#382: GOH's Letter of Intent to IMF (fwd)

[Robert Corbett <bcorbett@netcom.com>]

From: Max Blanchet <MaxBlanchet@worldnet.att.net>

 FROM IMF's Web Site (www.imf.org)
 
The following item is a Letter of Intent of the government of Haiti, 
which describes the policies that Haiti intends to implement in the 
context of its request for financial support from the IMF. The document, 
which is the property of Haiti, is being made available on the IMF 
website by agreement with the member as a service to users of the IMF
website.


Port-au-Prince, Haiti 
November 19, 1998
Mr. Michel Camdessus
Managing Director
International Monetary Fund
Washington, D.C. 20431
Dear Mr. Camdessus:

1.  Hurricane Georges passed through Haiti on the night of September 22 
and early in the morning of September 23, 1998, causing loss of human 
lives, population dislocation, damage to infrastructure, and substantial 
loss of agricultural output and livestock. The destruction could 
seriously set back the government?s capacity to implement financial 
policies to lower inflation and undertake urgently needed structural 
reforms to improve governance and remove Haiti?s serious structural 
bottlenecks to sustained economic development. 

2.  The Haitian government?s disaster relief and reconstruction effort 
is directed at providing emergency shelter, food, water, and medicine to 
the affected population, while rebuilding priority economic and social 
infrastructure that was destroyed and rehabilitating the productive 
capacity of the most severely affected regions. The costs associated 
with these activities are substantial and cannot be met by domestic 
efforts alone. The international community has responded positively to 
Haiti?s request for assistance, and some donors and creditors have begun 
to support disaster relief efforts with technical and financial 
assistance. To further mitigate the adverse impact of Hurricane Georges 
on Haiti?s fragile balance of payments and help meet the immediate 
financing needs without seriously depleting Haiti?s external reserves, 
the government of Haiti hereby requests from the IMF a purchase 
equivalent to 25 percent of quota under the IMF procedures on emergency 
assistance for natural disasters. To support this request, the 
government has developed an economic program covering FY 1998/991 aimed 
at maintaining macroeconomic stability and making progress in the 
structural area while efforts are being made to resolve the political 
crisis. Satisfactory performance under the program, which the government 
has requested IMF staff to monitor, is expected to facilitate the 
disbursement of additional aid from donors and could provide a basis for 
resuming discussions on an ESAF-supported program once a new government 
is installed.

I.  Background and Performance in FY 1997/98

3.   The first annual ESAF arrangement covering FY 1996/97 expired 
without completion of the mid-term review as a political crisis that led 
to the resignation of the prime minister in June 1997 adversely affected 
the implementation of structural reforms, the disbursement of external 
aid flows, and the economic recovery. While attempts to reach a 
political settlement continued, an economic program covering FY 1997/98 
(which the government asked IMF staff to monitor) was put in place in 
April 1998 to help maintain financial discipline, make progress in the 
structural area, facilitate some aid disbursements, and establish a 
basis for an early start of discussions on a program that could be 
supported by the second annual ESAF arrangement once a new government 
was installed. 

4.  Good progress was made in macroeconomic stabilization and structural 
reforms under the FY 1997/98 staff-monitored program. Twelve-month 
inflation declined from 17 percent in September 1997 to 8.3 percent in 
September 1998 (compared with 12 percent under the program), and output 
growth is estimated at around 3½ percent (2 percent under the program) 
as a result of strong export growth and a recovery in agriculture due to 
better weather conditions. Net international reserves increased by US$33 
million (compared to no change under the program). The central 
government deficit was contained to 1.3 percent of GDP (1.1 percent in 
the program), as revenue shortfalls experienced in the first half of the 
fiscal year were more than made up in the second half mainly as a result 
of steps taken in July 1998 to strengthen the administration of fuel 
excise taxes and tighten expenditure control procedures.

