## _cr15158 ## Source details **Canonical URL:** [_cr15158](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15158.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15158.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15158.pdf.json) --- ### A. Opportunities and Challenges for Growth — Key Findings - Deep-seated reforms across a range of areas are required to achieve a sustained increase in living standards. - Diversifying the export base is needed to cushion the impact of severe shocks that have reduced per capita income and prevented a sustained increase in the capital stock. - Integration into global-value chains (GVCs) can leverage proximity to the U.S. market and preferential trade agreements to generate employment, spur human capital creation, and move Haiti up the value-added chain. - Secure property rights are essential to increased investment; persistent uncertainty over land ownership and weak conflict resolution institutions impede investment. - Poor infrastructure, notably in electricity, imposes significant costs on firms and is a key bottleneck to growth. ### B. External Trade, GVCs, and Apparel Sector — Findings, Statistics, and Policies - Trade openness and composition: - Haiti is one of the most open economies in LAC; the U.S. is Haiti’s largest export market. - Imports of goods: increased from 23 percent of GDP in 1980–84 to 43 percent of GDP in 2010–13. - Exports: remained about 10 percent of GDP over 1980–84 to 2010–13. - Remittances: about a fifth of Haiti’s GDP in recent years. - In the 1980s: finished apparel 50 percent of total exports (on average); coffee 23 percent (on average). - In 2010–2013: apparel nearly 90 percent of exports; export of food staples less than 5 percent. - In 2010–2013: food imports 18 percent of imports (7.6 percent of GDP); fuel imports 26 percent of imports (10 percent of GDP). - Vulnerability to shocks: - 75 percent of Haitians subject to one or more economically damaging shocks per year (World Bank, 2014). - Negative terms-of-trade shocks in 1981–92, 2000–02, and 2008; repeated natural-disaster impacts. - Revealed Comparative Advantage (RCA) and sector trends: - Specialization in apparel steadily increased over the past 15 years. - Exports of agricultural products (fruits, and coffee) have steeply declined. - Haiti’s coffee exports (volume) in 2013 were only 5 percent of its 1995 level. - Apparel GVC entry points and experience: - Apparel GVC segments: (i) raw material supply; (ii) components (yarns, fabrics); (iii) production networks (garment factories/CMT); (iv) export channels; (v) retail marketing. - Preferential trade agreements have been instrumental in entry for Bangladesh, Lesotho, Nicaragua, and Haiti. - Haiti benefitted from HOPE (Hope I (2006); Hope II (2008)) and HELP (2010) Acts; HOPE/HELP deepened during rebuilding and apparel exports and employment grew significantly after adoption. - Relevant expiry dates noted in source: AGOA authorization expires on September 30, 2015; Nicaragua’s CAFTA-DR TPL will expire on December 31, 2014; Haiti’s U.S. trade preferences are set to expire in 2020 unless an extension is granted. - Haiti apparel sector statistics (verbatim table entries and sector figures): - Apparel foreign sales represented 90 percent of exports as of 2014. - Value added in the apparel sector: around 3 percent. - Employment in apparel: 30,000 workers, of which 65 percent are women (Better Work, 2014). - Geographic concentration: most firms in SONAPI industrial park; Grupo M industrial park at the Dominican border employs 6,500 workers; S & H Global in CARACOL employs 2,500 workers. - Comparative table entries (verbatim formatting from source): - BangladeshHaitiLesothoNicaragua - GDP (US$, billion) - 161.768.462.2711.26 - GDP per Capita (PPP, US$) - 3167.491703.002765.304592.82 - Apparel Exports (US$, million) - 18866.00837.22263.011274.47 - Apparel Exports (% of Total Exports) - 82.1%91.3%38.4%27.8% - Labor Force - 70.8%65.8%66.0%63.4% - Average Minimum Wages in the Apparel Sector 1/ - US$6.80US$5.12 - Skilled worker: US$4.08, Unskilled worker: US$ 3.75 - US$12.43 - Year of Entry in Value Chain - 1980s1980s1990sMid 1990s - Main Apparel Export Destinations - US & EUUSUSUS - Value Chain Entry Point - AssemblyAssemblyAssemblyAssembly - 1/ Per 8-hour workday - Policy implications for apparel upgrade: - Key challenges: (i) shortage of personnel with specialized skills (especially in management); (ii) low labor productivity; (iii) high electricity costs and poor infrastructure; (iv) lack of commercial property for large factories; (v) lack of access to finance; (vi) high administrative costs (including at customs). - Recommendation: steady implementation of reforms; an extension of preferential market access could provide time for reforms to mature and generate investment in higher value-added manufacturing. ### C. Property Rights, Cadastre, and Land Reform - Rationale and expected impacts: - Secure and transferable property rights promote domestic and foreign private investment, improve resource allocation, allow speedy and low-cost transactions, improve access to credit by enabling land as collateral, deepen the tax base, and incentivize land protection and post-disaster improvements. - Informality and consequences: - Surveys: 68 percent of urban population and 97 percent of rural population live on land without clear access to title (de Soto, 2000). - Informal tenure leads to fragmented plots, ownership conflicts, environmental degradation, and deterrence of investment and reconstruction. - Formal system complexity and performance: - Haiti ranks 175th out of 189 countries in the ease of registering property (World Bank, 2015). - Formal registration process follows an 1890 law requiring a hand-written survey report. - Process steps and institutional roles (verbatim elements): - After a sales agreement: survey (3 to 12 months), preparation of bill of sale (10 days to 5 months), registration/transcription and payment of taxes (3 months to 1.5 years). - Summary timeline and burden: Total: 17 steps; 4 to 8 institutions and 2 professionals; 14 to 16 documents; 6 months to 2.5 years. - No central land registry; DGI maintains chronological paper records in several thousand books dating back to 1824 (OAS 2010). - Institutional weaknesses and risks: - Over 500 notaries appointed for life by the President with no central registry, complicating title chain verification. - Surveyors licensed by commune may practice outside it, potentially invalidating transactions; fraud among notaries and surveyors is a problem. - Any person can object to a land survey, halting it and sending it to a local judge; average court conflict resolution length is five years (OAS 2010). - Land conflicts have delayed projects by up to two years in recent USAID projects (GAO 2013). - Plan Foncier de Base and cadastre timeline: - Initial non-legally binding national cadastre to start in targeted areas; initial cadastre would not issue titles or change legal competencies of notaries and surveyors. - Simultaneous efforts: (i) high-precision cartography; (ii) digitization of DGI archives and legal documents; (iii) ONACA and INARA staff working with locally-recruited staff and public verification of properties. - Timelines: - Within three years: complete initial cadastre in 8 rural communes and the city center of Port-au-Prince. - Completion of a nationwide cadastre, and passage of a new land law, envisaged in about ten years. - Historical note: no cadastre completed since 1784 (CIAT 2015). ### D. Electricity Sector — Constraints, Fiscal Implications, and Reform Priorities - Sector constraints and access: - Only about 30 percent of the population is connected to the grid; rural access even lower. - Capital concentrates about 75 percent of energy supplied. - Average effective tariff for FY2014: 28 cts/kwh. - About 90 percent of installed generation capacity is based on oil-derivatives (diesel and heavy fuel oil). - Fiscal and financial indicators (FY2013–FY2014 and end-FY2014 estimates): - Deficit of state-owned EDH: 2.5 percent of GDP in FY2014 (nearly 20 percent of tax revenues). - On-budget transfers to EDH (FY2013–FY2014): 0.7 percent of GDP. - Off-budget transfers (Petrocaribe-related flows): 0.9 percent of GDP. - An IPP exercised guarantees against the central government for unpaid electricity sold to EDH: 0.3 percent of GDP. - EDH’s stock of arrears with IPPs: US$144 million (1.5 percent of GDP). - Arrears with PBM: US$142 million (1.5 percent of GDP). - Arrears of IPPs and PBM vis-à-vis BMPAD for fuel purchases: about US$220 million (2.4 percent of GDP). - Delinquent electricity bills of the private sector vis-à-vis EDH: about G3 billion at end-FY2014 (0.7 percent of GDP). - Debt of Municipalities (public lighting): about G1.5 billion (0.3 percent of GDP). - Operational and efficiency indicators (FY2014): - Total energy billed represented only 40 percent of energy supplied. - Average delinquency rate for FY2014: over 30 percent. - Cash recovery index (billing × collection) about 25 percent in 2014: EDH received in revenue only 25 cents per dollar of electricity supplied. - Generation costs projected to be larger in FY2015–FY2017 as the largest dam (Peligre) is being repaired. - Service quality and self-generation effects: - Average hours of electricity supplied are low and variable; blackouts are long and unplanned; supply higher in Port-au-Prince and lower in provinces. - Self-generation by households and commercial-industrial clients increases oil bills, lowers EDH revenue base, and complicates the sector political economy. - Cross-cutting governance and planning notes: - EDH board chaired by the Minister of Public Works, includes a Finance Ministry representative; board has rarely met. - Regulation corresponds to the Ministry of Public Works. - IFI programs (World Bank, IDB, and the U.S.) target network improvement, meters installation, increased transparency and governance; disbursements lower than expected due to slow reform implementation. - Selection of Électricité de France (EDF) to draft a sector master plan is encouraging. - Policy recommendations and priority reforms: - Strengthen EDH’s management and sector regulation; EDH’s Board should meet regularly to approve budgets, audit accounts, and publish financial audits. - Publish all contracts with IPPs to improve accountability and transparency. - Review tariffs to ensure appropriate price signals and stop leakage of large industrial/commercial clients to off-grid self-generation. - Review and enforce penalties for non-payment; improve billing and collection; tackle theft; focus initially on largest clients. - Consider payment regularization plans for clients with large arrears and create a culture of payment for smaller clients (e.g., requiring paid electricity bills in loan applications or for a driving license). - Minister of finance should centralize payment of electricity bills for all central government institutions; budget for public lighting and municipal contributions related to consumption. - Control and reduce EDH’s wage bill; analyze IPP contracts to attenuate dispersion of costs; use different IPPs on a marginal cost rule; competitive and transparent bidding for new generation and publish documentation. - Consolidate cross arrears to clarify sector financials. - Diversify generation matrix toward wind, hydro, and biomass; overhaul EDH to make it financially sustainable; interconnect isolated grids to create a national market and reduce provincial costs. ### E. Public Expenditure, Capital Spending Efficiency, and Education - Public expenditure trends (2004–2014): - Central government spending: rose from 11 percent of GDP in 2004 to 25 percent of GDP in 2014. - Revenues (including grants): increased from 10 percent to 19 percent of GDP. - Project grants peaked post-earthquake; total increase in project grants amounted to 4 percentage points of GDP in 2004–2014. - Public expenditure peaked at 28 percent of GDP in 2012–2013 and decreased in 2014. - Projected government spending decrease to 23 percent of GDP in 2015–2017. - Government revenues: 20 percent of GDP in 2014 versus 26 percent of GDP in the region and LICs. - Drivers of expenditure growth: - Capital spending increased by about 9 percentage points of GDP between 2004 and 2014; financed mainly by project grants (4 percent of GDP) and Petrocaribe financing (3–4 percent of GDP). - Current spending increased by about 5 percentage points of GDP, largely driven by the wage bill (about 3 percentage points); transfers and subsidies about 2 percentage points. - Comparative capital spending levels (2012–2014): - Haiti capital spending: 15 percent of GDP. - LAC average capital spending: 6 percent of GDP. - LIC average capital spending: 9 percent of GDP. - Efficiency of capital spending: - Haiti’s PFDH score: 0.5 (on 0.5–1.2 range). - Haiti: PFDH 0.5, DEA 0.5; LAC: PFDH 0.9, DEA 0.7; LICs: PFDH 0.9, DEA 0.8. - Public Investment Management Index (PIMI): Haiti overall PIMI-index 1.1; Appraisal 0.0; Selection 1.2; Implementation 1.7; Evaluation 1.3. Haiti lags LAC and LICs in all project-cycle stages and performs particularly poorly in appraisal and selection. - Education spending and PSUGO: - Education spending: 4.2 percent of GDP in 2014; projected to increase to 4.8 