IMF Executive Board Concludes 2010 Article IV Consultation with Haiti

Public Information Notice (PIN) No. 10/112
August 6, 2010

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On July 21, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Haiti 1.

Background

The January 12, 2010 earthquake was a major setback for Haiti. Progress since 2004 in maintaining macroeconomic stability, resuming growth, and implementing essential reforms allowed the cancellation of US$1.2 billion of debt under the Heavily Indebted Poor Countries (HIPC) and Multilateral Debt Relieve Initiative (MDRI) in June 2009. Growth reached 2.9 percent in 2009, one of the highest rates in the Western Hemisphere, fueled by stronger agricultural and manufacturing output. Annual inflation was virtually zero in December due to the unwinding of the international food and fuel price shock. Prudent fiscal policies helped contain the deficit (excluding grants and externally financed projects) to 4.4 percent of gross domestic product (GDP), while the external current account deficit narrowed to 3.2 percent of GDP (from 4.8 percent of GDP in 2008), helped by strong exports, low import prices, and resilient remittances.

The earthquake caused unprecedented damages and losses, estimated at 120 percent of 2009 GDP. Over 225,000 persons were killed and 300,000 injured. Most ministries, hospitals, and schools in the Port-au-Prince region were destroyed. The humanitarian situation is only slowly improving, with 1.3 million people remaining in temporary shelters. Before the earthquake, Haiti was already the poorest country in the Western Hemisphere, ranking in the bottom quartile of the United Nations Development Program (UNDP) Human Development Index.

At a high level donor conference in New York in March, the government presented its National Action Plan for Recovery and Development to build a better Haiti. The plan aims at sustainably raising medium-term growth and reducing poverty by creating decentralized economic growth poles, reducing vulnerability to natural disasters, enhancing access to basic social services, and strengthening state institutions. Donors generously pledged US$9.9 billion in support of Haiti’s reconstruction, of which US$5.3 billion are to be disbursed over the next 18 months. Although actual disbursements so far have been slow, external aid related to the reconstruction could triple as a share of GDP over the next 3-5 years.

A recovery in economic activity, led by a rebound in agriculture, construction (including debris removal), and textile manufacturing, is mitigating the GDP decline (projected at 8.5 percent for the fiscal year ending in September 2010). Twelve month inflation reached 6.4 percent in May, in line with a projected increase of 8.5 percent for the year. The gourde has remained broadly stable since end-January, as the Bank of the Republic of Haiti (BRH) has stepped up its net foreign exchange purchases. Net International Reserves grew to US$646 million at end-May (from US$402 million at end-December). A recovery in revenue collection since January and weak spending have compensated for slow budget support disbursements. However, priority spending on relocation of families, education, energy, and transport infrastructure should pick up in the coming months. To maintain financial sector stability and restart credit, the central bank is launching a partial credit guarantee scheme, with technical support from the IMF and the World Bank.

Executive Board Assessment

Executive Directors noted that the January 2010 earthquake represented a major setback for Haiti, after several years of improved economic performance. Directors commended the authorities for quickly restoring basic government functions and maintaining sound policies in the very difficult conditions following the earthquake. They welcomed the incipient economic recovery, and stressed that swift disbursement of the resources pledged by donors for reconstruction and steady implementation of the economic program will be crucial to sustain growth.

Directors praised the authorities for their determination to build a better Haiti in the aftermath of the earthquake. They welcomed the authorities’ National Action Plan for Recovery and Development and agreed that the priorities outlined in the Plan should guide the reconstruction process. Directors also noted that, in the context of severe capacity constraints, the successful implementation of the Action Plan will require close coordination by the Interim Haitian Reconstruction Commission.

Directors agreed that securing adequate budget support from donors is essential to fund priority programs. They welcomed the authorities’ commitment to further strengthen revenue administration and reform tax policy to enhance domestic resource generation. Directors also welcomed the authorities’ efforts to prioritize and align spending with reconstruction priorities, and to improve the tracking and reporting of public spending.

