. - This includes private debt for which official guarantees have been extended and which therefore constitute a contingent liability of the public sector. - The ceilings for contracting and guaranteeing of nonconcessional debt by the total public sector (as defined in para.4) will be set at zero continuously throughout the program period. ### Definition of guarantee and of concessional debt (program purposes) - Guarantee of a debt: arises from any explicit legal obligation of the public sector to service a debt in the event of nonpayment by the debtor (involving payments in cash or in kind), or from any implicit legal or contractual obligation of the public sector to finance partially or in full any shortfall incurred by the debtor. - Concessional debt: for program purposes, a debt is concessional if it includes a grant element of at least 35 percent. - Grant element definition: the difference between the present value (PV) of debt and its nominal value, expressed as a percentage of the nominal value of the debt. - PV calculation: discount future debt-service payments using currency specific commercial interest reference rates (CIRRs) as laid out by the OECD. - CIRR averages and margins: - For maturity at least 15 years: ten-year-average CIRR used. - For maturity less than 15 years: six-month average CIRR used. - Margins to be added (as used by the OECD): 0.75 percent for repayment periods of less than 15 years, 1 percent for 15 to 19 years, 1.15 percent for 20 to 29 years, and 1.25 percent for 30 years or more. - Note: The grant element calculator is referenced (no link reproduced here). Grant element calculations take into account maturity, grace period, payment schedule, upfront commissions, and management fees. ### Exclusions from the ceiling - Excluded: short-term import-related credits, rescheduling arrangements, borrowing from the Fund, non-resident purchases of treasury bills, and guarantees for the electricity sector in the form of letters of credit. ### Arrears of the Central Government - External payment arrears: defined as overdue payments (principal and interest) to non-residents on debt contracted and guaranteed by the central government, defined according to creditor terms. Criterion: zero accumulation of external arrears monitored continuously. - Domestic arrears of the central government include: - Any bill received by a spending ministry from a supplier for goods and services delivered (and verified) and unpaid within 90 days after the due date of payment. - Wage, salary, and other payments to government employees (including direct and indirect allowances) due to be paid in a given month but unpaid on the 30th of the following month. - Interest or principal obligations unpaid 30 days after the due date of payment. - Exclusion: changes in the stock of arrears on account of interest, penalties and valuation changes. ### Base money (definition and measurement) - Change in base money defined and measured using: - The change in the stock of currency in circulation from Table 10R of the BRH. - The change in the stock of reserve deposits of commercial banks at the BRH, from Table 10R, using gourde sight deposits of commercial banks (Dépôts a vue en gourdes des BCM a la BRH) and cash-in-vault of commercial banks (Encaisses des BCM). - Measurement basis: cumulative changes from the stock at end-September 2009. ### Poverty-reducing expenditures - Growth measure: sum of domestically-financed spending for the Ministries in charge of agriculture, health, and education. - Measurement: flow on a cumulative basis from end-September 2009. ### Quarterly adjustments (performance criteria and indicative targets) - General: quarterly performance criteria and indicative targets will be adjusted for specified amounts. A. Adjustment for Domestic Arrears Accumulation - The ceilings for net BRH credit to the central government and net domestic banking sector credit to the central government will be adjusted downwards by the amount of outstanding domestic arrears accumulation. B. Adjustment for PetroCaribe-related Inflows in FY 2010 - Until the binational company charged to administer PetroCaribe-related funds is legally established, any drawdown of PetroCaribe-related deposits will be considered central government spending for program purposes. - The ceiling for net domestic credit to the central government will include movements in PetroCaribe accounts in the banking system and will be adjusted for the difference between the actual stock of PetroCaribe deposits in the banking system and the programmed stock of these deposits in the banking system. - The ceilings for net BRH credit to the central government, on BRH net domestic assets, and the floor for NIR will also include movements in PetroCaribe accounts at the BRH, adjusted for the difference between actual and programmed stocks at the BRH. - The adjustor will be calculated on a cumulative basis from October 1, 2009. - PetroCaribe deposit figures (selected cumulative flows and stocks as presented) - Total deposits in government accounts in the banking system - Cumulative flows (G mlns): ...1804.3 1520.7 2114.3 1873.4 3269.4 4656.3 6034.2 7403.1 - in US dollars (US$ mlns): ...42.4 43.2 55.8 45.0 79.1 113.3 147.4 181.6 - Stocks (G mlns): 3713.2 5517.5 2233.9 5827.5 5586.6 6982.6 8369.5 9747.3 11116.3 - in US dollars (US$ mlns): 88.9 131.3 132.1 144.7 133.9 168.0 202.2 236.3 270.5 - Deposits in government accounts at the BRH - Cumulative flows (G mlns): ...-90.3 -93.0 -93.0 -171.0 -171.0 -171.0 -171.0 -171.0 - in US dollars (US$ mlns): ...-2.2 -2.1 -2.2 -4.1 -4.1 -4.1 -4.1 -4.1 - Stocks (G mlns): 171.0 80.7 78.0 78.0 0.0 0.0 0.0 0.0 0.0 - in US dollars (US$ mlns): 4.1 1.9 2.0 1.9 0.0 0.0 0.0 0.0 0.0 - Deposits in government accounts in commercial banks - Cumulative flows (G mlns): ...1894.6 1613.7 2207.3 2044.5 3440.4 4827.3 6205.2 7574.1 - in US dollars (US$ mlns): ...44.6 45.4 58.0 49.1 83.2 117.4 151.5 185.7 - Stocks (G mlns): 3542.2 5436.8 5155.9 5749.5 5586.6 6982.6 8369.5 9747.3 11116.3 - in US dollars (US$ mlns): 84.8 129.4 130.1 142.8 133.9 168.0 202.2 236.3 270.5 - Sources: Haitian Authorities and IMF Staff estimates and projections (as presented in the PetroCaribe table). C. Adjustment for Net Program External Financing in FY 2010 - Program ceilings on BRH net credit to the central government, net domestic financing to the government, on BRH net domestic assets, and the floor on NIR reflect an assumed flow of net external financing defined as disbursements of cash budgetary assistance, exceptional financing (including rescheduled principal and interest) and debt relief minus debt service. These amounts exclude all PetroCaribe flows. - Program Net External Financing (In millions of U.S. dollars) — Cumulative basis - December 2009: -3.6 - March 2010: 25.4 - June 2010: 124.6 - September 2010: 235.1 - Adjustment rule: If actual net external financing is lower than programmed, the ceilings on net BRH credit to the central government, net domestic financing to the government, and on net BRH domestic assets will be adjusted upward, and the floor on NIR adjusted downward, by the amount of the difference (converted into gourdes at the program exchange rate). - Limit: The amount of this adjustment will be limited to US$50 million to smooth volatility and would only offset temporary delays in disbursements of already-identified budget support. - Calculation basis: cumulative from October 1, 2009. - Repayment expectation: any amount of net BRH financing under this