percent of GDP in 2015 (MENFP 2015). - PSUGO spending: 0.5 percent of GDP during 2012–2014; budgeted to increase to 1.1 percent of GDP in 2015. - Half of education spending domestically financed, half foreign financed. - Primary enrollment increased from 78 percent to 88 percent in 2011 (LAC average 92 percent in 2012). - Secondary enrollment in 2012: Haiti 25 percent; LAC 73 percent. - Average years of schooling (population > 15) increased to 5.1 by 2010 (Haiti), versus 8.1 for Latin America in 2010. - PSUGO execution metrics (selected verbatim entries): - Recruited teachers and education professionals: Program Estimate 11,000; Execution 8,725; Execution rate 79 percent; Cost Program Estimate G 1,443; Execution G 971; Execution rate 67 percent. - TOTAL cost Program Estimate G 12,201; Execution G 6,740; Execution rate 55 percent. - Out of 4,207 teachers hired in FY2014, only 3,388 reported to have signed contracts. - Authorities plan to contain costs by progressively incorporating students into the program and more selectively granting subsidies to private schools. - Education fiscal projections and scenarios to 2035 (percent of GDP): - Assuming unchanged benefit and coverage ratios and U.N. “medium” fertility rates: education spending decreases to 3.5 percent of GDP in 2035. - Gradual increase in enrollment rates to regional average: education spending increases to 4.9 percent of GDP in 2035. - U.N. “low” fertility rates: education spending of 4.1 percent of GDP in 2035. - U.N. “high” fertility rates: education spending of 5.7 percent of GDP in 2035. - Increasing per-student benefits by 20 percent would require additional fiscal space of about 1 percent of GDP. - Policy priorities: - Improve capital spending efficiency rather than further increasing capital spending levels. - Strengthen the public investment management framework, prioritizing project appraisal and selection. - Reallocate resources toward education while improving quality and accessibility. - Contain PSUGO costs via gradual incorporation and selective subsidies; plan for fiscal space if increasing enrollment and per-student benefits. ### F. Monetary Policy, Reserves, and Competitiveness - Monetary policy and tools: - BRH objectives: ensure low and stable inflation and preserve external value of the Gourde. - Reserve requirements: currently 38 percent and 41 percent on gourde and dollar deposits, respectively (IMF 2012). - BRH uses exchange rate interventions and open market operations; aims to limit depreciation to the 3–4 percent range. - Monetary transmission mainly via credit and exchange rate channels; interest-rate and asset channels weak due to shallow financial market. - Reserve adequacy and optimal level: - International reserves about 4.8 months of imports and 45 percent of broad money. - Model-based estimate of optimal reserves: 4 months of imports (using Dabla-Norris et al. 2011 framework and unconditional shock probability of 0.5; opportunity cost of reserves assumed 4.5 percent). - Practical recommendation: maintain reserves near the mid-point of 4–5 months of imports. - Equilibrium RER assessment and approaches: - CGER ERER: RER broadly aligned with fundamentals; modest overvaluation under 5 percent at end-FY2014. - MB-EBA Lite produces a very large benchmark deficit for 2015 of 7.1 percent of GDP implying a near 40 percent undervaluation driven by productivity assumptions; MB (IMF 2006) and ES give benchmark deficits around -3.6 to -3.2 percent of GDP. - Table 1 (verbatim indicators from source): - Indicator: ES | MB-CGER | MB-EBA Lite (2015) - Projection, percent GDP: -3.5 | -3.6 | -3.5 - Benchmark, percent GDP: -3.2 | -3.6 | -7.1 - Gap, percent GDP: -0.3 | 0.0 | 3.6 - Elasticity of CA to REER: -0.1 | -0.1 | -0.1 - Implied over (+) or under (-) valuation, percent: 3.1 | -0.1 | -37.1 - Competitiveness structural constraints: - Weak institutions, poor infrastructure, cumbersome regulatory environment, and high port costs hamper competitiveness. - Port cost differentials: exporting through Haiti’s ports costs 15 percent more than in the Dominican Republic; importing costs 35 percent more; procedures require 2–3 more weeks (World Bank 2014). - Doing Business 2015: Overall rank 180/189; starting a business rank 188/189; resolving insolvency rank 189/189. - Corruption Perceptions Index 2014: rank 161/174. - Global Competitiveness Report 2014-2015: Overall rank 137/144; Institutions sub-index rank 135/144. ### G. Financial Intermediation, Credit, and Inclusion - Financial sector structure and key statistics: - Bank lending to the private sector: under 20 percent of GDP. - Total deposits: around 40 percent of GDP. - System composed of nine banks (two state-owned: BNC and BPH; two foreign-owned: CNBA and Scotia; five domestic). Sogebank and Unibank provide about two-thirds of private sector credit. Top three banks (including BNC) account for over 80 percent of total assets (BRH 2014). - Foreign banks hold 6.5 percent of assets (FinStats 2015). - About 67 percent of bank branches, and 85 percent of total deposits, located in Port-au-Prince (which has about 25 percent of Haiti’s population). - About 100,000 loans outstanding in December 2014 (population over 10 milion). - Most banks extend around 40 percent of credit to their 10–15 largest clients; top 100 borrowers account for about half of total credit. - Credit spreads and lending environment: - Average lending rates have hovered around 20 percent in recent years; weighted-average lending-deposit spread about 8 percent in 2013. - Sectoral allocation of credit (December 2014, percent): - Agriculture: 0.1 - Industry: 15.6 - Energy, Gas, Water, Storage: 12.6 - Real Estate: 16.4 - Services: 55.2 (o/w Trade: 25.0; o/w Hotels and Resturants: 2.8; o/w Consumer Credit: 11.8; o/w Other Services: 15.5) - Agriculture receives almost no credit from the formal banking system. - Cooperatives and microfinance: - 90 registered savings and cooperative financial institutions with about 639 thousand members as of end-September 2013. - Cooperatives’ assets, million gourdes: 2,327 → 5,117 (2009 → 2013). - Assets as percent of GDP: 0.9 → 1.4. - Net Credit Outstanding, million gourdes: 1,258 → 2,864. - Deposits, million gourdes: 1,636 → 3,160. - Number of members: 339,485 → 638,958. - Number of borrowers: 46,637 → 59,196. - Cooperatives regulated by a 2002 law; poor coordination between BRH and CNC leads to licensing delays and incomplete information. - Microfinance sector data limited; one estimate loans around G 4 billion (1 percent of GDP); USAID-funded 2012 study estimated about 200 institutions with total assets of about G 10 billion. - Credit bureau and inclusion strategy: - Bureau d’Information sur le Crédit (BIC) launched in FY2014 with IDB and IFC support. - First stage: banks and non-bank financial institutions required to report credit extended to each borrower. - Considered second stage: build credit histories using non-credit payment data (utilities) — expansion beyond banking system would require legislation. - National Strategy for Financial Inclusion target: raise adults with an account at a formal financial institution from 27 percent to 45 percent in five years. - Key actions: develop legal framework, strengthen credit bureau, promote competition in money transfers, revisit account-opening requirements, study social payments through banking system, facilitate use of collateral including land. ### H. State-Owned Enterprises (SOEs), Fiscal Contingent Liabilities, and Specific Funds - Privatization and SOE portfolio: - Late 1990s privatization program: only three enterprises privatized (flour mill 1998; national cement factory 1999; TELECO 2010). - Remaining non-financial public enterprises include: EDH, APN, AAN, ONA, OPH, OAVCT, OFATMA, and sugar factory USJLDD. - Government retains 40 percent stake in NATCOM. - Fiscal contribution and risks: - Few SOEs pay dividends; contribution to revenue limited: less than 0.1 percent of GDP in FY2015 budget. - EDH receives substantial government subsidies and has not published financial statements since 2007. - EDH accumulated arrears (almost 1½ percent of GDP) to independent power producers, creating contingent liability. - Some SOEs have accumulated debts vis-à-vis government from unpaid taxes or collected taxes not transferred: over 0.1 percent of GDP in FY2014. - Road Maintenance Fund (FER): - Mandate: maintain road infrastructure; governance: Board chaired by Minister of Public Works; revenue sources include a charge on petroleum (1 Gourde per gallon), 5 automobile fees, fees on cigarettes/alcohol/driver’s licenses/passports, 20 percent of road tolls; external donor contributions. - Legal rule: up to 10 percent of FER resources for current spending; remainder for maintenance (85 percent) and emergencies (5 percent). - Resource levels: allocations of only G350–650 million (0.1 percent of GDP) during FY2013–2015. - Table of FER operations (2013–2015, in millions of gourdes, verbatim): - Revenue (2013): 346; (2014): 641; (2015 Proj.): 600 - Fuel fees: 2013: 166; 2014: 197; 2015: ... - Other fees: 2013: 175; 2014: 180; 2015: ... - Treasury subsidies: 2013: ...; 2014: 355; 2015: ... - Expenditure (2013): 769; 2014: 995; 2015 Proj.: 600 - Wage bill: 2013: 20; 2014: 23; 2015: ... - Goods and services: 2013: 11; 2014: 10; 2015: ... - Capital spending: 2013: 737; 2014: 961; 2015: ... - PSUGO Fund operations and fiscal treatment: - Financing sources: US$0.05 on incoming call minute (collected by CONATEL); US$1.5 on money transfers (collected by financial institutions). - Initial projection: collection capacity US$360 million for 5 years. - Fund operational but without legal framework; Lower house passed bill in August 2012; Senate not considered it. - Fund resources averaged G 1.9 billion (US$45 million) a year during FY2012–FY2013 (G 1.6 billion from telecoms and money transfer fees; G 0.3 billion from PCDR transfers). - Expenditure averaged G 1.7 billion per year in that period. - FY2014: Fund revenue G 1.6 billion; spending estimated G 1.5 billion. - FY2015 budget: revenue G 1.9 billion; spending G 1.8 billion. - PSUGO operations essentially extra-budgetary; from FY2013 information included in ECF fiscal tables; FY2014 and FY2015 budget laws included Fund spending under government investment. - Pension systems and civil service plan (DPC): - ONA (private sector mandatory plan) and Civil Service Pension Plan administered by DPC. - ONA: employee contributions 6 percent, employer contributions 6 percent; coverage about 2 percent of population; annual contributions FY2011 G 1.5 billion; retiree benefits G 80 million; restitutions G 20 million; end-2010 contributors about 200k vs 2k beneficiaries. - Civil Service Pension Plan (DPC) details (2014 statistics and benefit schedule): - Number of retirees: 14k. - Number of active contributors: 70k. - Monthly employee contributions: G 79 million. - Monthly retirement pensions: G 69 million. - Surpluses kept in a commercial bank account amounting to 0.4 percent of GDP at end-March 2014. - Benefit schedule (Table 6): - Age 55, Years of contribution 20, Restitution Rate 60, Monthly ceiling (G) 12,500 - Age 55, Years of contribution 25, Restitution Rate 60, Monthly ceiling (G) 15,000 - Age 55, Years of contribution 30, Restitution Rate 75, Monthly ceiling (G) 25,000 - Age 55, Years of contribution 40, Restitution Rate 100, Monthly ceiling (G) 30,000 - ONA financial weaknesses: weak management and supervision, low return on investments, high provision for NPLs, high administrative costs (wage bill 50 percent of total spending), and a small coverage base; recent actuarial study (Delarue, 2014) found no new contributors and called for deep structural reforms. ### I. External Buffers, Oil Prices, and Fiscal Implications - Optimal reserves and shock vulnerability: - Historical shocks listed (verbatim): - 2012: Hurricane (201,850 people impacted) - 2011: Epidemic (514,000 people impacted) - 2010: Earthquake (3.7 million people impacted) - 2008–09: Food prices, international financial crisis - 2004: Hurricane (315,594 people impacted) - 2004: Political Unrest - Variables used in optimal reserve estimate (verbatim items and values from source): - Fiscal Balance, percent GDP (2015): -3.2 - Imports, percent GDP (2015): 47.5 - CPIA (last available): 3.2 - External demand growth, percent (bottom 10th percentile): -5.8 - Terms of Trade growth, percent (bottom 10th percentile): -7.2 - Change in FDI to GDP (bottom 10th percentile): -34.1 - Change in aid to GDP (bottom 10th percentile): -25.6 - Model result: estimated optimal reserves 4 months of imports; practical recommendation to maintain reserves near mid-point of 4–5 months of imports. - Impact of lower oil prices: - As of March 2015, spot crude oil prices down 50 percent from one year earlier. - Under WEO projections, Haiti’s oil balance would improve by about 4.5 percent of GDP in FY2015. - Petrocaribe flows: during high oil prices about 4 percent of GDP per year; with lower oil prices flows should reduce to about 2 percent of GDP, partially offsetting balance-of-payments improvement. - Authorities’ fuel-price actions: increased fuel prices in October 2014 (7.5 percent for gasoline, 9.3 percent for diesel and 6.2 percent for kerosene), decreased prices in February 2015. - Risk: fall in oil prices worsens