Haiti—Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding


Port-au-Prince, Haiti
June 10, 2003

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431
U.S.A.

Dear Mr. Köhler

1. Haiti's critical challenge is to generate sustained economic growth and reduce widespread poverty. Unfortunately, economic conditions have deteriorated sharply over the last three years, reflecting a difficult political situation, weak private sector confidence and investment, and shrinking official foreign assistance other than humanitarian aid.

2. The government took significant corrective action in early 2003 to stabilize the economy. A flexible domestic fuel pricing system was adopted that entailed large price increases; the budget for FY 2002/03 adopted by parliament aims at lowering the fiscal deficit significantly; and the central bank tightened monetary policy. Based on these measures, inflationary pressures started to ease, and net international reserves and the foreign exchange market stabilized.

3. Building on the progress made, the government intends to continue and broaden its adjustment and reform effort, with a view to creating the conditions for sustained rapid growth and poverty reduction with broad support from the international community. To this end, and to establish an adequate track record toward a possible PRGF arrangement, we are pursuing a one-year economic and financial program that is summarized in the attached Memorandum of Economic and Financial Policies. The government requests that IMF staff monitor and follow up the execution of this program over the next twelve months.

4. The government will communicate to the IMF all the information needed to monitor progress in implementing the program. The authorities intend to review with IMF staff the progress made during the first six months of the program by September 2003 at the latest.

Sincerely yours,

HAITI—MEMORANDUM OF ECONOMIC AND FINANCIAL POLICIES FOR THE SECOND SEMESTER OF FY 2002/03

I. BACKGROUND

1. Haiti is facing a very difficult economic situation. Against the background of sharply declining real incomes over the past decade, the critical challenge for the country is to generate sustained economic growth and reduce widespread poverty. Unfortunately, the economic situation has deteriorated further over the last three years, reflecting a difficult political situation, weak private sector confidence and investment, and shrinking official foreign assistance other than humanitarian aid. Over this period, real GDP declined, the exchange rate depreciated markedly, and inflation accelerated. As fiscal deficits widened, international reserves were drawn down substantially, and external arrears accumulated vis-à-vis MDBs and bilaterals. As a result, the already precarious economic and social conditions of the population took a further turn for the worse.

2. Faced with this deterioration, the authorities in early 2003 took corrective action to stabilize the economy. To eliminate subsidies on consumption of petroleum products, the government decided to apply the law of March 1995 relating to petroleum excise duties and the implementation of a flexible mechanism for setting prices for petroleum products. Petroleum prices were thus raised by about 130 percent in January-February, a politically and socially difficult step. This fuelled popular demonstrations and a significant increase in the rate of inflation. The purchasing power of the least-affluent segments of society was eroded due to the impact of this measure on public transport prices and the cost of kerosene used by the poorest. At present, however, following information campaigns carried out by the government, the population overall seems to have understood the necessity of this measure. Moreover, as a result of the appreciation of the gourde in the first quarter of the fiscal year, domestic fuel prices went down in March and April, in line with decreasing landed costs. The budget for FY 2002/03 was submitted to parliament in February, designed to lower the fiscal deficit significantly. In mid-March, a protocol on cash management between the ministry of finance and the central bank was finalized; ceilings on central bank financing of the government for the third and fourth quarters of the fiscal year were subsequently set at G 1.2 billion. Regarding monetary policy, the central bank raised the interest rate on the benchmark 91-day bond in several steps to 28 percent in mid-March. As bank liquidity became tighter, commercial banks' deposit and lending rates followed suit. Based on these measures, inflationary pressures started to ease, and net international reserves and the foreign exchange market stabilized.