Directors stressed that further improvements in the monetary framework will be critical to enhancing the effectiveness of monetary policy. They welcomed plans to accelerate foreign exchange auctions reform, introduce Treasury bills, and recapitalize the central bank. Directors also noted staff’s assessment that the exchange rate is broadly in line with economic fundamentals and underscored that additional exchange rate flexibility will help ensure the absorption of aid inflows while avoiding inflationary pressures.

Directors concurred that steadfast improvements in the business climate and in governance are required to boost investment and private credit, reduce supply-side bottlenecks, and expand the export base. They welcomed the implementation of the Partial Credit Guarantee scheme as an important step to restart private sector activity and noted that the successful decentralization of economic activity will require strong partnerships with the private sector.

Directors agreed that the new three-year Extend Credit Facility-supported program provides an important anchor to the authorities’ economic policies and donor support in the context of the reconstruction process. The program provides a coherent set of macroeconomic policies that will support the authorities’ reconstruction and growth objectives, including by smoothing out the impact on the economy of large expected aid inflows. The program is supported by a comprehensive medium-term technical assistance strategy focused on strengthening state institutions.

Directors agreed that Haiti met the eligibility and qualification criteria for debt stock relief under the Post-Catastrophe Debt Relief Trust Fund. They noted that debt relief from the Fund and other creditors would free vital resources to alleviate Haiti’s protracted balance-of-payments needs, which have been exacerbated by the earthquake. Given Haiti’s persistent high debt vulnerabilities, Directors emphasized that future financing needs should be covered mostly through grants and highly concessional financing.

It is expected that the next Article IV consultation with Haiti will be held in accordance with the Executive Board decision on the consultation cycle for members with Fund arrangements.


Haiti: Selected Economic and Financial Indicators

 
  2006/07 2007/08 2008/09 2009/10
        (proj)
 
(Annual percentage change, unless otherwise indicated)        

Domestic economy

       

GDP at constant prices

3.3 0.8 2.9 -8.5

Consumer prices (end-of-period)

7.9 19.8 -4.7 8.5

Gross domestic investment (in percent of GDP)

25.0 26.0 23.4 23.9

Gross national savings (in percent of GDP)

24.8 21.5 20.2 21.7
(In percent of GDP)        

Public finances

       

Central government overall balance (including grants)

0.2 -3.1 -4.4 -2.9

Central government overall balance (excluding grants)

-5.0 -7.5 -11.1 -17.3

Public sector savings

3.2 1.4 1.2 2.2
(Changes in percent of beginning-of-period broad money)        

Money and credit

       

Net domestic assets

-1.2 3.7 8.5 7.6

Credit to the public sector (net)

-1.9 -7.2 3.6 -5.2

Credit to the private sector

3.9 9.6 5.9 -3.2

Broad money (including foreign currency deposits)

4.8 17.7 11.0 11.4
(Annual percentage change, unless otherwise indicated)        

External sector

       

Exports (f.o.b.)

5.7 -6.2 12.4 -12.1

Imports (f.o.b.)

4.5 30.2 -3.3 15.5

Current account balance (including official grants, in percent of GDP)

-0.3 -4.5 -3.2 -2.1

Current account balance (excluding official grants, in percent of GDP)

-6.9 -11.7 -10.6 -28.7

External public debt (end-of-period, in percent of GDP)

25.6 29.5 16.6 22.0

External public debt service (in percent of exports of goods

       

and nonfactor services)

8.3 8.2 3.9 3.1

Net international reserves (in millions of U.S. dollars) 1/

290.4 313.6 438.6 300.5

Liquid gross reserves (in millions of U.S. dollars) 2/

544.7 707.8 947.5 1076.2

In months of imports of the following year

2.3 2.9 2.9 3.1

Real effective exchange rate (appreciation +)

15.3 2.9 1.0 ...
 

Sources: Ministry of Economy and Finance; Bank of the Republic of Haiti; and IMF staff estimates.
1/ Excludes commercial banks' foreign currency deposits with the BRH.
2/ Gross reserves excluding capital contributions to international organizations.


1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.



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