5.  On the structural front, progress was made in some areas in the 
context of existing legislation. The civil service downsizing (CSD) law 
was published in the official gazette in mid-May 1998, and under the 
program, targets were established for the departure and retraining of at 
least 5,000 civil servants (about 10 percent of government employment) 
by end-September 1998. In the event, as of end-October 1998, some 5,200 
employees had been separated and indications are that about 200 more 
employees will be leaving the civil service by mid-December 1998. Also, 
in conjunction with the implementation of the CSD law, physical 
verification procedures for wage payments were implemented in May?June 
1998, resulting in the elimination of fraudulent wage payments related 
to some 2,900 employees from the government payroll. Budgetary savings 
from these actions are estimated at about ½ percent of GDP on an annual 
basis.

6.  During FY 1997/98, progress also was made toward the modernization 
of public enterprises. The flour mill was divested and procedures for 
the capitalization of the cement company were finalized (the transaction 
awaits the signature of the prime minister). Also, with assistance from 
the World Bank, the IDB, and U.S. AID, technical work continued in the 
preparation of the main public enterprises (the airport and the seaport, 
as well as the electricity and telephone companies) for their 
modernization.

7.  The implementation of financial sector reforms continued. New 
prudential regulations applicable to the banking system were put in 
effect through the issuance and implementation of circulars on loan 
classification and provisioning, loan concentration, internal controls, 
extension of internal audit standards to branches, and standardization 
of financial statements provided by banks. Proposals for phasing in 
capital adequacy requirements over a three-year period were discussed 
with the commercial banks with a view to issuing them by end-1998. Also, 
the previous management of the large, state-owned Banque Nationale du 
Credit (BNC) was replaced in April 1998 by an intervention team that has 
begun to restructure it.

II.  Impact of the Hurricane

8.  Although a full assessment of the impact of Hurricane George has not 
yet been completed, it is clear that the hurricane has inflicted 
substantial human suffering and financial losses, and caused extensive 
damage to the agricultural sector and the infrastructure. The latest 
reports indicate about 240 persons dead, and more than 324,000 directly 
affected by damage to or destruction of their homes, and dislocation 
from flood-prone areas. Damage to the country?s infrastructure, 
including roads, bridges, the port of Port-au-Prince, irrigation 
systems, as well as schools, hospitals and other buildings, has been 
substantial. The agriculture sector was most severely affected, mainly 
as a result of substantial damage to rice, plantain, beans, coffee, and 
sugarcane crops, as well as losses of livestock. In particular, in the 
Artibonite Valley (the country?s breadbasket) heavy flooding destroyed a 
substantial part of the September rice crop; furthermore, the next rice 
crop is threatened by lack of inputs and the poor state of irrigation 
infrastructure. Preliminary reports estimate the total losses, including 
the loss of crops and livestock and damage to infrastructure, at about 
US$80 million (1.9 percent of GDP). As a result of hurricane-related 
damages, it is projected that output growth in 1998/99 could be about 1?
2 percentage points lower than would have been otherwise.

9.  Hurricane Georges also will adversely affect Haiti?s budgetary and 
balance of payments position. It is estimated that the fiscal impact 
would amount to some G 580 million (0.8 percent of GDP) in FY 1998/99 
(of which about two-fifths is included in the government budget and the 
remainder is direct donor-financed expenditure) largely reflecting 
additional expenditure needed for relief and reconstruction operations. 
The external current account deficit (excluding grants) is estimated to 
widen by some US$37 million (0.9 percent of GDP). This deterioration is 
mainly on account of higher food imports and imports associated with 
relief and reconstruction operations, including infrastructure repairs; 
exports of agricultural products, which account for a small proportion 
of total exports, also are expected to be adversely affected. Donor 
emergency assistance announced so far totals about US$22 million (½ 
percent of GDP), mostly humanitarian assistance and food aid from the 
U.S. government and the reprogramming of some existing loans from the 
IDB.

