--- Page 1 --- INTERNATIONAL MONETARY FUND IMF Country Report No. 15/158 HAITI SELECTED ISSUES June 2015 This Selected Issues paper on Haiti was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation. with the member country. It is based on the information available at the time it was completed on May 6, 2015. Copies of this report are available to the public from International Monetary Fund 0 Publication Services PO Box 92780 0 Washington, D.C. 20090 Telephone: (202) 623-7430 o Fax: (202) 623-7201 E-mail: publications@imf.org Web: http./www.imf.org Price: $18.00 per printed copy International Monetary Fund Washington, D.C. 2015 International Monetary Fund --- Page 2 --- MONETARY FUND INTERNATIONAL HAITI SELECTED ISSUES May 6, 2015 Prepared By Lawrence Norton, Joseph Ntamatungiro, Approved By Gabriel Di Bella (all WHD), Emine Hanedar The Western Daniela Cortez, (FAD), and Anta Ndoye (SPR) Hemisphere Department CONTENTS OPPORTUNITIES AND CHALLENGES FOR GROWTH A. Introduction Vulnerability to Shocks B. External Trade: Diversify Exports to Reduce to GVCS to Support Growth and Job Creation C. Integrating Property Rights to Unlock Growth D. Strengthening Bottleneck to Growth E. Overhauling the Electricity Sector: Lifting a References FIGURE 1. Selected Trade Indicators TABLES 1. Selected Economic Indicators, 2013 of the Steps to a Sale by Genuine Deed 2. Summary BALANCING HUMAN CAPITAL AND PUBLIC EXPENDITURE IN HAITI: INFRASTRUCTURE FORMATION A. Introduction, B. Public Expenditure Trends, 2004-2014 and Education Spending: Some Indicators C. Efficiency of Capital Future Demand for Public Education: Fiscal Implications D. Assessing E. Concluding Thoughts References --- Page 3 --- HAITI FIGURE 1. Demographic Trends and Baseline Projections TABLES 1. Efficiency Scores 2. Public Investment Management Index 3. Average Years of Total Schooling, Population > 15, 1950-2010 4. Achievements Under the PSUGO Program, 2011-2014 MONETARY POLICY AND FINANCIAL INTERMEDIATION IN HAITI A. Introduction B. Monetary Policy C. Financial Intermediation and Financial Inclusion References TABLES 1. Balance Sheet of the Aggregated Banking System 2. Sectoral Allocation of Credit 3. Evolution of Savings and Credit Cooperative Sector EXTERNAL BUFFERS AND COMPETITIVENESS TO ABSORB SHOCKS AND SUPPORT GROWTH A. Introduction B. External Stability Assessment C. Haiti's Optimal Level of Reserves, D. The Impact on Haiti of Lower Oil Prices References TABLES 1. Current Account Benchmarks 2. Haiti's Ranking on International Surveys, Latest Available Year 3. Variables for Optimal Reserves. Estimate 4. Significant Shocks to Haiti Since 2004 HAITI'S PUBLIC SECTOR: EXPLAINING THE ECF'S FISCAL TARGET A. Introduction B. The Banque de la République d'Haiti (BRH) C. State-Owned Enterprises 2 INTERNATIONAL MONETARY FUND --- Page 4 --- HAITI D. The Road Maintenance Fund (FER). E. The PSUGO Fund F. The Pension System G. Municipalities References TABLES 1. BRH Profit and Loss Accounts 2. Structure of the BRH Balance Sheet 3. List of Autonomous Entities per Ministry and Category 4. Operations of the Road Fund (FER), 2013-2015 5. Operations of the PSUGO Fund 2012-15 6. Benefits for Public Sector Employees, INTERNATIONAL MONETARY FUND 3 --- Page 5 --- HAITI FOR GROWTH' AND CHALLENGES OPPORTUNITIES A. . The PSUGO Fund F. The Pension System G. Municipalities References TABLES 1. BRH Profit and Loss Accounts 2. Structure of the BRH Balance Sheet 3. List of Autonomous Entities per Ministry and Category 4. Operations of the Road Fund (FER), 2013-2015 5. Operations of the PSUGO Fund 2012-15 6. Benefits for Public Sector Employees, INTERNATIONAL MONETARY FUND 3 --- Page 5 --- HAITI FOR GROWTH' AND CHALLENGES OPPORTUNITIES A. Introduction standards in Haiti will require deep-seated a sustained increase in living the of 1. Achieving the export base is needed to cushion impact reforms across a range of areas. Diversifying and a sustained increase in the capital shocks that have reduced per capita income prevented of its severe chains (GVCS) would allow Haiti to take advantage stock. Integration into global-value to generate employment, spur the proximity to the U.S. market and favorable trade preferences the value added chain. As secure creation of human capital, and allow Haiti to begin climbing needed to address Haiti's to increased investment, reforms are property rights are essential and weak conflict resolution institutions. Haiti's poor persistent uncertainty over land ownership costs on firms and is also a key bottleneck to infrastructure, notably in electricity, imposes significant growth. Latin America and the Caribbean (LAC), 2. Haiti is one of the most open economies in preferential trade agreements carved out a place in world apparel exports through reforms to and has institutions and complementary structural with the U.S. However, the absence of strong to a high incidence of shocks, resulted trade policy, combined with continued vulnerability structural forms will help to attract augment failure of trade reforms to stimulate growth. Implementing with in the activities and aid Haiti in moving up the GVCS, beginning investments in higher value added the apparel industry. shocks. Haiti is subject to a diversification is important to reduce vulnerability to damaging 3. Export of Haitians subject to one or more economically high incidence of shocks, with 75 percent of exports and dependence on food (World Bank, 2014). The country's narrow range is crucial shocks per year to shocks. To reduce it, export diversification imports, further exacerbates its vulnerability evidence shows that, following a wave of trade low-income country like Haiti. Empirical have been for an open the diversification spurts of LICS in the 1990s reforms to open their economies, volatility and have increased their resilience to associated with a pronounced decrease in growth shocks (IMF 2014). initiatives provide Haiti with an opportunity to 4. The U.S. HELP and HOPE trade climbing the value added ladder. integrate into global value chains (GVC) and begin low are additional with the U.S. and low labor costs (despite productivity) Geographic proximity increasing labor productivity, improving advantages. Integrating into GVCS requires international labor comparative rights, and the business climate, and upholding in the infrastructure, property domestic and foreign investment standards. Better access to finance would also encourage apparel industry. Norton, Daniela Cortez, and Gabriel Di Bella (all WHD) 1 Prepared by Anta Ndoye (SPR), Lawrence INTERNATIONAL MONETARY FUND --- Page 6 --- HAITI and the land tenure system is essential to unlock 5. Strengthening property rights informal land rights exist alongside a complex Haiti's current land tenure system (where Establishing a modern land growth. system), is a serious obstacle to Haiti's development. and archaic legal each parcel of land and establish clear ownership, cadastre, which would both accurately survey and transferable property rights in Haiti. Such would greatly advance the goal of establishing secure allow land to be used as collateral, would incentivize investments to improve real property, information that could be a system conflicts over land rights, and provide reduce costly and time-consuming used for tax purposes. constitutes a serious deterrent for investment basic public infrastructure often furnish their 6. Inadequate means that enterprises must and a bottleneck to growth. a serious obstacle to Haiti's development. and archaic legal each parcel of land and establish clear ownership, cadastre, which would both accurately survey and transferable property rights in Haiti. Such would greatly advance the goal of establishing secure allow land to be used as collateral, would incentivize investments to improve real property, information that could be a system conflicts over land rights, and provide reduce costly and time-consuming used for tax purposes. constitutes a serious deterrent for investment basic public infrastructure often furnish their 6. Inadequate means that enterprises must and a bottleneck to growth. A lack of infrastructure costs in transport and logistics. These security, and energy, and cope with increased own sanitation, constraint to growth (IMF 2014). Improved bottlenecks have been shown to be a significant these costs, but also by reducing infrastructure would promote higher investment by reducing determination to maintain a stable concrete demonstration of the state's uncertainty by providing a business environment. expensive electricity supply unreliable, insufficient, and unwarrantedly 7. In particular reduction, and fuels fiscal vulnerabilities. Inadequate hampers investment, growth, poverty forces the private sector to generate its service (including frequent, long, and unplanned blackouts) and service, and prevents taking which reinforces a vicious cycle of high cost poor the and an own electricity, The electricity sector is a drag to budget advantage of economies of scale in production. state-owned electricity company (EDH) The deficit of the important source of macro vulnerability. of tax revenues), and was financed by central of GDP in FY2014 (nearly 20 percent of the was 2.5 percent of arrears. Only about percent transfers and loans, and by an accumulation even lower. Large government with access among the rural poor being population is connected to the grid, in education, health and security. High transfers to cover EDH's deficit crowd out priority spending distribution of income. electricity consumers result in a more regressive delinquency rates for large B. External Trade: Diversify Chart 1. Remittances and Trade Exports to Reduce Vulnerability (percent of GDP) to Shocks Remittances -5 Trade balance (right axis) -10 8. The U.S. is Haiti's largest export market, while the Dominican Republic has become the largest source of imports. The majority of apparel exports -25 to the U.S., Haiti's main trading 10 -30 are shipped the close to 90 percent of -35 partner. In 1980s, exports were with the U.S. and E.U. -40 countries. In 2013, trade to the U.S., as a 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 share of total exports, increased thanks to Sources: National Authorities; and IMF staff calculations. trade preferences in the 1). the generous Korea, China) have replaced EU countries (Figure apparel sector and new trade partners (Canada, INTERNATIONAL MONETARY FUND 5 In 1980s, exports were with the U.S. and E.U. -40 countries. In 2013, trade to the U.S., as a 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 share of total exports, increased thanks to Sources: National Authorities; and IMF staff calculations. trade preferences in the 1). the generous Korea, China) have replaced EU countries (Figure apparel sector and new trade partners (Canada, INTERNATIONAL MONETARY FUND 5 --- Page 7 --- HAITI compared to 1980, in favor of from the US decreased (as a share of total imports) In 2013, imports the Dominican Republic. increased significantly over the last two Haiti's trade deficit (as a share of GDP), of GDP in 9. increased from 23 percent of GDP in 1980-84 to percent decades. Imports of goods (at about 10 percent of GDP). The (significantly 2010-13. Exports, in turn, were mostly unchanged with remittances from Haitians that migrated trade deficit began to be financed increasingly remittances accounted for larger) and economic deterioration. Indeed, abroad given political instability (Chart 1). about a fifth of Haiti's GDP in recent years with exports becoming The composition of trade also changed significantly, sales of finished 10. increasing in importance. External undiversified and the size of food imports during the 1980s, while accounted for 50 percent of total exports (on average) for apparel products (on average). External food purchases accounted coffee accounted for 23 percent of exports while fuel accounted for 14 percent on 25 percent of imports on average (6 percent of GDP), two decades, exports became of GDP) (IMF, 1983, 1985). Over the past of food average (4 percent accounted for nearly 90 percent of exports, while export undiversified. In 2010-2013 apparel in import composition were not as staples accounts for less than 5 percent. While changes and in terms of trade. Accordingly, food significant, this masked large changes in import levels of GDP), while fuel imports accounted for accounted for 18 percent of imports (7.6 percent imports 26 percent (10 percent of GDP) in 2010-2013. vulnerable to external shocks. Haiti's of trade makes Haiti extremely 11. The composition makes it vulnerable to terms of trade and weather dependence on agricultural and oil imports Since the 1980s, a series of those related to price fluctuations for food staples. coffee shocks, particularly in Haiti: in 1981-92 (a fall in prices), negative terms-of-trade shocks were experienced rise in imported food prices) (World Bank, 2000-02 (a fall in coffee and cacao prices), and 2008 (a and droughts) also had a Natural disasters (hurricanes, floods, a devastating earthquake, and impacting 2014). production, pushing up food and energy imports negative impact on agricultural production. negatively on domestic agricultural advantage (RCA) measures show 12. Not surprisingly, Haiti's revealed comparative since the mid-1990s 2 . Calculated RCA, goods and increases in apparel i/the declines in agricultural data where X represents exports by the country Balassa (1965), using export as developed by the year (see expression 1). world n of product k, and t represents Balassa (1965). Product classes k were obtained by (RCA) was calculated using with 80 or 81), 2 Revealed Comparative Advantage System) product codes related to fruit (all 5-digit codes beginning with 61, 62, 64, or 64) aggregating HS (Harmonized with 901), and finished apparel (all 6-digit codes beginning and 2010). coffee (all 5-digit codes beginning the CEPII BACI International Trade Database (Gaulier Zignago for annual export trade flows from MONETARY FUND 6 INTERNATIONAL Balassa (1965). Product classes k were obtained by (RCA) was calculated using with 80 or 81), 2 Revealed Comparative Advantage System) product codes related to fruit (all 5-digit codes beginning with 61, 62, 64, or 64) aggregating HS (Harmonized with 901), and finished apparel (all 6-digit codes beginning and 2010). coffee (all 5-digit codes beginning the CEPII BACI International Trade Database (Gaulier Zignago for annual export trade flows from MONETARY FUND 6 INTERNATIONAL --- Page 8 --- HAITI in apparel has steadily increased calculated reveal that Haiti's specialization 13. The RCAS of agricultural products (fruits, and coffee) the 15 years. At the same time its exports were 5 percent over past coffee exports (in volume terms) in 2013 only have steeply declined. Indeed, Haiti's of its 1995 level. Xikt Xit Xnkt. (1) RCAikt = Xnt the importance of implementing External trade trends in Haiti also underscore all 14. East Asian countries, Mauritius and Chile implemented structural alongside trade reforms. boosted their growth performance (World Bank, trade liberalization policies in the 1990s, which reforms which strengthened institutions their trade reforms with structural also 2005) and accompanied Some of these countries (e.g., India, China, Mauritius) and entrenched macroeconomic stability. in one sector at a time (India), or trade liberalization, either by relaxing protection for industries opted for partial via special economic zones export by pursuing a dual track approach to liberalizing sound infrastructure in Mauritius), along Mauritius). Strong institutions (e.g. low corruption, rate India, (China, inflation rates and a competitive real exchange (Mauritius, with the maintenance of stable for trade liberalization policies. (World Bank, Chile), via sound policy, provided long-term credibility 2005). turmoil and liberalized trade against the backdrop of domestic 15. Haiti, in contrast, reforms. Reforms in the late 1980s included the indecisive implementation of structural as lower customs duties (except for elimination of import and export license restrictions, as well restrictions and reduced tariffs on Haiti eliminated import agricultural goods). In the mid-1990s, Specific rates (0-3 percent) were introduced agricultural goods to 15 percent (from 40-50 percent). 2011)., Tariffs have remained broadly basic (e.g., rice, sugar, flour, and cement) (IMF, at 4.8 for products applied tariff is the lowest in the region percent. unchanged since then. Haiti's simple average it is nonetheless lower than in tariff (8.2 percent), Although agriculture has a higher-than-average in tariffs for agricultural goods, deteriorated countries. The combination of a reduction further decline of the agricultural comparator uncertain policy framework, contributed to a infrastructure, and an secular decrease in productivity. The unsteady domestic sector, which was already experiencing a decline in the exports of manufacturing the 1990s was also reflected in a dramatic situation during goods (Lundahl, 2013). (Figure 1). trade policy with structural reforms more remains to pair 16. For Haiti, the main challenge Although there is some room to use tariffs conducive to export diversification and growth. sector, steep increases in tariffs may averages) to stimulate the agricultural (converging to CARICOM 3 Haiti became a member of the WTO in 1996. INTERNATIONAL MONETARY FUND 7 --- Page 9 --- HAITI only result in higher domestic food prices, a worse income distribution, and promote rent-seeking activities. Instead, a number of structural reforms could improve the productivity of the agricultural sector and encourage export diversification. A number of surveys document how Haiti compares negatively with peers in competitiveness, infrastructure quality and governance. (Figure 1). Trade policy is not a substitute for institutional strengthening. Figure 1. Haiti: Selected Trade Indicators 70 14 60 Trade Flows and Tariffs (AIIF Products) Trade Flows and Tariffs (Agricultural Products): 1/ 14 (percent ofGDP) 60 12 (percent OfGDP) rent-seeking activities. Instead, a number of structural reforms could improve the productivity of the agricultural sector and encourage export diversification. A number of surveys document how Haiti compares negatively with peers in competitiveness, infrastructure quality and governance. (Figure 1). Trade policy is not a substitute for institutional strengthening. Figure 1. Haiti: Selected Trade Indicators 70 14 60 Trade Flows and Tariffs (AIIF Products) Trade Flows and Tariffs (Agricultural Products): 1/ 14 (percent ofGDP) 60 12 (percent OfGDP) Bimports DExports 50 10 40 8 DImports 30 6 DExports 20 4 1980- 1985- 1990- 1995- 2000- 2005- 20101980- 1985- 1990- 1995- 200084 89 94 99 04 09 13 84 89 94 99 04 2005- 09 2010- 13 35 25 30 Exports/Imports: and Tariffs (Non- -Agricultural) 1/ MFN Applied Tariffs (percent ofGDP) 30 20 (2014, average) DImports manufactures Agricuturalproducts DExports: manufactures DNon-a agriculturalproducts 15 DAl products 15 10 10 5 3 2 S de e o a a E 3 a 1980- 1985- 1990- 1995- 2000- 2005- 2010U N 11 C 84 89 94 99 04 09 13 U 8 I Main Export Partners Main Import Partners (shar (shar ota 5.0% 6.1% 18.1% 27.4% 8% 21.5% 2% 73% 33. 9% 670% 33.3% BU Uniteds States mBelgium uxe our rg mFrance Bitaly Germany MCanada BU UnitedStates Canada mFrance Mexico Korea Restofthev China World Dominican nRepublic B Japan mNetherlands sAntilles China mPeru mRestofthel World 70 8 Evolution of RCA over Time for Haiti Global Competitiveness Indicators 60 (index, 1-7) A Fruit mHaiti IGuatemala Coffee 50 6 ICARICOM2/ MNicaragua EISalvador mHonduras Apparel ICostal Rica DR Panama 20 2 Global Institutions Infrastructure 1995 1998 2001 2004 2007 2010 2013 Competitiveness Index Source: World Trade Organization (WTO); the Direction of Trade Statistics (DOTS) Database; National Authorities; Global Competitiveness Report (2014-15); and IMF staff calculations. 1/Imports data is missing for years 1990-94. 2/The estimate for CARICOM includes: Antigua and Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Saint Lucia, St. Kitts and Nevis, St. Vincent and the Grenadines, Suriname, and Trinidad and Tobago (when available). 