a701: IMF Concludes 2001 Article IV Consultation with Haiti (fwd)

[Bob Corbett <corbetre@webster.edu>]

From: Robert Benodin <r.benodin@worldnet.att.net>


IMF Concludes 2001 Article IV Consultation with Haiti


On January 18, 2002, the Executive Board of the International Monetary Fund
(IMF) concluded the Article IV consultation with Haiti.1
Background

During FY 2000/01, the Fund monitored Haiti’s economic policies through a
staff-monitored program (SMP). The main purpose of the SMP was to assist in
maintaining sound macro-economic policies and in implementing structural
reforms that are important for the attainment of macro-economic stability,
with the aim of establishing a positive track record. It was hoped that once
the political crisis associated with the May 2000 parliamentary elections
was resolved and following the presidential elections in November 2000, a
satisfactory track record would facilitate intensified discussions for a
Fund-supported arrangement under the Poverty Reduction and Growth Facility.
To date, though some progress has been made under the auspices of
OAS/CARICOM (Organization of American States/Caribbean Community), the
political crisis essentially remains unresolved. While donors’ humanitarian
assistance continued to be channeled through NGOs, budgetary aid remained
suspended throughout FY 2000/01 pending the resolution of the political
crisis in a manner acceptable by all interested parties.

Performance under the SMP during FY 2000/01 was weak. Real GDP is estimated
to have declined by around two percent, reflecting tight monetary conditions
and the negative expectations raised by the continuing high fiscal imbalance
and central bank financing. Inflation (12-month) remained broadly unchanged
at around 16 percent during most of the year and decelerated during the last
quarter to reach 12 percent in September 2001. Fiscal performance
deteriorated, as the overall central government deficit rose to 2.7 percent
of GDP (2.5 percent of GDP in FY 1999/2000). Central government revenue
declined to an historically low level (7.3 percent of GDP, against 8.1
percent of GDP in FY 1999/2000). All categories of revenue were below
target; in particular, petroleum taxation underperformed, partly as a result
of a decision by the authorities not to adjust retail prices to increased
landed costs (in contrast to the flexible pricing policy envisaged under the
SMP). While total budgetary spending was held at an estimated 9.8 percent of
GDP (10.1 percent of GDP in FY 1999/2000), outlays on non-wage current goods
and services were well above target. Major problems remain regarding
transparency and accountability in budget execution and the use of
discretionary accounts remains extensive. The deficit was financed mostly by
the central bank.

Tight monetary conditions and crowding out by the public sector combined
with the weak economy and continuing political uncertainty all contributed
to a sharp decline in credit to the private sector. Net official reserves
(program definition) declined to the equivalent of 1 month of imports of
goods and services. Faced with negative capital flows, Haiti accumulated
external arrears. The IDB withheld new disbursements pending the payment of
arrears, and the World Bank cancelled undisbursed loans. The gourde remained
broadly stable relative to the
U.S. dollar owing to the tightening of monetary policy, the decline in
reserves and the accumulation of external arrears.
Executive Board Assessment