Venezuela’s situation → risk of discontinuation of Petrocaribe program; sudden stop would require significant further adjustment. ### J. Key Policy Recommendations (consolidated) - Strengthen property rights and modernize land tenure (establish a modern land cadastre; Plan Foncier de Base timelines: initial cadastre in 8 rural communes and Port-au-Prince center within three years; nationwide cadastre and new land law envisaged in about ten years). - Improve infrastructure, with emphasis on electricity service provision to reduce recurring fiscal transfers and arrears associated with EDH; diversify generation (wind, hydro, biomass), interconnect grids, overhaul EDH governance and regulation, and publish IPP contracts. - Increase labor productivity, improve access to finance, enhance business climate, and uphold international labor standards to facilitate GVC integration (starting with apparel). - Pair trade policy with structural reforms to encourage export diversification rather than relying on tariff adjustments alone; exercise caution on steep tariff increases due to risks to food prices and distribution. - Improve capital spending efficiency: strengthen public investment institutions, transparency of budget execution, procurement openness, cash management, project appraisal and selection. - Reallocate and protect human-capital spending: improve education quality and access, cautiously expand PSUGO with cost-containment measures, plan fiscal space for higher per-student benefits if pursued. - Strengthen monetary policy implementation: produce timely macro/financial data, avoid reserve requirement exemptions, rely more on open market operations, maintain international reserve buffer of 4–5 months of imports. - Promote financial inclusion: use collateral reforms (including land cadastre), strengthen credit bureau, regulate cooperatives and microfinance, promote competition in banking and money transfers. *International Monetary Fund — Haiti country report content unit* ### References ______________________________________________________________________________ 21 ### _cr15158 - References ______________________________________________________________________________ 21 ### A. Opportunities and Challenges for Growth — Key Findings - Deep-seated reforms across a range of areas are required to achieve a sustained increase in living standards. - Diversifying the export base is needed to cushion the impact of severe shocks that have reduced per capita income and prevented a sustained increase in the capital stock. - Integration into global-value chains (GVCs) can leverage proximity to the U.S. market and preferential trade agreements to generate employment, spur human capital creation, and move Haiti up the value-added chain. - Secure property rights are essential to increased investment; Haiti’s persistent uncertainty over land ownership and weak conflict resolution institutions impede investment. - Poor infrastructure, notably in electricity, imposes significant costs on firms and is a key bottleneck to growth. ### B. External Trade and Vulnerability to Shocks — Findings and Statistics - Haiti is one of the most open economies in Latin America and the Caribbean (LAC); the U.S. is Haiti’s largest export market. - Apparel exports account for a dominant share of exports and benefited from U.S. HELP and HOPE trade initiatives. - Trade flows and composition: - Imports of goods increased from 23 percent of GDP in 1980–84 to 43 percent of GDP in 2010–13. - Exports remained about 10 percent of GDP over the same period. - Remittances accounted for about a fifth of Haiti’s GDP in recent years. - In the 1980s, finished apparel accounted for 50 percent of total exports (on average); coffee accounted for 23 percent (on average). - In 2010–2013 apparel accounted for nearly 90 percent of exports; export of food staples accounted for less than 5 percent. - In 2010–2013 food imports accounted for 18 percent of imports (7.6 percent of GDP); fuel imports accounted for 26 percent of imports (10 percent of GDP). - Vulnerabilities: - 75 percent of Haitians are subject to one or more economically damaging shocks per year (World Bank, 2014). - Haiti experienced negative terms-of-trade shocks in 1981–92, 2000–02, and 2008; natural disasters have also had major adverse effects. - Revealed Comparative Advantage (RCA) trends: - Specialization in apparel has steadily increased over the past 15 years. - Exports of agricultural products (fruits, and coffee) have steeply declined. - Haiti’s coffee exports (in volume terms) in 2013 were only 5 percent of its 1995 level. ### C. Infrastructure, Electricity, and Fiscal Implications — Findings and Figures - Electricity sector constraints: - Only about 30 percent of the population is connected to the grid. - The deficit of the state-owned electricity company (EDH) was 2.5 percent of GDP in FY2014 (nearly 20 percent of tax revenues). - Transfers to cover EDH’s deficit crowd out priority spending in education, health and security. - High delinquency rates for large electricity consumers lead to a more regressive distribution of income. - Infrastructure gaps force enterprises to self-provide sanitation, security, and energy, increasing production costs and reducing potential economies of scale. ### D. Policy Analysis and Recommendations - Pair trade policy with structural reforms to encourage export diversification and sustainable growth rather than relying on tariff adjustments alone. - Prioritize reforms to: - Strengthen property rights and modernize the land tenure system (establish a modern land cadastre to survey parcels and establish clear ownership). - Improve infrastructure, with particular emphasis on electricity service provision to reduce recurring fiscal transfers and arrears associated with EDH. - Increase labor productivity, improve access to finance, enhance the business climate, and uphold international labor standards to facilitate GVC integration (beginning with the apparel industry). - Caution on tariff policy: - While there is some room to use tariffs (converging to CARICOM averages) to stimulate agriculture, steep tariff increases risk higher domestic food prices, worse income distribution, and rent-seeking. - Complementary structural reforms emphasized by comparator country experiences: - Successful cases (East Asian countries, Mauritius, Chile, India, China) combined trade liberalization with institutional strengthening, infrastructure investment, stable inflation, and competitive real exchange rates to support diversification. ### E. Comparative and Historical Context - Trade liberalization in Haiti occurred amid domestic turmoil and indecisive implementation of structural reforms, contributing to a decline in the agricultural sector and manufacturing exports. - Haiti’s simple average applied tariff is 4.8 percent; agriculture tariff average is 8.2 percent. - Comparator experiences (World Bank, 2005; IMF, 2014) show that trade liberalization accompanied by strong institutions and structural reforms yields improved diversification and resilience. *Source: _cr15158 - References (May 6, 2015)* ### 17. A value chain represents all activities that firms would engage to bring a product to ### 17. A value chain represents all activities that firms would engage to bring a product to the market ### Global value chains (GVCs) and development - Value chains represent all activities firms engage to bring a product to market. - Value chains have become increasingly global, increasing interconnection and specialization across activities and stages rather than industries. - GVC integration contributes to growth, productivity, and employment; integration into GVCs often provides an easier path to higher living standards than building a complete domestic value chain. - Case study evidence suggests countries that integrated successfully in GVCs (instead of pursuing domestically-based industrialization) experienced better outcomes in the activities and sectors studied (OECD, 2014). ### Apparel global value chain: structure and entry points - The apparel GVC is highly globalized and is a common entry point for developing countries because related skills can be acquired relatively easily. - Segments of the apparel GVC described: - (i) raw material supply, including natural and synthetic fibers; - (ii) provision of components, such as yarns and fabrics manufactured by textile companies; - (iii) production networks made up of garment factories, including domestic and overseas subcontractors; - (iv) export channels established by trade intermediaries; and - (v) marketing networks at the retail level. - Developing countries (for example, Bangladesh, Lesotho, Nicaragua) are often present in the production network segment (cutting, sewing, supplying trim, shipping ready-made garments) due to advantages such as favorable trade agreements, abundant labor supply, and proximity to end markets. ### Role of preferential trade agreements in apparel GVC integration - Preferential trade agreements (usually between developing and developed markets) have supported apparel GVC integration: - Bangladesh: - Benefits since the 1980s from preferential market access to the EU (Generalized System of Preferences) and the MFA quota system, enabling entry into lowest segments of the apparel value chain and becoming a top exporter in low-cost apparel. - Concentrated in high-volume, low value-added basic products supplied to low and medium market segments in the E.U. and the U.S. - Lesotho: - Became a large apparel exporter to the U.S., partly due to preferential trade agreements. - The phase out of the MFA system in 2005 led to a decline in Lesotho’s apparel exports. - AGOA was instrumental to attract FDI, almost exclusively from Taiwanese investors using factories mainly for cut-make-trim (CMT) operations; financing, sourcing fabrics, product development and design, logistics, merchandising and marketing were carried out in Taiwan (Staritz and Morris, 2013). - Lesotho’s apparel firms export mainly five pocket denim jeans and knit tops (T-shirts and polo shirts). - Nicaragua: - Signing of the CAFTA-DR TPL agreement with the US led to a surge in apparel exports to the US. - Nicaragua competes primarily in lower unit value segments (knitted shirts and intimate apparel) (Frederick, Bair, and Gereffi, 2014). - The Tariff Preference Level (TPL) under CAFTA-DR allowed apparel made of certain cotton and synthetic fiber assembled in Nicaragua to enter the U.S. duty free regardless of origin of fabrics; the TPL will expire on December 31, 2014. - Haiti: - Benefitted from regional trade preferences in apparel since 1983 (duty-free access to U.S. market for certain apparel made of U.S. materials). - International sanctions in the early 1990s cut exports almost to zero. - U.S. granted more flexible, Haiti-specific trade preferences through HOPE (Hope I (2006); Hope II (2008)) and HELP (2010) Acts; preferences based largely on duty-free treatment for apparel articles made with third-country inputs, especially fabric. - HOPE/HELP preferences were deepened during rebuilding; apparel exports and employment grew significantly after adoption. - Relevant expiry and authorization dates: - AGOA authorization expires on September 30, 2015. - Nicaragua’s CAFTA-DR TPL will expire on December 31, 2014. - Haiti’s U.S. trade preferences are set to expire in 2020 unless an extension is granted. ### Country outcomes and value-added challenges - Integration into GVCs underpinned increases in GDP per capita across countries including Cambodia, China, Costa Rica, the Czech Republic, Mexico, Thailand and Vietnam. - Policies that helped integration: openness to trade and investment, improved business environment, creation of export zones (World Bank, 2014). - Persisting outcome across several countries: concentration at low-value added segments of apparel industry, limited domestic input production, and low labor productivity relative to Asian competitors. ### Haiti: apparel sector statistics and characteristics - Apparel exports and value: - Apparel foreign sales represented 90 percent of exports as of 2014. - Value added in the apparel sector is still low (around 3 percent). - Production and employment: - Production limited mostly to simple knits and some woven products; mix slowly shifting toward more complicated woven goods (e.g. khaki pants). - Employment in apparel: 30,000 workers, of which 65 percent are women (Better Work, 2014). - Geographic concentration: - Most companies located in SONAPI industrial park (outskirts of Port-au-Prince). - An industrial park at the Dominican border employs 6,500 workers (Grupo M). - A subsidiary of a Korean company (S & H Global) in CARACOL industrial park employs 2500 workers. - Comparative indicators (as presented in the source table): - Table entries (presented verbatim from the source): - BangladeshHaitiLesothoNicaragua - GDP (US$, billion) - 161.768.462.2711.26 - GDP per Capita (PPP, US$) - 3167.491703.002765.304592.82 - Apparel Exports (US$, million) - 18866.00837.22263.011274.47 - Apparel Exports (% of Total Exports) - 82.1%91.3%38.4%27.8% - Labor Force - 70.8%65.8%66.0%63.4% - Average Minimum Wages in the Apparel Sector 1/ - US$6.80US$5.12 - Skilled worker: US$4.08, Unskilled worker: US$ 3.75 - US$12.43 - Year of Entry in Value Chain - 1980s1980s1990sMid 1990s - Main Apparel Export Destinations - US & EUUSUSUS - Value Chain Entry Point - AssemblyAssemblyAssemblyAssembly - 1/ Per 8-hour workday ### Cases of increasing value added and constraints - Bangladesh example: - Increased value added by developing a domestic textile industry for knitted textiles, enabling exporting firms to source locally. - In 1994 introduced a cash incentives program for exporters of apparel products using domestic fabrics, increasing value added of exports. - Constraints faced: shortage of skilled workers, supervisors and managers; labor and environmental compliance concerns required by buyers to enter sourcing networks (Staritz, 2011). - General risk from sunset clauses: - Increasing value added and labor productivity is essential to preserve investment as trade preferences usually have a sunset clause. - Nicaragua and Lesotho face expiration of trade preferences with the US, which could lead to significant decreases in their exports. - Haiti benefits from U.S. preferences set to expire in 2020 unless extended. ### Policy challenges and recommendations for Haiti’s apparel upgrade - Key challenges to attract investment into higher value activities: - (i) shortage of personnel with specialized skills (especially in management), and still-low labor productivity; - (ii) high electricity costs and generally poor infrastructure; - (iii) lack of commercial property to accommodate factories of 2000 employees and more; - (iv) lack of access to finance; - (v) high administrative costs (including at customs). - Policy implications: - Steady implementation of reforms is required to address shortcomings; an extension of preferential market access could provide needed time for reforms to mature and generate investment in higher value-added manufacturing. ### Strengthening property rights to unlock growth - Rationale for land cadastre: - Secure and transferable property rights promote domestic and foreign private investment, improve resource allocation, allow speedy and low-cost transactions, improve access to credit by enabling land as collateral (Besley and Ghatak, 2009). - A cadastre would deepen the tax base and allow more equitable and transparent taxation. - Land protection and improvements incentivized by secure title can reduce vulnerabilities to natural disasters. - Extent of informality and consequences: - Haiti’s existing land tenure system is largely informal, particularly in rural areas. - Surveys found that 68 percent of the urban population and 97 percent of the rural population live on land without clear access to title (de Soto, 2000). - Informal tenure resulted in fragmented plots, conflicts over ownership, environmental degradation, and deterrence of investment and reconstruction (post-2010 earthquake). - Formal system complexity and performance: - Haiti ranks 175th out of 189 countries in the ease of registering property (World Bank, 2015). - The formal registration process follows an 1890 law requiring a hand-written survey report. - Process steps and institutional roles (verbatim elements from source): - After a sales agreement, steps include: survey (3 to 12 months), preparation of bill of sale (10 days to 5 months), registration/transcription and payment of taxes (3 months to 1.5 years). - Summary timeline and burden: Total: 17 steps; 4 to 8 institutions and 2 professionals; 14 to 16 documents; 6 months to 2.5 years. - No central land registry exists; the central DGI office maintains a chronological paper record of transactions in several thousand books dating back to 1824 (OAS 2010). - Institutional weaknesses and practical risks: - Heavy reliance on notary publics and surveyors; notaries are appointed for life by the President and there are over 500 notaries with no central registry, complicating title chain verification. - Surveyors licensed by commune may practice out of it, potentially invalidating transactions; fraud among notaries and surveyors is a problem. - DGI’s role is primarily tax collection, not record-keeping; payment of taxes on a prior transfer does not ensure lack of ownership dispute. - Titling informal parcels may require compiling oral histories and local documentation; the principle of land sharing among descendants can involve large numbers of claimants. - Any person can object to a land survey, halting it and sending it to a local judge; the average length of conflict resolution in the wider court system is five years (OAS 2010). - Land conflicts have delayed projects by as much as two years in recent USAID projects despite high-level government backing (GAO 2013). _Italic: International Monetary Fund — Haiti country report content unit_ ### 32. A modern cadastre system is essential to addressing these challenges. A functioning ### _cr15158 - 32. A modern cadastre system is essential to addressing these challenges. A functioning ### Cadastre: purpose and impact - A functioning cadastre would: - Delineate individual parcel boundaries across the whole country, eliminating the need for the archaic surveying system. - Confirm land ownership, together with any associated rights or liens. - Reduce uncertainty over land rights, encourage investments, and reduce conflicts over land. - Historical note: In Haiti’s case, no cadastre has been completed since 1784 (CIAT 2015). ### Institutions involved in cadastre development - Office national du cadastre (ONACA): - Autonomous agency created in 1984 under the authority of the Ministry of Public Works, Transportation, and Communications. - Tasked with developing a land cadastre covering the whole country; made little progress prior to the earthquake. - Institut National de la Réforme Agraire (INARA): - Part of the Ministry of Agriculture; shares responsibility with ONACA in rural areas. - Centre National de l’Information Géospatiale (CNIGS): - Part of the Ministry of Planning; tasked with using satellite imagery to survey the territory of Haiti. - DGI (part of the Finance Ministry): - Tasked with scanning its written records into machine-readable form. - Comité Interministériel d’Aménagement du Territoire (CIAT): - Inter-ministerial committee headed by the Prime Minister’s office; coordinates activities of ministries including the Ministries of the Interior and of the Environment. - Local administration: - Haiti’s 140 communes administer state land at the local level and are key participants. ### Plan Foncier de Base: phased approach and timeline - Initial approach: - Develop a non-legally binding national cadastre, starting in several targeted areas. - Initial cadastre would not issue titles or change legal competencies of notaries and surveyors. - Simultaneous efforts include: - (i) Developing high-precision cartography of Haiti’s territory. - (ii) Digitization of the DGI archives as well as legal documents relevant to land ownership. - (iii) Work on the ground: ONACA and INARA staff working with locally-recruited staff and the public to delineate properties and verify ownership. - Timelines: - Within three years: complete the initial cadastre in 8 rural communes and the city center of Port-au-Prince. - Completion of a nationwide cadastre, and passage of a new land law, envisaged in about ten years. ### Electricity sector: barrier to growth and fiscal drag - Sector characteristics and constraints: - Electricity sector is a bottleneck to growth: high prices and unreliable service (frequent, long, and unplanned blackouts) force private sector self-generation. - Self-generation reinforces high cost, poor service, and prevents economies of scale. - Fiscal and macro vulnerability: - Deficit of state-owned EDH was 2.5 percent of GDP in FY2014 (nearly 20 percent of tax revenues). - Financing of the deficit included central government transfers and loans, and accumulation of arrears with independent power providers (IPPs). - In FY2013–FY2014: - On-budget transfers to EDH amounted to 0.7 percent of GDP. - Off-budget transfers (Petrocaribe-related flows) reached 0.9 percent of GDP. - An IPP exercised guarantees against the central government for unpaid electricity sold to EDH for 0.3 percent of GDP. - Access and poverty impacts: - Only about 30 percent of the population is connected to the grid; access among the rural poor is even lower. - Coverage has remained about constant for decades due to EDH’s unsustainable financial situation impeding investment. - High generation costs raise costs for water and sewage services and crowd out priority spending in education, health and security. - High delinquency rates for large electricity consumers contribute to a more regressive distribution of income. ### Service quality, operational indicators, and generation mix - Service quality: - Average hours of electricity supplied are low and variable; blackouts are long and unplanned. - Supply is higher in Port-au-Prince and lower in the provinces. - Financial support from Venezuela (Petrocaribe) increased service hours in recent years; a reduction or stop of these resources would likely result in longer blackouts. - Self-generation effects: - Households and commercial-industrial clients use self-generation; many disconnect from the grid entirely. - Self-generation increases oil bill, lowers EDH revenue base, and complicates sector political economy. - EDH and market structure: - EDH is in charge of distribution and transmission and conducts some generation; the system is organized in nine grids, the largest includes Port-au-Prince. - Three IPPs (Sogener, E-Power and Haytrac) and a tri-national enterprise (PBM, Petion-Marti-Bolivar) generate most electricity. - EDH’s board is chaired by the Minister of Public Works and includes a representative of the Ministry of Finance; the board has rarely met in recent years. - Regulation corresponds to the Ministry of Public Works. - Key performance and financial indicators (FY2014 and related): - Capital concentrates about 75 percent of energy supplied. - Average effective tariff for FY2014: 28 cts/kwh. - Total energy billed in FY2014 represented only 40 percent of energy supplied. - Average delinquency rate for FY2014: over 30 percent. - Cash recovery index (billing × collection) about 25 percent in 2014: EDH received in revenue only 25 cents per dollar of electricity supplied. - About 90 percent of installed electricity generation capacity is based on oil-derivatives (diesel and heavy fuel oil). - Generation costs projected to be larger in FY2015–FY2017 as the largest dam (Peligre) is being repaired. ### Cross arrears and stocks of debt (end-FY2014 estimates) - EDH’s stock of arrears with IPPs: US$144 million (1.5 percent of GDP). - Arrears with PBM: US$142 million (1.5 percent of GDP). - Arrears of IPPs and PBM vis-à-vis BMPAD for fuel purchases: about US$220 million (2.4 percent of GDP). - Delinquent electricity bills of the private sector vis-à-vis EDH: about G3 billion at end-FY2014 (0.7 percent of GDP). - Debt of Municipalities (for public lighting): about G1.5 billion (0.3 percent of GDP). ### External support and planning - IFI programs (World Bank, IDB, and the U.S.) target network improvement, installation of meters, increased transparency and governance; disbursements have been lower than expected due to slow reform implementation. - A memorandum of understanding (“Electricity Sector Protocol”) with sector stakeholders is noted as a positive recent initiative. - Selection of Électricité de France (EDF) to draft a sector master plan is encouraging. ### Policy recommendations and priority reforms - Governance and management: - Strengthen EDH’s management and sector regulation. - EDH’s Board should meet regularly to ensure budgets are approved on time, accounts are audited, and financial audits are published. - Publish all contracts with IPPs to improve accountability and transparency. - Tariffs, billing, and collections: - Review tariffs to ensure appropriate price signals and stop leakage of large industrial/commercial clients to off-grid self-generation. - Review and enforce penalties for non-payment. - Improve billing and collection, tackle theft, and focus initially on largest clients who constitute the lion’s share of revenues. - Consider payment regularization plans for clients with large arrears and create a culture of payment for smaller clients (e.g., requiring paid electricity bills in loan applications or for a driving license). - EDH can establish a calendar of outages by affected area to improve demand planning by the private sector. - Government payments and municipal contributions: - Minister of finance should centralize payment of electricity bills for all central government institutions. - Budget should provide for the cost of public lighting; municipalities should contribute in relation to consumption and revenues. - Expenditure control and procurement: - Control and reduce EDH’s wage bill. - Analyze electricity provision contracts with IPPs to attenuate wide dispersion of costs. - Use different IPPs on a marginal cost rule; follow competitive and transparent bidding for new generation facilities and publish all documentation. - Consolidate cross arrears to add clarity to the sector’s financial statements. - Investment, diversification, and interconnection: - Diversify the electricity generation matrix toward wind-based, hydro, and biomass. - Overhaul EDH to make it financially sustainable and strengthen regulation and transparency to attract investment in lower-cost generation alternatives. - Interconnect isolated grids to create a national market and allow significant electricity cost reductions in the provinces. *International Monetary Fund. (Excerpt from chapter/section).