II. PROGRAM FOR 2003-04

3. Building on the progress made, the government intends to continue and broaden its adjustment and reform efforts in the period ahead. Our goal is to develop and implement a comprehensive medium-term program that will create the conditions for sustained rapid growth and poverty reduction with broad support from the international community including the IMF. Toward this goal, and to establish an adequate track record toward a possible PRGF arrangement, we are pursuing a one-year economic and financial program, the implementation of which will be monitored by Fund staff. The key economic objectives of the program are as follows:

6. To achieve these targets, new revenue measures will be taken, including:

• Widening the tax base through: more stringent granting of tax exemptions to NGOs; generalizing a two-percent withholding tax at customs that now applies only to part of imports¹, and including new sectors in the base of the turnover tax; and increasing the verification fees on imported goods to 5 percent, as a temporary measure to be assessed after no more than one year.

• Increasing excise taxes on alcohol and tobacco; and

• Strengthening tax and customs administration, with better coordination between domestic tax and customs directorates, and improved valuation of imports with the assistance of a pre-shipment inspection firm (a contract with the firm has been signed on May 5, 2003).

Expenditure will be reduced mainly by:

• Containing nonwage current expenditure, in particular outlays for operations, by way of improved prioritization in spending;

• Limiting non-essential capital spending, focusing outlays mainly on projects to improve the economic and social infrastructure; and

• Maintaining the civil service wage bill at its current level.

Monetary and exchange rate policy

7. The monetary program for the second semester of FY 2002/03 aims at reducing inflation, and stabilizing international reserves, in the context of the floating exchange rate system. Preventing further large depreciation of the gourde is essential in near-term to stabilize expectations and increase private sector confidence. While the central bank will refrain from interventions in the foreign exchange market (except for the purchases needed to service the government's foreign exchange needs), it will conduct monetary policy with a view to stemming significant depreciation pressures, until underlying inflation has declined to the targeted range. The central bank's main instrument for controlling gourde liquidity will remain the issuance of its bonds at market-determined interest rates. Given the considerable uncertainty about the inflation outlook, if necessary the central bank will further tighten monetary policy via higher interest rates and increased issuance of BRH bonds to absorb liquidity.

Structural reforms and governance

8. The focus of governance measures under the program will be on the public sector, including public enterprises. By September 2003, the criteria for channeling outlays through discretionary ministerial accounts will be tightened. Subsequently, their use (except for project accounts managed jointly with donors), will be gradually restricted to one account per ministry, earmarked for emergency outlays, by March 2004. Detailed data on the budget approved by parliament, fiscal developments, and the fuel pricing mechanism will be published on a regular basis on the finance ministry's web site (starting on May 31, 2003). The government will start preparing the budget law for FY 2003/04 early enough so that it can be submitted to parliament before the start of the fiscal year (October 1). The government will create legal and material conditions for effective auditing by the Office of Budget Control (CSCCA) by March 2004. During the program period, expenditure management, control and reporting/classification of outlays in ministries will be enhanced (and we are benefiting from technical assistance from the IDB in these areas). The government is committed to undertaking an external audit or evaluation of five major public enterprises (EDH, Teleco, Camep, Airport Authority, Harbor Authority) during the program period, starting with EDH and Teleco, for which it will be necessary to identify sources of finance. Thus, the government has requested the support of the World Bank and has invited it to send a mission to Haiti to determine the strategy for the audit/evaluation. The authorities will start discussions in the coming weeks with the World Bank on additional governance measures, with a view to developing an agenda of measures that could be supported by increased World Bank engagement. In parallel, they will start discussions with donors with respect to preparation for an Interim-Poverty Reduction Strategy Paper.

9. The authorities will submit to parliament a new banking law by December 2003 to bring bank regulations in line with international standards. In the first half year of FY 2003/04, they will prepare a new law of the central bank in consultation with the IMF to provide it an adequate degree of autonomy in the conduct of monetary policy. The Financial Intelligence Unit (UCREF) will become operational by end-July 2003, and the reform of the credit cooperatives sector will be continued.