III.  Policy Response

10.  Despite the setback caused by Hurricane Georges, the government 
remains committed to ensuring macroeconomic stability and pressing ahead 
with key structural reforms in a manner consistent with existing 
legislation. To that effect, it has developed an economic program 
covering FY 1998/99 which is predicated on an assumed real GDP growth of 
around 2 percent and aims at maintaining an inflation rate of about 8?10 
percent while containing the loss of official net international reserves 
to US$10 million. The program envisages a financing gap of about US$37½
 million (after the IMF?s emergency assistance), which is expected to be 
met through support from Haiti?s donors.

11.  The fiscal program aims at holding the central government budget 
deficit (including the high priority expenditures associated with 
hurricane-related reconstruction and the costs of structural reforms) to 
G 1,256 million (1.7 percent of GDP) in FY 1998/99. In order to meet the 
deficit target, expenditure will be kept under tight control and steps 
will be taken to strengthen tax collection. Thus, the program would 
envisage continued implementation of the cash management and monthly 
budget allocation system that was put in place toward the end of FY 
1997/98 so as to limit monthly government outlays to monthly revenue 
collections and programmed financing. To formally give effect to this 
arrangement, a protocol will be signed by the Ministry of Economy and 
Finance and the Bank of the Republic of Haiti by early December 1998. 
The wage bill will be kept under control by tightening hiring procedures 
and the government will abstain from granting across the board wage 
increases to civil servants. However, selective wage increases will be 
phased in in the context of the implementation of donor-backed sectoral 
reforms to attract and retain qualified personnel, and improve 
efficiency in service delivery. Also, steps will be taken to restrict 
the use of ministerial discretionary accounts ("comptes courants"), 
restrain nonreconstruction related capital outlays, and rehabilitate the 
regular requisition procedure for spending (consistent with IMF 
technical assistance recommendations).

12.  On the revenue side, efforts to increase tax collection and enhance 
tax administration will continue, including through the collection at 
customs of the vehicle registration tax and the excises on imports of 
alcoholic beverages and tobacco; the implementation of steps to 
strengthen the large taxpayer unit (UGCF) and the Customs Office; and 
tightening of the administrative procedures for granting tax exemptions 
and limiting the granting of discretionary exemptions, in line with IMF 
technical assistance recommendations. 

13.  The program envisages that the public enterprises will restrain 
their capital spending so as to refrain from using domestic financing as 
was the case in FY 1997/98. The program incorporates increases in 
interest payments by the government on its debt to the central bank to G 
22 million a month beginning in October 1998.

14.  In the context of the managed floating exchange regime, monetary 
and credit policies will be set in line with the program?s inflation and 
reserves objectives during FY 1998/99. For this purpose and in 
accordance with the program?s performance indicators on the central bank
?s net domestic assets and net international reserves, liquidity will be 
controlled mainly through the placement of central bank bonds with 
interest rates that would remain positive in real terms. Also, the 
provision of new credit by the state-owned banks, particularly the BNC, 
will continue to be strictly limited. It is expected that satisfactory 
performance under the program would allow a substantial lowering of the 
central banks? intervention interest rates during the fiscal year.

15.  The government will conclude the downsizing of the civil service by 
mid-December 1998 and will initiate the implementation of administrative 
reforms and institutional strengthening of the public sector with 
technical and financial assistance from donors. In order to help 
alleviate poverty and improve governance, the government will take steps 
to raise efficiency in the delivery of justice and security, health and 
education, and infrastructure rehabilitation and maintenance. These 
steps will be fully specified over the next three months in consultation 
with the donors and creditors involved in each sector.

16.  Technical work toward the modernization of the main public 
enterprises (airport, port, and the electricity and telephone companies) 
will continue. With assistance from the World Bank, the IDB, and U.S. 
AID, specific actions will be taken including the design of plans for 
the downsizing of employment, the transfer of certain enterprise 
liabilities to the government, putting in place regulatory frameworks, 
the start of bidding processes for the divestment of the enterprises 
under various modalities, and the selection of winning bidders.