adjuster would be expected to unwind when the budget support is received, or at the latest be fully repaid within one year. ### Clarification of structural conditionality A. Fiscal Sector (selected structural benchmarks) - Initiating efforts to introduce a new tax code: - Set up a working group in the MEF, and publish a work program with specific deadlines on the MEF website by end-September 2010. - Preparing monthly consolidated Treasury balances: - Publish on the MEF website a table consolidating balances in all accounts in the ledger of government accounts maintained by the Treasury, not later than three months after the end of each month, starting from end-September 2010 with end-June 2010 data. - Inventory of all government and donor accounts at the BRH and BNC: - Prepare and submit to the IMF a list of all government and donor accounts at the BRH and BNC and update it as needed; set for end-September 2010. - Publishing quarterly reports with monthly data (for AGD and DGI) on revenue performance: - AGD requirements include: number of importers in SYDONIA; number of importers that imported during the month; number importing in provinces; total number of customs posts; number of customs posts in provinces; value of imports by broad categories (including fuel products and imports exempted from or zero-rated under various duties and taxes); collections by type of duty and tax; and collections from provinces. - DGI requirements include: number of taxpayers in DGI files (including exempted taxpayers, government employees, public enterprises); number of taxpayers that have fulfilled tax obligations; aggregate turnover or revenue, aggregate profits, labor, and non-labor costs for taxpayers that have fulfilled tax obligations; and collections by type of tax or duty, including in provinces. - Assessment: quarterly with the initial test date at end-September 2010. B. Monetary Policy and Financial Sector - Memorandum of understanding between the MEF and the BRH (benchmark set for end-September 2010) to: - Establish the amount of government debt owed to the BRH. - Update the BRH recapitalization plan. - Set a calendar of T-bill issuance with amounts to be issued for financing and for BRH recapitalization. ### Provision of information (reporting requirements) - Authorities to provide daily, weekly and monthly monetary and fiscal indicators to IMF staff, and details of any loan contract or guarantee to be ratified by a non-financial public sector entity before signature, plus other data upon request. - Daily: - The exchange rate. - Weekly — 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 central government and public sector (net); (e) Currency in circulation; (f) base money; (g) details of inflows and outflows of gross foreign exchange reserves; (h) volume of foreign exchange transactions, of which BRH sales and purchases; (i) gross international reserves; and (d) net international reserves (NIR). - Net International Reserves of the BRH (End-October, 2009, in USD millions) - A. Gross Foreign Exchange Reserves: 1,024.9 - B. Gross Liabilities: 439.1 - C. Net Foreign Assets (=A-B): 585.8 - D. FX deposits of commercial banks & CAM transfer at the BRH: 284.1 - E. Project accounts: 8.9 - F. Special accounts in U.S. dollars & euros: 4.4 - G. Seized values: 3.0 - H. SDR allocation (liability): 124.8 - J. NIR (=C-D-E-F-G+H): 410.3 - Note: Calculated using the current exchange rate from the 10R form. - Weekly — Fiscal Indicators: - (a) Revenues (internal, external, other) and (b) Expenditures on cash basis (wages and salaries, goods and services, external debt, current accounts). - Timeliness: these weekly data reported with maximum five-day lag preliminary data (four weeks for final data). - Monthly data (maximum 30-day lag for final data unless stated): - Table 10R and Table 20R. - Tableau on the comptes courants. - “Project Accounts”, by donor. - Tableau de trésorerie de devises. - Tableau des Operations Financières de l’Etat (within 14 days). - Table underlying the TOFE to determine checks in circulation and balance on investment project accounts. - Set of external debt tables. - Report of revenue collection of DGI (Rapport d'activités). - The aide memoire table, which includes monetary policy indicators (foreign exchange interventions, Gourde and foreign currency credit and deposits, monetary financing). - Tables of revenue collection of AGD (Indicateurs d’activités aux ports, Rapport analytique des perceptions douanières à l'importation). - Balance of Bureau de Monetization accounts, including spending from “fonds de contrepartie” and movements linked to the ALBA-PetroCaribe agreement. - Balance of PetroCaribe/ALBA-related deposits at commercial banks and the BRH. - Quarterly: - Report on poverty-reducing expenditures, with a maximum 30-day lag for final data. A. Other information - Authorities will share by-laws of the new binational (Venezuela-Haiti) entity as soon as enacted, and all needed information and financing terms to assess whether financing flows received by such entity constitute public debt (direct and/or contingent). ### Appendix I: Methodological note for post-earthquake GDP estimates (summary of approach and key PDNA figures) - Purpose: methodology to generate Haiti’s post-disaster GDP and preliminary staff estimates of the earthquake impact on medium-term growth, based on the post disaster needs assessment (PDNA). Key PDNA estimates and staff treatment: - PDNA estimated damages and losses at US$7.8 billion, or 120 percent of GDP. - Damages: US$4.2 billion (65 percent of GDP). - Losses: US$3.6 billion (55 percent of GDP). - PDNA gauged recovery and reconstruction needs: - US$3.9 billion for the next 18 months. - US$8.9 up to US$11.5 billion for the next three years. - Table 1 (PDNA costing, in millions of U.S. dollars) - Damages: 2010: 4,237; 2011–2013: - ; Total: 4,237 - Losses: 2010: 2,377; 2011: 796; 2012: 289; 2013: 99; Total: 3,561 - Recovery: 2010: 1,606; 2011: 863; 2012: 398; 2013: 75; Total: 2,942 - Reconstruction: 2010: 2,913; 2011: 1,964; 2012: 712; 2013: 444; Total: 6,033 - Source: Haiti Earthquake PDNA Report, issued on March 30, 2010. Methodology applied to GDP: - Post-disaster GDP projections generated from PDNA flows using 2009 GDP as base. - Annual flows related to losses, recovery, and reconstruction combined and scaled with sectoral production coefficients to generate proxies for changes in value-added. - Constant price GDP projected using 2009 as base year and estimated annual change in value-added. - Damages (stock of lost assets) excluded from GDP impact analysis; flows related to losses, recovery and reconstruction included. - Table 2 (selected sectoral flows and value-added, in millions of U.S. dollars) - I. Losses (total): 2010: 237; 2011: 779; 2012: 628; 2013: 999; Total: 3,561 - Primary Sector (Agriculture, farming and fishing): 2010: 119; 2011: 110; 2012: 0; 2013: 0; Total: 130 - Secondary Sector total: 894 314 147 990 0 1,455 (values presented across cells) - Services total: 136 447 114 300 0 1,977 - II. Recovery and Reconstruction flows (total): 2010–2015 and total 5,007 (detailed by sector and year in the table). - III. Value added (gross): - Primary Sector value-added flows: -600.9 -0.9 4.4 0.8 0.2 1.1 (presented as sectoral breakdown) - Secondary Sector and Services value-added flows presented in the table, with Total Gross Value Added: -569 313 451 406 382 356 - Sources: Haiti Earthquake PDNA Report, and staff estimates. - Note: Value added flows obtained by adding annual flows related to losses, recovery and reconstruction and scaling with sectoral production coefficients. *Italic: Source — IMF staff summary of the content unit titled "_cr10263 - 21. A ceiling applies to the contracting and guaranteeing by the public sector of" (PDF chapter/section).