8 INTERNATIONAL MONETARY FUND : World Trade Organization (WTO); the Direction of Trade Statistics (DOTS) Database; National Authorities; Global Competitiveness Report (2014-15); and IMF staff calculations. 1/Imports data is missing for years 1990-94. 2/The estimate for CARICOM includes: Antigua and Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Saint Lucia, St. Kitts and Nevis, St. Vincent and the Grenadines, Suriname, and Trinidad and Tobago (when available). 8 INTERNATIONAL MONETARY FUND --- Page 10 --- HAITI Growth and Job Creation to GVCS to Support C. Integrating to that firms would engage to bring a product 17. A value chain represents all activities and resulted in more interconnection Value chains have become increasingly global of in the value the market. in specific activities and stages between economies as well as more specialization factor to growth and productivity as well chain rather than in industries. GVCS are also a contributing development and is often an easier path Integration in a GVC facilitates economic as employment. value chain. Case study evidence generally standards than building a complete to higher living successfully in GVCS instead of pursuing domesticallysuggests that countries which integrated in the activities and sectors studied (OECD, industrialization experienced better outcomes based 2014). increases in GDP per capita in array of countries to GVCS underpinned and Vietnam. 18. Integration Costa Rica, the Czech Republic, Mexico, Thailand including Cambodia, China, the business environment, and the increase to trade and investment, improve into GVCS Policies to openness have a role in the integration of countries creation of export zones seemed to played (World Bank, 2014). production is extremely globalized. The In the value chain for apparel into GVCS, as 19. particular, for the integration of developing countries apparel industry is a typical entry point This GVC is organized in the following segments: related skills can be acquired relatively easily. fibers; (ii) provision of components, such as material supply, including: natural and synthetic made of (i) raw textile companies; (ii) production networks up the yarns and fabrics manufactured by subcontractors; (iv) export channels garment factories, including their domestic and overseas networks at the retail level (Chart 2). established by trade intermediaries; and (v) marketing are often present in the production Developing countries (as Bangladesh, Lesotho, and Nicaragua), such as favorable trade value chain, due to various advantages network segment of the apparel to end markets. Production activities involve abundant labor supply, and proximity agreements, the ready-made garment. cutting, sewing, supplying trim, or shipping 1 a Department Stores Chart 2. Apparel Global Value Chain Us (designing. Garmentfabrics cutting, ironing) sewing. butonhoing Brand Named a En Specialty Stores Cotton Yam Fabric (weaving. nitting. Domestica and Wool Silk Spinning) Subcontactors Mass etc. finshing) E Merchandise Chains Discount Auncament Overseas Chains Synthetic Contractors M OuN NaturalGas Petochemical) tibers Domestic Overseas and Trading Off-price. utiet Subcontra ac ctors Companies tear Other ProductionNetworks ExportNetworks MarketingNetworks ComponentNetworis Source: Fernandez Stark, K, Frederick, S. and Gereffi, G. (2011) INTERNATIONAL MONETARY FUND 9 --- Page 11 --- HAITI between developing and developed markets) Preferential trade agreements (usually 20. in the apparel GVC. In this regard, have supported the integration the 1980s) from Chart 3. Lesotho: Apparel Exports to United States Bangladesh benefits (since (percentoftotall U.S. imports) 0.8 market access to the EU (Generalized 0.8 toen 0.7 preferential 0.7 0.6 System of Preferences) and the MFA quota 0.6 0.5 which allowed the country to enter the 0.5 -Volume Value 0.4 system" of the apparel value chain and 0.4 0.3 lowest segments in the low-cost 0.3 0.2 become one of the top exporters 0.1 industry. oftotall U.S. imports) 0.8 market access to the EU (Generalized 0.8 toen 0.7 preferential 0.7 0.6 System of Preferences) and the MFA quota 0.6 0.5 which allowed the country to enter the 0.5 -Volume Value 0.4 system" of the apparel value chain and 0.4 0.3 lowest segments in the low-cost 0.3 0.2 become one of the top exporters 0.1 industry. Bangladesh is concentrated in 0.1 apparel of high-volume, low value-added 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 the production that are supplied into the low and Sources: U.S. Department tof Commerce (OTEXA): IMF staff estimates. basic products in the E.U. and the U.S. medium market segment Chart 4. Nicaragua: Apparel Exports to United States to the (percento of total U.S. imports) became a large apparel exporter 2.2 Lesotho trade 2 I U.S., partly due to preferential agreements' 1.8 Volume 1.6 out of MFA system 1.6 Value 1.4 although the subsequent phase 1.4 in 2005 led to a decline in Lesotho's apparel 0.8 3). For Lesotho, AGOA was 0.8 0.6 exports (Chart from 0.6 0.4 instrumental to attract FDI, almost exclusively 0.4 0.2 Taiwanese investors which used their factories 0.2 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 mainly for cut-make-trim (CMT) operations, while Sources: U.S. Department of Commerce (OTEXA): IMF staffe estimates. financing, sourcing fabrics, product development Chart 5. Haiti: Apparel Exports to United States and (percent coff total U.S. imports) and design, logistics, merchandising 1.8 marketing were carried out in Taiwan (Staritz 1.8 (2008) (20 1.6 Lesotho's apparel firms export 1.6 Volume Value and Morris,2013). and knit tops 1.4 1.2 mainly five pocket denim jeans 1.2 and shirts. 0.8 such as T-shirts polo 0.8 0.6 0.6 0.4 it was the signing of the CAFTA- 0.4 For Nicaragua, with the US that led to a 0.2 20132015Q1 0 DR TPL agreement 4). 6 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 in its apparel exports to the US (Chart Sources: U.S. Department of Commerce (OTEXA); IMF staff estimates. surge competing in lower unit Nicaragua is primarily from motivated by Multi-Fiber started to invest in and source Bangladesh, 4 Korea and other East Asian countries to abundant supply of low-cost labor. Arrangement (MFA) quota hopping and by access Bangladesh's program that provides dutyAct (AGOA) is a nonreciprocal trade preference including 5 The African Growth and Opportunity products from eligible sub-Saharan African (SSA) countries, to certain free treatment to U.S. imports of certain 30, 2015. AGOA extends duty-free treatment Lesotho. Its current authorization expires on September under GSP. apparel and footwear products, which are not eligible that allows apparel Preference Level (TPL) under CAFTA-DR free trade agreement if in Nicaragua, 6 Nicaragua was granted a Tariff fiber to enter the U.S. duty free under CAFTA-DR assembled made of certain cotton and synthetic The TPL will expire on December 31, 2014 regardless of the origin of the fabrics. INTERNATIONAL MONETARY FUND --- Page 12 --- HAITI (Frederick, Bair, and Gereffi, of the chain (knitted shirts and intimate apparel) value segments 2014). and footwear products, which are not eligible that allows apparel Preference Level (TPL) under CAFTA-DR free trade agreement if in Nicaragua, 6 Nicaragua was granted a Tariff fiber to enter the U.S. duty free under CAFTA-DR assembled made of certain cotton and synthetic The TPL will expire on December 31, 2014 regardless of the origin of the fabrics. INTERNATIONAL MONETARY FUND --- Page 12 --- HAITI (Frederick, Bair, and Gereffi, of the chain (knitted shirts and intimate apparel) value segments 2014). in the apparel sector. Since 1983, Haiti has long benefitted from regional trade preferences, access to the U.S. market of Caribbean countries have benefitted from duty-free Haiti and other that are made of U.S. Chart 6. Haitian Apparel Exports to the United States certain apparel exports sanctions against (rolling 12- month sum) materials. However, international 1000 Volume, apparel exports to Haiti, SME millions (RHS) 1990s cut exports almost to zero. 900 -Haiti totale exports to world, USS millions Haiti in the early flexible trade 800 Apparelt to US USS millions More recently, the U.S. granted more preferences specific to Haiti to help the country investment and create jobs (HOPE Act). These 500 attract as part of the rebuilding 400 preferences were deepened (HELP Act) Trade preferences in the 2015 200 process based on duty-free 2009 2010 2011 2012 2013 2014 (OTEXA); HOPE/HELP acts are largely Sources: National Authorities; U.S. Department of Commerce for apparel articles made with thirdIMFS staff estimates. treatment fabric. Because the U.S. is country inputs, especially Chart 7. Global Value Chain: Value -Added Stages Haiti's primary export destination, apparel exports and employment grew significantly Services after the adoption of these laws. R&D Lesotho, Haiti, Bangladesh, Nicaragua 21. Despite trade preferences, Lesotho Marketing continue to be mainly at the Design and Nicaragua Distribution low-value added end of the apparel Purchasing is mainly present in the Production industry. Nicaragua assembly segment of the GVC, with no to domestic production of Production: Post- Production significant spillovers Pre- Intangible -Production Tangible Activities Intangible inputs. In this regard, a relatively large apparel Activities sector, (at the local or regional level) is Source: Fernandez- Stark, K, Frederick, S. and Gereffi, G. (2011), generally required to attract investment in and Frederick, 2014). In Lesotho, a particularly in the woven segment (Staritz in lowfabric production, is low compared to Asian countries specialized challenge has been that labor productivity industries (as Cambodia and Vietnam) cost apparel are also at the low end in increased sharply since 2009, but they as 22. Haiti's apparel exports sales represented 90 percent of exports of value added (Charts 5 and 6). Apparel foreign is still terms added in the sector is still low (around 3 percent). Production of 2014. However, the value The mix is slowly shifting, however, toward to simple knits and some woven products. limited mostly (e.g. khaki pants) (Hornbeck, 2010). production of more complicated woven goods workers, of which 65 percent are greater industry is still relatively low (30,000 in Employment in the apparel located in the SONAPI industrial park the Better Work, 2014). Most companies are border women; park in the Dominican employs outskirts of Port-au-Prince, although an industrial (S & H Global) located in the M), and a subsidiary of a Korean company 6,500 workers (Grupo 2500 workers. CARACOL industrial park (near Cap Haitien) employs INTERNATIONAL MONETARY FUND 11 woven goods workers, of which 65 percent are greater industry is still relatively low (30,000 in Employment in the apparel located in the SONAPI industrial park the Better Work, 2014). Most companies are border women; park in the Dominican employs outskirts of Port-au-Prince, although an industrial (S & H Global) located in the M), and a subsidiary of a Korean company 6,500 workers (Grupo 2500 workers. CARACOL industrial park (near Cap Haitien) employs INTERNATIONAL MONETARY FUND 11 --- Page 13 --- HAITI added of apparel exports by developing a domestic increased the value In 1994, 23. Bangladesh which allowed exporting firms to source locally. textile industry for knitted textiles for exporters of apparel products using domestic Bangladesh introduced a cash incentives program value added of its exports. Thus, an increasing fabrics, which allowed the country to increase the also for input sourcing. That than cutting and sewing, as they are responsible share of firms do more of of skilled workers, supervisors and is facing constraints in the form shortage which have become a said, Bangladesh with labor and environmental compliance managers as well as concerns networks (Staritz, 2011). requirement from buyers to enter sourcing is essential to preserve investment, as value added and labor productivity are the 24. Increasing clause. Both Nicaragua and Lesotho facing trade preferences usually have a sunset could lead to a significant decrease in their expiration of trade preferences with the US, which from the US which are set to Haiti benefits from generous trade preferences exports. Similarly, expire in 2020 unless an extension is granted. value activities (including in apparel) Haiti's ability to attract investment into higher an extension in 25. of reforms, and may benefit from will require the steady implementation that will need addressing include () a shortage of preferential market access. Challenges and still-low labor productivity:" personnel with specialized skills (especially in management), (ii) a lack of commercial property to (ii) high electricity costs (and generally poor infrastructure); a lack of access to finance; (v) and high accommodate factories of 2000 employees and more; (iv) of reforms to address these administrative costs (including at customs). The implementation market access could provide will require time, and thus the extension of preferential of higher valueshortcomings mature and generate investment in the production needed time for such reforms to added manufacture goods. Rights to Unlock Growth D. Strengthening Property is essential to Haiti's economic development. 26. A functioning land cadastre system domestic and foreign private investment, improve Secure and transferable property rights promote transactions, and improve access to credit by allocation by allowing speedy and low-cost would also deepen the resource and Ghatak, 2009). A cadastre allowing land to be used as collateral (Besley taxation. Finally, the land protection and tax base and allow for more equitable and transparent vulnerabilities to natural disasters; key improvements incentivized by secure title can reduce exposure to disasters. with a level of land degradation and with frequent priorities in a country and Nicaragua but productivity is generally lower. Wage costs in Haiti are lower than in Bangladesh 12 INTERNATIONAL MONETARY FUND to credit by allocation by allowing speedy and low-cost would also deepen the resource and Ghatak, 2009). A cadastre allowing land to be used as collateral (Besley taxation. Finally, the land protection and tax base and allow for more equitable and transparent vulnerabilities to natural disasters; key improvements incentivized by secure title can reduce exposure to disasters. with a level of land degradation and with frequent priorities in a country and Nicaragua but productivity is generally lower. Wage costs in Haiti are lower than in Bangladesh 12 INTERNATIONAL MONETARY FUND --- Page 14 --- HAITI Table 1. Selected Economic Indicators (2013) Lesotho Nicaragua Bangladesh Haiti 2.27 11.26 161.76 8.46 GDP (US$, billion) 2765.30 4592.82 GDP per Capita 3167.49 1703.00 (PPP, US$) 1274.47 Apparel Exports 18866.00 837.22 263.01 (US$, million) 27.8% Apparel Exports (% 82.1% 91.3% 38.4% ofTotal Exports) 63.4% 65.8% 66.0% Labor Force 70.8% Minimum Skilled worker: US$4.08, US$12.43 Average US$6.80 US$5.12 Unskilled worker: US$ 3.75 Wages in the Apparel Sector 1/ Mid 1990s Year of Entry in 1980s 1980s 1990s Value Chain US Main Apparel Export US & EU US US Destinations Assembly Assembly Value Chain Entry Assembly Assembly Point Database; WDI Database; and National Authorities. World Economic Outlook (WEO) Sources: UN Comtrade; 1/ Per 8-hour workday informal, particularly in rural areas. Haiti's existing land tenure system is largely of the rural population 27. of the urban population and 97 percent Surveys have found that 68 percent Instead, an informal land tenure system land without clear access to title (de Soto, 2000). with dissolution of live on after the Haitian revolution the and family ties developed 1825 (when a Civil based on occupancy basic land titling system has existed since the plantation system. While the same landowners had little incentive to pursue formal Code based on the French system was adopted), expensive, and pursuing institutions were weak and politicized, costs prohibitively as it was title. Haiti's legal often perceived as hostile, particularly formal title required interaction with a government the Haitian state (Lundahl, 2013). clear how much settled land originally belonged to not and contributed to resulted in fragmented plots 28. Informal land tenure eventually Informal land system can adequately and environmental degradation. in rural conflicts over ownership social norms, as has long been the case property rights when there are strong works reasonably well in protect scholars argue that Haiti's informal system Haitian communities, and some However, as growing population fully official institutions (Smucker et al, 2000). outside the context of weak 20th and given limited opportunities Haiti's cultivable land by the turn of the century, land parcels are settled that continues today. Today, rural of agriculture, a fragmentation of parcels began is that a farmer's land is a decent living, and adding to inefficiency generally too small to support be located at some distance from each other of several tiny parcels that can often composed INTERNATIONAL MONETARY FUND 13 and some However, as growing population fully official institutions (Smucker et al, 2000). outside the context of weak 20th and given limited opportunities Haiti's cultivable land by the turn of the century, land parcels are settled that continues today. Today, rural of agriculture, a fragmentation of parcels began is that a farmer's land is a decent living, and adding to inefficiency generally too small to support be located at some distance from each other of several tiny parcels that can often composed INTERNATIONAL MONETARY FUND 13 --- Page 15 --- HAITI land to maintain a claim also hinders economic (Lundahl, 2013). The need to continuously occupy it slowed reconstruction by deterring and in urban areas after the 2010 earthquake, also conflicts over development, structures. The informal system generates owners from demolishing damaged records, can invite fraudulent claims. The inherent land, and in the absence of reliable written and studies have found that it contributes to uncertainty of the system also deters investment, planning (Dolisca et al, 2007). degradation by reducing incentives to long-term environmental and archaic, making Haiti one of the most 29. The formal land title system is complex to the World Bank's 2015 Doing in the world. According difficult places to register property countries in the ease of registering property (World Business survey, Haiti ranks 175th out of 189 is reached, the first step in registering Bank, 2015)". After a sales agreement between parties law that the report be hand-written. property is to conduct a survey, which follows an 1890 that is then submitted to one of about Thereafter, a notary public prepares a sale agreement which then hand-writes the calculations and communal offices of the Tax Department DGI, 6-9 months to 140 local After the taxes are paid, the DGI requires an additional text of the assessment notice. returning the documents to the notary public, hand-record and transcribe the documents, finally central land registry, although the DGI office in Port-au-Prince. There is no and a copy to the central record of transactions in several thousand central DGI office does maintain a chronological paper books, dating back to 1824 (OAS 2010). the system relies heavily on notary 30. In the absence of a nationwide land cadastre, The key role of notary publics (which with the DGI representing the state. title publics and surveyors, for life by the President) is to ensure that clear have a special legal status, and are appointed notaries in the country, and no central before it is transferred. However, with over 500 of title back at least exists, trace the required chain going registry, notaries may not be able to adequately prior claims on the land that could invalidate Notaries may also not be able to discover laws land to twenty years. owners respected inheritance requiring the transaction, such as whether the previous to sell the land was made (which in Haiti among children, or whether a previous promise to the time and be divided Group, 2012). The use of