17.  As regards financial sector reforms, the strengthening of banking 
supervision and prudential regulations will continue with technical 
assistance from the IDB and the IMF and, as part of this process, 
regulations on banks? capital adequacy requirements will be issued by 
end-December 1998. Steps have been taken to bolster the financial health 
of private commercial banks. Also, an action plan for the restructuring 
of the BNC will be drawn up by end-February 1999 with technical 
assistance from the IMF and the IDB. The plan will include, inter alia, 
proposals for an orderly downsizing of employment and the number of 
branches, strengthening the managerial and operating controls of the 
bank, and improving lending operations and loan recovery. A decision on 
the modality and the level of recapitalization of the bank will be taken 
by end-April 1999 with a view to its eventual divestment.

18.  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.

19.  To help monitor performance under the program, the government has 
established quarterly performance indicators for end-December 1998, and 
end-March, end-June, and end-September 1999, as specified in attached 
Table 1, on net international reserves and net domestic assets of the 
central bank; net bank credit expansion to both the nonfinancial public 
sector and the central government; the government wage bill; arrears on 
external public debt; and the contracting and guaranteeing of 
nonconcessional external loans. Also, the government has established 
structural benchmarks in the following areas: tax collection; government 
expenditure control; and the modernization of public enterprises and the 
financial sector, as specified in attached Table 2. Structural 
benchmarks in the areas of justice and security, and education and 
health will be specified by end-February 1999 in consultation with Haiti
?s donors and creditors. The government intends to review with IMF staff 
the progress made in implementing the program in February, May, and 
August 1999.

Very truly yours,
 
/s/
------------------------------------------------------------------------
Fred Joseph
Minister of Economy and Finance  /s/
------------------------------------------------------------------------
Fritz Jean
Governor of the Bank of the Republic of Haiti 



------------------------------------------------------------------------
1Haiti's fiscal year runs from October 1 to September 30.

 

Table 1. Haiti: Quantitative Benchmarks, December 1998-September 1999   
     Estimated
Stock at
End-Sep. 1998                              1999                      
     Dec. 1998Mar. JuneSep.
------------------------------------------------------------------------
  (Maximum cumulative change from
end-September 1998)Net domestic credit to the nonfinancial
   public sector1 (in millions of gourdes)5,963362610 833950 Net 
domestic credit to the central 
   government (in millions of gourdes)16,173342600 833950 Net domestic 
assets of the central bank
   (in millions of gourdes)1,2339180269 322339 Arrears on external 
public debt3000 00       Publicly contracted or guaranteed
   nonconcessional external loans
   (in millions of U.S. dollars)     Up to one year4,5...00 00     Over 
one-year maturity5...00 00   (Minimum cumulative change from
end-September 1998)Net international reserves of central bank
    (in millions of U.S. dollars)1,61905-5 -10-10       Memorandum item:
Government current revenue
   (in millions of gourdes)7...1,6073,084 4,5355,791   (Maximum 
cumulative level from
end-September 1998)Government wage bill (in millions of gourdes)7...840
1,573 2,3063,040       
------------------------------------------------------------------------
Sources: Ministry of Finance; BRH; and Fund staff estimates.
1Benchmarks on the net domestic assets of the BRH and net domestic 
credit to the central government and to the nonfinancial public sector 
will be adjusted upward by any quarterly shortfall in external budgetary 
financing set forth under the program baseline (at actual exchange 
rates) provided the programmed expenditures for hurricane relief and 
structural reforms are carried out; the benchmarks for the net 
international reserves of the BRH will be adjusted downward by the 
equivalent amounts in U.S. dollars. The program provides for G 348 
million of expenditure on structural reforms (completion of civil 
service downsizing and separation payments for restructuring of public 
enterprises and the BNC); if the cost of these reforms is below the 
programmed level, the benchmarks will be adjusted accordingly. The 
benchmarks will be adjusted for any cumulative excess external budgetary 
financing above the baseline unless it is used to finance higher than 
programmed hurricane relief and reconstruction, separation payments 
under the civil service reform or public enterprise restructuring, 
higher than programmed capital spending, or payment of up to G 40 
million of domestic arrears.
2Net domestic assets of the BRH is defined as the difference between the 
central bank's net international reserves and its currency in 
circulation. The benchmarks on net domestic assets are evaluated at the 
average exchange rate for the respective quarters.
3Continous basis.
4Excludes normal import-related credits.
5Concessional loans are defined as those that provide a grant element of 
at least 35 percent based on the appropriate OECD's commercial interest 
reference rates (CIRRs). The benchmarks exclude possible external 
borrowing up to US$20 million by TELECO to finance planned investments.
6Defined as the difference between the central bank'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 will be excluded from the net international reserves. For 
purposes of the NIR target, the gross foreign assets of the BRH are 
adjusted to exclude foreign currency deposits of the domestic commercial 
banks.
7Not benchmarks. 