* ### 3. The methodology used first isolated flows affecting domestic product on the ### _cr10263 - 3. The methodology used first isolated flows affecting domestic product on the ### Methodology for isolating flows affecting domestic product - Flows of losses were fully factored into the analysis. - For recovery and reconstruction, flows likely not to generate income or affect output and capital formation were removed. - Specifically excluded: activities related to the distribution of food assistance and cash for work programs. - Also excluded: imported household goods, education equipment, furniture and vehicles for reconstruction. - Incorporated from the PDNA: - US$2.6 billion in recovery funds (out of US$2.9 billion). - US$5.2 billion in reconstruction funds (out of US$6 billion). ### Flows retained from the PDNA (selected figures) - Losses by year (in millions of U.S. dollars): 2010: 2,377; 2011: 796; 2012: 289; 2013: 99; Total: 3,561. - Recovery (flows retained) by year (in millions of U.S. dollars): 2010: 1,138; 2011: 883; 2012: 523; 2013: 75; Total: 2,618. - Reconstruction (flows retained) by year (in millions of U.S. dollars): 2010: 2,331; 2011: 1,663; 2012: 748; 2013: 444; Total: 5,186. - Notes on exclusions: - Recovery exclusions (amounting to US$324 million): distribution of food assistance and cash for work programs. - Reconstruction exclusions (amounting to US$847 million): imported construction goods (household goods, education equipment and materials, furniture, vehicles) that do not generate value added. ### Rephasing and scaling of the PDNA envelope - The PDNA recovery and reconstruction envelope was reduced and re-phased to account for non-resident services/incomes and absorptive capacity constraints. - Rationale: - Only a portion of resources would remunerate activities or services provided by non-residents and thus not count as Haitian value added. - Phasing of reconstruction stretched to FY 2015 to reflect mobilization time for pledged resources, limited absorptive capacity, and supply bottlenecks. - Rephased figures (in millions of U.S. dollars): - Losses: 2010: 2,377; 2011: 796; 2012: 289; 2013: 99; Total: 3,561. - Total Recovery and reconstruction: 2010: 1,395; 2011: 1,134; 2012: 879; 2013: 624; 2014: 486; 2015: 488; Total: 5,007. - Recovery: 2010: 1,135; 2011: 881; 2012: 522; 2013: 75; Total: 2,612. - Reconstruction: 2010: 261; 2011: 253; 2012: 358; 2013: 549; 2014: 486; 2015: 488; Total: 2,395. ### Impact on GDP and sectoral projections - FY 2010: - Economic activity estimated to contract by 8.5 percent on account of significant upfront losses. - The earthquake occurred at the start of the second quarter of Haiti’s fiscal year, disrupting remaining-quarter activity in public infrastructure services, manufacturing industries, and commerce. - The bulk of earthquake losses (67 percent) affected all sectors. - Construction sector expanded by 100 percent despite overall contraction. - Real GDP growth (percent change from previous period, sequence presented in the source): - Real GDP: 2.9 -8.5 9.8 8.4 6.9 6.2 6.0 - Sectoral notes: - Strong construction and recovery activities drive the rebound. - Growth in FY 2011 could reach 9.8 percent. - Average growth projected at 7 percent over FY 2012–15. - Economy expected to endure losses until FY 2013 while construction and recovery fuel growth and services, manufacturing, and mining gradually pick up. ### Exchange rate and external stability assessment - REER and nominal dynamics: - REER appreciated by almost 90 percent during 2003–2008. - In 2009, the currency depreciated by about 8 percent in real effective terms. - REER rose by about 11 percent between December 2009 and April 2010. - Nominal appreciation of the gourde was about 6 percent between December 2009 and April 2010. - Exchange arrangement: - De jure arrangement: floating. - Since January 2010: de facto classified as a managed exchange rate regime (“other managed”). - Central bank has been purchasing foreign exchange to build reserves ahead of expected large import demand related to reconstruction. - Current account and financing: - Official transfers averaged about 7 percent of GDP a year during 2005-2009. - Conservative assumptions based on commitments could yield about 14 percent of GDP a year on average during FY 2011–15 in aid disbursements. - Current account deficit including grants expected to return to around 3 percent of GDP by 2015. - Policy implications: - Large scaled-up aid and remittances are expected to exert significant real appreciation pressures. - Short-term central bank option: build reserves to lean against excessive exchange rate volatility. - Over time, some real appreciation is unavoidable. - Structural reforms needed to reduce supply-side bottlenecks, expand the export base, and improve the business environment to mitigate appreciation impacts on external competitiveness. - Strengthened coordination between fiscal, monetary, and exchange rate policies is critical to manage the surge in aid and external inflows and avoid excessive exchange rate volatility. ### Remittances, exports, and competitiveness - Remittances: - Inflows hit a record high of US$111 million in February 2010 (a 32 percent increase year-on-year). - Remittances projected to grow by about 11 percent in FY 2010. - Projection assumption: net remittance inflows grow slightly above host country growth for FY 2011 and gradually align with host country trends by FY 2015. - Exports: - Textile exports account for about 95 percent of Haiti’s exports, almost entirely to the United States. - The Haiti Economic Lift Program (HELP) Act could increase tariff preference levels and volumes for certain knit and woven apparel products. - Textile industry operating close to capacity; benefits from HELP Act require new industrial zones and FDI to expand capacity and move up the value chain. - If the government moves expeditiously on industrial zones and business climate improvements, exports could grow faster than currently projected. - Structural competitiveness indicators: - Total network of roads about 4,000 km in 2000. - Electricity consumption per capita is the lowest in the region, at 2 percent of the level in the Dominican Republic. - FDI inflows as a share of GDP among the lowest in the region. - Haiti ranks last in the Latin America and Caribbean region on ease of starting a business (World Bank Doing Business Indicators) and in the lowest quintile among low income countries. - No material improvement in economic and political risk measures (International Country Risk Guide). ### Debt sustainability and public debt position (selected findings) - Debt relief and DSA context: - Haiti reached the completion point in June 2009 and qualified for US$1.2 billion in debt relief under the HIPC Initiative and MDRI. - Debt service savings: US$265 million under HIPC; US$972.7 million under MDRI. - The NPV of the debt stock was reduced from US$1,320 million at end-September 2008 to US$641 million at end-September 2009. - Nominal debt stock and ratios: - Nominal external public and publicly guaranteed (PPG) debt stock: US$1.24 billion at end-September 2009 (about 19 percent of GDP), down from US$1.88 billion at end-September 