surveyors adds is binding, see Haiti Property Law Working Haiti's archaic legal framework, and surveyors are particularly in expense of registering property, out of it, potentially invalidating the transaction. only licensed by commune but sometimes practice The DGI represents the state in the both notaries and surveyors is also a problem. fact that taxes were Fraud amongst not record-keeping, and the transaction, but its role is primarily tax collection, is no dispute over ownership of the transfer of title does not ensure that there paid on a previous parcel of land. and complex formal system of land tenure, 31. The parallel existence of an informal resolution systems, generates conflict and weak conflict together with land fragmentation The first potential conflict arises if a parcel previously over the ownership of land. and uncertainty title is clear and undisputed, which is frequently not the case. 8 Haiti's ranking assumes that the underlying land 14 INTERNATIONAL MONETARY FUND not record-keeping, and the transaction, but its role is primarily tax collection, is no dispute over ownership of the transfer of title does not ensure that there paid on a previous parcel of land. and complex formal system of land tenure, 31. The parallel existence of an informal resolution systems, generates conflict and weak conflict together with land fragmentation The first potential conflict arises if a parcel previously over the ownership of land. and uncertainty title is clear and undisputed, which is frequently not the case. 8 Haiti's ranking assumes that the underlying land 14 INTERNATIONAL MONETARY FUND --- Page 16 --- HAITI formal title exists. Titling such property requires formed part of the informal system, and no who have valid claims on a piece of land oral histories and local documentation as to descendents can compiling the principle that land be shared amongst (Earth Institute, 2012), which given exist it can often be contested, given number of people. Where title does already facilitates involve a large but also because the legal structure Haiti's weak capacity to implement a complex process, their name is on a title or not) can For example, anyone (regardless of whether the claim. If a land title such objections. it and sending it to a local judge to evaluate that the object to a land survey, halting of American States reports is sent to the wider court system, the Organization undertaken by dispute resolution is five years (OAS 2010). In recent projects average length of conflict two despite the fact that the projects by as much as years, USAID, such conflicts have delayed backing (GAO 2013). underlying projects had high-level government these challenges. A functioning cadastre system is essential to addressing the 32. A modern boundaries across the whole country, eliminating cadastre would delineate individual parcel would also confirm land ownership, together need for the archaic surveying system. The cadastre uncertainty over land rights, encourage associated rights or liens. A cadastre would reduce has been since with any land. In Haiti's case, no cadastre completed investments, and reduce conflicts over 1784 (CIAT 2015). Table 2. Summary of the Steps toa Sale by Genuine Deed Estimated Time Institution or professional involved Documents needed sale or promise of sale Step of the procedure* Notary . Preliminary agreement 3to 12months L Preliminary sale agreement Prior survey ISTEP . Surveyor Property title 2. Survey Survey of the property and writing of survey documents Count District Clerk Attorney Seller's identity card byt the surveyor. Office of Land Registry (DGI News Exploit survey ou sommation 6STEPS Copy of new survey Copy ofr freceiptfromDGl the oldp property titlei in the margin and the DGlreceipts 10 days to 5months Copy of new survey with 3. Preparation of the billofsale . Notary Office of Land Registry (DG) Mortgage situation of oft the property ont built properties (CFPB) and bills for utilities (DINEPA Verification of title documents, writing compilation of bill of of sale, Ministries, consulate, general assembly, or and e Evidence EDH)f for of; the payment pastf five taxes years, includingt the current year. and required documentationt for the sale, the notary. etc. (depending on legal status of seller . providing the identity of the seller and the buyer collection of fees and taxes by buyer) permissions Documentationg (4-6 6 docs.) 3 months to 1.5 years 6STEPS (DGD Bill of sale with alloft the above documents from in DGI the annex and payment oftaxes Office of Land Registry Receipt of payment oft taxes and fees 4. Notary Registration, submits transcription, the deed of sale to the DGIf for and taxes registration and transcription and pays the fees 6months to 2.5years 4STEPS 4108inetitutions and 2professionals 14t to 16 documents Total: 17 steps Manual. Sources: Haiti Property Law Working Group: Haiti Land Transaction Certainp procedures can be done simultaneously. in efforts to build a cadastre. The institutions participate 33. A wide range of government created in 1984 under the authority national du cadastre (ONACA) is an autonomous agency ONACA is tasked Office and Communications (OAS 2010). and transcription and pays the fees 6months to 2.5years 4STEPS 4108inetitutions and 2professionals 14t to 16 documents Total: 17 steps Manual. Sources: Haiti Property Law Working Group: Haiti Land Transaction Certainp procedures can be done simultaneously. in efforts to build a cadastre. The institutions participate 33. A wide range of government created in 1984 under the authority national du cadastre (ONACA) is an autonomous agency ONACA is tasked Office and Communications (OAS 2010). of the Ministry of Public Works, Transportation, although it made little progress prior to land cadastre covering the whole country, de with developing a shares responsibility with the Institut National (OAS 2010). In rural areas ONACA National de l'Information the earthquake of the Ministry of Agriculture. The Centre la Réforme Agraire (INARA), part is tasked with using satellite imagery survey (CNIGS), part of the Ministry of Planning, entity involved in the land Géospatiale of the Finance Ministry, is another key the territory of Haiti. The DGI, part form. , Transportation, although it made little progress prior to land cadastre covering the whole country, de with developing a shares responsibility with the Institut National (OAS 2010). In rural areas ONACA National de l'Information the earthquake of the Ministry of Agriculture. The Centre la Réforme Agraire (INARA), part is tasked with using satellite imagery survey (CNIGS), part of the Ministry of Planning, entity involved in the land Géospatiale of the Finance Ministry, is another key the territory of Haiti. The DGI, part form. The Comité its written records into machine-readable cadastre, and it is tasked with scanning inter-ministerial committee headed by the d'Aménagement du Territoire (CIAT), an Interministériel INTERNATIONAL MONETARY FUND 15 --- Page 17 --- HAITI the activities of the ministries above as well as Prime Minister's office, is tasked with coordinating Interior and of the Environment; Haiti involved ministries (including the Ministries of the land at the local other Haiti's 140 communes administer state Property Law Working Group 2012). Finally, level, and are key participants as well. binding national cadastre, plan is to first develop a non-legally a 34. The authorities' Foncier de Base (basic land plan) aims to build starting in several targeted areas. The Plan the cadastre would not issue titles legislation. Therefore, in its initial stages cadastre before pursuing and surveyors. The plan relies on several simultaneous the legal competencies of notaries of or change of cartography of Haiti's territory; (ii) digitization efforts, including (i) developing high-precision relevant to land ownership; and most crucially the DGI archives as well as legal documents that are with staff and Staff from ONACA and INARA work together locally-recruited (ii) work on the ground. as well as to verify ownership. Within three years, the public to more accurately delineate properties in 8 rural communes and the city center of Portthe authorities plan to complete the initial cadastre of a new land law, is envisaged in Completion of a nationwide cadastre, and passage au-Prince. about ten years. to Growth Sector: Lifting a Bottleneck E. Overhauling the Electricity to growth. High electricity prices hurt Haiti's The electricity sector is a bottleneck blackouts) force 35. service (including frequent, long, and unplanned competitiveness, and an unreliable which reinforces a vicious cycle of high cost and the private sector to generate its own electricity, of scale in production. service, and prevents taking advantage of economies poor source of sector is a drag to the budget and an important was 36. The electricity of the state-owned electricity company (EDH) macroeconomic vulnerability. The deficit and was financed by central of GDP in FY2014 (nearly 20 percent of tax revenues), 2.5 percent of arrears with independent power providers government transfers and loans, and accumulation to EDH amounted to 0.7 percent of GDP, on-budget transfers (IPPs). In particular, in FY2013-FY2014, flows reached 0.9 percent of GDP. transfers in the form of Petrocaribe-related sold to while off-budget the central government for unpaid electricity Moreover, an IPP exercised guarantees against with IPPs, which in turn ran arrears on 0.3 of GDP. In addition, EDH has run arrears flows). EDH for percent government agency that manages Petrocaribe fuel purchases with BMPAD (an autonomous reduction. Only about 30 percent of sector has set back efforts at poverty 37. The electricity the rural poor being even lower. is connected to the grid, with access among financial situation the population about constant for decades, as EDH's unsustainable of Coverage has remained electricity generation costs push up the cost impeded investment in expanding the grid. High for poverty reduction. Large transfers to services, which are essential providing water and sewage in education, health and security. High delinquency cover EDH's deficit crowd out priority spending regressive distribution of income. electricity consumers result in a more rates for large hours of electricity supplied are low and variable, The quality of service is poor. Average and lower in 38. Supply of electricity is higher in Port-au-Prince and blackouts are long and unplanned. 16 INTERNATIONAL MONETARY FUND generation costs push up the cost impeded investment in expanding the grid. High for poverty reduction. Large transfers to services, which are essential providing water and sewage in education, health and security. High delinquency cover EDH's deficit crowd out priority spending regressive distribution of income. electricity consumers result in a more rates for large hours of electricity supplied are low and variable, The quality of service is poor. Average and lower in 38. Supply of electricity is higher in Port-au-Prince and blackouts are long and unplanned. 16 INTERNATIONAL MONETARY FUND --- Page 18 --- HAITI Chart 8. Electricity Distributed to Port- -au- -Prince 8). Financial support from (Percent of total) the provinces (Chart Venezuela (in the context of the Petrocaribe initiative) allowed increasing service hours and blackouts during the last few years, but reducing lack of progress in reducing technical and given losses, a reduction or a stop of these non-technical blackouts. resources will likely result in longer Aug-12 Feb-13 Aug-1 13 Feb-14 Aug- 14 Aug-11 Feb-12 supply constrains and Sources: Haitian National Authorities: andIMF staff calculations. 39. To attenuate unreliable service, the private sector has resorted household and commercial - industrial is observed both at the have decided to to self-generation. Self-generation as a hedge for blackouts, many clients. Although some clients use self-generation Chart 9. Electricity Production be disconnected from the grid outright. This 1,150 prevents economies of scale in electricity 1,100 (Chart 9), perpetuates high costs, 1,050 generation 1,000 increases the size of the oil bill (as self-generation is expensive), hurts competitiveness, and worsens financial situation of EDH (as clients willing and 850 -Electricity Production (12the off grid). In addition, it 800 month, y/y growth, MWh) percent, right with the capacity to pay go of the sector, as 750 axis -10 complicates the political economy services for self700 Aug: 11 Feb-1 -12 Aug- 12 Feb-13 Aug- 13 Feb-1 -14 Aug- 14 the profit rate of those supplying Sources: Haitian National Authorities; andl IMF staff calculations. (diesel generators, fuel, etc) is inversely generation related with EDH's performance. in the sector. EDH is in charge of distribution and State-owned EDH is the main player system is 40. generation. The electricity transmission of electricity, and conducts some electricity Three IPPS (Sogener, E-Power in nine grids, the largest of which includes Port-au-Prince. most electricity. organized (PBM, Petion-Marti-Bolivar) generate and Haytrac) and a tri-national enterprise Works, and that includes a representative of the EDH's board (chaired by the Minister of Public and for approving EDH's budget (among Ministry of Finance), is responsible for tariff determination few complicating the but has rarely met during the past years, Ministry of other responsibilities), of the sector corresponds to the of needed reforms. The regulation implementation Public Works. problems. The capital (Port-auEDH's revenues are constrained by serious governance tariffs have decreased 41. about 75 percent of energy supplied. Average effective increases in the Prince) concentrates in the composition of the client base (with over the past few years due to a change of commercial and industrial customers, which customers and a decrease in that is share of residential The average effective tariff for FY2014 numbers generate their own electricity). 40 percent of in increasing Total energy billed in FY2014 represented only nonetheless very high at 28 cts/kwh. losses) and capacity and governance of both theft (non-technical energy supplied, as a consequence in addition to poor billing rates, the average losses). Delinquency is high: of billing issues (technical The cash recovery index (the product delinquency rate for FY2014 was over percent. INTERNATIONAL MONETARY FUND 17 is share of residential The average effective tariff for FY2014 numbers generate their own electricity). 40 percent of in increasing Total energy billed in FY2014 represented only nonetheless very high at 28 cts/kwh. losses) and capacity and governance of both theft (non-technical energy supplied, as a consequence in addition to poor billing rates, the average losses). Delinquency is high: of billing issues (technical The cash recovery index (the product delinquency rate for FY2014 was over percent. INTERNATIONAL MONETARY FUND 17 --- Page 19 --- HAITI in 2014:In other words, EDH received in and collection) is thus extremely low: about 25 percent Performance Indicators of EDH only 25 cents per dollar of electricity supplied Chart (Percent 10. of electricity distribution) revenue (Chart 10). are unwarrantedly large. 42. EDH's expenditures oil-based This is the result of expensive and inefficient onerous IPP contracts, and an electricity generation, the past CRI -BilingRate outsized wage bill, which has increased during few years. Investment is insufficient to maintain and Aug- 12 Feb-13 Aug- -13 Feb-14 Aug- 14 Resources for investment in recent years Aug-1 11 Feb-12 andIMF staff calculations. expand the grid. Sources: Haitian National Authorities; have come mainly from donors. matrix and onerous contracts. costs reflect a biased generation and 43. Very high electricity capacity is based on oil-derivatives (diesel About 90 percent of installed electricity generation These are to be larger in costs. projected heavy fuel oil), contributing to large generation is being repaired. IPP contracts dam in the country (in Peligre) FY2015-FY2017 as the largest which make the markups, take-or-pay clauses, and government guarantees, at times, to costs." 9 incorporate large Uneven tax treatment of fuel purchases add, generation bill even more onerous. introduces noise in financial which complicates planning, 44. Cross arrears are rampant, of arrears with IPPS at end-FY2014 is estimated at investment. EDH's stock million accounts, and prevents while those with PBM were estimated at US$142 US$144 million (1.5 percent of GDP), BMPAD for fuel purchases were estimated at of GDP). Arrears of IPPs and PBM vis-à-vis of the sector vis-à-vis (1.5 percent Delinquent electricity bills private about US$220 million (2.4 percent of GDP). of GDP). In turn, debt of at about G3 billion at end-FY2014 (0.7 percent EDH were estimated at about G1.5 billion (0.3 percent of GDP). Municipalities (for public lighting) was estimated to the sector's World Bank, the IDB and the U.S. have programs support target 45. The In particular, IFI programs to date has been disappointing. development, but performance to billing and collection, and of the network, installation of meters support been lower than the improvement other. Disbursements have increased transparency and governance, among of reforms. on the back of slow progress in the implementation expected will reduce fiscal vulnerabilities, promote 46. Putting EDH onto a sustainable footing growth and poverty reduction. investment, and be instrumental in supporting but will affect vested private situation of EDH will be beneficial in the long-term, the Overhauling the financial therefore, require strong ownership on part interests in the short term. Advancing reforms will, although EDH and at times, Haytrac, (the smallest are generally tax exempt, fuel purchases by 9 Fuel purchases for electricity generation the same taxes charged at the pump. In contrast, This is also the IPPs which supplies the south of the country) which pay serve the capital Port-au-Prince) are tax exempted. the two largest IPPs (Sogener and E-Power, largest city, Cap Haitien) case for PBM (which serves the second INTERNATIONAL MONETARY FUND --- Page 20 --- HAITI of understanding for the sector authorities. EDH and at times, Haytrac, (the smallest are generally tax exempt, fuel purchases by 9 Fuel purchases for electricity generation the same taxes charged at the pump. In contrast, This is also the IPPs which supplies the south of the country) which pay serve the capital Port-au-Prince) are tax exempted. the two largest IPPs (Sogener and E-Power, largest city, Cap Haitien) case for PBM (which serves the second INTERNATIONAL MONETARY FUND --- Page 20 --- HAITI of understanding for the sector authorities. A recent initiative in the form of a memorandum is a good of the of the sector's main stakeholders "Electricity Sector Protocol") with the participation donors) is essential (the Coordination of actions among all stakeholders (including would be step in that direction. advance. A master plan for the sector momentum and ensuring that reforms France to draft such for creating The recent selection of Électricité de (EDF) instrumental in coordinating actions. a plan is encouraging. EDH's and the sector's regulation are priorities. 