Financing and arrears clearance

10. Over the program period, the government will develop a plan for the clearance of all of Haiti's external arrears in close consultation with the staff of the IMF and the World Bank. It intends to seek donor financing for arrears clearance, with a view to clearing all arrears to the World Bank and IDB by March 2004, thus facilitating the transition to a fully financed PRGF-supported program. Clearance of arrears will likely proceed sequentially, starting with the creditors that are the most advanced in the process of reactivating their loans.

Program monitoring

11. Performance under the program will be monitored using quarterly indicative targets, structural benchmarks, and quarterly reviews. Indicative targets for end-June 2003 and end-September 2003, as specified in Table 1, relate to net international reserves and net domestic assets of the central bank; net domestic banking sector credit to the nonfinancial public sector; net central bank credit to the central government; and domestic arrears of the central government. An understanding on policies and targets for FY 2003/04 will be reached in the context of the first review (by end-September 2003 at the latest). The main policy actions envisaged under the program are listed in Table 2, including those constituting structural benchmarks. Approval by the management of the IMF of the Letter of Intent and the Memorandum of Economic and Financial Policies (MEFP) and their transmission to the Executive Board are subject to the implementation of the following prior actions: (a) parliamentary approval of a budget for FY 2002/03 in line with the fiscal targets established in the program (paragraph 5 of this MEFP); (b) the signing of a protocol between the finance ministry and the BRH that stipulates ceilings on central bank financing of the government of no more than 1.9 percent of GDP on an annual basis during April-September 2003; and (c) starting publication of detailed data on the flexible fuel pricing mechanism on a monthly basis.

12. The government will not impose restrictions on payments and transfers for international transactions, introduce new or intensify trade restrictions for balance of payments purposes, resort to multiple currency practices, or enter into bilateral payments agreements incorporating restrictive practices with other IMF members. Haiti will consult with the IMF periodically, in accordance with the IMF's policies on such consultations, concerning the progress made by Haiti in the implementation of policies and measures designed to address the country's balance of payments difficulties.

Program financing and arrears clearance

1. During the period of the SMP, present a plan for the comprehensive clearance of external arrears, agreed by the IMF and the World Bank. Identify financing for the clearance of arrears to MDBs during the SMP period.

Governance

1. Start to publish regularly (at least monthly) on the web and/or other media updated information on the operations of the flexible domestic fuel pricing mechanism by May 31, 2003 (prior action).

2. Gradually reduce the use of ministerial current accounts by September 2003, and maintain one account per ministry earmarked for small emergency outlays by March 2004, and encourage the use of requisition procedures for other outlays (structural benchmark).

3. Publish the budget approved by the parliament and regularly (at least monthly) publish budget execution data on the web (structural benchmark).

4. Submit to parliament the FY 2003/04 draft budget on a timely basis.

5. Strengthen the operational independence, operating budget, and institutional capacity of the Cour Superieure des Comptes et du Contentieux Administratif by March 2004.

6. Carry out an external financial audit of EDH, TELECO by September 2003, and of CAMEP, AAN, APN by March 2004 (structural benchmark).

HAITI—TECHNICAL MEMORANDUM OF UNDERSTANDING

Definition of cumulative targets and adjustments

The Ministry of Economy and Finance, the Bank of the Republic of Haiti (BRH), and Fund staff will use the following definitions of indicative targets and adjustments of the indicative targets to monitor the quarterly performance under the staff monitored program for April 2003-September 2003 (second semester of FY 2002/03).

I. DEFINITIONS

A. Net BRH Credit to the Central Government³

1. The change in net BRH credit to the central government is defined as, and will be measured using:

a. Change in net domestic credit to the central government from the BRH according to Table 10R of the BRH from the stock of end-March 2003;

b. Change in the stock of special accounts (EU, PL480, rice of Japan, and United States) according to Table "Comptes Spéciaux" of the BRH from the stock of end-March 2003 will be excluded from change in net domestic credit to the central government as defined above.⁴

2. Changes in any other special account (as defined in footnote 4) maintained or established at the BRH will be treated as in 1.b above.