2008. - Assuming full delivery of Paris Club debt relief, end-September 2009 debt stock would be US$1.06 billion (16.6 percent of GDP). - Haiti’s public debt as of end-September 2009 estimated at about 24.8 percent of GDP. - Composition: external creditors about 67 percent of PPG debt; domestic debt about 8.2 percent of GDP (credit from central bank BRH). - DSA outcome and risks: - Under the baseline scenario that does not include any debt relief provided or committed by official creditors following the January 2010 earthquake, the updated DSA shows Haiti’s risk of debt distress remains high due to deterioration of the macroeconomic outlook and new borrowing. - Net present value (NPV) of the debt-to-exports ratio would breach the relevant policy-dependent threshold in the baseline scenario for the medium term. - An alternative scenario with announced debt relief delivered by multilateral and bilateral creditors would improve the debt sustainability outlook. - Continued need: new borrowing should remain limited and on highly concessional terms; staff will monitor external debt evolution and the government’s ability to secure highly concessional financing and mobilize domestic resources. *Prepared by Fund and Bank staff; excerpted from the Joint Bank-Fund Staff Debt Sustainability Analysis 2010 chapter.* ### 3. The level of external PPG debt at end-September 2009 rose by more than ### _cr10263 - 3. The level of external PPG debt at end-September 2009 rose by more than ### Increase in external PPG debt (2009–2010) - In nominal terms, Haiti’s debt was expected to reach 13.2 percent of GDP in 2009 under the Completion Point DSA—3 ½ percentage points lower than actual debt stock. - The larger-than-expected increase reflects higher bilateral debt between 2008 and 2009 due to new borrowing (on concessional terms) from Venezuela under the PetroCaribe agreement, on which no relief was provided under the HIPC initiative. - Haiti’s external debt rose to US$1.48 billion at end-March 2010, reflecting: - the IMF emergency augmentation of January 2010, - new IDB borrowing, - further PetroCaribe financing. ### Reassessment after the earthquake; announced creditor actions - Damages and losses from the earthquake are estimated at more than 120 percent of 2009 GDP. - A multi-year reconstruction and growth strategy was developed; US$9.9 billion have been pledged at the New York Donors’ Conference in March 2010. - Several creditors announced intentions to provide debt relief on outstanding debt stocks: - World Bank: debt relief on outstanding debt of SDR 24.3 million (about US$36 million as of May 21, 2010). Debt relief became effective in May 2010 when the 14 donors to the Debt Relief Trust Fund agreed to allocate the resources needed to cover the debt cancellation. - IDB: would provide US$479 million to cancel Haiti’s outstanding debt as of end-December 2009 and convert undisbursed loans in the existing project portfolio into grants. Debt relief was approved in March 2010 by the Board of Governors and will become effective when committed donor financing is available. - IFAD: announced in April that it would cancel about US$50.7 million in outstanding debt (in NPV terms) to be delivered in the form of grants against debt service due, on a pay-as-you-go basis. - Venezuela: officially confirmed it would provide debt relief on Haiti’s outstanding debt as of January 25, 2010 in the amount of US$395 million; modalities for debt relief have yet to be clarified. - Taiwan, Province of China: offered to pay about US$12 million in interest and to provide a five-year moratorium on principal payments on Haiti’s outstanding debt. ### IMF Post-Catastrophe Debt Relief (PCDR) Trust and Fund assistance - In June 2010, the IMF Executive Board approved the establishment of the Post-Catastrophe Debt Relief (PCDR) Trust to assist countries affected by catastrophic natural disasters. - If Haiti’s eligibility for assistance under the PCDR is approved, debt stock relief could be provided on Haiti’s outstanding obligations to the Fund in the amount of SDR 178.13 million. - Official creditors accounting for about 92 percent of Haiti’s outstanding debt as of end-March 2010 (excluding the Fund) have already delivered or are firmly committed to providing debt relief on outstanding debt stocks. ### DSA framework updates and key debt flows included - The current DSA framework includes: - new borrowing accumulated since the Completion Point in June 2009, - projected new borrowing through FY 2015. - Accumulated concessional PetroCaribe trade financing of US$295 million is included. - The framework incorporates the new airport loan (US$33 million) contracted in December 2009 with the Development Bank of Venezuela (BANDES). - Projected flows included: - projected ECF disbursements through FY 2013, - accumulated PetroCaribe flows of US$160 million in FY 2010, - projected future PetroCaribe borrowing in the range of US$230-250 million a year through FY 2015. ### External debt sustainability outlook (2010–2030) — Baseline - Long-run assumptions: long-run growth slightly higher than Completion Point DSA; exports of goods and services would grow by 10–12 percent a year but decline in percent of GDP until FY 2013, then recover to more than 17 percent of GDP by 2030. - Imports would surge by more than 60 percent in FY 2011 and revert to about 35 percent of GDP in 2030. - Haiti remains at high risk of debt distress after the earthquake: - PV of external debt relative to exports breaches the indicative threshold until 2022, reaching a peak of 187 percent in 2013 before declining to less than 100 percent in 2022. - The PV of the debt-to-revenue ratio is slightly below the relevant policy threshold in 2010 (at 23.5 percent) but declines steadily over the projection period. - Accumulated PetroCaribe debt of US$295 million raised the PV of external debt by more than 45 percentage points of exports in FY 2010. - Continued PetroCaribe accumulation, expected to increase by about US$230–250 million a year, poses a risk to medium-term debt servicing capacity. - Alternative and shock scenarios worsen most debt stock and service indicators; combined shocks could push the PV of debt-to-exports ratios up to 400 percent in FY 2012 before declining, remaining above the threshold throughout the projection period. - The breach of thresholds is protracted (debt-to-exports ratio breached until 2022), which precludes a modification of Haiti’s risk of debt distress rating using the remittance-based framework. ### Debt relief scenario effects - Assumes delivery of relief on debt stocks as of end-September 2009 by the World Bank, IDB, IFAD, and PetroCaribe, and debt relief on outstanding credit to the Fund as of end-January 2010 (SDR 178.13 million). - Translates into a debt stock relief of about US$965 million in nominal terms as of end-2009. - Under the debt relief scenario: - all debt indicators remain below policy relevant thresholds in the baseline scenario except the debt-to-exports indicator, which temporarily breaches the threshold between 2014 and 2018. - debt dynamics remain sensitive to external shocks; under the combination shock, stock indicators (PV of debt-to-GDP; PV of debt-to-exports; PV of debt-to-revenue) breach thresholds, with PV of debt-to-exports peaking at 297 percent in 2012 and remaining above 100 percent until 2027. ### Public debt sustainability analysis - Baseline: - PV of public debt-to-GDP remains at about 30 percent throughout the projection period. - Domestic