47. Strengthening EDH's management are approved on time, that EDH should meet regularly to ensure, inter alia, that budgets to ensure Board Tariffs should be reviewed and that financial audits are published. the accounts are audited, utilization of electricity supply. This should stop that price signals are appropriate for an efficient to Penalties for and commercial sectors off-grid self-generation. leakage of large clients in industrial Inspections on clients and evaluations on the non-payment should be reviewed and enforced. and proceed on a regular basis. of service should be led by the regulatory body quality in collection. of service should result in an improvement short48. Improving the quality some actions can be taken in the service improvements can only proceed gradually, which should improve Although establish a calendar of outages by affected area, term. On the latter, EDH can planning of demand by the private sector. increased. Efforts should be geared at increasing 49. EDH's revenues need to be swiftly focus should be on the largest clients, who and tackling theft. The initial for billing and collection, plans should be considered constitute the lion's share of EDH's revenues. Payment regularization for smaller clients (including arrears, and to create a culture of payment clients with large payments bills in loan applications or for a driving license). by, e.g. requiring paid electricity bill. The minister of finance should remain current in its electricity The 50. The government bills for all central government institutions. budget should centralize the payment of electricity is too large for municipalities to bear with for the cost of public lighting, as its cost with consumption and should provide should contribute to payments in relation their own resources. Municipalities revenues. and reduced. The wage bill should be need to be controlled wide 51. EDH's expenditures need to be analyzed together with IPPS to attenuate controlled. Electricity provision contracts with IPPS need to be published to dispersion of costs despite similar technologies. All contracts IPPS needs to proceed on a marginal cost accountability and transparency. Use of different in all decisions impacting improve bidding process needs to be followed rule. A competitive and transparent facilities by EDH, and all including on the construction of new generation financial electricity costs, Consolidating cross arrears will add clarity to documentation need to be published. statements of the sector's participants. matrix needs to be diversified, and isolated forward, the electricity generation 52. Going hydro, and biomass-electricity generation. interconnected. Haiti has potential for wind-based, and transparency grids sustainable, strengthening regulation Overhauling EDH to make it financially INTERNATIONAL MONETARY FUND 19 needs to be followed rule. A competitive and transparent facilities by EDH, and all including on the construction of new generation financial electricity costs, Consolidating cross arrears will add clarity to documentation need to be published. statements of the sector's participants. matrix needs to be diversified, and isolated forward, the electricity generation 52. Going hydro, and biomass-electricity generation. interconnected. Haiti has potential for wind-based, and transparency grids sustainable, strengthening regulation Overhauling EDH to make it financially INTERNATIONAL MONETARY FUND 19 --- Page 21 --- HAITI should result in increased investment in lower-cost generation alternatives. Interconnecting the now isolated grids will create a national market, and will allow significant electricity cost reductions in the provinces. 20 INTERNATIONAL MONETARY FUND --- Page 22 --- HAITI References Advantage" II 1 Manchester School of "Trade Liberalization and Revealed Comparative and Social Balassa, B. (1965). 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(Washington, D.C.World Bank). making", (Washington, DC: World Bank "Reflections for evidence-based policy World Bank. (2014), Group) Uncertain World", East Asia and Pacific Competitiveness in an World Bank. 2014. "Enhancing DC, World Bank). Economic Update (October), (Washington, MONETARY FUND 22 INTERNATIONAL --- Page 24 --- HAITI World Bank (2014). Doing Business 2015: Going Beyond Efficiency. Washington, DC: World Bank. DOI: 10.1596/978-1-4648-0351-2. License: Creative Commons Attribution CC BY 3.0 IGO World Trade Organisation. (2011), "Trade profiles 2011", WTO Publications (Geneva,WTO) INTERNATIONAL MONETARY FUND 23 --- Page 25 --- HAITI BALANCING HUMAN EXPENDITURE IN HAITI: PUBLIC FORMATION' CAPITAL AND INFRASTRUCTURE A. Introduction trends in the last increases underpinned Haiti's public expenditure 1. Capital spending sustained levels in public investment, Haiti's performance decade. Despite relatively high and low-income countries (LICS) both in terms of negatively with that of the region and practices. compares better infrastructure and with respect to management translating resources into and progress was made in achieving higher on education increased recently to Haiti 2. Spending primary enrollment rates helped bring enrollment rates. The strong focus on increasing However challenges remain in closing the school enrollment (88 percent). rates closer to universal primary years of schooling, increasing enrollment gap with the region in terms of increasing average the quality of the education system. and tertiary education and enhancing for secondary formation and better expenditure to support both human capital 3. Rebalancing public The combination of high, but inefficient, infrastructure will improve the growth environment. rather than increasing spending. The declining capital spending calls for enhancing capital efficiency, provides room to raise enrollment rates, population relative to the working population resources school-age is needed to increase spending per student. Reallocating but additional fiscal space would support human capital education while enhancing its quality and accessibility foster long term towards of the capital stock. This should formation, but would also increase the productivity growth. Trends, 2004-2014 B. Public Expenditure Chart 1. Public Expenditures and Revenues Haiti's central government spending increased (Percent of GDP) 4. points of GDP in the last decade. 30 Expenditure by 14 percentage of GDP in 2004 to 25 25 - Currentr revenue (Chart 1). It rose from 11 percent Projectgrants of GDP in 2014, while revenues (including grants) 20 Budgetsupport percent from 10 percent to 19 percent of GDP2 Current increased points while budget revenue increased by 4 percentage U increased by 1 percentage points. Project grants support quake period but returned to peaked in the post-earth The total increase in project 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 lower levels in 2013-2014. in 2004-2014. Sources: Haitian Authorities; andl IMF staff calculations grants amounted for 4 percentage points in was highest (at 28 percent of GDP) Public expenditure 1 Prepared by Emine Hanedar (FAD) 2 Figures for Haiti refer to fiscal years (October September). 24 INTERNATIONAL MONETARY FUND --- Page 26 --- HAITI The decrease in public spending in 2014 reconstruction accelerated. 2012-2013, as post-earthquake levels in the years ahead. suggests a return to more sustainable is similar to other countries in the spending (as a share of GDP) 5. Central government At 27 percent of GDP in 2012-2014 to decrease in the coming years. region but it is expected (2012-14) spending was slightly Chart 2. Public Expenditure central government America (Percent of GDP) lower than the average for Latin HAITI The decrease in public spending in 2014 reconstruction accelerated. 2012-2013, as post-earthquake levels in the years ahead. suggests a return to more sustainable is similar to other countries in the spending (as a share of GDP) 5. Central government At 27 percent of GDP in 2012-2014 to decrease in the coming years. region but it is expected (2012-14) spending was slightly Chart 2. Public Expenditure central government America (Percent of GDP) lower than the average for Latin and the Caribbean (LAC) (30 percent of and LICS (28 percent of GDP) (Chart 2). GDP), effort winds down, 25 As the post-earthquake is 20 spending (as a share of GDP) government to 23 percent in projected to decrease 2015-2017 which is lower than the regional 10 and the LIC's but in line with lower average revenue-to-GDP ratio in Haiti. Government DR Haiti 2004- Haiti 2012- Caribbean LIC's America Latin revenues were 20 percent in 2014 compared 2011 2014 of GDP in the region and the Sources: World Economic Outlook; and IMF staff calculations. to percent LICS. growth was mainly driven by capital spending. 6. Central government expenditure of GDP between 2004 and 2014. This spending increased by about 9 percentage points of GDP) and Petrocaribe Capital financed by project grants (4 percent significant increase was mainly (in percent of GDP) increased by about financing (3-4 percent of GDP). Current spending bill (about 3 percentage points). The points, largely driven by increases in the wage (Chart 3). The 5 percentage and subsidies (about 2 percentage points) other main contributors were transfers during 2006-08. Although from a spending started before the 2010 earthquake, Interest increase in capital bill and transfers and subsidies also increased. lower level than capital spending, the wage concessional debt (Chart 4). minor given a low and payments are relatively Universelle, Gratuite et Obligatoire). PSUGO-related spending excludes PSUGO (Programme de Scolarisation Capital as public investment in the budget. expenditures are classified INTERNATIONAL MONETARY FUND 25 --- Page 27 --- HAITI Chart 3. Growth of Expenditures (2003-14) Chart 4. Increase in expenditures 2003-2014 (Percent of GDP) (Percentage increases in three year averages) Capital expenditure Capitalle lexpenditure 25 SWages and salaries a Wages and salaries 150 aGoods and services 0 Goods and services 20 IT Transfers and subsidies . Transfersa and subsidies DInterest payments DInterest payments 2006- 08 2009- 11 2012-14 2003-05 2006-08 2009- 11 2012-14 -50 -50 Sources: World Economic Outlook; and IMF staff calculations. Sources: Haitian Authorities; and IMF staff calculations. 7. As of 2014 capital spending in Haiti is higher than the average for both the LAC region Chart 5. Capital Spending (2012-2014) (Percent of GDP) and LICS. In 2012-14, capital spending was 15 percent 35 of GDP, much higher than the average for the LAC 30 Capital spending Other spending region (6 percent of GDP) and the LIC average (9 percent of GDP) (Chart 5). Among LAC countries, only Ecuador shows a similar high level of capital spending with 14 percent of GDP. A number of LICS, however, also have relatively large public investment ratios, as e.g., Republic of Congo (24 percent), DR Haiti 2004- Haiti 2012- Caribbean LIC's Latin 2011 2014 America Djibouti (16 percent), Mozambique (16 percent) and Sources: World Economic Outlook; andl IMF staff calculations. Niger (14 percent). Although low development levels high public investment ratios, these may also respond to inefficiencies, weak governance may, justify and a lack of planning. (2012-2014) Chart 6. Decomposition of Public Expenditure (Percent of GDP) 8. In turn, spending on other categories are (24 percent), DR Haiti 2004- Haiti 2012- Caribbean LIC's Latin 2011 2014 America Djibouti (16 percent), Mozambique (16 percent) and Sources: World Economic Outlook; andl IMF staff calculations. Niger (14 percent). Although low development levels high public investment ratios, these may also respond to inefficiencies, weak governance may, justify and a lack of planning. (2012-2014) Chart 6. Decomposition of Public Expenditure (Percent of GDP) 8. In turn, spending on other categories are 40 Capital spending Wages lower than in the LAC region. Haiti's central aGoods and services mInterest payments 35 D Social benefits ands security D Not specified government wage bill (5 percent of GDP), is relatively low with respect to LAC (8 percent of GDP), and LICS (7 percent of GDP) (Chart 6). This difference can be explained by the different coverage of employee compensation across countries. Spending on social benefits and security is negligible given the low level of DR Haiti Caribbean LIC's Latin America coverage and benefits. 4 Sources: World Economic Outlook; and IMF staff calculations. 4 Social benefits (GGES) are defined as transfers in cash or in kind to protect the entire population or specific segments of it against certain social risks. They are classified according to the type of scheme governing their and consist of social security benefits, social assistance benefits, and employer social benefits (GFSM 2001, payment, 6.67-6.72). Note: The payment of pensions and other retirement benefits through employer social paragraphs insurance schemes are not expense; they are treated as reductions in liabilities. 26 INTERNATIONAL MONETARY FUND Sources: World Economic Outlook; and IMF staff calculations. 4 Social benefits (GGES) are defined as transfers in cash or in kind to protect the entire population or specific segments of it against certain social risks. They are classified according to the type of scheme governing their and consist of social security benefits, social assistance benefits, and employer social benefits (GFSM 2001, payment, 6.67-6.72). Note: The payment of pensions and other retirement benefits through employer social paragraphs insurance schemes are not expense; they are treated as reductions in liabilities. 26 INTERNATIONAL MONETARY FUND --- Page 28 --- HAITI increased in the last few years, due mainly to PSUGO, 9. However, spending in education education was 4.2 percent of GDP in 2014 and is and is similar to the LAC average. Spending on 2015). Central government spending to increase to 4.8 percent of GDP in 2015 (MENFP lower than the average projected LAC average in 2013 (4.7 percent of GDP), slightly was comparable with the than that in MENA (3.8 percent of GDP) for Sub- Saharan Africa (5 percent of GDP) and higher financed and half foreign Half of the education spending in Haiti is domestically Universelle, (World Bank 2013). the PSUGO (Programme de Scolarisation financed. The government launched in 2011-12 free basic education to children from poor Gratuite et Obligatoire). The program aims providing of GDP during 2012-2014 and is budgeted households. PSUGO spending amounted for 0.5 percent the fees collected on international of GDP in 2015. PSUGO is financed by to increase to 1.1 percent extent through the budget 5 calls and remittances, and to a lower Some Indicators of Capital and Education Spending: C. Efficiency of Haiti's public investment spending Table 1. Efficiency Scores 10. The efficiency of metrics. An efficiency PFDH DEA appears low, according to a number efficiency (IMF 0.5 frontier analysis is used to evaluate capital spending Haiti 0.5 assesses efficiency by the extent to which 0.9 0.7 2014). This method outputs. The LAC inputs are translated into infrastructure LIC's 0.9 0.8 monetary reflects how far a country is from the production IMF (2014) methodology which is determined by the best performers Source: possibility frontier real stock per worldwide. The used inputs are the public capital output is estimated using the capita in purchasing power parity (PPP). The infrastructure Indicator (GCI), which considers, inter alia, infrastructure component of the Global Competitiveness supply, and of (mobile) of roads, of (air)ports, of electricity the overall quality of infrastructure, two metrics to evaluate capital spending lines. The efficiency frontier analysis uses (DEA). The telephone Hull" (PFDH) and the "Data envelopment Analysis" efficiency: the "Partial Free Disposal metrics is that the first measure benchmarks against a main difference between the PFDH and DEA and reduce sensitivity to outliers while the of peers and re-samples to improve robustness overestimate inefficiencies by group of outliers and could second is more sensitive to the presence in the sample. According to both benchmarking a country relative to only a few best performers lower than the average for the LAC capital spending efficiency in Haiti is significantly is the lowest in the measures Haiti's PFDH score (at 0.5 on 0.5-1.2 range) among region and LICS. In particular, world (Table 1). the ECF's Fiscal Target" for a comprehensive 5 See the Selected Issues Paper "Haiti' 's Public Sector: Explaining discussion of the PSUGO fund and its resources. INTERNATIONAL MONETARY FUND 27 ing a country relative to only a few best performers lower than the average for the LAC capital spending efficiency in Haiti is significantly is the lowest in the measures Haiti's PFDH score (at 0.5 on 0.5-1.2 range) among region and LICS. In particular, world (Table 1). the ECF's Fiscal Target" for a comprehensive 5 See the Selected Issues Paper "Haiti' 's Public Sector: Explaining discussion of the PSUGO fund and its resources. INTERNATIONAL MONETARY FUND 27 --- Page 29 --- HAITI be rooted in a weak public investment efficiency in Haiti may 11. Low capital spending Investment Management Index framework. In this regard, the Table 2. Public By stage Public Investment Management PIMI-index Overall Appraisal Selection Implementation Evaluation Index (PIMI) (Dabla-Norris, et al., 1.1 0.0 1.2 1.7 1.3 1.5 the public Haiti 1.6 1.2 1.9 2.0 2012) assesses LAC 1.3 1.7 1.8 1.2 investment framework by focusing LIC's 1.5 the main stages of the project Source: Dabla-Norris and others (2012) on cycle (strategic guidance and and, project evaluation and audit). Haiti appraisal; project selection; project implementation; and thus its overall PIMI-index project and LICS in all stages of the project cycle, lags behind the LAC region aggregates (Table 2). Haiti performs particularly lower than that for both country is significantly poorly in the appraisal and selection of projects. Table 3. Average Years of Total Schooling, Population: > 1990 15, 1950-2010 2000 2010 12. Despite increased primary 1950 1960 1970 1.2 1980 2.0 3.4 4.3 5.1 education enrollment rates and average Haiti 0.6 2.5 0.8 2.8 3.6 5.0 6.0 7.0 8.1 7.9 9.0 these indicators lag Dominican Caribbean Republic 4.0 4.3 5.4 5.4 6.0 7.1 6.4 7.3 8.1 years of education, Latin America 2.7 3.3 4.1 the averages for the region. Sources: UNESCO(2011). Efforts in the last few years resulted in an from 78 percent to 88 percent in 2011, slightly increase of the enrollment rate for primary education secondary enrollment rate is still in sharp lower than the LAC average (92 percent in 2012). However education compared to 25 percent enrolled in 2012 to secondary that contrast with the region. Only Indicators (2012). Available data up to 2010 shows 73 percent in the LAC (World Development increased significantly (from a low base) in of schooling (for people 15 and older) the average years those in the Caribbean and Latin America (Table 3). the past 60 years but remain lower than result in new adult cohorts with higher years of Although the recent increase in enrollment rates will given the low base level. is needed to reach regional averages education, more progress since the Haitian education system is heavily Collaboration with private schools is important enrollments are in private schools. These dominated by private schools. More than 80 percent of all institutions, and their quality international institutions, NGOS, or religious schools are managed by varies significantly. school fees. PSUGO has subsidies to private schools and eliminated PSUGO 13. PSUGO provided Table 4 summarizes the execution status of the with different objectives. and the 11 sub-programs under the 11 sub-programs during 2011-2014 with regard to the objectives of PSUGO has been on a few program by the PSUGO Fund and the budget. The emphasis fees due resources provided schools, the elimination of school by namely subsidies to participating private and administrators areas, schools, and payments to public school teachers parents to participating public for 6-12 year old children in about participating in the program. Subsidies are provided for 2011-2016 (hiring teachers and school 8,400 private and public schools. The program objectives schools) were achieved at end 2014 with directors, and subsidies to children in and outside public 55 percent of the planned resources rates of 79 percent or more. At the same time, only execution 28 INTERNATIONAL MONETARY FUND namely subsidies to participating private and administrators areas, schools, and payments to public school teachers parents to participating public for 6-12 year old children in about participating in the program. Subsidies are provided for 2011-2016 (hiring teachers and school 8,400 private and public schools. The program objectives schools) were achieved at end 2014 with directors, and subsidies to children in and outside public 55 percent of the planned resources rates of 79 percent or more. At the same time, only execution 28 INTERNATIONAL MONETARY FUND --- Page 30 --- HAITI for 2011-2016 (G 12.2 billion) had been used and there was an underestimation of the program cost. As a result, cost overruns led to off-budget spending estimated at G 2 billion. Going forward, the authorities intend to contain costs by progressively incorporating students into the program, and by more selectively granting subsidies to private schools, mainly in areas that are not adequately covered by public schools. Table 4. Haiti: Achievements under the PSUGO Program, 2011-2014 Sub- programs Activities Performance per sub- -program Costs per sub- program (G million) Prog. Est. Execution Prog. Est. Execution rate (%) rate (%) Stengthening human resources 1 Recruited teachers and education professionals 11,000 8,725 79 Identification of needy kids Needy kids identified in departments 100,551 94,513 94 1,443 971 67 Strengthening the data base Strengthening the information system 14 40 Subsidizing kids outside public schools Number of kids covered 860,250 785,674 91 Eliminating school fees in public schools Number of kids covered 639,750 680,300 106 9,494 5,153 54 Auditing schools covered by the program Number of schools audited 10,000 9,552 96 538 419 78 Improving coordination and communication Number of vehicles 74 73 Monitoring and evaluation Number of physical and financial reports Training of teachers and Directors, supervision Number of teaching professionals 10,000 7,495 Caring for street kids Number of kids covered 2,000 1,250 TOTAL Sources: Ministry of Economy and Finance; Ministry of Education (PSUGO Program); and Fund Staff estimates. 