Information about Western Hemisphere Hemisferio Occidental
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Statement by Paulo Nogueira Batista, Executive Director for Haiti and Ketleen Florestal, Advisor to the Executive Director February 29, 2008

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International Monetary Fund
Published Date:
April 2008
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On behalf of our authorities, we would like to thank staff for the constructive dialogue that has taken place during the last mission of November 2007 and that is being maintained as practical policy issues arise. We would also like to express our appreciation to the management and staff of the World Bank and the IMF for their continued support to the PRSP drafting process and their helpful comments on the Document de Stratégie Nationale pour la Croissance et la Reduction de la Pauvreté (DSNCRP) officially transmitted this past November.

The authorities have informed us that they have already taken steps to address some of the issues raised in the Joint Staff Advisory Note (JSAN). The budget and sector costing strategies are being revised with a view of ensuring consistency between these estimates and projected budget figures and in anticipation of the donors’ meeting to be held in Port-au-Prince at the end of April. A detailed action plan has been prepared as well as an implementation framework. Both documents are being discussed with representatives of the donor community.

As far as the PRGF is concerned, just as it was the case at the time of the first review, Haiti has delivered a strong performance and the authorities remain committed to maintaining this good track record until completion of the agreement. Yet, notwithstanding the authorities’ efforts with support from the IDB and the IMF, the experts needed to complete two structural performance criteria (the IFRS compliance gap report and the assessment of Banque Nationale de Crédit - BNC’s recapitalization needs following the absorption of Socabank) could not be hired before the end-September 2007 test date. The experts have finally been found and hired thus allowing these performance criteria to be completed as prior actions to the holding of the Board meeting of the second review.

Capacity Constraints and Absorptive Capacity

Our authorities acknowledge that the speed of implementation of the investment budget remains a cause of concern despite its important pick up during the last quarter of 2007. They are working steadfast –with the assistance of donors—to remove bottlenecks that have constrained project execution and limited absorptive capacity. Nevertheless, the human capital constraint remains binding. It is reflected not only in the scarcity of needed skills in the domestic market but also in the difficulties of finding international experts (expatriates or foreign nationals) in a timely fashion.

The aforementioned capacity constraint has been particularly hurtful in the public works sector. Several projects have been delayed because local firms had reached maximum capacity and/or foreign firms did not find the bids profitable enough to justify a start-up investment in Haiti. Efforts to garner investors’ interests and to reach out to non traditional investors have borne their fruits. New investors particularly from Latin America and the Caribbean have become increasingly interested in doing business in Haiti often in partnership with local firms. By the end of the last fiscal year, this had improved the pace of implementation of public investment projects, which are crucial in achieving growth and poverty reduction goals.

Improving coordination and efficiency on both the Government and donor side is also critical. Better knowledge by the international community of the administrative and legal constraints as well as enhanced efforts to encourage national ownership is important in increasing absorptive capacity. Had these conditions prevailed in 2007, Haiti could have better used the long time spent trying to accommodate the World Bank’s and some donors’ insistence to have grant agreements ratified by the Haitian Parliament despite the fact that the constitution does not bestow such authority upon Parliament.

Downside Risks

Responsible and prudent policies have helped maintain stabilization gains. The macroeconomic framework is continuously being strengthened, and measures to improve governance, maintain political stability and enhance security are designed to help restore investor confidence. An important reduction of inflation has been achieved in recent periods owing to the strong fiscal position and the appreciation of the national currency. However, more recently, international food and petroleum price hikes have led to considerable inflationary pressures in the domestic market. Despite growing political pressures, the authorities remain committed to maintaining macroeconomic stability and to refrain from taking short-term ad hoc measures to counter price inflation, as these measures may jeopardize fiscal consolidation and long-term growth. They are considering the adoption of policies that would allow the relaxation of the supply constraint in the medium and long run, such as investment in agriculture, while bringing some alleviation to the hardships of the most vulnerable sections of the population in the short run.