Table 2. Haiti: Structural Benchmarks, October 1998?September 1999
October?December 1998January?March 1999April ?June 1999July ?September 
1999 Public expenditures managementSigning and implementation of a cash 
management protocol (early Dec. 1998). 
Agreement with the CSCCA for the extension of the procedures for the 
request for the replenishment of the "comptes courants" (mid?-Dec. 
1998). 

Publication of a circular by the ministry of finance authorizing the 
above-mentioned extension (Dec. 1998). 
Extension of the procedures for the request for the replenishment of the 
"comptes courants" to the economic sector (Jan. 1999). 
Extension of the procedures for the request for the replenishment of the 
"comptes courants" to the socio-cultural sector (Feb. 1999). 

Extension of the procedures for the request for the replenishment of the 
"comptes courants" to political sector and "other expenditures" of the 
central government (Mar. 1999).
Elaboration of a procedure for improving the monitoring of capital 
expenditure (Sept. 1999). Strengthening of tax revenueCollection of the 
vehicle registration tax at customs at the time of importation (Dec. 
1998). 
Collection of excise duties on imported tobacco and alcoholic beverages 
at customs (Dec. 1998). 

Draft a circular granting a delegation of daily operational powers of 
the director general of taxes to the head of the UGCF (Dec. 1998). 

Increase the financial resources allocated to the UGCF (Dec. 1998). 
Financial sector reformIssuing of a circular on banks? capital adequacy 
requirement (Dec. 1998).Design a plan for the restructuring of the BNC 
(Feb. 1999).Agreement with the BRH on the modality and level of 
recapitalization of the BNC and the BPH (Apr. 1999).Reduction of the 
number of employees of the BNC consistent with the restructuring plan 
(Sept. 1999). Civil service reform and sectoral policies Completion of 
the civil service downsizing (mid-Dec. 1998). 
Start the updating of the existing regulations regarding the procedures 
for hiring civil servants (Dec. 1998). 

Agreement with the European Union on the specific measures for the 
reform of the ministries of education and health (Dec. 1998).
Agreement with Canada on the specific measures for the reform of the 
ministry of justice (Jan. 1999). 
Implementation of a procedure for control of hiring and defining the 
institution in charge of this control as well as penalties in case of 
violation (Jan. 1999).
Implementation of the specific measures (to be determined) in the 
ministries of justice, education, and health. Implementation of the 
specific measures (to be determined) in the ministries of justice, 
education, and health. Public enterprises reform
Elaboration of a plan for reducing the number of employees of the port 
authority (June 1999). 
Elaboration of a plan for reducing the number of employees of the 
electricity company (June 1999).
Start the implementation of the plan for reducing the number of 
employees of the port authority (Sep. 1999). 
Start the implementation of the plan for reducing the number of 
employees of the electricity company (Sep. 1999). External financial 
assistanceEmergency assistance from the IMF.
Possible disbursement of budget support from Taiwan, Province of China.
Possible disbursement of the budget support from Canada and the European 
Union.