* ### 1. Capital spending increases underpinned Haiti’s public expenditure trends in the last ### _cr15158 - 1. Capital spending increases underpinned Haiti’s public expenditure trends in the last ### Key messages and overview - Capital spending increases underpinned Haiti’s public expenditure trends in the last decade; despite relatively high and sustained levels in public investment, Haiti compares negatively with the region and LICs in translating resources into better infrastructure and in management practices. - Spending on education increased recently and primary enrollment rose toward universal levels (88 percent), but gaps remain in average years of schooling, secondary and tertiary enrollment, and education quality. - Rebalancing public expenditure to support human capital formation and better infrastructure—through enhanced capital efficiency and reallocations toward education—would improve the growth environment. ### Public expenditure trends, 2004–2014 - Central government spending rose from 11 percent of GDP in 2004 to 25 percent of GDP in 2014; revenues (including grants) increased from 10 percent to 19 percent of GDP. - Current revenue increased by 4 percentage points of GDP; budget support increased by 1 percentage point of GDP. - Project grants peaked in the post-earthquake period; the total increase in project grants amounted to 4 percentage points of GDP in 2004–2014. - Public expenditure peaked at 28 percent of GDP in 2012–2013 during post-earthquake reconstruction and decreased in 2014. - Central government spending (2012–2014) was 27 percent of GDP versus regional averages: Latin America and the Caribbean (LAC) 30 percent of GDP, LICs 28 percent of GDP. - Projected decrease in government spending to 23 percent of GDP in 2015–2017. - Government revenues were 20 percent of GDP in 2014 compared to 26 percent of GDP in the region and LICs. - Drivers of expenditure growth (2004–2014): - Capital spending increased by about 9 percentage points of GDP between 2004 and 2014; financed mainly by project grants (4 percent of GDP) and Petrocaribe financing (3–4 percent of GDP). - Current spending increased by about 5 percentage points of GDP, largely driven by the wage bill (about 3 percentage points); transfers and subsidies contributed about 2 percentage points. - Interest payments are relatively minor given low and concessional debt. - Comparative levels (2012–2014): - Capital spending in Haiti: 15 percent of GDP. - LAC average capital spending: 6 percent of GDP. - LIC average capital spending: 9 percent of GDP. - Among LAC countries, only Ecuador shows a similar high level with 14 percent of GDP. - Examples of LICs with high public investment ratios: Republic of Congo 24 percent, Djibouti 16 percent, Mozambique 16 percent, Niger 14 percent. - Other expenditure categories (2012–2014): - Central government wage bill: Haiti 5 percent of GDP, LAC 8 percent of GDP, LICs 7 percent of GDP. - Spending on social benefits and security is negligible. - Education spending: - Education spending was 4.2 percent of GDP in 2014 and projected to increase to 4.8 percent of GDP in 2015 (MENFP 2015). - Central government education spending comparable with LAC average in 2013 (4.7 percent of GDP); slightly lower than Sub-Saharan Africa (5 percent of GDP) and higher than MENA (3.8 percent of GDP) (World Bank 2013). - Half of education spending is domestically financed and half foreign financed. - PSUGO (Programme de Scolarisation Universelle, Gratuite et Obligatoire) spending: 0.5 percent of GDP during 2012–2014; budgeted to increase to 1.1 percent of GDP in 2015. - PSUGO financed by fees on international calls and remittances and, to a lower extent, through the budget. ### Efficiency of capital and education spending: indicators and program performance - Capital spending efficiency: - Efficiency frontier analysis (inputs: real public capital stock per capita PPP; output: infrastructure component of the Global Competitiveness Indicator). - Two metrics used: Partial Free Disposal Hull (PFDH) and Data Envelopment Analysis (DEA). - Haiti’s PFDH score: 0.5 (on 0.5–1.2 range) — among the lowest in the world. - Table of efficiency scores (source IMF 2014): - Haiti: PFDH 0.5, DEA 0.5 - LAC: PFDH 0.9, DEA 0.7 - LICs: PFDH 0.9, DEA 0.8 - Public Investment Management Index (PIMI) (Dabla-Norris et al., 2012): - Haiti lags LAC and LICs in all project-cycle stages (strategic guidance and appraisal; selection; implementation; evaluation and audit). - PIMI indices by stage (overall and components): - Haiti overall PIMI-index 1.1; Appraisal 0.0; Selection 1.2; Implementation 1.7; Evaluation 1.3. - LAC overall 1.6; Appraisal 1.2; Selection 1.9; Implementation 2.0; Evaluation 1.5. - LICs overall 1.5; Appraisal 1.3; Selection 1.7; Implementation 1.8; Evaluation 1.2. - Haiti performs particularly poorly in the appraisal and selection of projects. - Education outcomes and PSUGO performance: - Primary enrollment increased from 78 percent to 88 percent in 2011 (LAC average 92 percent in 2012). - Secondary enrollment in 2012: Haiti 25 percent; LAC 73 percent. - Average years of schooling (population > 15) increased over 1950–2010 but remain lower than Caribbean and Latin America (selected data points from Table 3): - Haiti: 1950 0.6; 1960 0.8; 1970 1.2; 1980 2.0; 1990 3.4; 2000 4.3; 2010 5.1. - Dominican Republic: 1950 2.5; 2010 7.9. - Caribbean: 1950 4.0; 2010 9.0. - Latin America: 1950 2.7; 2010 8.1. - More than 80 percent of enrollments are in private schools; quality varies significantly. - PSUGO program execution (2011–2014) — achievements and execution rates (Table 4 highlights): - Recruited teachers and education professionals: Program Estimate 11,000; Execution 8,725; Execution rate 79 percent; Cost Program Estimate G 1,443; Execution G 971; Execution rate 67 percent. - Identification of needy kids in 2 departments: Program Estimate 100,551; Execution 94,513; Execution rate 94 percent; Cost Program Estimate G 2,800; Execution G 1,440. - Subsidizing kids outside public schools: Program Estimate number covered 860,250; Execution 785,674; Execution rate 91 percent; Cost Program Estimate G 1,494; Execution G 5,153; Execution rate 54 percent. - Eliminating school fees in public schools: Program Estimate number covered 639,750; Execution 680,300; Execution rate 106 percent; Cost Program Estimate G 538; Execution G 419; Execution rate 78 percent. - TOTAL cost Program Estimate G 12,201; Execution G 6,740; Execution rate 55 percent. - Note: Out of 4,207 teachers hired in FY2014, only 3,388 are reported to have signed contracts. - PSUGO objectives for 2011–2016 (hiring teachers and school directors, subsidies) were achieved at end-2014 with execution rates of 79 percent or more for many sub-program objectives. - Only 55 percent of the planned resources for 2011–2016 (G 12.2 billion) had been used by end-2014; underestimation of program cost led to off-budget spending estimated at G 2 billion. - Authorities plan to contain costs by progressively incorporating students into the program and more selectively granting subsidies to private schools, mainly where public coverage is inadequate. ### Assessing future demand for public education and fiscal implications - Demographic projections (U.N. medium fertility assumption): - Fertility rate in Haiti declined to 2.9 in 2015 (LAC 2.1 percent) and expected to decrease to 2.2 in 2035. - Share of population below 19 projected to decrease from 45 percent in 2015 to 36 percent in 2035 (LAC 27 percent). - Life expectancy projected to increase from 64 years in 2015 to 69 years in 2035 (LAC 76 years). - Dependency ratio projected to increase from 7.5 percent in 2015 to 9.9 percent in 2035 (LAC 20.8 percent). - Education spending as share of GDP depends on: - Benefit generosity (average education spending per student to GDP per worker); - School enrollment (coverage) rate (students to school-age children); - Demographics (ratio of school-age children to population 20–64). - Projected scenarios for education spending (as percent of GDP) to 2035: - Assuming unchanged benefit and coverage ratios and U.N. “medium” fertility rates: education spending decreases to 3.5 percent of GDP in 2035. - Gradual increase in enrollment rates, particularly secondary, to catch up with the regional average (in 2015): education spending increases to 4.9 percent of GDP in 2035. - Sensitivity to fertility assumptions: - U.N. “low” fertility rates imply education spending of 4.1 percent of GDP in 2035. - U.N. “high” fertility rates imply education spending of 5.7 percent of GDP in 2035. - Increasing per-student benefits requires fiscal space: - Increasing per-student benefits by 20 percent would require additional fiscal space of about 1 percent of GDP. ### Policy implications and priorities - Improve capital spending efficiency rather than further increasing capital spending levels. - Strengthen the public investment management framework, with priority on project appraisal and selection. - Reallocate resources toward education while improving quality and accessibility to support human capital formation and increase productivity of the capital stock. - Contain PSUGO costs through gradual student incorporation and more selective subsidies to private schools, focusing on areas underserved by public schools. - Plan for fiscal space if increasing enrollment and per-student benefits, noting sensitivity to demographic scenarios and fertility assumptions. *Prepared by Emine Hanedar (FAD), International Monetary Fund.* ### 18. Haiti should enhance the efficiency of capital spending rather than in increase its level. ### 18. Haiti should enhance the efficiency of capital spending rather than in increase its level. ### Efficiency of capital spending and public investment - Findings: - High infrastructure-related spending was needed in the aftermath of the earthquake, but capital spending appears to be crowding out other, equally needed, spending. - A number of metrics show that the efficiency of public investment in Haiti remains low when compared to the region and LICs. - Policy recommendations: - Increase the efficiency of capital spending by strengthening public investment institutions. - Prioritize transparency of budget execution, openness of the procurement process, and an efficient cash management system to ensure stability of public investment and reduce opportunities in rent seeking. - Improve transparency and accountability in project management, monitoring and evaluation to strengthen incentives to deliver on time and on budget and increase the integrity in the use of public resources (IMF 2015). ### Investing in human capital: education - Findings: - Investing in human capital through better education is essential to foster sustainable economic growth and social cohesion. - Recent research shows economic growth is responsive not only to average years of schooling but to measures of the quality of education (Hanushek and Woessman 2012). - Qualified teachers are an important determinant of cognitive achievement (World Bank, 2014). - Actions and recommendations: - Pursue higher enrollment rates, including gradually increasing secondary school attendance, accompanied by increases in the quality of the education system to ensure learning. - PSUGO is investing in training of teachers and directors. - The government should play a strong role in regulating and monitoring the quality of the education system, including private schools. - Spending needs to be allocated transparently and public and private schools should coordinate policies and approaches. - Improve education statistics to monitor developments and evaluate outcomes. - Combined with other institutional reforms, accumulation of human capital should make Haiti more attractive for investors and promote employment and social cohesion. ### Monetary policy: objectives, tools, and challenges - Objectives and tools: - The BRH’s objectives are to ensure a low and stable rate of inflation and to preserve the external value of the Gourde. - In recent years the BRH has used a combination of exchange rate market interventions and open market operations and has strived to limit depreciation to the 3–4 percent range. - The BRH primarily manages liquidity through reserve requirements, which are currently 38 percent and 41 percent on gourde and dollar deposits, respectively (IMF 2012). - The BRH conducts open market operations through issuance of central bank bills and intervenes periodically in the foreign exchange market (both sells and buys U.S. dollars). - Transmission and constraints: - Inflation is heavily influenced by tradable food and energy staples: food accounts for half of the CPI basket, and food and energy together account for two-thirds. - Imports of food and energy are about 20 percent of GDP; pass-through from exchange rate depreciation to inflation is high. - Monetary transmission is primarily through the credit and exchange rate channels; the interest rate and asset channels are weak due to a