12,201 6,740 55 'Out of 4,207 teachers hired inFY2014, only 3,388 arer reported to have signed contracts. D. Assessing Future Demand for Public Education: Fiscal Implications 14. Haiti's fertility rate has decreased in recent years, and it is projected to continue declining through the medium term (Figure 1). According to the U.N. population projections, the fertility rate (average number of children per woman) in Haiti has been declining over the past 35 years to 2.9 in 2015 (2.1 percent in LAC) and is expected to decrease further to 2.2 in 2035 (Figure 1). Accordingly, the share of population below 19 (which underpins the demand for schooling) is projected to decrease from 45 percent in 2015, to 36 percent in 2035 (27 percent in LAC). In turn, life expectancy is projected to increase from 64 years in 2015 to 69 years in 2035 (76 years in LAC). The increase in life expectancy combined with declining fertility rates will push up the dependency ratio from 7.5 percent in 2015 to 9.9 percent in 2035 (20.8 percent in LAC). 6 The U.N. periodically publishes data on demographic trends and performs long term The are based on a probabilistic method using the medium fertility assumption. The probabilistic projections. method for projections total fertility consists of three separate processes: (i) a high-fertility pre-transition phase, (ii) the transition projecting itself and (ii) a low-fertility post-transition phase. The method incorporates fertility country-specific assumptions and empirical experience of all low-fertility countries having already experienced a recovery (U.N., 2013). INTERNATIONAL MONETARY FUND 29 in LAC). 6 The U.N. periodically publishes data on demographic trends and performs long term The are based on a probabilistic method using the medium fertility assumption. The probabilistic projections. method for projections total fertility consists of three separate processes: (i) a high-fertility pre-transition phase, (ii) the transition projecting itself and (ii) a low-fertility post-transition phase. The method incorporates fertility country-specific assumptions and empirical experience of all low-fertility countries having already experienced a recovery (U.N., 2013). INTERNATIONAL MONETARY FUND 29 --- Page 31 --- HAITI Figure 1 Demographic Trends and Baseline Projections FertilityR (CI ildr Rate Share ofPopulation Below: 19Yearsof, Age (Thous inds) Haiti Haiti Med dium projecion Medium prgjection Latin America nd The 2 20 Latin America & Caribbes Caribbean Me dium projection Mediur um projed on E E E E E E E E E E 8 8 a 2 R R 8 a a 3 E 2 E E 5 E E E E 2 2 DE R A R S A a a 90 25 Life Expectancy at Birth Dependency Ratio 80 (Yea rs) 80 (Index) 70 20 Haiti Medium projedion 50 15 LasnAmencaaCarebxen Medium projedion Haiti Medium projection Latin America &Cari ibbean 20 Mediu jum projection E E a R E E a E E E 8 E a a a a E a E 3 2 E E S E E E E a E E a S a a a Source UN Warld Populaion Prorpecr (20-3). 15. Education cost per student, school enrollment rates, and demographics determine education expenditure (as a share of GDP). Expression (1) decomposes public spending on education (as a share of GDP, ED/GDP) in: (i) benefit generosity (average education spending per student to GDP per worker); (ii) the school enrollment (or coverage) rate (i.e., the number of students to the school age children); and, (iii) demographics, defined as the ratio of school-age children to population 20-64.7 ED ED students students - 19 (1) = pop5 GDP GDP pop5 - 19 pop20 - 64 pop20 - 64 Fiscal Monitor, "Public Expenditure reform, Making difficult choices" 1 (2014). 30 INTERNATIONAL MONETARY FUND per student to GDP per worker); (ii) the school enrollment (or coverage) rate (i.e., the number of students to the school age children); and, (iii) demographics, defined as the ratio of school-age children to population 20-64.7 ED ED students students - 19 (1) = pop5 GDP GDP pop5 - 19 pop20 - 64 pop20 - 64 Fiscal Monitor, "Public Expenditure reform, Making difficult choices" 1 (2014). 30 INTERNATIONAL MONETARY FUND --- Page 32 --- HAITI enrollment rates. A projection trends provide scope to increase 16. Projected demographic assuming unchanged benefit and Chart 7. Education Projections ratios, and the U.N. "medium" (percent of GDP) 7.0 coverage consistent with education 7.0 6.0 fertility rates, is decreasing to 6.0 5.0 spending (as a share of GDP) 5.0 4.0 3.5 percent in 2035. This result would be 4.0 3.0 driven by the projected decrease in the 3.0 2.0 ratio of school-aged population to the 2.0 1.0 labor force. A gradual increase in 1.0 0.0 enrollment rates, in particular secondary 0.0 2015 2020 2025 2030 2035 enrollment rate, to catch up with the 2005 2010 (in 2015) would imply an Expanding coverage Education spending in 2015 -Baseline projection regional average to (2013); Haitian Authorities; and IMF staff calculations. increase in education spending Sources: UN World Population Prospects 4.9 percent of GDP in 2035. The increase in rates is sensitive to fertility rates. Using the U.N. education spending needed to increase enrollment (as a share of GDP) of 4.1 percent of rates would require a level of education spending ratio, "low" fertility would result in a significantly higher education spending GDP while U.N.'s "high" fertility rate of 5.7 percent of GDP. isolates the additional fiscal space. The analysis above 17. Increasing benefits would require education spending (as percent of GDP). The fiscal implications of demographics and coverage on to increases in enrollment rates, increases in education will be larger, if in addition would space to finance per-student benefits by, e.g. 20 percent, increase benefits. Increasing there is an per-student of about 1 percent of GDP. require additional fiscal space E. Concluding Thoughts spending rather than in increase its level. Haiti should enhance the efficiency of capital the capital 18. was needed in the aftermath of earthquake, While high infrastructure-related spending needed, spending. In addition, a number of spending appears to be crowding out other, equally remains low when compared to the of public investment in Haiti metrics show that the efficiency of capital spending by strengthening public region and LICS. Thus, increasing the efficiency of budget execution, openness of investment institutions should now be prioritized. Transparency are critical to ensure stability of and an efficient cash management system in the procurement process in rent seeking. More transparency and accountability public investment and reduce opportunities incentives to deliver on time and on monitoring and evaluation will strengthen project management, resources (IMF 2015). and increase the integrity in the use of public budget education is essential to foster sustainable 19. Investing in human capital through better commitment to education is necessary. Pursuing economic growth and social cohesion. A strong school attendance, should be enrollment rates, including gradually increasing secondary higher INTERNATIONAL MONETARY FUND 31 and an efficient cash management system in the procurement process in rent seeking. More transparency and accountability public investment and reduce opportunities incentives to deliver on time and on monitoring and evaluation will strengthen project management, resources (IMF 2015). and increase the integrity in the use of public budget education is essential to foster sustainable 19. Investing in human capital through better commitment to education is necessary. Pursuing economic growth and social cohesion. A strong school attendance, should be enrollment rates, including gradually increasing secondary higher INTERNATIONAL MONETARY FUND 31 --- Page 33 --- HAITI accompanied with increases in the quality of the education system to ensure learning. Recent research has shown that economic growth is not only responsive to average years of schooling, but on measures of the quality of education (Hanushek and Woessman 2012). Qualified teachers are an important determinant of cognitive achievement (Wold Bank, 2014). PSUGO is investing in training of teachers and directors. On the institutional front, the government should have a strong role in regulating and monitoring the quality of the education system, including the private schools. Spending needs to be allocated transparently and public and private schools should coordinate policies and approaches. Improving education statistics is vital for monitoring developments and evaluating outcomes. Together with the implementation of other institutional reforms, the accumulation of human capital should make Haiti more attractive for investors and promote employment and social cohesion. 8 The authors use cross-country growth regressions to assess the relationship between educational achievement and GDP growth. The results show a close relationship between educational achievement and GDP growth that is remarkably stable across countries, time period and sensitivity analyses of specification. 9 Other important factors are nutrition, health, cognitive and social-emotional development in the early years of life. 32 INTERNATIONAL MONETARY FUND --- Page 34 --- HAITI References H. Qu, Y. Said, B. Shukurov, M. Sommer, and Albino-War, M., S. Cerovic, F. Grigoli, J. Flores, J. Kapsoli, MENA and CCA Oil-Exporting Countries," "Making the Most of Public Investment in S. Yoon, 2014, International Monetary Fund). IMF Staff Discussion Note (Washington: Student Learning In Latin America and the Luque, 2014, Great Teachers: How to Raise Bruns, B and J. World Bank Group). Caribbean (Washington: 2012, "Investing in Public A. Kyobe, Z. Mills, and C. Papageorgiou, 201. Dabla-Norris, E., J. Brumby, Journal of Economic Growth, Vol. 17, pp. Investment: An Index of Public Investment Efficiency," Better Schools lead to more growth? Cognitive Skills, Hanushek E., and L. Woessmann, 2012, "Do 17 (4) (2012), pp. 267-321 and causation, I Journal of Economic Growth, economic outcomes, Reform-Making Difficult Fund, 2014, "Fiscal Monitor: Public Expenditure International Monetary Choices, " (Washington). RarInvestment More Efficient, Board Paper (Washington). forthcoming, Making Public (MENFP), 2013, Budget général l'Education nationale et de la Formation professionnelle Ministère de 2013-2014 (Port au Prince : MENFP). de la république exercice professionnelle (MENFP), 2014, Budget Ministère de I'Education nationale et de la Formation rectificatif 2014-2015 (Port au Prince : MENFP). (MENFP), 2014, Budget général nationale et de la Formation professionnelle Ministère de l'Education 2014-2015 (Port au Prince : MENFP). de la république exercice Formation (MENFP). 2007. "La Stratégie National Ministry for Education and Professional l'Education pour Tous. Port-au-Prince. d'Action pour DVD Edition, Department of Prospects: The 2012 Revision, United Nations, 2013, World Population Economic and Social Affairs, Population Division. Education in Haiti: The Way Forward (Washington: OPREAL). Wolff, L., 2008, Schools Fill the Gap for Poor Children? (Washington: World World Bank, 2015, Haiti: Can Non-Public Bank). INTERNATIONAL MONETARY FUND 33 . "La Stratégie National Ministry for Education and Professional l'Education pour Tous. Port-au-Prince. d'Action pour DVD Edition, Department of Prospects: The 2012 Revision, United Nations, 2013, World Population Economic and Social Affairs, Population Division. Education in Haiti: The Way Forward (Washington: OPREAL). Wolff, L., 2008, Schools Fill the Gap for Poor Children? (Washington: World World Bank, 2015, Haiti: Can Non-Public Bank). INTERNATIONAL MONETARY FUND 33 --- Page 35 --- HAITI POLICY AND FINANCIAL MONETARY IN HAITI' INTERMEDIATION A. Introduction towards containing inflation, but the transmission policy in Haiti is geared inflation 1. Monetary the policy stance is at times challenging. Containing mechanism is weak and assessing of the CPI necessitates a moderate path for context where tradable goods are a large share a mix of in a central bank (BRH) has strived to achieve this goal through exchange rate depreciation. The market operations. As in many other low-income exchange rate market interventions and open to conduct monetary the BRH also resorted to changes in legal reserve requirements channel. While monetary countries, demand through the credit policy, which are transmitted to aggregate stability, policy formulation is hampered by policy has been broadly successful in maintaining price to shocks and by the shallow domestic transmission is complicated by Haiti's vulnerability of policy in data gaps, stance is at times difficult. The effectiveness monetary market, and assessing the policy of a consistent policy mix, most moderate inflation rate depends on the implementation ensuring a This should anchor exchange rate depreciation expectations importantly, a sustainable fiscal policy. policy could be strengthened by allowing in the medium term. Against that backdrop, monetary financial deepening to better additional exchange rate flexibility to respond to shocks, promoting communication on the underlying changes onto interest rates, and by strengthened transmit policy policy stance. competition and in Haiti is low and concentrated, and greater 2. Financial intermediation financial inclusion. The financial regulatory framework is needed to promote are an improved banks, and cooperatives and microfinance institutions system is dominated by a few local Credit is low and heavily concentrated, in part reflecting relatively small and still mostly unregulated. in collecting on debt. A credit bureau was and difficulties on creditworthiness and in lack of information the creditworthiness of individual borrowers, established to improve information-sharing on The authorities have recently launched a support credit access to first-time borrowers. formal financial time should to raise the share of adults with access to financial inclusion strategy, which aims the financial system and an improved services. While efforts to direct more payments through financial inclusion will require reforms to environment will help grow the sector, broad regulatory including of land. promote the use of collateral, B. Monetary Policy low and stable rate of inflation and to preserve The BRH's objectives are to ensure a rate, but 3. The BRH does not have an objective for the exchange the external value of the Gourde. policy tools to limit depreciation to the has used a combination of monetary in recent years 1 Prepared by Lawrence Norton and Gabriel Di Bella (WHD) 34 INTERNATIONAL MONETARY FUND --- Page 36 --- HAITI is set out in law, and the BRH pursues its goals range (Chart 1). Central bank autonomy 3-4 percent that is respected by the fiscal authorities. with operational independence influenced by Chart 1. Exchange Rate Depreciation 4. Inflation is heavily (gourdes per dollar, percenty ty/y) food and energy staples. Inflation, as (tradable) price index (CPI), is measured by the consumer and weighted towards a few imported food heavily Food accounts for half of the CPI energy staples. for basket, and food and energy together account H pursues its goals range (Chart 1). Central bank autonomy 3-4 percent that is respected by the fiscal authorities. with operational independence influenced by Chart 1. Exchange Rate Depreciation 4. Inflation is heavily (gourdes per dollar, percenty ty/y) food and energy staples. Inflation, as (tradable) price index (CPI), is measured by the consumer and weighted towards a few imported food heavily Food accounts for half of the CPI energy staples. for basket, and food and energy together account two-thirds. As imports of food and energy are about 20 percent of GDP, the pass-through from exchange rate depreciation to inflation is high. 11 Oct-11 Apr- 12 Oct- 12 Apr- 13 Oct-13 Apr- 14 Oct-14 Oct- 10 Apron changes in Sources: BRH; andl IMF staff estimates. 