3. The changes will be measured on a cumulative basis from the stock at end-March 2003.

B. Net Domestic Banking Sector Credit to the Nonfinancial Public Sector⁵

1. The change in net domestic banking sector credit to the nonfinancial public sector is defined as, and will be measured using:

a. Change in the stock of net domestic credit of the public sector from the BRH according to Table 10R of the BRH from the stock of end-March 2003;

b. Change in the stock of net domestic credit of the public sector from the BNC according to Table 610 of the BRH from the stock of end-March 2003;

c. Change in the stock of net domestic credit of the public sector at other domestic banks; and

d. Change in the stock of special accounts (EU, PL480, STABEX, rice of Japan, and United States) according to Table "Comptes Spéciaux" of the BRH from the stock of end-March 2003 will be excluded from the definition of net domestic banking sector credit to the nonfinancial public sector.

2. Changes in any other special account (as defined in footnote 4) maintained or established in the BRH, BNC, or BPH will be excluded.

3. The changes will be measured on a cumulative basis from the stock at end-March 2003.

C. Net International Reserves

1. The change in net international reserves will be measured using:

a. Change in net international reserves ("Réserves de change nettes" of the BRH Table 10R) from the stock of end-March 2003; and

b. Minus the change in U.S. dollars deposits of commercial banks at the BRH ("Dépôts a vue US$ des bcm à la BRH" of the BRH Table 10R) from the stock of end-March 2003.

2. Data will be valued at the corresponding end-period exchange rate.

3. For definition purposes, net international reserves are the difference between the BRH's gross foreign assets (comprising gold, special drawing rights, all claims on nonresidents, and claims in foreign currency on domestic financial institutions) and reserve liabilities (including liabilities to nonresidents of one-year maturity or less, use of Fund credit, excluding trust funds, and any revolving credit from external financial institutions). Swaps in foreign currency with domestic financial institutions and pledged or otherwise encumbered reserve assets are excluded from net international reserves.

4. The changes will be measured on a cumulative basis from the stock at end-March 2003.

D. Net Domestic Assets of the BRH

1. The change in net domestic assets of the BRH is defined as, and will be measured using:

a. Change in currency in circulation ("Monnaie en circulation" of the BRH Table 10R); and

b. Minus the change in the U.S. dollar amount of net international reserves (program definition according to C above), converted into gourdes at the program exchange rate.

2. The program definition of net domestic assets of the BRH will use a program exchange rate of G 45 per U.S. dollar for the period April 2003-September 2003.

3. The changes will be measured on a cumulative basis from the stock at end-March 2003.

E. Nonconcessional Loans

1. The definition of debt comprises all instruments, including new financial instruments that share the characteristics of debt, as set forth in paragraph No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No.12274-(00/85), August 24, 2000).

2. Concessional loans are those loans that provide a grant element of at least 35 percent based on the corresponding OECD's Commercial Interest Reference Rates (CIRRs) as of September 2000.

3. The indicative target limits exclude conventional short-term import-related credits.

4. The ceilings for contracting nonconcessional loans will be set at zero throughout the program period.

II. QUARTERLY ADJUSTMENTS

The quarterly indicative targets will be adjusted for the following amounts:

A. Adjustment for Domestic Arrears Accumulation
(BRH Credit to CG and NFPS)

The ceilings for net BRH credit to the central government and the net domestic banking sector credit to the nonfinancial public sector will be adjusted downwards for the amount of domestic arrears accumulation.

²The SMP covers the period April 1, 2003-March 31, 2004.

³The central government comprises the presidency, prime minister's office, parliament, federal courts, treasury, and line ministries. It includes expenditure financed directly by foreign donors through ministerial accounts (comptes-courants).

⁴Special accounts are transitory accounts of the central government for specific foreign-financed projects or external assistance.

⁵The NFPS includes the central government, the public enterprises (Teleco, EDH, APN, APP, and Camep), and foreign-financed projects.