shallow domestic financial market. - Changes in the interest rate on BRH bills do not have a significant impact on other interest rates in the economy. - Implementation challenges: - Monetary policy implementation is complicated by vulnerability to weather events and natural disasters, shifts in terms of trade, foreign financing, political events, and a shallow domestic interbank market. - Insufficient high-frequency macroeconomic data (particularly in the agricultural sector) and limited capacity for liquidity forecasting complicate policy calibration. - Treasury management by the central government needs significant improvement and introduces additional volatility into gourde liquidity. - Assessing the stance of monetary policy is challenging due to exemptions that lower the effective reserve rate, fluctuation in volumes of central bank bills, and absence of forward guidance. - Policy recommendations: - Better understand the transmission mechanism through production of quality and timely macroeconomic and financial data. - Avoid use of exemptions on reserve requirement implementation and rely more on open market operations to align market interest rates with targets. - Consider publishing a synthetic indicator that takes all factors impacting liquidity absorption into account, such as a weighted average of the effective reserve rates and the rates on outstanding BRH bills. - Maintain an international reserve buffer credible for market intervention; staff analysis suggests international reserves should be in the range of 4–5 months of prospective imports. - Increase exchange rate flexibility to rebuild buffers after interventions and implement a fiscal policy consistent with recovering and then maintaining appropriate buffers. ### Financial intermediation and financial inclusion - Findings: - Financial intermediation is very low in Haiti and concentrated; greater competition and an improved regulatory framework is needed to promote financial inclusion. - The financial system is dominated by a few local banks; cooperatives and microfinance institutions are relatively small and still mostly unregulated. - Credit is low and heavily concentrated, reflecting lack of information on creditworthiness and difficulties in collecting on debt. - Key statistics: - Bank lending to the private sector remains under 20 percent of GDP. - Total deposits are around 40 percent of GDP. - Reserve requirements and non-credit domestic investments contribute to an excess of deposits over bank credit. - The system is composed of nine banks (two state-owned: BNC and BPH; two foreign-owned: CNBA and Scotia; five domestic). Sogebank and Unibank together provide about two-thirds of private sector credit. The top three banks (including BNC) account for over 80 percent of total assets (BRH 2014). - Foreign banks hold 6.5 percent of assets (FinStats 2015). - About 67 percent of bank branches, and 85 percent of total deposits, are located in the Port-au-Prince area, which has about 25 percent of Haiti’s population (BRH 2014 and BRH/World Bank 2014). - There were about 100,000 loans outstanding in December 2014 (out of a population of over 10 milion). - Most banks extend around 40 percent of their credit to their 10–15 largest clients; the 100 top borrowers account for about half of total credit. - Policy recommendations: - Promote financial inclusion through reforms to encourage use of collateral, including land. - Strengthen information-sharing (credit bureau established) to support credit access to first-time borrowers. - Improve the regulatory environment for cooperatives and microfinance institutions. - Promote competition in the banking sector to reduce concentration and high costs of financial services. *Source: _cr15158 - 18. Haiti should enhance the efficiency of capital spending rather than in increase its level.* ### 15. Credit spreads are high, although top ### 15. Credit spreads are high, although top clients can borrow on more favorable terms. ### Credit spreads, lending and deposit rates - Average lending rates have hovered around 20 percent in recent years, even as savings rates have remained near zero. - The weighted-average lending-deposit spread in Haiti was about 8 percent in 2013, similar to that in the Dominican Republic and lower than that in Nicaragua or Jamaica (each about 14 percent; FinStats 2015). - Interpretation: relatively few large borrowers can access credit at rates close to banks’ own costs of funds, while smaller borrowers pay significantly higher rates, reflecting higher perceived risk premia and significant information asymmetries. ### Sectoral allocation of credit (December 2014, percent) - Agriculture: 0.1 - Industry: 15.6 - Energy, Gas, Water, Storage: 12.6 - Real Estate: 16.4 - Services: 55.2 - o/w Trade: 25.0 - o/w Hotels and Resturants: 2.8 - o/w Consumer Credit: 11.8 - o/w Other Services: 15.5 - Note: Trade (wholesale and retail) is the largest single category, followed by real estate; industry receives about 15 percent of total credit (mostly food and beverage); agriculture receives almost no credit from the formal banking system. ### Port-au-Prince vs provinces (Chart indicators) - Charts show the concentration of deposits and population: Metropolitan Port-au-Prince and Provinces (Share of total deposits and population, percent of total). ### Savings and lending rates (Chart 10 indicators) - Time series shown for Average Lending Rate in Gourdes, Weighted-Average Lending Rate in Gourdes, Weighted-Average Interest Rate on Savings Deposits (Percent) covering Mar-12 to Sep-14. ### Implications for financial intermediation and growth - More competition, better information, and an improved regulatory framework are needed to increase financial intermediation and boost growth. - A narrow credit base and high margins are common in LICs, reflecting lack of competition and high intermediation costs imposed by weak institutions (Poghosyan 2012). - High costs of financial intermediation constrain growth by limiting access to credit (Haiti ranked 171th in the world on this indicator in the 2015 Doing Business survey) and by driving up costs of receiving remittance transfers. - Over half of all households receive remittances from the Haitian diaspora (Herrera et al, 2014), yet fees associated with these transfers are over double that in Nicaragua (Chart 11; Average cost of sending US$ 200, percent). ### Credit bureau (Bureau d’Information sur le Crédit, BIC) - Launched in FY2014; developed with IDB and IFC to expand access to credit by providing lenders with a continuously updated database on creditworthiness. - First stage: bank and non-bank financial institutions required to report credit extended to each borrower. - Expected effects: help current borrowers demonstrate creditworthiness to other lenders, potentially increase competition among lenders, and increase incentives for borrowers to honor debts. - Considered second stage: allow would-be first-time borrowers to build a credit history using non-credit payment data (e.g., proof of payment of utilities such as EDH and DINEPA) to establish creditworthiness for a first-time loan. - Expansion to nontraditional data beyond the banking system would require legislation. ### Cooperatives and microfinance sector - Cooperatives: - 90 registered savings and cooperative financial institutions with about 639 thousand members as of end-September 2013. - About 80 percent of cooperative branches located in the provinces (focused outside Port-au-Prince). - Known total assets of the entire sector were just over G 5 billion, or under 1.5 percent of GDP. - Growth: 59 thousand borrowers as of end-September 2013, compared with 47 thousand in 2009. - Table 3. Evolution of Savings and Credit Cooperative Sector (2009 vs 2013) - Assets, million gourdes: 2,327 → 5,117 - as a percent of GDP: 0.9 → 1.4 - Net Credit Outstanding, million gourdes: 1,258 → 2,864 - Deposits, million gourdes: 1,636 → 3,160 - Number of members: 339,485 → 638,958 - Number of borrowers: 46,637 → 59,196 - Regulatory issues: - Cooperatives regulated by a 2002 law that placed supervisory responsibilities at a unit within the BRH, but retained the Conseil National des Coopératives (CNC) with licensing responsibilities. - Poor coordination between BRH and CNC leads to licensing delays and incomplete information; most cooperatives are not registered and BRH does not publish sub-sector information. - Revisions to clarify roles and simplify registration pending in parliament for several years but not approved. - Microfinance: - Two types: microfinance subsidiaries of registered commercial banks (some supported by foreign donors via guarantees) and microfinance institutions operated by NGOs/local credit unions. - Limited data availability; one self-reported estimate suggests loans around G 4 billion, or 1 percent of GDP (Microfinance Information Exchange, 2015). - A USAID-funded 2012 study estimated about 200 institutions with total assets of about G 10 billion (Lhermite, 2012), but verification is difficult due to limited reporting to the central bank. - BRH has been developing a draft law to regulate microfinance institutions; not yet submitted to parliament. ### National Strategy for Financial Inclusion - Objective: raise the share of adults with an account at a formal financial institution from 27 percent to 45 percent in five years. - Key action items: - Further develop the legal framework of the financial system. - Strengthen the credit bureau. - Promote more competition in the money transfer business to reduce costs. - Revisit requirements for opening a bank account (e.g., minimum account balances). - Study feasibility of making social payments through the banking system. - Facilitate use of collateral, including real assets and land; land reforms require a functioning land cadastre and improved property rights. --- ### EXTERNAL BUFFERS AND COMPETITIVENESS TO ABSORB SHOCKS AND SUPPORT GROWTH ### Overview and main conclusions - Haiti’s real exchange rate (RER) is broadly aligned with fundamentals, but competitiveness is severely constrained by structural factors. - Maintaining international reserves equivalent to 4–5 months of imports would provide an adequate buffer to withstand shocks and avoid stop-and-go growth dynamics. - The recent decline in international oil prices is a significant positive terms-of-trade shock since 2008–09, narrowing the current account deficit and contributing to increased domestic fiscal revenue under fixed pump prices; gains partially offset by lower Petrocaribe financing flows. ### Equilibrium real exchange rate (ERER) assessment - CGER ERER approach: RER has not significantly deviated from the level implied by fundamentals during the last two decades; equilibrium estimated as function of terms of trade, productivity relative to trading partners, changes in public spending, net foreign assets, and remittances. - All variables except changes in public spending were statistically significant. - Post-2010 earthquake surge in transfers and debt forgiveness caused the ERER to rise; RER adjusted more slowly due to BRH interventions to boost reserves. - In FY2013 and FY2014 BRH sold reserves to smooth depreciation; end-FY2014 results suggest a modest overvaluation of under 5 percent. ### Exchange rate regime and pass-through - De jure regime: float, but BRH seeks to limit annual nominal depreciation against the U.S. dollar given significant pass-through to inflation and to anchor expectations. - Higher inflation in Haiti than trading partners over recent years led to some real appreciation of the gourde. ### Macroeconomic Balance (MB) and External Stability (ES) approaches - Two MB/ES approaches applied: - EBA Lite (2015): produces a very large benchmark deficit for 2015 of 7.1 percent of GDP, implying a very large undervaluation of close to 40 percent (using assumed elasticity of current account from Isard and Faruquee (1998)). Driven by very low relative productivity, high aid and remittances. - MB (IMF 2006): estimates a medium-term benchmark current account deficit of -3.6 percent of GDP. - ES approach: calculates current account deficit consistent with keeping external debt at 40 percent of GDP; yields benchmark of -3.2 percent of GDP. - Table 1. Current Account Benchmarks (Units as indicated) - Indicator: ES | MB-CGER | MB-EBA Lite (2015) - Projection, percent GDP: -3.5 | -3.6 | -3.5 - Benchmark, percent GDP: -3.2 | -3.6 | -7.1 - Gap, percent GDP: -0.3 | 0.0 | 3.6 - Elasticity of CA to REER: -0.1 | -0.1 | -0.1 - Implied over (+) or under (-) valuation, percent: 3.1 | -0.1 | -37.1 - Overall: results suggest currency is broadly aligned with fundamentals, though EBA Lite produces divergent large undervaluation driven by productivity assumptions. ### Limitations of RER-focused competitiveness analysis - CPI as proxy for non-tradable prices is problematic in Haiti because food accounts for half the CPI basket, making CPI a poor proxy for firm costs. - Standard RER measures ignore imported input cost increases in local currency following depreciation; Haitian exports (apparel) have very high import content, so depreciation raises import input costs, offsetting competitiveness gains. - Econometric models rely on volatile fundamentals, data quality issues, and coefficients that do not capture country-specific structural factors; low wages alone have not translated into sustained financial inflows. ### Structural constraints on competitiveness - Major structural obstacles include weak institutions, poor infrastructure, and cumbersome regulatory environment. - Lack of basic public services forces firms to self-provide electricity, sanitation, and security. - Haiti’s port costs are the highest in the region: - Exporting through Haiti’s ports costs 15 percent more than in the Dominican Republic. - Importing costs 35 percent more. - Procedures require 2–3 more weeks in both cases (World Bank 2014). - Business environment difficulties: cumbersome legal/regulatory procedures (including land transactions), unclear/contradictory legal framework, weak rule of law creating uncertainty (e.g., Labor Code provisions). - International rankings: - Haiti remains in the bottom 5 percent of all countries surveyed in the World Bank’s “Doing Business” survey (percentage rank has deteriorated). - Perceptions of corruption have shown some progress from a low base, but comparator countries have also improved (Transparency International 2014). *Source: IMF staff estimates and text from the cited chapter.