5. The BRH relies mostly reserve requirements to conduct monetary legal low-income countries (LICS) that Chart 2. Net BRH FX Intervention 2010) policy. Like many the BRH (Millionsof USS, cumulative since October have shallow domestic financial markets, through reserve primarily manages liquidity which in Haiti are currently requirements, and dollar 38 percent and 41 percent on gourde T respectively (IMF 2012). The BRH also Nets sales 0 deposits, market operations through the Net purchases conducts open the interest -50 issuance of central bank bills, and uses -50 rate on its bills as a signal of the monetary policy -100 Oct-11 Apr- 12 Oct- 12 Apr-1 13 Oct- 13 Apr- 14 Oct- 14 -100 in the Oct- 10 Apr- 11 stance. The BRH also intervenes periodically Sources: BRH Aide Memoire; andl IMF staff calculations. exchange market, and both sells and buys foreign inflows after the earthquake of the U.S. dollars. The strong exchange (to avoid an appreciation the BRH to intervene in the market to buy foreign US$ during the past pushed of these flows resulted in the BRH mainly selling Gourde), while the absorption couple of years (Chart 2). effected through the credit and exchange rate 6. Monetary transmission is primarily adjust the level of gourde liquidity, and open market operations channel, channels. Reserve requirements These moves also impact the exchange rate impacting the level of banks' excess reserves. (through credit growth), although foreign exchange pressures as excess gourde liquidity generates in expectations (including political for foreign currency also responds to changes into the the demand (by introducing a foreign currency component uncertainty). A high level of dollarization rate and asset channels are weak in Haiti, supply), is another complicating factor. The interest and Montiel, 2012). Changes in money shallow domestic financial markets (Mishra as it is in most LICS with impact on other interest rates in the the interest rate on BRH bills do not have a significant fairly steady in recent years (see Both market lending and deposit rates have remained economy. Section B). INTERNATIONAL MONETARY FUND 35 the the demand (by introducing a foreign currency component uncertainty). A high level of dollarization rate and asset channels are weak in Haiti, supply), is another complicating factor. The interest and Montiel, 2012). Changes in money shallow domestic financial markets (Mishra as it is in most LICS with impact on other interest rates in the the interest rate on BRH bills do not have a significant fairly steady in recent years (see Both market lending and deposit rates have remained economy. Section B). INTERNATIONAL MONETARY FUND 35 --- Page 37 --- HAITI by Haiti's vulnerability to of monetary policy is complicated and 7. The implementation shifts in the terms of trade, foreign financing, shocks. Weather events and natural disasters, exchange pressures in Haiti. drivers of inflation and of foreign political events have been important shocks by increasing volatility in the foreign domestic interbank market also amplifies but The shallow of how shocks propagate in the economy, exchange market. The BRH has a clear understanding A lack of high frequency calibration of the policy response. insufficient data hampers sector) and a limited capacity for liquidity macroeconomic data (particularly in the agricultural by the central government, which forecasting complicates monetary policy. Treasury management into the level of gourde liquidity. The improvement, introduces additional volatility provided needs significant could increase as aid and foreign financing diminishes, pressure on government deposits fiscal consolidation does not proceed as needed. challenging. Policy rates are used the stance of monetary policy is sometimes other interest rates in 8. Assessing by a weak transmission mechanism to but their role is hampered but a for signaling, have also signaled tightening, Increases in the level of reserve requirements of the the economy. reserve rate and complicate the measuring number of exemptions lower the effective fluctuation in the volume of central bank stance (Chart 3). There has been significant in the policy intended policy have not always tracked movements bills in recent years, and amounts outstanding stance (Chart 4). And while there is a the assessment of the policy rate, which also complicates changes in policy are not always policy and a monthly note on inflation, quarterly note on monetary announced, and forward guidance is not provided. Headline and Effective Required Reserves Chart 4. BRH Bills andi Outstanding rate) Chart 3. weighted. average of goude and dollar rates) (Billions of gourdes interest (Percent of Deposits, BRHI bills outstanding 38 10 Interestrate, 91- day bill -Headline Reserve Rate Effective Reservef Rate Nud 32 2 32 col anh Dec-11 Jul-12 Feb-13 Sep-13 Apr-1 14 Nov- 14 30 Oct- 10 Apr-1 11 Oct-11 Apr- 12 Oct-1 -12 Apr- 13 Oct-13 Apr- 14 Oct-14 Oct-10 Sources: May-11 BRH FMIWeekly: andl IMF staff estimates. Sources: BRH FMIV Weekly; andl IMF staff estimates. would be increased by a better understanding of The effectiveness of monetary policy The transmission 9. operational framework. mechanism, and by a strengthened and timely the transmission including through the production of quality mechanism should be better understood, the of reserve on implementation macroeconomic and financial data. The use of exemptions should be used to ensure that market requirements should be avoided and open market operations more clear and avoid instances This will make the policy stance of interest rates are close to targets. than that implied by the implementation provided by policy rates is different the central where the signaling the communication of the policy stance, market operations (Chart 5). To strengthen factors impacting liquidity open indicator that takes all bank could consider publishing a synthetic 36 INTERNATIONAL MONETARY FUND mechanism should be better understood, the of reserve on implementation macroeconomic and financial data. The use of exemptions should be used to ensure that market requirements should be avoided and open market operations more clear and avoid instances This will make the policy stance of interest rates are close to targets. than that implied by the implementation provided by policy rates is different the central where the signaling the communication of the policy stance, market operations (Chart 5). To strengthen factors impacting liquidity open indicator that takes all bank could consider publishing a synthetic 36 INTERNATIONAL MONETARY FUND --- Page 38 --- HAITI effective reserve rates and the rates on such as a weighted average of the absorption into account, outstanding BRH bills (Chart 6). exchange buffer that rate anchor requires keeping a foreign Maintaining the exchange in the mid10. medium-term inflation expectations is credible for market intervention. Anchoring that allows the Central Bank to credibly reserve buffer single digits requires an international buffers after increased intervention intervene when negative shocks materialize. Rebuilding and of a fiscal policy that is of increased exchange rate flexibility, following shocks requires appropriate buffers. Staff analysis suggests consistent first, with recovering, and then, maintaining, the of 4-5 months of prospective international reserves should be in range that, in the case of Haiti, imports. 2 Chart 6. BRH Monetary Policy Rates rates and BRH bill Chart 5. BRH Liquidity Absoportion and BRH bills outsanding (Weighteda javerage of percent changes in effectivereserve (Threer month rolling average of required reserves rates, since October 2010) asa percent of total deposits) 43 5 41 4 40 3 39 2 37 1 36 0 34 1 Oct-10 Apr-1 11 Oct-11 Apr- 12 Oct-12 Apr-13 Oct-13 Apr- 14 Oct-14 34 Oct- -10 Apr-11 Oct-1 11 Apr-12 Oct-12 Apr-13 Oct-13 Apr- 14 Oct-14 Sources: BRH FRMI Weekly; and IMF staff estimates. Sources: BRH FMI Weekly; and IMF staff estimates. Intermediation and Financial Inclusion C. Financial of economic growth, but is intermediation is a key determinant and 11. The level of financial between depositors The role of the financial system as an intermediary is crucial very low in Haiti. to convert savings into productive credit, borrowers, addressing information asymmetries however, financial intermediation is very (Levine et al, 2000). In the case of Haiti, to economic growth services entail high costs. low, credit concentrated, and financial is composed of nine banks, two of sector features a few large players. The system and five are Haiti's banking (CNBA and Scotia), (BNC and BPH), two are foreign-owned and Unibank, which are state-owned by two domestic private banks: Sogebank domestic. However, the sector is dominated credit. The top three banks (including provide about two-thirds of private sector is common which together (BRH 2014). This level of concentration BNC) account for over 80 percent of total assets to absorb shocks and support growth" 2 See Selected Issues Paper "External Buffers and Competitiveness INTERNATIONAL MONETARY FUND 37 's banking (CNBA and Scotia), (BNC and BPH), two are foreign-owned and Unibank, which are state-owned by two domestic private banks: Sogebank domestic. However, the sector is dominated credit. The top three banks (including provide about two-thirds of private sector is common which together (BRH 2014). This level of concentration BNC) account for over 80 percent of total assets to absorb shocks and support growth" 2 See Selected Issues Paper "External Buffers and Competitiveness INTERNATIONAL MONETARY FUND 37 --- Page 39 --- HAITI (6.5 percent of assets) is unusual (FinStats but the small presence of foreign-banks in the region, 2015). of deposits over bank credit. credit is low, and there is a significant excess 12. Domestic after the Chart 7. Domestic Credit to Private Sector Despite rapid credit growth in the years (Percent of GDP) bank lending to the private 2010 earthquake, of GDP, which is sector remains under 20 percent the lowest in the region (Chart 7). However, total (at around 40 percent of GDP) are not low deposits standards. This excess of deposits over 16 by regional bank credit is due to high reserve requirements, Haiti Jamaica Nicaragua 8 large share of assets 8 Dominican Republic but also because a relatively takes the form of non-credit domestic investments, enterprises (Table 1, Chart 8). 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 often in affiliated Sources: National Authorities; and IMF staff estimates. 13. The formal banking system is Banking System Haiti has a Table 1. Balance Sheet of the Aggregated concentrated in Port-au-Prince. (end- December 2014, percent of GDP) third of the number of bank branches on a per Assets Liabilities 18.7 and a quarter of the and liquid assets 3.31 Demand Deposits 21.1 capita basis as in Nicaragua, Reserves Cash at the central bank 135/Savings and Term liabilities Deposits 1.9 number of branches per person as in the BRH and Treasury Bills 2.4 Other short -term -term liabilities 3.3 Dominican Republic, but 67 percent Foreign, Assets 17.5Capital 1.2Other long 3.9 neighboring and 85 percent of total Net Lending 8.0 of bank branches, Domestic Investments 3.1 deposits, are located in the Port-au-Prince area, Real Estate and Other 49.0Total Liabilities 49.0 which only has about 25 percent of Haiti's Total Assets Statistiques et Indicateurs Financiers," " Q1 2015. Bank Source: BRH "Rapport population (BRH 2014 and BRH/World 2014) (Chart 9). account for a Chart 8. Bank Deposits and Private Sector Credit 14. Relatively few borrowers (Percent of GDP) share of credit, reflecting a lack of Deposits Private Sector Credit significant and difficulties in information on creditworthiness debt. There were about 100,000 loans collecting on of 30 in December 2014 (out of a population outstanding Moreover, most banks extend around 20 over 10 milion). clients. 40 percent of their credit to their 10-15 largest For the system as a whole, the 100 top borrowers Jamaica Nicaragua for about half of total credit, reflecting limited Dominican Haiti account Republic creditworthiness information and a dysfunctional Sources: FinStats Database; andl IMF staff estimates. debt? In such a system, close system for recovering according to the World Bank's 'S Doing Business last in the world on the practice of resolving insolvency, is at a few top clients, as close Haiti ranks collect debts therefore helps explain why credit concentrated rankings. An inability to personal relationships can help ensure repayment. 38 INTERNATIONAL MONETARY FUND amaica Nicaragua for about half of total credit, reflecting limited Dominican Haiti account Republic creditworthiness information and a dysfunctional Sources: FinStats Database; andl IMF staff estimates. debt? In such a system, close system for recovering according to the World Bank's 'S Doing Business last in the world on the practice of resolving insolvency, is at a few top clients, as close Haiti ranks collect debts therefore helps explain why credit concentrated rankings. An inability to personal relationships can help ensure repayment. 38 INTERNATIONAL MONETARY FUND --- Page 40 --- HAITI mechanisms for collecting on collateral for formal institutional personal relationships can substitute (Bond and Rai, 2002. although top Chart 9. Port-au-Prince and the Provinces 15. Credit spreads are high, (Share of total deposits andp population, percent of total) clients can borrow on more favorable terms. rates have hovered around 20 Sharec of Deposits Average lending rates have 70 SSharec of Population percent in recent years, even as savings remained near zero (Chart 10). However, the lending-deposit spread in Haiti weighted-average in 2013, similar to that in the was about 8 percent that in Dominican Republic and lower than Nicaragua or Jamaica (each about 14 percent; 0 Metropolitan Port- -au- Prince Provinces Finstats 2015). This suggests that relatively few Sources: BRH, IHSI; andl IMF staff estimates. borrowers can access credit at rates close to Gourdes large while smaller borrowers Chart 10. Savings and Lending Rates in banks' own costs of funds, (Percent) significantly higher rates, likely reflecting higher 30 Averagel Lending Rate in Gourdes pay where information Weighted- Averagelending Rate in Gourdes perceived risk premia in a context 25 Weighted- Averageinterestt Rate on Savings Deposits asymmetries are still significant. 20 wrwNWArMPYT Tm L n distribution of bank loans M 16. The sectoral credit is concentrated in the suggests Trade (wholesale and retail) is consumption sector. followed by real estate, and a the largest category, are another 12 Jan-1 13 Jun-1 13 Nov- -13 Apr- 14 Sep- 14 range of other services together Mar-12 Augstaff estimates. destination of credit. Industry receives Sources: FMI Weekly; and IMF important of total credit, mostly to the food 2. Sectoral Allocation of Credit about 15 percent receives almost no credit Table 2014, percent) and beverage industry. Agriculture (December 0.1 from the formal banking system. Agriculture 15.6 Industry Storage 12.6 above suggests that more Energy, Gas, Water, 16.4 17. The discussion Real Estate better information, and an improved Services 55.2 competition, needed to increase financial 25.0 regulatory framework are o/w Trade 2.8 and boost growth. As discussed by owl Hotels and Resturants 11.8 intermediation credit base and high margins o/w Consumer Credit Poghosyan (2012), a narrow and o/w Other Services 15.5 in LICS, reflecting a lack of competition are common weak institutions. Source: BRH; and IMF staff estimates. high intermediation costs imposed by Addressing these constraints can boost financial costs of financial intermediation in reduce its costs, and promote growth. The high ranked 171th in the world on this intermediation, limiting access to credit (Haiti Haiti constrain growth not only by up the costs of receiving remittance indicator in the 2015 Doing Business survey), but by driving the Haitian diaspora (Herrera et al, receive remittances from transfers. Over half of all households double that in Nicaragua (Chart 11). with these transfers are over 2014), yet the fees associated INTERNATIONAL MONETARY FUND 39 financial intermediation in reduce its costs, and promote growth. The high ranked 171th in the world on this intermediation, limiting access to credit (Haiti Haiti constrain growth not only by up the costs of receiving remittance indicator in the 2015 Doing Business survey), but by driving the Haitian diaspora (Herrera et al, receive remittances from transfers. Over half of all households double that in Nicaragua (Chart 11). with these transfers are over 2014), yet the fees associated INTERNATIONAL MONETARY FUND 39 --- Page 41 --- HAITI 18. The BRH launched a credit bureau in FY2014. The credit bureau (the Bureau Chart 11. Costs of d'information sur le Crédit, BIC), developed in (Average cost of sending USS Processing 200, percent) Remittances collaboration with the IDB and the IFC, is intended Nicaragua to expand access to credit by providing lenders with a continuously Regional Median updated database on the creditworthiness of potential borrowers. In the first Dominica can Republic stage of its operation, bank and non-bank institutions are financial Jamaica required to report to the BIC on credit extended to each borrower. The BIC will Haiti current borrowers demonstrate help their creditworthiness to other potential lenders, Sources: FinStats 2015; and IMF staff estimates. 10 potentially increase competition among lenders while their debts. To help potential first-time increasing incentives for borrowers to honor second stage where would-be borrowers receive credit, the authorities are proof of borrowers could build a credit for considering a payment of utilities (such as EDH and history, example by providing first-time loan. This DINEPA), in order to establish broadening data reporting to the BIC creditworthiness for a individuals and small enterprises would be beneficial to unbanked necessarily because it would facilitate their having had formal access to credit, thus building a credit history without credit without having a previous credit overcoming the trap of not being eligible for nontraditional data beyond history (IFC 2012). In expansion of the credit the banking system would require bureau to cover legislation, however. 19. The cooperative and microfinance competition in the financial sector is another avenue to promote more cooperative financial sector, but the sector is small. There are 90 institutions with about 639 registered savings and Unlike commercial banks, thousand members as of cooperatives are focused end-September 2013. of branches located in the provinces. outside of Port-au-Prince, with about 80 G5 billion, or under 1.5 However, known total assets of the entire sector percent percent of GDP. The sector is but were just over thousand borrowers as of end-September, growing, not at a rapid pace: there were compared with 47 thousand in 2009. Table 3. Evolution of Savings and Credit Cooperative Sector (units as indicated) Assets, million gourdes as of cooperatives are focused end-September 2013. of branches located in the provinces. outside of Port-au-Prince, with about 80 G5 billion, or under 1.5 However, known total assets of the entire sector percent percent of GDP. The sector is but were just over thousand borrowers as of end-September, growing, not at a rapid pace: there were compared with 47 thousand in 2009. Table 3. Evolution of Savings and Credit Cooperative Sector (units as indicated) Assets, million gourdes as a percent of GDP 2,327 5,117 Net Credit Outstanding, million 0.9 1.4 gourdes 1,258 Deposits, million gourdes 2,864 Number of members 1,636 3,160 Number of borrowers 339,485 638,958 Source: BRH; and IMF staff 46,637 59,196 estimates, 40 INTERNATIONAL MONETARY FUND --- Page 42 --- HAITI for cooperatives would help spur its Modernization of the regulatory environment at a 20. a 2002 law that placed supervisory responsibilities development. Cooperatives are regulated by (the Conseil National des Coopératives, unit within the BRH, but maintained an existing institution actions of the two institutions are not well In practice, the Most CNC) with licensing responsibilities. information on the sector (IMF 2013). coordinated, leading to licensing delays and incomplete information on the sub-sector and the BRH does not publish cooperatives are not registered, each quarter on banks). Revisions to the legal (compared with comprehensive data published the roles of the BRH and CNC and simplify registration framework for cooperatives that would clarify not been approved by parliament. have been pending for several years, but have procedures There with limited data availability. sub-sector remains unregulated, of 21. The microfinance in Haiti. The first are microfinance subsidiaries are two types of microfinance institutions banks operate such subsidiaries, which sometimes registered commercial banks. Several commercial (USAID 2013). Other microfinance from foreign donors by extending guarantees small credit receive support organizations, or function as local, institutions are operated by non-governmental but one estimate based on selfRelatively little information is available on the sector, GDP unions. are around G 4 billion, or 1 percent of (Microfinance reported data suggests that loans USAID and published in 2012 used sampling Information Exchange, 2015). A study funded by in Haiti with total assets of about estimate that there might be 200 such institutions bank, methodology to microfinance institutions report data to the central G 10 billion (Lhermite, 2012), but since few a draft law that would regulate this estimate. The BRH has been developing it is difficult to verify been submitted to parliament. microfinance institutions, but it has not yet Financial Inclusion aims to raise the share of The government's National Strategy for the of the 22. to financial services while safeguarding stability the the population that has access with the World Bank, aims to raise financial system. The strategy, developed in coordination institution from 27 percent to 45 percent of adults that have an account with a formal financial financial the share the legal framework of the system, in five years. Key action items are further developing transfer business to reduce costs (all more competition in the money credit bureau, and promoting the requirements for opening up a bank account noted above). Other measures include revisiting of making social payments through minimum account balances), studying the feasibility (such as on laid out in the financial inclusion strategy is facilitating the banking system. One key reform priority are drafting a law), and land. The including real assets (for which the authorities Issues the use of collateral, cadastre and improving property rights (see Selected latter will require a functioning land "Opportunities and Challenges for Growth"). Paper INTERNATIONAL MONETARY FUND 41 bureau, and promoting the requirements for opening up a bank account noted above). Other measures include revisiting of making social payments through minimum account balances), studying the feasibility (such as on laid out in the financial inclusion strategy is facilitating the banking system. One key reform priority are drafting a law), and land. The including real assets (for which the authorities Issues the use of collateral, cadastre and improving property rights (see Selected latter will require a functioning land "Opportunities and Challenges for Growth"). Paper INTERNATIONAL MONETARY FUND 41 --- Page 43 --- HAITI References Statistiques et Indicateurs Financiers : Q1 d'Haïti (BRH, 2014). Rapport Banque de la République financieres.html FY2015. Available at htpu@swwebrhnetisats Intermediation and Endogenous Growth," Valerie R and Bruce D Smith (1991) "Financial Bencivenga, Studies, Vol 58, No. 2. The Review of Economic Substitutes in Microfinance Yale University. Bond, Philip, and Ashok Rai (2002) "Collateral Fin Stats 2015. World Bank Group, November 2014. C., Torelli, CZanuso, C.. N., Milbin, D. Roubaud, F, Saint-Macary, du séisme. IHSI, Herrera, J, Lamaute-Brisson, vie Haïti entre 2007 et 2012. La réplique sociale L'Evolution des conditions de en DIAL, Paris, Port-au-Prince, 2014. Knowledge Guide, Washington, DC. Finance Corporation (2012) "Credit Reporting International Financial Sector Surveillance in Low-Income International Monetary Fund (2012) "Enhancing Countries- Background Paper. Washington, DC. and Fifth Reivew under the Fund (2013) "2012 Article IV Consultation International Monetary Sector Review, Washington, DC. Extended Credit Facility-Financial "Financial Intermediation and Growth: Norman Loayza, and Thorsten Beck (2000) ; Levine, Ross, and Causes. " Journal of Monetary Economics. Casuality de la Microfinance en Haiti. Année September 2012. Recensement de L'industrie Lhermite François. 