Directors expressed deep concern about the continued decline in per capita
income and persistence of widespread poverty, the increase in the fiscal
deficit and central bank financing, and the accumulation of external debt
arrears. Directors urged the government and all political parties to
redouble efforts toward a settlement of the political crisis so as to pave
the way for restoring the momentum of economic development and poverty
reduction, with support from the international community, particularly in
the social area.
Directors regretted that discussions on a new staff-monitored program (SMP)
could not be concluded. They emphasized that, while continuing to work on
the resolution of the political impasse, the authorities should implement a
macroeconomic adjustment program aimed at reducing the fiscal deficit,
containing inflation, and stemming the loss in reserves. If strictly adhered
to, such a program could allow for a prudent lowering of interest rates,
which would help prevent a further deterioration of the economy. Directors
noted that satisfactory performance under a new SMP, along the lines just
mentioned, would be important to initiate fruitful discussions on an
eventual PRGF arrangement in support for a medium-term strategy for economic
recovery.
Directors welcomed the recent submission of the budget for FY 2001/02 to
parliament, the first official budget since 1996. However, they considered
that the small reduction in domestic financing of the fiscal deficit will
fall short of what is needed to stabilize the economy. Directors, therefore,
urged the authorities to take determined additional measures to increase the
tax effort through improved tax and customs administration, broadening the
tax base, and adoption of an automatic price adjustment mechanism for
petroleum products. Budgetary spending should be tightly controlled, with
its composition reoriented away from current to capital expenditure.
Directors welcomed the authorities’ intention to improve governance by way
of enhancing transparency and accountability in budget execution. They urged
the authorities to restrict the use of discretionary ministerial accounts
exclusively to emergency outlays and to eliminate the discretionary element
in revenue collection. Directors also highlighted the importance of
enforcing a strong cash management system that would effectively forestall
excessive central bank financing and arrears accumulation.
On monetary policy, Directors emphasized the need to continue to restrain
credit expansion to facilitate attaining the inflation and net international
reserves targets. Noting the risks for inflation and the external value of
the gourde from a premature loosening of monetary policy, they stressed that
interest rates should be lowered further only if inflation remains under
control, in the context of a broadly stable exchange rate and reduced budget
deficit.
Directors welcomed the measures to improve the supervision and health of the
banking system. They urged the authorities to complete the draft texts for a
new banking law and a new central bank charter to bring them into conformity
with international standards. The authorities’ efforts to combat money
laundering and drug trafficking are commendable and should be sustained by
making the recently created Financial Intelligence Unit operational.
Directors also highlighted the need for legal steps enabling the freezing of
terrorist assets.
Directors welcomed the authorities’ intention to maintain the floating
exchange rate regime and, given the low level of reserves, urged them to
refrain from foreign exchange intervention. They encouraged the authorities
to step up structural reforms aimed at reducing domestic production costs,
increasing productivity, and strengthening competitiveness, and, in this
context, they looked forward to the restructuring and privatization of a
number of large public enterprises as well as the adoption of a plan for
privatizing the Banque Nationale de Credit. Haiti’s commitment to an open
trade policy was welcomed. Directors encouraged the authorities to clear
overdue financial obligations to the international financial institutions.
Directors welcomed the authorities’ efforts to improve statistics in the
real, external, and public sectors. They emphasized the need to sustain
these efforts, with technical assistance from bilateral and multilateral
agencies, including directly from the Fund and through the Caribbean
Technical Assistance Center.
Public Information Notices (PINs) are issued, (i) at the request of a member
country, following the conclusion of the Article IV consultation for
countries seeking to make known the views of the IMF to the public. This
action is intended to strengthen IMF surveillance over the economic policies
of member countries by increasing the transparency of the IMF’s assessment
of these policies; and (ii) following policy discussions in the Executive
Board at the decision of the Board. The Staff Report for the (2001) Article
IV Consultation with Haiti is also available.
Haiti: Selected Economic Indicators
Fiscal Year Ending September 30     Proj
1997     1998        1999      2000        2001

Domestic economy
Real GDP (annual percentage change)                 1.4                3.1
2.2                1.2                -1.7
Consumer prices (annual percentage change  17.0                8.3
9.9                15.3                12.3
Gross domestic investment (percent of GDP)                  24.5
24.5                27.7                27.3                22.8
Gross national savings (percent of GDP)                  17.6
20.5                22.7                20.9                18.0
(In percent of GDP)

Public finances
Central government
                         -0.6                -1.1                -1.4
         -2.5                -2.7
Overall public sector
                             -3.0                -3.3                -3.7
             -5.2                -3.6
Public sector savings                                                  2.4
2.2                2.3                0.8                -0.6
(Changes in percent of beginning period broad money)

Money and credit
Net domestic assets                                                   10.6
11.4                15.1                18.1                9.2
Credit to the non-financial public sector
      -1.9                3.0                7.3                7.9
8.3
Credit to the private sector
17.5                7.6                4.4
16.9                -3.1
Broad money
15.4                15.4                17.7                36.2
5.3
(Annual percentage change unless otherwise indicated)

External sector
Exports (f.o.b. in U.S. dollars)
20.9                45.7
16.5                -6.2                -3.0
Imports (f.o.b. in U.S. dollars)
9.9                16.9                14.3
7.9                -3.2
External current account balance (percent of
    -6.9                -5.5                -5.0                -6.4
        -4.8
External public debt (end-period, percent of GDP)                30.1
29.0                26.4                29.9                28.9
External public debt service (percent of exports of goods                8.5
8.0                8.3                7.9                9.4
Net official reserves (end-period, months of imports                2.2
2.3                2.2                1.6                1.8
Real effective exchange rate (appreciation +)
11.0                8.2                8.9                -6.1
6.3
Sources: Bank of the Republic of Haiti; Ministry of Economy and Finance; and
IMF staff estimates.




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. This PIN summarizes the views of the Executive Board
as expressed during the January 18, 2002 Executive Board discussion based on
the staff report.