* ### 9. A number of cross-country surveys illustrate some of the biggest obstacles to Haiti’s ### 9. A number of cross-country surveys illustrate some of the biggest obstacles to Haiti’s competitiveness ### Competitiveness: survey findings and key barriers - Doing Business 2015: - Overall rank: 180/189 - Enforcing contracts: best sub-indicator at 84 (but still takes 530 days) - Starting a business: rank 188/189; involves 12 procedures and generally takes 97 days; costs of starting business up since 2010 - Resolving insolvency: rank 189/189; "No practice of insolvency to measure time and costs" - Corruption Perceptions Index 2014: rank 161/174; positive trend over past decade - Global Competitiveness Report 2014-2015: - Overall rank: 137/144 - Labor market efficiency best sub-ranking at 77 - Institutions sub-index rank: 135/144 - Within Institutions, particular concerns: insecure property rights, transparency of government policymaking, and the efficiency of the legal system - Charts (descriptive): - Evolution of Ease of Doing Business: comparative percentage-rank series for 2006–2015 showing Haiti vs LIC average, Jamaica, Dominican Republic, Nicaragua - Evolution of Corruption Perceptions: comparative percentage-rank series for 2004–2014 showing Haiti vs LIC average, Jamaica, Dominican Republic, Nicaragua ### Implications from surveys - Major obstacles to competitiveness: starting a business, resolving insolvency, weak institutions (property rights, government transparency, legal efficiency), and pervasive corruption perceptions. - Noted deterioration: costs of starting a business have risen considerably since 2010. ### Haiti’s Optimal Level of Reserves - Rationale for reserves: - Haiti is vulnerable to shocks (weather events, political tension, volatile external financing). - Large share of population close to subsistence → high human costs from shocks to domestic absorption. - Opportunity costs of holding reserves are significant given large infrastructure gaps and low yield on reserves. - Historical context: - Haiti has experienced several periods of negative per capita income growth over the past 30 years associated with political instability, a food price shock, and an earthquake. - Benchmarks and current coverage: - International reserves at about 4.8 months of imports and 45 percent of broad money. - These levels are described as appropriate according to common rules of thumb: - Reserves cover three months of imports rule. - Reserves correspond to 20 percent of broad money rule. - Charts referenced: - Chart 5: Gross International Reserves (Months of Prospective Imports) Dec-06 to Dec-14 showing Haiti vs simple average of 30 LICs. - Chart 6: Reserves as Share of Broad Money (Percent) 2000–2014 showing Haiti vs simple average of 30 LICs. - Country-specific model (Dabla-Norris et al. 2011 framework): - Shock variables set at bottom 10 percent of Haiti’s distribution over past ten years to estimate vulnerability. - Fundamentals (CPIA, fiscal balance, imports to GDP) set at current levels to gauge crisis severity. - Unconditional probability of a shock assumed at 0.5 (50 percent chance of some shock each year). - Variables used in optimal reserve estimate (as presented): - Fiscal Balance, percent GDP (2015): -3.2 - Imports, percent GDP (2015): 47.5 - CPIA (last available): 3.2 - External demand growth, percent (bottom 10th percentile): -5.8 - Terms of Trade growth, percent (bottom 10th percentile): -7.2 - Change in FDI to GDP (bottom 10th percentile): -34.1 - Change in aid to GDP (bottom 10th percentile): -25.6 - Historical significant shocks since 2004 (Table 4): - 2012: Hurricane (201,850 people impacted) - 2011: Epidemic (514,000 people impacted) - 2010: Earthquake (3.7 million people impacted) - 2008–09: Food prices, international financial crisis - 2004: Hurricane (315,594 people impacted) - 2004: Political Unrest - Model results and interpretation: - Estimated optimal level of reserves: 4 months of imports (based on unconditional shock probability, country-specific factors, and assumed opportunity cost of reserves of 4.5 percent). - Factors pushing estimate upward: volatility in external demand, terms of trade, FDI and aid; weak CPIA score. - Mitigating factors: country’s flexible exchange rate, recent decline in import bill, significant fiscal consolidation programmed for FY2015. - Cautions and bounds: - Estimate should be treated as a lower bound. - Decline in international oil prices reduces import dependence and thus lowers the estimate; reversal would raise optimal reserves. - Exchange rate functions partly as a nominal anchor; costs of sharp devaluation may be sizeable. - Model is risk-neutral; some degree of risk aversion may warrant maintaining reserves above the model’s point estimate. - Practical recommendation: - Maintain reserves near the mid-point of 4–5 months of imports to balance buffering needs and opportunity costs. ### Impact on Haiti of Lower Oil Prices - Magnitude and effects: - As of March 2015, spot crude oil prices were down 50 percent from one year earlier. - Under latest WEO projections, Haiti’s oil balance would improve by about 4.5 percent of GDP in FY2015. - Petrocaribe financing: - Since 2007, Haiti has borrowed from Venezuela under Petrocaribe; financing tied to international oil price. - During period of high oil prices, Petrocaribe flows to Haiti were about 4 percent of GDP per year. - With lower oil prices, Petrocaribe flows should reduce to about 2 percent of GDP, partially offsetting balance-of-payments improvement. - Fiscal adjustment implications: - Decline in Petrocaribe financing has prompted fiscal adjustment focused on reducing energy subsidies. - By keeping domestic pump prices essentially unchanged amid the drop in international oil prices, authorities recoup customs duties and excise taxes previously forgone (these foregone revenues represented about 2 percent of GDP in FY2014). - Note on recent fuel-price actions: authorities increased fuel prices in October 2014 (7.5 percent for gasoline, 9.3 percent for diesel and 6.2 percent for kerosene), but decreased prices in February 2015. - Risk considerations: - Fall in oil prices worsens Venezuela’s economic situation → increases risk of discontinuation of Petrocaribe program. - Haiti’s dependence on Petrocaribe and limited alternative financing sources means a sudden stop would require significant further adjustment, though impact would be less than in a high-oil-price environment. ### Banque de la République d’Haïti (BRH): financial position and operations - Recent profitability and income drivers: - BRH net income in FY2013: US$14.4 million (Net Income 14.4 in Table 1). - Interest on FX portfolio in FY2013: US$59.9 million (Interest and dividend income on Foreign Placements 59.9 in Table 1). - Income from claims on the government: US$25.1 million in FY2013. - BRH earned G 1.1 billion a year (about US$25 million) on its claims on the government in recent years under an agreement pending final settlement. - Most BRH expenses related to salaries, benefits, and administrative expenses. - BRH balance sheet (end-FY2014; totals and breakdowns): - Total assets: 146,814 millions of gourdes / US$3,222.6 million - Asset composition: - Gold: 3,202 millions of gourdes / US$70.3 - Liquid FX Reserves: 81,183 / US$1,782.0 - Other FX Reserves: 2,797 / US$61.4 - Claims on the Public Sector: 49,463 / US$1,085.7 - Claims on the Private Sector: 4,249 / US$93.3 - Other Assets: 5,920 / US$129.9 - Liabilities composition: - Foreign Liabilities: 13,242 / US$290.7 - Money in Circulation: 23,865 / US$523.8 - Commercial Bank Deposits and Reserves: 57,601 / US$1,264.3 - Public Sector Deposits: 37,134 / US$815.1 - Non-Bank Private Deposits: 6,950 / US$152.5 - BRH Bills Outstanding: 4,857 / US$106.6 - Capital Account: 3,167 / US$69.5 - Reserve composition and liquidity: - Most of Haiti’s FX reserves are held in corporate debt: two-thirds of BRH’s FX reserves (excluding gold and participation in international institutions) were held in corporate debt at end-FY2013. - Most of the rest was collateral placed to conduct repurchase operations that were subsequently unwound. - Haiti’s FX reserves are managed with the goals of maintaining liquidity, being available for sale, and held at market value. - Fund staff view: Haiti’s FX reserves, being investment-grade and denominated in U.S. dollars, are considered liquid for balance of payments purposes under BPM6 guidelines. - Profit remittance and capitalization agreement: - Article 59 of BRH law prescribes distribution of net profits: 25 percent to the Treasury, 10 percent to a legal reserve, and balance to special reserves as determined by BRH Executive Board. - As part of a memorandum of understanding to recapitalize the central bank agreed within the 2010 ECF arrangement, BRH agreed with the MEF to not remit net profits to the Treasury. ### State-Owned Enterprises (SOEs): legal framework and governance - Legal definition and expectations: - SOEs defined as autonomous entities involved in financial, commercial and industrial activities; operate under the commercial code and expected to provide economic and social return. - Created by law; governance includes management team and executive board; under administrative supervision of a sectoral ministry; financial transactions supervised by the Ministry of Finance and by the Court of Accounts. - Autonomy and government intervention: - SOEs enjoy administrative and financial autonomy, but government can intervene if they fall into deficit. - Circumstances for government intervention (Article 154 of decree of May 17, 2005): - (i) deficit greater than a third of the revenue of the previous year; - (ii) the deficit exceeds 15 percent of the revenues during three years over a five-year period; - (iii) losses are higher than a third of the capital; - (iv) a court decision forces the SOE to pay debt obligations exceeding 80 percent of revenues. - Government can propose liquidation to parliament for underperforming SOEs. - Ownership structure and private participation: - SOEs may be fully or partially (mixed) owned. - Private sector participation in SOEs should follow the 1996 law on the modernization of public enterprises. *Source: _cr15158 - 9. A number of cross-country surveys illustrate some of the biggest obstacles to Haiti’s (IMF staff content provided).