At the political level, the government is pursuing its efforts to garner consensus and encourage participation in finding solutions to Haiti’s numerous problems. This spirit of consensus building has allowed them to reach an agreement on the roadmap to the renewal of a third of the Senate whose term expired the second Monday of January 2008. Reaching the consensus needed to form the new electoral council took more time than projected and elections could not be organized prior to the expiration date. Nonetheless, it has finally been agreed by all parties that the ten senators would leave office as soon as the new electoral decree is approved by Parliament. On February 21, 2008 a draft of the electoral decree has been officially transmitted to Parliament.

Strengthening the Central Bank’s Financial Position

We thank the Fund for the support received to move forward with the plan to redress the Central Bank’s financial situation. The strategies envisaged in the “fact finding” mission’s report are a valued input in the authorities’ decision-making process. The comparative advantage of the alternative strategies (front-loaded versus gradual approach and high versus low recapitalization schemes) are being assessed internally. The urgency of addressing the deteriorating position of the Central Bank, particularly in order to safeguard the effectiveness of monetary policy and maintain price stability, is being weighted against the fiscal effort implied for the short run and the time needed to make the appropriate administrative and legal changes to implement the recapitalization plan. This plan, in our authorities’ view, is intrinsically linked to achieving complete financial independence of the Central Bank and thus implies the complete removal of the possibility of a return to fiscal dominance. Thus, as underscored in the aforementioned TA report, one of the most important elements of the action plan is the development by the Central Government of the permanent capacity to finance itself without recourse to monetary financing. This goal will be achieved through increased fiscal revenues, the creation of Treasury Bonds and the development of a local capital market.

The divestment by the central bank of the state telecom company (TELECO) is also instrumental in the recapitalization process. This divestment will also relieve the central bank of duties that take time away from the central bank in achieving its core functions. Our authorities are appreciative of the assistance of the IFC in this process.

On Growth and Poverty Reduction

Achieving positive real per capita GDP growth after several years of decline is definitely a step forward in the fight against poverty. Nevertheless, the actual pace of growth is insufficient to ensure a significant progress towards achieving the MDGs. To promote higher levels of growth and alleviate poverty, massive investments are needed particularly in infrastructure. However, both the resource and capacity constraints are binding. Thus, the key challenges the authorities face for the implementation of the PRSP include the ability to mobilize adequate levels of domestic and international resources and that of increasing absorptive capacity.

Efforts to increase fiscal revenues have already brought satisfactory results. The authorities are committed to maintaining the course and to enhancing further tax collection through sustained efforts to strengthen the fiscal administrations and curb smuggling and tax evasion. To decrease backlogs and improve the services offered by customs, starting this month, the working week of the customs office has been extended to Saturdays with the possibility of it being called upon to work on Sundays in case of an emergency.

Besides the lack of adequate availability of expert services, institutional weaknesses have also hampered a better implementation of investment projects. Personnel are being recruited to strengthen the programming units of line ministries particularly that of public works, agriculture, justice, education and health. Announcements have been launched to that effect and candidates’ records are being reviewed. Public accountants and budget comptrollers are also being progressively deployed in all central government administrations to ensure the respect of transparent and efficient public management practices. The implementation and monitoring structures of the PRSP, which benefited considerably from inputs from the Public Expenditure Management and Financial Accountability Review (PEMFAR) exercise led with support from the World Bank and the IDB, will allow prompt identification of bottlenecks and other factors delaying project implementation.

The scarce supply and high cost of electricity represents an important impediment to business activity. The authorities are pleased to have been able to conclude a power generation and distribution contract with a new domestic firm that will both increase significantly electricity generation and reduce users’ costs. In the meantime, with the support of several donors, efforts are being made to increase the efficiency of the state electricity company (EDH) through better controls, reduction in technical losses and the gradual modernization of the plant’s equipment. The IDB is also preparing with the authorities a program for the financing of the hydroelectric dam of Peligre. The operation is scheduled to be approved by the IDB Board during the fall of 2008.