2010-11. USAID/HAITI, pp 5-7. (2015). Data available online at: Microfinance Information Exchange Smenneane "How Effective is Monetary Transmission in Low-Income Mishra, Prachi and Montiel, Peter (2012) Paper WP/12/143. Countries? A Survey of the Empirical Evidence" IMF Working Countries: The Role of "Financial Intermediation Costs in Low-Income Poghosyan, Tigran (2012) Factors. II IMF Working Paper WP/12/140. Regulatory, Institutional, and Macroeconomic (2013) "Evaluation of DCA Guarantees to United States Agency for International Development Capital and Sogesol, Haiti Final Report. August Micro-Credit Washington, DC: World Bank Bank. 2014. Doing Business 2015: Going Beyond Efficiency. CC BY 3.0 IGO World License: Creative Commons Attribution Group. DOI: 10159697814648-43512 42 INTERNATIONAL MONETARY FUND Tigran (2012) Factors. II IMF Working Paper WP/12/140. Regulatory, Institutional, and Macroeconomic (2013) "Evaluation of DCA Guarantees to United States Agency for International Development Capital and Sogesol, Haiti Final Report. August Micro-Credit Washington, DC: World Bank Bank. 2014. Doing Business 2015: Going Beyond Efficiency. CC BY 3.0 IGO World License: Creative Commons Attribution Group. DOI: 10159697814648-43512 42 INTERNATIONAL MONETARY FUND --- Page 44 --- HAITI TO BUFFERS AND COMPETITIVENESS EXTERNAL SUPPORT GROWTH' ABSORB SHOCKS AND A. Introduction is aligned with fundamentals, but competitiveness 1. Haiti's real exchange rate is broadly the external stability assessment for constrained by structural factors. This note presents of the severely The application of various methods analyzing with the 2015 Article IV consultation. (RER) level suggests that it is broadly aligned appropriateness of Haiti's real exchange rate the large pass through from This is the case despite some 'fear of floating' given flexible fundamentals. rate arrangement is, nonetheless, rate depreciation to inflation. Haiti's exchange of the RER are exchange economic conditions. Formal assessments enough to respond to shifts in underlying which in Haiti is constrained by weak institutions, of limited use as a measure of competitiveness, environment. In this regard, synthetic indicators infrastructure, and a cumbersome regulatory poor indices of international competitiveness. place Haiti near the bottom of cross-country to 4-5 months of imports would provide Maintaining international reserves equivalent dynamics. 2. shocks and avoid stop-and-go growth buffer for Haiti to withstand shocks the an adequate balance the use of reserves a buffer against against The estimates presented in this note The analysis suggests that maintaining reserve costs of holding relatively low-yielding reserve assets. for Haiti given its high level of of 4-5 months of prospective imports is appropriate allow stop-and-go coverage capacity. This should attenuating vulnerability to shocks and limited response the last 30 years, and capital that have characterized the country during growth dynamics accumulation. terms of trade oil prices is the most significant 3. The recent decline in international decline has been a positive terms-of-trade shock shock facing Haiti since 2008-09. The oil price deficit and has contributed to narrowed the current account for Haiti, which has significantly prices. However, these gains have domestic fiscal revenue in a context of fixed pump increasing offset by lower Petrocaribe financing flows. been partially 1 Prepared by Lawrence Norton (WHD) INTERNATIONAL MONETARY FUND 43 that have characterized the country during growth dynamics accumulation. terms of trade oil prices is the most significant 3. The recent decline in international decline has been a positive terms-of-trade shock shock facing Haiti since 2008-09. The oil price deficit and has contributed to narrowed the current account for Haiti, which has significantly prices. However, these gains have domestic fiscal revenue in a context of fixed pump increasing offset by lower Petrocaribe financing flows. been partially 1 Prepared by Lawrence Norton (WHD) INTERNATIONAL MONETARY FUND 43 --- Page 45 --- HAITI Assessment B. External Stability suggests that Haiti's currency is broadly real exchange rate approach 4. The equilibrium of Rate Assessment aligned with fundamentals. The application Chart 1. Real Real Exchange Exchange Rate Approach) (CGER Equilibrium the equilibrium real exchange rate (ERER) Fitted Value -Real Exchange Rate the Consultative Group on approach developed by RER has 120 Exchange Rates (CGER) suggests that the deviated from the level implied by not significantly The 80 during the last two decades. its fundamentals estimates Haiti's equilibrium ERER approach of its terms of trade, exchange rate as a function relative to trading partners, changes productivity in public spending, net foreign assets, and 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 remittances. All variables except changes in public Sources: IMF staff estimates. spending were found to be statistically significant, tracked these fundamentals over a that the real exchange rate has closely after the 2010 and the results suggest and debt forgiveness that occurred long period. In particular, the surge in transfers more slowly, as the central the ERER to rise (see Chart 1), but the RER adjusted and earthquake caused reserve position. More recently (in FY2013 intervened to boost its international results bank (BRH) smooth the pace of depreciation, and end-FY2014 FY2014), the BRH has sold reserves to modest overvaluation of under 5 percent. suggest a Chart 2. Real Effective Exchange Rate broadly (January 2007 100) 5. Haiti's RER has remained despite some 'fear of floating' While appropriate rate regime is a float, the BRH the de jure exchange seeks to limit the annual nominal depreciation against 115 the significant pass-through to the U.S. dollar, given As inflation, and as a way to anchor expectations. inflation has been higher in Haiti than in its trading partners over the last few years, limiting exchange rate 90 Jan-10 Jan- 11 Jan- 12 Jan-13 Jan-14 Jan-1 15 90 resulted in some real appreciation of Jan-07 Jan- -08 Jan-09 depreciation has Sources IMF staff estimates. the gourde Table 1. Current Account Benchmarks (Chart 2). (Units asi indicated) MB-EBA Lite MBof the Macroeconomic Indicator ES CGER (2015) 6. The application (ES) GDP -3.5 -3.6 -3.5 Balance (MB) and External Stability Projection, percent GDP -3.2 -3.6 -7.1 to assess the RER do not point to Benchmark, percent -0.3 0.0 3.6 approaches MB Gap, percent GDP -0.1 -0.1 -0.1 significant deviations from equilibrium. Elasticity of CA to REER estimate benchmark current account Implied over (+) or under (-) 3.1 -0.1 -37.1 approaches of relative fundamentals. valuation, percent balances based on a set Source: IMF staff estimates. CGER approach calculates benchmark ES the application of two of those on medium- -term fundamentals, EBA uses current year. This note reports approach based uses long term growth and inflation projections. 44 INTERNATIONAL MONETARY FUND -0.1 -0.1 -0.1 significant deviations from equilibrium. Elasticity of CA to REER estimate benchmark current account Implied over (+) or under (-) 3.1 -0.1 -37.1 approaches of relative fundamentals. valuation, percent balances based on a set Source: IMF staff estimates. CGER approach calculates benchmark ES the application of two of those on medium- -term fundamentals, EBA uses current year. This note reports approach based uses long term growth and inflation projections. 44 INTERNATIONAL MONETARY FUND --- Page 46 --- HAITI External Balance Assessment approach ("EBA Lite"), approaches to Haiti. The first, a modified of GDP, implying a very large benchmark deficit for 2015 of 7.1 percent derived produces a very large elasticity of the current account undervaluation of close to 40 percent, using an assumed results are driven by a very low level of (1998) (Table 1). In Haiti's case, the and from Isard and Faruquee inflows, and by relatively high levels of aid which is associated with capital MB in relative productivity, weaker current account. The second, the presented remittances, which are associated with a deficit of 3.6 percent of GDP as a medium-term IMF (2006) suggests a smaller current account set of fundamentals, with Haiti's low benchmark; this MB approach is based on a different asset position (post-debt partially offset by its relatively balanced net foreign with keeping productivity being the current account deficit that is consistent relief). Finally, the ES approach calculates 40 percent of GDP). This approach results in a external debt at some benchmark level (in this case, levels, suggesting that the benchmark of -3.2 percent of GDP, close to current again current account currency is broadly aligned with fundamentals. shortcomings as a measure of Haiti's 7. All of these approaches have significant analyses of the RER as a measure of competitiveness. As suggested in Di Bella et al. (2007), for the price of non-tradables. In by the use of the CPI as a proxy of the competitiveness are complicated CPI basket, making it unlikely to be representative the case of Haiti, food accounts for half the the effect of imported inputs, which of firms. Moreover, standard RER measures ignore some of the costs terms as a currency depreciates, offsetting become more expensive in local currency of Haiti's exports involve the final processing gain of devaluation. The vast majority content. Moreover, competitiveness and thus Haitian exports have very high import of imported fabric into apparel be treated with caution, as they rely on a set of the results of econometric models should likewise wide of shocks and are subject to data that in Haiti have been volatile due to a range structural factors. fundamentals coefficients that do not directly account for country-specific quality issues, and use to be a powerful factor for attracting capital while Haiti's still-low wages are assumed financial flows into Haiti have For example, return, in practice (for reasons discussed below), Issues by implying a higher and favorable access to the U.S. market (See Selected long been low despite its location "Opportunities and Challenges for Growth"). Paper, structural factors. While is constrained by numerous 8. Haiti's competitiveness rate is not a key obstacle to Haiti's external econometric analysis suggests that the exchange of other factors that in Haiti's case are such models do not directly account for a set services means that performance, The lack of basic public serious obstacles to its international competitiveness. and security, and must deal with poor for their own electricity, sanitation, firms must often arrange in the region, driving up the costs of Haiti's exports infrastructure. Haiti's port costs are the highest exporting through Haiti's ports costs inputs into those exports. For example, and and also the imported Dominican Republic; importing costs 35 percent more, 15 percent more than in the neighboring weeks (World Bank 2014). Haiti's business procedures require 2-3 more in both cases the necessary with cumbersome procedures environment is also difficult from a legal and regulatory perspective, and Challenges for see Selected Issues Paper "Opportunities (including on land transactions, contradictory legal framework. This legal Growth"), and an often unclear and sometimes outright for example in whether combined with a weak rule of law, creates further uncertainty, framework, INTERNATIONAL MONETARY FUND 45 Dominican Republic; importing costs 35 percent more, 15 percent more than in the neighboring weeks (World Bank 2014). Haiti's business procedures require 2-3 more in both cases the necessary with cumbersome procedures environment is also difficult from a legal and regulatory perspective, and Challenges for see Selected Issues Paper "Opportunities (including on land transactions, contradictory legal framework. This legal Growth"), and an often unclear and sometimes outright for example in whether combined with a weak rule of law, creates further uncertainty, framework, INTERNATIONAL MONETARY FUND 45 --- Page 47 --- HAITI the Labor Code permits nighttime work in the assembly industry, or under what terms productive workers must be paid more than the base minimum wage (Better Work Haiti, 2015). Haiti also appears to have lost ground in relative terms in recent years, as measured by its percentage rank in the World Bank's "Doing Business" survey, where it remains in the bottom 5 percent of all countries surveyed (Chart 3 3; see World Bank 2014). Haiti has seen some progress with regard to perceptions of corruption, albeit from a low base, but comparator countries have made progress as well (Chart 4; see Transparency International 2014). Chart 3. Evolution of Ease of Doing Business Chart 4. Evolution of Corruption (Percentage rank) Perceptions (Percentage rank) 10 60 Haiti -LIC average Jamaica Dominican Republic Haiti -LIC average Nicaragua Jamaica Dominican Republic 70 Nicaragua 55 80 1 80 100 100 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Sources: World Bank; and IMF staff estimates. Sources: Transparency International; and IMF staff estimates. 9. A number of cross-country surveys illustrate some of the biggest obstacles to Haiti's competitiveness. According to "Doing Business", Haiti performs particularly poorly on starting a business, which involves 12 procedures and generally takes 97 days (see table). Notably, the costs involved have risen considerably since 2010. Haiti is the last place on the survey on resolving insolvency. The World Economic Forum's "Global Competitiveness Report" has a broader focus and assigns gives the lowest rank for Haiti under its Institutions sub-index. Within the category of institutions, insecure property rights, transparency of government policymaking, and the efficiency of the legal system are highlighted as particular concerns. Table 2. Haiti's Ranking on International Surveys, Latest Available Year Indicator Rank Sample Comments Doing Business 2015 189 Enforcing contracts best sub-indicator at 84 (but still takes 530 o/w Starting a Business 189 Costs of business days) starting up since 2010 o/w Resolving Insolvency 189 No practice of insolvency to measure time and costs Corruption Perceptions Index 2014 174 Positive trend over past decade Global Competitiveness Report 2014-2015 137 144 Labor market efficiency best sub-ranking at 77 o/w Institutions 144 Property rights, legal system, government transparency cited as particular problems Source: World Bank; Transparency International; and World Economic Forum. 46 INTERNATIONAL MONETARY FUND but still takes 530 o/w Starting a Business 189 Costs of business days) starting up since 2010 o/w Resolving Insolvency 189 No practice of insolvency to measure time and costs Corruption Perceptions Index 2014 174 Positive trend over past decade Global Competitiveness Report 2014-2015 137 144 Labor market efficiency best sub-ranking at 77 o/w Institutions 144 Property rights, legal system, government transparency cited as particular problems Source: World Bank; Transparency International; and World Economic Forum. 46 INTERNATIONAL MONETARY FUND --- Page 48 --- HAITI Haiti's Optimal Level of Reserves C. to shocks. Estimating reserve cushion due to its vulnerability 10. Haiti's needs a substantial of the trade-off between the likelihood and reserve level begins with an assessment economy faces a an optimal the costs of holding reserves. Haiti's undiversified potential costs of shocks against tension, and volatile external shocks spanning weather events, political of the wide range of potential domestic absorption are high, as a large share financing. The human costs of a shock to Haiti also has large infrastructure gaps and lives close to subsistence. On the other hand, assets. population costs in holding low-yielding reserve thus faces significant opportunity Haiti attenuate the stop-and-go growth An reserve cushion would help Haiti has seen several 11. appropriate income in recent decades. dynamics that have lowered Haiti's per capita often associated with political capita income growth over the past years, The of periods of negative per food shock and an earthquake. severity but which have also been due to a price in non-crisis years instability income downward despite positive growth but these shocks has driven per capita would reduce the severity of these shocks Staff Report, Box 2). An adequate reserve buffer promoting (see that later impedes growth in non-crisis years, also avoid the destruction of capital steadier per capita income growth. and 45 percent of broad money, Haiti's international 12. At about 4.8 months of imports used rules of thumb. While this remained appropriate according to generally to reserves peak, reserves remain appropriate according represents a decline from the post-earthquake that reserves cover three months of imports), used rules of thumb. The first such rule (i.e., shock to the current account. frequently of the reserve cushion to withstand a resilience in the measures the appropriateness to 20 percent of broad money) measures The second (ile., that reserves correspond remains appropriate and higher flight. On both measures, Haiti's reserve coverage ignore face of capital Charts 5 and 6). However, such generic benchmarks than in most low-income countries (see circumstances. of idiosyncratic shocks and country-specific the frequency Chart 6. Reserves as Share of Broad Money Chart 5. Gross International Reserves (Percent) (Months of Prospective Imports) 7 80 -Haiti Simple average of 301 LICs -Haiti Simple Averageof 301 LICS 5 50 1 10 2000 2002 2004 2006 2008 2010 2012 2014 Dec- -06 Dec-07 Dec- -08 Dec- -09 Dec- 10 Dec- 11 Dec-12 Dec- 13 Dec 14 Sources: WEO; andl IMF staff estimates. Sources: IFS; WEO; andl IMF staff estimates. better estimate circumstances may produce a A model accounting for a Haiti's specific Dabla-Norris 13. benchmarks. The framework proposed by of optimal reserve coverage than generic in avoiding crises and in reducing their attempts to measure the benefit of reserves et al (2011) INTERNATIONAL MONETARY FUND 47 -07 Dec- -08 Dec- -09 Dec- 10 Dec- 11 Dec-12 Dec- 13 Dec 14 Sources: WEO; andl IMF staff estimates. Sources: IFS; WEO; andl IMF staff estimates. better estimate circumstances may produce a A model accounting for a Haiti's specific Dabla-Norris 13. benchmarks. The framework proposed by of optimal reserve coverage than generic in avoiding crises and in reducing their attempts to measure the benefit of reserves et al (2011) INTERNATIONAL MONETARY FUND 47 --- Page 49 --- HAITI characteristics This model takes country-specific severity as well as the costs of reserve holdings. whether a given shock results in an account that have a known relationship in influencing of trade, into absorption). The shock variables (terms economic crisis (defined as a drop in domestic bottom 10 percent of Haiti's specific FDI to GDP, and aid to GDP) were set at the external demand, distribution over the past ten years, and are intended Table 3. Variables for Optimal Reserves Estimate to crisis events. Haiti's -3.2 to estimate Haiti's vulnerability Fiscal Balance, percent GDP (2015) fundamentals (CPIA, fiscal balance, and imports to Imports, percent GDP (2015) 47.5 current levels, are intended to gauge the CPIA (last available) 3.2 GDP), set at Table 3). External demand growth, percent (bottom potential severity of a crisis event (see -5.8 10th Terms percentile) of Trade growth, percent (bottom of shocks is another -7.2 14. The frequency model. Over the past ten 10th percentile) in FDI to GDP (bottom 10th important factor in the Change -34.1 years Haiti has seen at numerous distinct shocks, percentile) in aid to GDP (bottom 10th weather events that impacted more than Change -25.6 counting only percentile) 200,000 people (Table 4). A longer-term analysis, Sources: IMF staff estimates. carried out by the International Disaster Database that Haiti has been struck by shocks every reports for the Shocks to Haiti Since 2004 1-2 years since 1900. Accordingly, Table 4. Significant purposes of the model, the unconditional Year Event probability of a shock is assumed at 0.5, 2012 Hurricane (201,850 people impacted) ie, that Haiti is assumed to have a 2011 Epidemic (514,000 people impacted) chance of undergoing some 2010 Earthquake (3.7 million people impacted) 50 percent international financial crisis shock each year, albeit not necessarily one 2008-09 Food prices, impacted) 2004 Hurricane (315,594 people that generates a crisis. Political Unrest an optimal Source: EMDAT; and IMF staff estimates. 