borrowing increases from 8 percent of GDP in FY 2010 to 20 percent of GDP by 2030. - PV of the debt-to-revenue ratio rises to about 160 percent by 2016 and remains at that level. - Shock scenarios: - Public debt indicators are sensitive to growth shocks and debt-creating flows. - A combination of a growth shock and lower primary balance would raise PV of debt-to-GDP and debt-to-revenue well above baseline. ### Debt management capacity and earthquake impact - The earthquake severely disrupted debt management systems; the Ministry of Finance building has been damaged. - Further technical and financial support will be needed to recover data, set up a working computer system, and rehabilitate physical infrastructure. - Prior to the earthquake, debt management capacity had improved: - BRH and MEF completed installation of UNCTAD DMFAS system, version 5.3. - Debt reporting by the government had improved. - Progress had been made in establishing the debt unit at the Ministry of Finance, though finalization of the draft operations manual and legal/institutional framework depended on technical assistance by UNCTAD and CEMLA. ### Conclusions and policy implications - Haiti’s risk of external debt distress remains high even after HIPC and MDRI debt relief; PV of debt-to-exports breaches the 100 percent threshold for a prolonged period. - Implementation of debt relief commitments would significantly improve the debt sustainability outlook and contribute to reconstruction, provided donors meet Haiti’s large and immediate financing needs through grants and highly concessional loans. ### Box 1: Macroeconomic assumptions (selected highlights) - Growth and inflation: - GDP contracted by 8.5 percent in FY 2010. - Growth expected to rebound to almost 10 percent in FY 2011. - Average about 7.5 percent a year between FY2011 and FY2015. - Long-run growth projected at 5 percent (vs. 4.5 percent in Completion Point DSA). - Inflation projected at about 8 percent in FY 2011 and FY 2012; revert to about 6.5 percent starting FY 2014. - Fiscal policy: - Revenue reached 11 percent of GDP in FY 2009; projected at about 10 percent of GDP immediately after the earthquake. - Government revenues expected to increase to 14 percent of GDP in 2015. - Primary spending projected to peak at about 32 percent of GDP in 2011 and 2012, then fall to about 22 percent in the long run. - Fiscal deficit expected to peak at 5 percent of GDP in 2012 and average 3.4 percent of GDP from 2016 onwards. - Grants and financing: - Grants assumed to peak at about US$1.5 billion per year in FY 2011-12 and average about US$1.1 billion per year through FY 2015. - Assumed grant element of new external borrowing is 35 percent. - Current account: - Contracted by 20 percent in FY 2010. - Exports of goods and services projected to rebound and grow by an average of 12 percent in FY 2011–15 and reach their pre-earthquake value by [text cut off in source]. *Source: _cr10263 - 3. The level of external PPG debt at end-September 2009 rose by more than* ### 2016. Exports are assumed to increase to about 18 percent of GDP by 2030, slightly higher than ### _cr10263 - 2016. Exports are assumed to increase to about 18 percent of GDP by 2030, slightly higher than ### Macroeconomic outlook and projections - Real GDP growth (selected): 2010 -8.5; 2011 9.8; 2012 8.4; 2013 6.9; 2014 6.2; 2015 6.0; 2016 5.5; long-run through 2030 mostly 5.0; 2030 5.1 (see table for full year-by-year series). - GDP deflator (period change, selected): 2010 8.0; 2011 9.7; 2012 8.6; 2013 7.4; 2014 6.5; thereafter generally 5.0; 2030 5.0. - Real GDP per capita (local currency, selected): 2010 -7.9; 2011 5.6; 2012 6.7; long-run averages in the 3–4 range; 2030 3.6. ### External sector — trade, current account, and reserves - Exports of goods and non-factor services (percent of GDP): projected to increase to about 18 percent of GDP by 2030. - Imports of goods and non-factor services (percent of GDP): surge to about 52 percent of GDP in FY 2011–12 (reconstruction-related imports); revert to about 37 percent of GDP by 2030. - Current account deficit excluding grants (percent of GDP): about 29 percent in FY 2010; about 24 percent in FY 2011; declines to about 13 percent by FY 2015. - Current account deficit coverage by grants: projected to average 3.5 percent of GDP in FY 2013–15 and 4.4 percent of GDP through 2030. - Liquid gross reserves (in months of imports of G&S): series around 2.8–3.5 months across projections (see table). ### Debt dynamics and sustainability indicators - PV of external debt (selected years, percent of GDP): series shown from low single digits to teens in alternative scenarios; baseline PV of external debt rises through projections (see tables for year-by-year values). - PV of PPG external debt (percent of GDP): detailed yearly projections in tables; several stress scenarios reported. - Debt service-to-exports ratio (percent, selected): historical and projected series with values such as 6.8, 5.8, 3.7, 6.2, 5.7, 5.9,... (table contains full series). - PPG debt service-to-revenue ratio (percent, selected): series includes values such as 8.5, 6.9, 4.7, 7.2, 5.9, 5.0,... (table contains full series). - Public sector debt (percent of GDP): 2007 34.9; 2008 37.7; 2009 24.8; 2010 30.7; projected trend with averages reported (2016-30 average around low 30s). - PV of public sector debt (percent of GDP): sample values reported in table (e.g., 9.4, 8.2, 23.7, 28.3,... with projections to 30.0 in selected years). - Gross financing need (percent of GDP): series around 10.3, 11.7, 12.5, 11.4, 11.4, 13.8,... (table contains full series). - Memorandum items: Nominal GDP (Billions of US dollars) series and PV of PPG external debt (Billions of US dollars) provided in tables. ### Scenarios and stress tests — illustrative outcomes - Stress and alternative scenarios considered include: - A1: Key variables at their historical averages in 2010-2030. - A2: New public sector loans on less favorable terms in 2010-2030. - B1–B6: Bound tests covering shocks to Real GDP growth, Export value growth, US dollar GDP deflator, Net non-debt creating flows, combination shocks, and a one-time 30 percent nominal depreciation in 2011. - Outcome highlights (tables summarize numeric impacts): - Under combination and depreciation shocks, PV of debt-to-GDP, PV of debt-to-exports, and PV of debt-to-revenue ratios rise substantially in the stressed years. - The most extreme stress test is defined as the test that yields the highest ratio in 2020 for each indicator; in many panels this corresponds to a Combination shock. - Sensitivity tables provide year-by-year percent values for PV of debt-to-GDP, PV of debt-to-exports, and PV of debt-to-revenue under baseline and alternative scenarios. ### Key fiscal and financing assumptions - Government revenues (excluding grants, percent of GDP): series around 10.6, 10.7, 11.2, and projected increases with values reaching about 16.9 in later projection years (see table). - Aid flows (Billions of US dollars): annual flows shown (e.g., 0.3, 0.3, 0.4, 0.9, 1.4,...), with o/w Grants and Concessional loans detailed. - Grant-equivalent financing (percent of GDP): shown across projections (examples include 15.7, 19.2, 14.8, 11.8, 9.9, 8.5, ...). - Grant element of new public sector borrowing (percent): projected values such as 25.6, 30.3, 31.5, 31.6, 32.8, 33.0, ... in tables. ### Policy implications and priorities (derived from projections and scenarios in the text) - Reconstructive-import-driven external deficits are transient: imports peak (about 52 percent of GDP in FY 2011–12) and are projected to decline to about 37 percent of GDP by 2030, reducing external vulnerabilities over the medium term. - Grants play a central role in covering the large current account deficit in the near term: grants projected to average 3.5 percent of GDP in FY 2013–15 and 4.4 percent through 2030, underscoring dependence on concessional financing and aid flows. - Debt sustainability is sensitive to shocks to growth, exports, external financing terms, and exchange rate movements: stress tests show substantial increases in PV debt ratios under adverse scenarios, highlighting the need to preserve concessional financing and maintain prudent fiscal policies. - Strengthening domestic revenue mobilization (government revenues excluding grants shown rising over projections) and controlling primary expenditure will be important to stabilize public debt indicators and reduce reliance on external grants and concessional borrowing. *Prepared by the Western Hemisphere Department; staff estimates and projections, July 8, 2010.