Monetary Policy and Financial Sector Strengthening

The authorities welcome the findings and recommendations of the FSAP report as they are helpful in their efforts to strengthen the financial sector, which has withstood well the risks caused by the three banks that had been in difficulty two years ago. Nevertheless, as underlined in the FSAP report, the financial system still faces a number of challenges. The authorities look forward to the approval by Parliament of the new banking law that addresses many of the shortcomings of the existing prudential regulation and supervision of the banking institutions particularly those pertaining to insolvency procedures. The authorities are also committed to moving promptly with the supervision and regulation of credit unions, microfinance institutions, insurance companies and pension funds.

On the monetary policy front to enhance the policy framework, the Central Bank has formally adopted a monetary aggregate target and top priorities include increasing competition in and the effectiveness of its bond auction system through the broadening of participants and the improvement of liquidity forecasting. In the long run, the Central Bank hopes to diversify the use of its instruments and reduce its reliance on reserve requirements.

Progress on this front has been temporarily upset by recent inflationary pressures and speculative behavior. Nonetheless, the significant recent reduction of interest rates on Central Bank paper should encourage in the medium run an upturn in private domestic credit.

Prudential regulations to reduce foreign exchange exposure have recently been tightened. The existing ceiling on the net open FX position of banks was not binding at 8 percent and has been reduced to 1 percent.

Completion Point Triggers and Debt Management

Progress has been made towards achieving completion point triggers particularly with the conclusion of the drafting of the PRSP and, more recently, with the voting of the law on asset declaration by both chambers of Parliament. The donors’ meeting to be held in Port-au-Prince next April is crucial for the mobilization of additional resources for the implementation of the PRSP. Revisions introduced in the existing procurement law have been transmitted to the highest level of Government for review pending its submission to Parliament.

The debt management capacities of the Ministry of Economy and Finance and the Central Bank are being reinforced with the assistance of UNCTAD, which has recently produced the evaluation report for the implementation of the centralized debt management database with the adoption of SYGADE (Système de gestion et d’analyse de la dette) by both institutions. The TA from UNCTAD includes staff training and institutional strengthening of debt management structures.

The authorities are convinced of the need to give quasi exclusive preference to external support in the form of grants in order to safeguard debt sustainability, and Haiti is appreciative of the financial support that is being awarded through the HIPC, Paris Club and MDRI debt relief mechanisms. In view of the vast needs of the country, while the authorities are wary of any engagement, which would jeopardize long-term debt sustainability, they are thankful for the opportunities offered by the Petro Caribe agreement, which has a 50 percent grant element. They are committed to implementing the latter in a self-sustaining manner and are pleased that the first and second shipment of petroleum products are programmed to take place in March and April.

Conclusion

Haiti is still, and probably will be for a while longer, going through a difficult period and our authorities stand ready to acknowledge that the political and security situation could reasonably be perceived as lacking sufficient sturdiness even with the significant progress made on these fronts with the assistance of the United Nations Stabilization Mission in Haiti (MINUSTAH) and the international community at large. Nonetheless, the persistent categorization of Haiti with the most troubled post/in-conflict nations of the world by part of foreign media is unjustifiable, unfair and potentially very damaging to the work the Fund and other donors are trying to achieve with the Haitian authorities. This negative publicity is repeatedly being circulated even if often based on questionable facts. Hence, the Fund, the World Bank and other donors are encouraged to be ever more proactive in spreading the information they hold on Haiti’s countless achievements notwithstanding the prevailing capacity constraints and recurring external shocks. Our colleagues at the Board are also invited to be the echo of the favorable assessment of Haiti’s performance under the PRGF and, in the case of donor countries, of the accounts we presume they are receiving from their countries’ representatives of the improved situation on the ground.

Finally, our authorities would like us to commend the management and staff of the IMF for understanding the need to keep conditionality under the program at a minimum and to focus on PRSP and HIPC Initiative completion point triggers. They look forward to the up scaling and timely delivery of technical and financial support from the international community for the achievement of the goals set out in the PRGF and PRSP.

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