* ### 9. In the late 1990s, the government began a privatization program with the objective of ### _cr15158 - 9. In the late 1990s, the government began a privatization program with the objective of ### Privatization program and state-owned enterprises (SOEs) - SOEs slated for privatization included: a flour mill, a cement factory, the telephone company (TELECO), the electricity company (EDH), the national port authority (APN), the airport authority, an edible oil plant and two commercial banks (Banque nationale de crédit, BNC and Banque populaire d’Haïti, BPH). - Only three enterprises were privatized: - Flour mill (1998) - National cement factory (1999) - Telecommunications company TELECO (2010) - Remaining non-financial public enterprises in the state portfolio include: EDH, APN, AAN, ONA, Office des Postes d’Haïti (OPH), OAVCT, OFATMA, and sugar factory USJLDD. - Government retains a 40 percent stake in NATCOM (former TELECO). ### Financial performance and fiscal contribution of SOEs - Most SOEs are financially sound except EDH, which receives substantial government subsidies. - A few SOEs pay dividends to the central government, but their contribution to revenue is very limited: less than 0.1 percent of GDP in the FY2015 budget. - APN was exempted from distributing dividends to consolidate its capital base. - Only a few SOEs publish financial statements regularly, despite legal requirements (Articles 150 and 151 of the decree of May 17, 2005) to submit financial statements to the Ministry of Finance and the Court of Accounts. - EDH has not published financial statements since 2007, hindering a full picture of its financial position. ### Central government creditor/debtor positions and contingent liabilities - Some SOEs have accumulated debts vis-à-vis the government from unpaid taxes or taxes collected from customers but not transferred to the Treasury: over 0.1 percent of GDP in FY2014. - EDH has accumulated arrears (almost 1½ percent of GDP) to independent power producers, creating a contingent liability for the central government. - Local authorities have accumulated arrears to EDH related to street lighting: 0.5 percent of GDP. - Legal framework does not prevent SOEs from contracting debt; existing debt is very limited and guaranteed by the central government. - SOEs maintain a creditor position with the domestic banking system in the form of deposits: 0.6 percent of GDP at end-February 2015. ### Road Maintenance Fund (FER): mandate, governance, and financing - FER is a financial autonomous agency created by law (of July 2003) to maintain road infrastructure on a sustainable basis; under technical supervision of the Ministry of Public Works and financial supervision of the Ministry of Finance; activities submitted to external audit by the Court of Accounts. - Governance: - Headed by a managing director appointed by the Presidency. - Operates under a Board established by an order (arrêté) of September 2005. - Board chaired by the Minister of Public Works and includes 5 members: Ministry of Public Works (2), local authorities (1 currently designated by the Ministry of the interior), transporters (1) and petroleum companies (1). - Responsibilities: - Maintains a list of eligible roads established by the Ministry of Public Works; list revised every two years and proposed by the FER Board. (The Ministry of Public Works maintains roads not eligible to the FER.) - FER domestic resource sources collected by Tax and Customs departments: - A charge on petroleum products (1 Gourde per gallon of gasoline and diesel) - 5 fees collected on automobiles - Fees collected on cigarettes, alcohols, driver’s licenses and passports - 20 percent of road tolls - External support: contributions from bilateral donors (EU, France, and Canada) and multilateral institutions (World Bank, IDB). - Borrowing: under exceptional circumstances FER can borrow to finance current spending, with Board approval. - Fiscal rules and use of funds: - Resources deposited in a special account with the BRH (compte FER). - By law, up to 10 percent of FER resources is used for current spending; remainder used for road maintenance under regular activities (85 percent) and emergencies (5 percent). - Ministry of Public Works manages road maintenance spending; FER’s DG manages current spending. - Road maintenance budget: 70 percent for national road network under central government responsibility; remainder for roads under local authorities. - Resource levels: - FER resources are limited, with allocations of only G350–650 million (0.1 percent of GDP) during FY2013–2015. - Table 4 (operations of FER, 2013–2015) shows: - Revenue (2013): 346 million; (2014): 641 million; (2015 Proj.): 600 million (in millions of Gourdes) - Fuel fees: 2013: 166; 2014: 197; 2015: ... - Other fees: 2013: 175; 2014: 180; 2015: ... - Treasury subsidies: 2013: ...; 2014: 355; 2015: ... - Expenditure (2013): 769; 2014: 995; 2015 Proj.: 600 - Wage bill: 2013: 20; 2014: 23; 2015: ... - Goods and services: 2013: 11; 2014: 10; 2015: ... - Capital spending: 2013: 737; 2014: 961; 2015: ... - (Sources: FER, Ministry of Economy and Finance and Fund staff estimates) ### PSUGO Fund: design, operations, and fiscal treatment - Objective: mobilize resources to provide compulsory and free school access to 1.5 million disadvantaged children under the universal, free and compulsory program (PSUGO). - Financing sources decided: - US$0.05 on each incoming call minute, to be collected by CONATEL; - US$1.5 on money transfers (incoming or outgoing the country), to be collected by financial institutions and transferred to the central bank (BRH). - Initial expectations: - Effective from June 2011. - Initial projections: collection capacity at US$360 million for the 5 years, with equal contributions from the two sources. - Managed by a council of 15 members, including BRH; independent international firm responsible for audit. - Legal status and implementation: - Fund operational but without a legal framework; bill on establishment, organization and functioning pending adoption by parliament. - Lower house passed a bill in August 2012; bill not yet considered by the Senate. - Fees have been collected despite pending legislation. - BRH circular 98 of May 2011 instituted the fee on money transfers for “cost of testing, certification, operation and inspection”. - Fiscal reporting and program monitoring: - PSUGO operations have been essentially extra budgetary. - Resources deposited in a special account at the BRH, within the definition of Net Credit to the Central Government (NCG), captured within the program targets. - Changes in deposits affect government financing through the change in NCG; Fund’s revenues and expenditures are not recorded in the table of budget execution as a counterpart. - For program monitoring, starting from FY2013, information on revenues and expenditure was included in the ECF’s table of government fiscal operations. - The FY2014 and FY2015 budget laws included the Fund’s spending under government investment; Fund’s revenue recorded under domestic financing (assumed withdrawals on the Fund’s special account). In staff fiscal tables Fund’s revenue is added to government revenue. - Operational figures: - Fund resources averaged G 1.9 billion (US$45 million) a year during FY2012–FY2013: - G 1.6 billion (US$38.7 million) collected from telecommunications and money transfer fees - G 0.3 billion from transfers from PCDR resources - Expenditure averaged G 1.7 billion per year during that period; difference remained in Fund’s deposits with the central bank. - FY2014: Fund revenue was lower at G 1.6 billion, with spending estimated at G 1.5 billion. - FY2015 budget figures show increase: revenue G 1.9 billion and spending G 1.8 billion. ### Pension system (ONA) structure and financial situation - Pension system components: - Private sector mandatory plan (managed by ONA). - Civil service mandatory pension plan. - Voluntary pension schemes by major corporations exist but are unregulated and unsupervised; no readily available information. - ONA specifics: - ONA (Office National d’Assurance-Viellesse) is State-owned enterprise regulated by a law of 1965 (modified by the organic law of August 28, 1967 and subsequent decrees); under technical supervision of the Ministry of Social Affairs. - Law provides for a board with representatives of employers, workers and the government. - Funding: employee contributions 6 percent of member’s wages and employer contributions 6 percent of member’s wages. - Coverage: employees of formal private sector and certain categories of public sector employees, mainly in SOEs. Self-employed, informal sector workers, and civil servants can participate voluntarily if they provide total contribution of 12 percent of their salary. - Benefits under mandatory plan: - Old-age pension: 1/3 of average monthly salary during the last 10 years of contributions, for those who have contributed for at least 20 years. Benefits are neither indexed nor adjusted for inflation. ONA has a restitution system for employees who do not meet conditions for old-age pension. Old-age pension represents more than 70 percent of total benefits. - Permanent disability pension: monthly pension based on 1/5 of average monthly earning in the last 10 years before disability, for contributors between 10 and 20 years. Benefits neither indexed nor adjusted for inflation. - Survivor pension: 1/2 of the pension, split among surviving spouse and minor dependents (less than 18). Benefits neither indexed nor adjusted for inflation. - Financial position and challenges: - Low dependency ratio generates significant surpluses, but ONA’s financial position remains weak. - End-2010: some 200k individuals contributed compared with only 2k beneficiaries. - Coverage rate is small: about 2 percent of the population. - Annual contributions during FY2011 amounted to G 1.5 billion; retiree benefits G 80 million; restitutions G 20 millions. - Weak management and supervision (Board not functional), low return on investments, high provision for NPLs, shocks to domestic activity, and high administrative costs (wage bill unusually high, representing 50 percent of total spending) contribute to weak financial position. - A recent actuarial study (Delarue, 2014) found ONA has been recording no new contributors and concluded ONA’s situation called for deep structural reforms. *Source: Haitian Authorities; IMF staff text in content unit _cr15158* ### 28. The Civil Service Pension Plan is administered by the Direction de la Pension Civile ### 28. The Civil Service Pension Plan is administered by the Direction de la Pension Civile ### Administration and coverage - Administered by the Direction de la Pension Civile (DPC) within the Ministry of Finance. - The plan is mandatory for civil servants and open to public sector contractual employees willing to contribute. - DPC essentially acts as a benefit payment agency; a coordination unit assists DPC in providing benefits in regional departments. ### Benefits, eligibility, and contribution rules - Benefits available at the age of 55 for public sector employees who have contributed to the plan (8 percent of the base salary). - Government matching contribution: - Until mid-1990: government matched 100 percent of the employee contribution. - At the time of the report: government contribution reduced to 2–3 percent. - Government intends to increase its contribution in future budgets. - Majority of retirement benefits represent old age benefits (pensions), which vary according to the length of the contribution period, with a 20-year minimum contribution. - Since 2004, the plan provides reimbursements to agents who have contributed less than 20 years. - The plan offers survivor benefits for non-remarried spouses and children up to age 24. A few exceptions apply to a few categories. - Old age benefits are not adjusted for inflation. ### Benefit schedule (Table 6) - Age 55, Years of contribution 20, Restitution Rate 60, Monthly ceiling (G) 12,500 - Age 55, Years of contribution 25, Restitution Rate 60, Monthly ceiling (G) 15,000 - Age 55, Years of contribution 30, Restitution Rate 75, Monthly ceiling (G) 25,000 - Age 55, Years of contribution 40, Restitution Rate 100, Monthly ceiling (G) 30,000 ### Other non-contributory benefits and services - Since 2007, public sector retirees benefit from medical insurance (medical and funeral services) fully covered by the government. - Initiatives introduced: - Since 2005: loans guaranteed by the Civil Service Pension Plan extended by the Banque populaire haïtienne to retirees at an 18 percent interest rate. - Since 2008: DPC extends advances to employees at a 12 percent interest to allow the payment of the income tax. - Since 2009: retirement benefits are progressively paid through bank transfers to reduce cost and errors from checks. - A service is provided to retirees to assist with annual re-registration administrative formalities. ### Financial position and key statistics (2014) - Number of retirees: 14k. - Number of active contributors: 70k. - Monthly employee contributions: G 79 million. - Monthly retirement pensions: G 69 million. - Surpluses are kept in a commercial bank account amounting to 0.4 percent of GDP at end-March 2014, mainly invested in government T-bills. - The number of retirees includes about 3k retired military with monthly pensions of about G 10 million; payments to military retirees are reimbursed by the central government budget following the dissolution of the army and military pension system. - Recruitments in the police and social sectors are expected to increase the plan’s revenue base. ### Municipalities (related fiscal context) - Aggregate spending by Municipalities is estimated at below 2 percent of GDP. - Municipal responsibilities per Constitution of March 1987 and Decree of February 2006 exceed current capacity due to limited financial and technical resources. - Municipal spending includes police, cemeteries, markets, butcheries, protection of sites, basic hygiene and health services, civil protection, and cultural infrastructure; large municipalities provide garbage collection and public lighting. - Total municipalities: 140. - Municipal revenue sources: - Transfers from the central government and earmarked taxes amounting to about 1 percent of GDP, transferred through the Ministry of the Interior. - Local taxes (essentially real estate taxation) and fees on services provided by municipalities. - Municipalities have accumulated arrears to EDH related to public lighting of 0.5 percent of GDP at end-FY2014. - Municipalities currently owe no debt to the domestic banking system. - Municipal activities are subject to ex-post controls by the Court of Accounts and must follow the procurement framework (Decree of September 5, 2009); economic data and reporting on municipalities are lacking and sometimes delayed by more than one year. *Source: _cr15158 - 28. The Civil Service Pension Plan is administered by the Direction de la Pension Civile (IMF PDF).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15158.pdf_