* ### Annex I. Fund Relations ### Annex I. Fund Relations ### I. Membership Status - Joined: September 08, 1953; Article VIII member ### II. General Resources Account - SDR Million %Quota - Quota 81.90 100.00 - Fund holdings of currency 81.83 99.92 - Reserve Position 0.07 0.08 - Holdings Exchange Rate ### III. SDR Department - SDR Million %Allocation - Net cumulative allocation 78.51 100.00 - Holdings 68.91 87.77 ### IV. Outstanding Purchases and Loans - SDR Million %Quota - ECF Arrangements 178.13 217. ### V. Latest Financial Arrangements - Date of Expiration | Type | Arrangement Date | Amount Approved (SDR Million) | Amount Drawn (SDR Million) - ECF | Nov 20, 2006 | May 31, 2010 | 180.18 | 180.18 - ECF | Oct 18, 1996 | Oct 17, 1999 | 91.05 | 15.18 - Stand-By | Mar 08, 1995 | Mar 07, 1996 | 20.00 | 16.40 ### IV. Projected Payments to Fund (without HIPC Assistance) - (SDR Million; based on existing use of resources and present holdings of SDRs) - Forthcoming - 2010, 2011, 2012, 2013, 2014 - Principal - 3.57 10.30 15.85 - Charges/Interest - 0.02 0.02 0.47 0.45 0.42 - Total - 0.02 0.02 4.04 10.75 16.27 - Note: - 1/ When a member has overdue financial obligations outstanding for more than three months, the amount of such arrears will be shown in this section. ### VII. Implementation of HIPC Initiative (Enhanced Framework) - I. Commitment of HIPC assistance Framework - Decision point date Nov 2006 - Assistance committed by all creditors (US$ Million) 1/ 140.30 - Of which: IMF assistance (US$ million) 3.12 - (SDR equivalent in millions) 2.10 - Completion point date June 2009 - II. Disbursement of IMF assistance (SDR Million) - Assistance disbursed to the member 2.10 - Interim assistance 0.29 - Completion point balance 1.81 - Additional disbursement of interest income 2/ 0.23 - Total disbursements 2.34 - Notes: - 1/ Assistance committed under the original framework is expressed in net present value (NPV) terms at the completion point, and assistance committed under the enhanced framework is expressed in NPV terms at the decision point. Hence these two amounts cannot be added. - 2/ Under the enhanced framework, an additional disbursement is made at the completion point corresponding to interest income earned on the amount committed at the decision point but not disbursed during the interim period. ### VIII. Implementation of Multilateral Debt Relief Initiative (MDRI) - Not Applicable ### IX. Exchange Arrangement - Haiti’s de jure exchange rate arrangement is floating. - The de facto exchange rate arrangement has been reclassified with the January 12, 2010 earthquake from crawl-like to “other managed” arrangement. - Prior to the earthquake: - the gourde was on a depreciating trend against the US dollar and remained within a narrow band between April 1, 2008 and January 10, 2010. - Consequently, during that period, the de facto IMF classification has been retrospectively reclassified to a crawl-like arrangement. - Since the earthquake: - the exchange rate has appreciated and remained somewhat more volatile. - effective January 11, 2010, the de facto arrangement has been reclassified to other managed from crawl-like. - Additional details: - The change from a fixed to managed floating regime took place in January 1990. - Haiti's exchange system is free of restrictions on the making of payments and transfers for current international transactions. - Since September 1991, all transactions have taken place at the free (interbank) market rate. ### X. Safeguards Assessment - The update assessment of the Banque de la République d’Haiti (BRH) was concluded in September 2008. - Findings and status: - The authorities have made progress in implementing safeguards recommendations, but improvements are still needed in a number of areas. - The qualitative analysis of the main differences between currently used accounting principles and IFRS did not reveal major differences and suggested that a gradual adoption of IFRS by the BRH was feasible. - The Audit Committee was set up, but its capacity needs to be strengthened. - Vulnerabilities remain in the areas of foreign reserves management, the timely conduct of external audits, and timely production of audited financial statements. - Post-earthquake: - The impact of the January 2010 earthquake on the key safeguards within the central bank is not yet clear. - A reassessment will be necessary in the future in the context of the new program. ### XI. Article IV Consultation - The last Article IV consultation was concluded by the Executive Board on July 9, 2007. - Haiti is on a 24-month cycle. - The conclusion of the 2009 Article IV consultation has been delayed, including by the January 12, 2010 earthquake. ### XII. Technical Assistance - Haiti has benefited from the following IMF technical assistance missions since 2005: - FAD - July 2010 Tax policy - June 2010 Revenue administration (Control of revenue exemptions) - February 2010 Revenue administration (Tax and customs administration)1 - February 2010 Cash management - November 2009 Public financial management - November 2009 Budget preparation and execution - September 2009 Evaluation of tax and customs administrations - November 2006 Public expenditure management - April 2005 Public expenditure management - May 2005 Tax policy and revenue administration - 1 Joint mission with CARTAC. - CARTAC - April-June 2010 Macro-fiscal unit development - November 2009 National accounts statistics - April 2008 Customs administration - MCM - March 2010 Partial credit guarantee scheme - December 2009 Development of domestic debt market - November 2009 Insurance sector - March 2008 FSAP and ROSC on Banking Supervision - November 2007 BRH recapitalization plan - March 2007 Banking law (jointly with LEG) - May 2006 Accounting of the central bank - November 2005 Implementation of a bond auction mechanism - March 2005 Monetary operations - STA - April-May and November 2007 GDDS workshop - May, October and December 2006 Monetary and financial statistics, Government Finance statistics - November 2005 and May 2006 Multisector statistics - LEG - March 2007 Banking law ### XIII. Resident Representative - Mr. Jacques Bouhga Hagbe is the Fund’s Resident Representative since July 1, 2010 replacing Mr. Graeme Justice. *Annex I. Fund Relations (As of May 31, 2010).* ### 3. Six months have passed since the earthquake that destroyed the major part of Port-au- ### Six months have passed since the earthquake that destroyed the major part of Port-au-Prince in January 2010 ### Human impact and immediate needs - Over 3.7 million people, more than one third of the population, were affected by the earthquake. - An estimated 250,000 persons were killed and over 300,000 injured. - The Post-Disaster Needs Assessment (PDNA) indicates that the recovery and reconstruction needs may reach as much as US$11.5 billion over the next three years. - The PDNA also estimated destruction amounting to about 120 percent of 2009 GDP. - According to the Haitian government, 60 percent of government, administrative and economic infrastructure has been destroyed. - Only 275,000 of 20 million cubic meters of rubble have been removed, according to a UN report. - Haiti’s 2009 population: 9.7 million (U.S. Census Bureau estimate). ### Macroeconomic context and projections - Haiti is a PRGT-eligible country with annual per capita income of US$661 in 2009. - Reconstruction costs: - PDNA: may reach as much as US$11.5 billion over the next three years (paragraph 3). - Staff note (Section II): Reconstruction costs could amount to US$11.5 billion over the next ten years. - Exports, imports, reserves and fiscal balance projections (selected highlights from Table 1 and memoranda): - Current account balance (in percent of GDP): -4.5 (2007/08), -3.0 (2008/09), -3.2 (Est.2009/10), -2.1 (Proj.2010/11), -3.7 (Proj.2011/12), -4.1 (Proj.2012/13), -4.1 (Proj.2013/14). - Current account balance, excl. grants (in percent of GDP): -11.7, -12.4, -10.6, -28.7, -24.2, -19.7, -16.8 (same sequence). - Goods exports (f.o.b) growth: -6.2, 0.1, 12.4, -12.1, 10.6, 10.5, 12.3 (same sequence). - Goods imports (f.o.b) growth: 30.2, -0.8, -3.3, 15.5, 26.0, 6.2, 7.8 (same sequence). - Gross liquid international reserves (in millions of U.S. dollars): 707.8, 754.7, 947.5, 1,076.2, 1,139.8, 1,212.0, 1,302.2 (same sequence). - Gross liquid international reserves (in months of next year's imports of goods and services): 2.9, 3.0, 2.9, 3.1, 3.2, 3.2, 3.4 (same sequence). - Debt-to-exports ratio (updated DSA): would remain above 100 percent until 2022, with a peak at 187 percent in 2013 (prior to post-earthquake debt relief). ### International response, financing gaps, and donor disbursement - Donors pledged a total of US$9.9 billion to support the reconstruction plan, of which US$5.3 billion are to be disbursed over the next 18 months. - The authorities welcome generous pledges announced at the high-level UN conference in March 2010, but raise concern about the slow pace of disbursement of amounts pledged—particularly those for budget support in FY 2010. - Staff call upon Executive Directors to convey urgency for prompt delivery of budget support assistance, particularly before the end of FY 2010. - Official creditors accounting for about 92 percent of Haiti’s outstanding debt as of end-March 2010 (excluding the Fund) have already delivered or are firmly committed to providing debt relief on outstanding debt stocks. - Specific creditor actions and commitments noted: - World Bank approved debt stock relief in the amount of SDR 24.3 million (about US$36 million) financed by individual donors’ contributions. - IDB debt relief on US$479 million in outstanding stock and undisbursed loan amounts approved by Board of Governors in March 2010, to become effective when committed donor financing is available. - IFAD announced cancellation of about US$50.7 million in outstanding debt (in NPV terms), to be delivered as grants against debt service on a pay-as-you-go basis. - Venezuela confirmed it would provide US$395 million in debt relief on outstanding PetroCaribe obligations as of January 25, 2010. - Brazil has already disbursed US$55 million through the Haiti Reconstruction Fund channel, including US$15 million in budget support (noted as omitted in parts of the staff report). - Some constituency countries (for example, Brazil, Ecuador and CARICOM) and the Dominican Republic have disbursed significant amounts or provided assistance. ### IMF financing, PCDR eligibility, and ECF program - Staff considers Haiti eligible and qualifies for debt stock relief under the PCDR Trust Fund; the January 12, 2010 earthquake meets the PCDR Trust definition of a qualifying Catastrophic Disaster. - Eligible outstanding obligations to the Fund for stock debt relief under the PCDR Trust amount to SDR 178.13 million: - PRGT credit outstanding as of January 12, 2010: SDR 105 million. - ECF disbursement (including an augmentation) of January 29, 2010: SDR 73.13 million. - Haiti made all scheduled debt service payments on the debt outstanding as of January 12, 2010. - While eligible for debt flow relief under the PCDR Trust until January 12, 2012, there will be no applicable debt service until June 2012 (no principal payments scheduled; next interest payment scheduled for June 2012 following Fund’s waiver of interest through end-December 2011). - The authorities requested a new Extended Credit Facility (ECF) and reiterate strong commitment to sound macroeconomic management and to the National Action Plan for the Reconstruction and Development of Haiti. - The ECF-supported program priorities include: - Raising revenue collection and increasing the efficiency and transparency of spending. - Upgrading monetary operations to facilitate absorption of aid inflows and manage related pressures. - Restarting credit while maintaining financial sector stability through creation of a Partial Credit Guarantee (PCG) scheme. - Attracting investment and expanding the export base by improving infrastructure and the business environment. - Fund technical assistance will focus on financial sector issues, revenue administration, budget preparation and planning, and Treasury management; a comprehensive medium-term technical assistance strategy is being coordinated with development partners. ### Financial sector measures and Partial Credit Guarantee (PCG) - Haitian banking sector: adequate liquidity, but non-performing loans have increased and private sector credit has declined since the earthquake. - Central bank (BRH) estimates the adequate size of the PCG at US$130 million; IMF staff endorsed this number. - Only US$35 million have been pledged or are expected to be pledged in the near term for the PCG (by the IDB, the World Bank, and one donor to the Haiti Reconstruction Fund), according to World Bank staff and confirmed by the authorities. - Given the urgency, the BRH decided to set aside US$70 million from its own international reserves; the staff supports this decision. - Many debtors are not or will not be in a situation to adequately service their debts; authorities view implementation of the PCG as urgent to enable banks and microfinance institutions to expand supply of credit. ### Policy implementation, objectives, and recommendations - Policy implementation over the six months since the earthquake has been satisfactory; authorities aim to use the earthquake as an opportunity to build a better Haiti. - Authorities’ National Action Plan for Reconstruction and Development aims at: - Promoting growth and poverty reduction by creating decentralized poles of economic activity. - Reducing vulnerability to natural disasters. - Enhancing access to basic social services. - Strengthening state institutions. - Key recommendations and programmatic positions: - Ensure that disbursements by donors match their pledges, especially during the first 18 months of the ECF program. - Prioritize donor support to restore and modernize the Internal Revenue Agency (DGI) and customs administration to mobilize larger domestic resources. - Use Fund resources under the ECF to smooth volatility of international reserves and of the exchange rate associated with large and lumpy aid disbursements. - Remove infrastructure bottlenecks, improve energy supply, reduce transaction costs, and increase access to credit to encourage strong private sector participation and attract foreign direct investment, including in tourism and textiles. - Continue Fund technical assistance to improve public financial management and efficiency of government spending. ### Staff appraisal and conclusion - Staff supports the authorities’ request for debt-stock relief under the PCDR Trust and recommends disbursement of such relief. - Rationale: earthquake caused destruction amounting to about 120 percent of 2009 GDP, affected more than a third of the population, and generated substantial and long-lasting balance-of-payments needs; resources freed by debt relief are critical to meeting these needs and placing Haiti’s debt on a sustainable path. - The authorities have maintained macroeconomic stability, restored basic administrative functions and payment systems, and launched a coordinated reconstruction effort with limited financial resources and capacity. - Close coordination between the Fund and the authorities is expected to continue in design and implementation of policies under the new three-year ECF arrangement. *International Monetary Fund — Staff Assessment of Eligibility and Qualification for Debt Stock Relief Under the Post-Catastrophe Debt Relief Trust Fund (July 8, 2010).* ### 1. As you know, the January 12, 2010 earthquake caused damages and losses estimated ### IMF Executive Board Concludes 2010 Article IV Consultation with Haiti ### Background and impact of the January 12, 2010 earthquake - Damages and losses estimated at 120 percent of GDP. - Reconstruction costs amount to US$11.5 billion over the next 10 years. - About 3.7 million Haitians (over a third of our population) living in Port-au-Prince and neighboring cities have been directly affected. - Over 225,000 persons were killed and 300,000 injured. - 1.3 million people remaining in temporary shelters. - Donors pledged US$9.9 billion for reconstruction, of which US$5.3 billion are to be disbursed over the next 18 months. - External aid related to the reconstruction could triple as a share of GDP over the next 3-5 years. ### Macroeconomic developments and projections - Growth reached 2.9 percent in 2009. - GDP projected decline of 8.5 percent for the fiscal year ending in September 2010. - Twelve month inflation reached 6.4 percent in May; projected increase of 8.5 percent for the year. - GDP is projected to expand by 9 percent in fiscal year 2011-12, and 6 percent by 2015. - Inflation expected to reach 8.5 percent in the current fiscal year and to decline to 7 percent by 2013. - Remittances grew by 12 percent between January and May of 2010 (over the previous year). - Net international reserves (NIR) grew to US$646 million at end-May (from US$402 million at end-December). - The program aims to boost revenue collection to 13 percent of GDP by 2013, from 10% percent currently. ### Debt relief and financing - Executive Board approved full cancellation of Haiti’s outstanding liabilities to the Fund, of about SDR 178 million (equivalent to US$268 million). - Debt relief financed by the Post-Catastrophe Debt Relief (PCDR) Trust Fund. - New three-year Extended Credit Facility (ECF) arrangement approved: SDR 40.9 million (about US$ 60 million) over three years. - Financing under the ECF carries a zero interest rate until end-2011 and thereafter zero to 0.5 percent, with a maturity of 10 years and a grace period of 5½ years. - Directors noted that future financing needs should be covered mostly through grants and highly concessional financing. ### Policy actions, program objectives, and technical assistance - Authorities committed to reconstructing and placing Haiti’s debt on a sustainable path; request for debt stock relief under the PCDR Trust. - Maintain macroeconomic stability while implementing National Action Plan for Recovery and Development. - Program priorities: improving efficiency and transparency of spending, increasing revenues, modernizing monetary and exchange rate operations, and enhancing credit growth. - Fiscal objectives: raise domestic revenue and align budget and financing with reconstruction priorities. - Monetary objectives: build a sustainable external position while absorbing reconstruction-related foreign exchange flows; improve Bank of the Republic of Haiti’s independence; develop a market for government securities. - IMF to provide comprehensive medium-term technical assistance focused on tax policies, revenue administration, budget preparation and execution, and assisting in the first issuance of government securities. - Central bank launching a partial credit guarantee scheme with IMF and World Bank technical support to restart credit. ### Executive Board assessment and recommendations - Directors commended authorities for restoring basic government functions and maintaining sound policies after the earthquake. - Swift disbursement of donor resources and steady implementation of the economic program crucial to sustain growth. - Priorities in the National Action Plan should guide reconstruction; implementation will require close coordination by the Interim Haitian Reconstruction Commission. - Securing adequate budget support from donors is essential to fund priority programs. - Further strengthen revenue administration and reform tax policy to enhance domestic resource generation. - Improve tracking and reporting of public spending. - Enhance monetary framework: accelerate foreign exchange auctions reform, introduce Treasury bills, and recapitalize the central bank. - Additional exchange rate flexibility can help absorb aid inflows while avoiding inflationary pressures. - Improvements in the business climate and governance required to boost investment and private credit, reduce supply-side bottlenecks, and expand the export base. - Partial Credit Guarantee scheme seen as important to restart private sector activity. - Program provides a coherent macroeconomic framework to smooth the impact of large expected aid inflows, projected to triple to about 15 percent of GDP over in the next 3 years. ### Key statistics (as presented) - Growth (2009): 2.9 percent. - GDP decline projection (fiscal year ending September 2010): -8.5 percent. - Twelve month inflation (May): 6.4 percent. - Inflation projection (current fiscal year): 8.5 percent. - GDP reconstruction cost: US$11.5 billion over 10 years. - Donor pledges: US$9.9 billion; US$5.3 billion to be disbursed over 18 months. - Remittances growth (Jan–May 2010 vs prior year): 12 percent. - Net international reserves: US$646 million (end-May); US$402 million (end-December). - IMF debt cancellation: about SDR 178 million (equivalent to US$268 million). - New ECF financing: SDR 40.9 million (about US$ 60 million). - ECF interest terms: zero until end-2011; zero to 0.5 percent thereafter; maturity 10 years; grace period 5½ years. - Aid inflows projected to triple to about 15 percent of GDP over the next 3 years. - Revenue collection target: 13 percent of GDP by 2013 (from 10% percent currently). *Source: IMF Public Information Notice and Press Release, July 21, 2010.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10263.pdf_