15. The results suggest level of reserves of 4 months of is based on the unconditional probability of a This estimate of an optimal level of reserves and an assumed imports. that influence a shock's impact on the economy, shock, the country-specific factors Haiti's calculated optimal reserve level is pushed opportunity cost of holding reserves of 4.5 percent. and FDI and aid in recent years, as well in external demand, terms of trade, factor. Also upwards by the volatility flexible exchange rate is an important mitigating as by its weak CPIA score. The country's bill and the significant fiscal consolidation programmed important is the recent decline in the import for FY2015. best be seen as a lower should be treated with some caution and may 16. This estimate driver of these results by reducing in international oil prices is an important In bound. The decline reversed Haiti's optimal reserve level would rise. dependence (see Section C); if this but the Haiti's import rate for the purpose of analysis, Haiti is classified as having a flexible exchange devaluation would be addition, that the costs of a sharp exchange rate's role as a nominal anchor suggests a significant shock. The rate may not be able to fully accommodate sizeable and thus the exchange 48 INTERNATIONAL MONETARY FUND 16. This estimate driver of these results by reducing in international oil prices is an important In bound. The decline reversed Haiti's optimal reserve level would rise. dependence (see Section C); if this but the Haiti's import rate for the purpose of analysis, Haiti is classified as having a flexible exchange devaluation would be addition, that the costs of a sharp exchange rate's role as a nominal anchor suggests a significant shock. The rate may not be able to fully accommodate sizeable and thus the exchange 48 INTERNATIONAL MONETARY FUND --- Page 50 --- HAITI degree of risk aversion may be warranted, as analysis is also designed to be risk-neutral, but some human suffering. Taken together, external shocks can quickly lead to food insecurity and may be prudent, in order to near the mid-point of 4-5 months of imports reserve maintaining reserves the costs of holding relatively low-yielding balance the use of reserves as a buffer against assets. on Haiti of Lower Oil Prices D. The Impact Haiti's terms of trade. Oil prices decline in international oil prices improves 17. The sharp the global financial crisis. As of March 2015, spot witnessed the largest decline since Outlook, have recently from one year earlier (see Regional Economic crude oil prices were down 50 percent terms-of-trade shock for Box 2.3). This sharp drop represents a large positive would by Western Hemisphere, WEO Haiti's oil balance improve including Haiti. Under the latest projections, oil importers, about 4.5 percent of GDP in FY2015. Petrocaribe financing, partially offsetting the 18. However, the oil price fall also reduces Haiti has borrowed from Venezuela under improvement in the balance of payments. Since, 2007, to obtain long-term debt at belowPetrocaribe agreement, which allows participating countries to the international the oil from Venezuela. The level of financing is tied market rates as they purchase Petrocaribe flows to Haiti were about and during the recent period of high oil prices, Petrocaribe flows to oil price of lower oil prices should reduce 4 percent of GDP per year. The current period in Haiti's balance of payments. about 2 percent of GDP, partially offsetting the improvement Haiti to carry out a fiscal The fall in Petrocaribe financing has also prompted in recent years, with 19. has financed a large part of the fiscal deficit adjustment. Petrocaribe financing projects but also for transfers to EDH. The the financing being used for domestic infrastructure in large part by reducing energy subsidies. the necessary fiscal adjustment oil authorities are pursuing unchanged in the face of the fall in international By keeping domestic pump prices essentially customs duties and excise taxes that were previously the authorities are again able to collect prices, about 2 percent of GDP). forgone (that in FY2014 represented the risk of a sudden stop. The fall in oil prices The decrease in oil prices also increases discontinuation of 20. situation in Venezuela, raising the risks of a possible exacerbates the economic large flows and has little alternative Petrocaribe program. As Haiti still receives relatively the impact on the the would be necessary, although financing sources, a significant further adjustment oil would be less than in an environment of high prices. economy for gasoline, 9.3 percent for diesel and 6.2 October 2014 (7.5 percent 2 The authorities increased fuel prices in in February 2015. percent for kerosene), but decreased prices INTERNATIONAL MONETARY FUND 49 raising the risks of a possible exacerbates the economic large flows and has little alternative Petrocaribe program. As Haiti still receives relatively the impact on the the would be necessary, although financing sources, a significant further adjustment oil would be less than in an environment of high prices. economy for gasoline, 9.3 percent for diesel and 6.2 October 2014 (7.5 percent 2 The authorities increased fuel prices in in February 2015. percent for kerosene), but decreased prices INTERNATIONAL MONETARY FUND 49 --- Page 51 --- HAITI References Better Work Haiti: garnment industry 10th biannual synthesis report under the HOPE II legislation/International Labor Office; International Finance Corporation. Geneva: ILO, 2015. Dabla-Norris, Era; Kim, Jun Il; and Shirono, Kazuko "Optimal Precautionary Reserves for Low-Income Countries : A Cost-Benefit Analysis. IMF Working Paper 11/249. 2011 Di Bella et al (2007), "Assessing Competitiveness and Real Exchange Rate Misalignment in LowIncome Countries" " IMF Working Paper WP/07/201, International Monetary Fund. Isard, Peter and Faruqee, Hamid (1998), "Exchange Rate Assessment; Extension of the Macroeconomic Balance Approach", No 167, IMF Occasional Papers, International Monetary Fund. IMF (2006), Methodology for CGER Exchange Rate Assessments, Washington, DC. International Disaster Database, available electronically at www.emdat.be Regional Economic Outlook, Western Hemisphere (2015). IMF, Washington DC. Transparency International (2014). "The Corruption Perceptions Index". Available via the Internet: http/www.transparency.org World Bank. 2014. Doing Business 2015: Going Beyond Efficiency. Washington, DC: World Bank. DOI: 10.1596/978-1-4648-0351-2. License: Creative Commons Attribution CC BY 3.0 IGO World Economic Forum (2006). "The Global Competitiveness Report 2006-2007". Available via the Internet: htp/hwwelormorg. 50 INTERNATIONAL MONETARY FUND , Washington DC. Transparency International (2014). "The Corruption Perceptions Index". Available via the Internet: http/www.transparency.org World Bank. 2014. Doing Business 2015: Going Beyond Efficiency. Washington, DC: World Bank. DOI: 10.1596/978-1-4648-0351-2. License: Creative Commons Attribution CC BY 3.0 IGO World Economic Forum (2006). "The Global Competitiveness Report 2006-2007". Available via the Internet: htp/hwwelormorg. 50 INTERNATIONAL MONETARY FUND --- Page 52 --- HAITI EXPLAINING THE ECF'S HAITI'S PUBLIC SECTOR: FISCAL TARGET' A. Introduction of fiscal public finances requires an appropriate coverage 1. A good assessment of Haiti's programs (2006-10 and 2010-14) have accounts. Although fiscal targets under IMF-supported of sector institutions with significant Central Government, there are a number public and which focused on the impact on public debt accumulation, weight in the economy, which (directly or indirectly) recent years, deficits accumulated by the of fiscal vulnerabilities.? 2 For example, over are the source has become a drain for government finances. state-owned electricity utility (EDH) sector entities other than the central The current note provides an inventory of public BRH), state-owned 2. include the central bank (Banque de la République d'Haiti, such government. These (Electricité d'Haiti, EDH), autonomous agencies enterprises (SOES) such as the electricity utility the fund for the universal education Road Fund (FER), special treasury accounts such as main constraint to as the and local authorities (municipalities). The program (PSUGO), the pension system, is the lack of financial data for most of public the compilation of public sector fiscal accounts enterprises even if these entities are autonomous agencies and state-owned entities, mainly their financial data on a regular basis. required by law to publish deficit of a (2015-2018) targets the medium-term program central 3. The new IMF-supported institutions. This subset includes, in addition to the subset of non-financial public sector resources, as well as the FER, PSUGO, all transaction financed with Petrocaribe-related as well as fiscal government, for public debt dynamics, and EDH balances. These entities are responsible collected and integrated as the treasury single vulnerabilities. Other information will be gradually state owned enterprises, and local is expanded to cover autonomous agencies, account (TSA) authorities. de la République d'Haiti (BRH) B. The Banque The BRH's net income was over The BRH has generated a profit in recent years. (see BRH 4. to the BRH's most recent audited financial statements $14 million in FY2013, according has been the return on its FX portfolio in recent years, 2014). The central bank's key income driver The interest on its FX portfolio was which has largely funded the central bank's operations. G 1.1 billion a year (about US$60 million in FY2013 (Table 1). The BRH has also earned under the terms of an agreement million) on its claims on the government in recent years, US$25 Ntamatungiro and Lawrence Norton (WHD) Prepared by Joseph 2 International Monetary Fund (2006 and 2010). and Challenges for Growth". 3 See the Selected Issues Paper "Opportunities INTERNATIONAL MONETARY FUND 51 income driver The interest on its FX portfolio was which has largely funded the central bank's operations. G 1.1 billion a year (about US$60 million in FY2013 (Table 1). The BRH has also earned under the terms of an agreement million) on its claims on the government in recent years, US$25 Ntamatungiro and Lawrence Norton (WHD) Prepared by Joseph 2 International Monetary Fund (2006 and 2010). and Challenges for Growth". 3 See the Selected Issues Paper "Opportunities INTERNATIONAL MONETARY FUND 51 --- Page 53 --- HAITI with the government pending a final settlement of these claims. Most of the central bank's expenses related to salaries, benefits, and administrative expenses. Table 1: BRH Profit and Loss Accounts, US$ Millions FY2013 FY2012 Interest and dividend income on Foreign Placements 59.9 65.1 Income from caims on the government 25.1 Income from credit operations 2.6 2.2 Interest paid -13.5 -1.3 Net profit from real estate sales 13.5 10.6 Other income 5.3 4.2 Income net of interest 106.7 Salaries and Benefits 53.7 71.6 Administrative Expenses 11.9 12.2 Maintainence of Currency in Circulation 7.2 Depreciation 4.1 3.3 Other expenses 2.9 3.5 Operating Expenses 78.7 97.7 Net Income 14.4 9.1 Source: BRH FY2013 audited financial statements, Fund staff calculations. 5. BRH's assets as of end-FY2014 were about G 147 billion (US$3.2 billion, or 37 percent of GDP). About half of the BRH's assets were held as foreign exchange reserves, and claims gross on the government (about G 49 billion, or US$1.7 billion) accounted for most of the rest (Table 2). BRH liabilities consisted mostly of deposits, money in circulation, and BRH bills outstanding. Table 2: Structure of the BRH Balance Sheet, end-September 2014 Assets millions of gourdes in millions of USS Gold 3,202 70.3 Liquid FX Reserves 81,183 1,782.0 Other FX Reserves 2,797 61.4 Claims on the Public Sector 49,463 1,085.7 Claims on the Private Sector 4,249 93.3 Other Assets 5,920 129.9 Total 146,814 3,222.6 Liabilities Foreign Liabilities 13,242 290.7 Money in Circulation 23,865 523.8 Commercial Bank Deposits and Reserves 57,601 1,264.3 Public Sector Deposits 37,134 815.1 Non-Bank Private Deposits 6,950 152.5 BRH Bills Outstanding 4,857 106.6 Capital Account 3,167 69.5 Source: BRH, Fund Staff Calculations 52 INTERNATIONAL MONETARY FUND Total 146,814 3,222.6 Liabilities Foreign Liabilities 13,242 290.7 Money in Circulation 23,865 523.8 Commercial Bank Deposits and Reserves 57,601 1,264.3 Public Sector Deposits 37,134 815.1 Non-Bank Private Deposits 6,950 152.5 BRH Bills Outstanding 4,857 106.6 Capital Account 3,167 69.5 Source: BRH, Fund Staff Calculations 52 INTERNATIONAL MONETARY FUND --- Page 54 --- HAITI debt. According to the FY2013 audited Most of Haiti's FX reserves are held in corporate in 6. FX reserves (excluding gold and participation financial statement, two-thirds of the BRH's Most of the rest was institutions) were held in corporate debt at end-FY2013: unwound. Haiti's FX international operations, which were subsequently collateral placed to conduct repurchase firms with the goal of maintaining liquidity, are reserves are managed by intenationaly-ecogribed Fund staff confirmed that, as Haiti's FX reserves are available for sale, and are held at market value. considered liquid for balance of in U.S. dollars, they are investment-grade and denominated Balance of Payments and International under the latest guidelines of the payments purposes Investment Position Manual (BPM6). the as part of an agreement to The BRH does not remit profits to government to be distributed 7. BRH law states that 25 percent of net profits are capitalization. Article 59 of the balance to special reserves for investment and 10 percent to a legal reserve, and the of to the Treasury, Board. However, as part of a memorandum BRH Executive expansion as determined by upon in the context of Haiti's the central bank that was agreed understanding to recapitalize the MEF to not remit net profits to the Treasury. the BRH agreed with ECF arrangement, C. State-Owned Enterprises entities involved in enterprises (SOES) as autonomous 8. Haitian law defines state-owned under the commercial code and are and industrial activities. They operate financial, commercial return. They are created by law and their governance expected to provide an economic and social board.' They are under the administrative team and an executive of structure includes a management transactions are supervised by the Ministry supervision of a sectoral ministry and their financial et du Contentieux Court of Accounts (Cour Supérieure des Comptes can Finance and by the and financial autonomy, the government administrative). While SOES enjoy administrative The can propose to parliament if they fell into deficit." government intervene in their management SOES are owned fully or partially (mixed of SOES that do not meet expectations. the liquidation financiers 2013.pdf. The audit is BRH can be found at hip/heswebehaet/etute which is 4 The audited financial statement of TELECO. The BRH owns about 97 percent of TELECO, of because of the BRH's holdings of residual since 2001. In the absence of audited financial statements qualified but which has not been revalued valued at G 1.9 billion TELECO, the audit is qualified. Report 14/105, available at 5 See IMF 7th Review, IMF Country of national administration. M 6 See the Decree of May 17, 2005 on organization of the executive board (3 to 9 members) are 7 According to Article 128 of the Decree of May 17, 2005, the Senate, members for a 3-year term renewable once. nominated by the government after approbation by could intervene: () deficit 17, 2005 lists 4 circumstances under which the government of the revenues of 8 Article 154 of decree of May of the previous year; (ii) the deficit exceeds 15 percent court decision greater than to a third of the revenue losses are higher than a third of the capita; and (iv) a during three years over a five-year period; exceeding (iii) 80 percent of revenues. forces the SOE to pay debt obligations INTERNATIONAL MONETARY FUND 53 renewable once. nominated by the government after approbation by could intervene: () deficit 17, 2005 lists 4 circumstances under which the government of the revenues of 8 Article 154 of decree of May of the previous year; (ii) the deficit exceeds 15 percent court decision greater than to a third of the revenue losses are higher than a third of the capita; and (iv) a during three years over a five-year period; exceeding (iii) 80 percent of revenues. forces the SOE to pay debt obligations INTERNATIONAL MONETARY FUND 53 --- Page 55 --- HAITI should be in line with the 1996 law on the 9 Private sector participation in SOES enterprises). modernization of public enterprises. program with the objective of In the late 1990s, the government began a privatization included a flour 9. investment. 10 The SOES slated for privatization injecting capital and increasing the electricity company (EDH), the national the telephone company (TELECO), banks (Banque mill, a cement factory, edible oil plant and two commercial authority (APN), the airport authority, an three enterprises were privatized, port BNC and Banque populaire d'Haiti, BPH). Only nationale de crédit, (1999) and the telecommunications namely the flour mill (1998), the national cement factory in the state portfolio include Non financial public enterprises remaining company TELECO (2010). national port authority (APN), the national airport distribution company (EDH), the Postes d'Haiti, OPH), a the electricity office (ONA), the postal office (Office des authority (AAN), the social security labor and maternity insurance office (OFATMA), third-party vehicle insurance company (OAVCT), a stake in NATCOM (former The government also has a 40 percent and a sugar factory (USJLDD). TELECO)." is EDH, which receives sound, with the key exception 10. Most SOES are financially to the central government, but government subsidies. 12 A few SOES pay dividends the FY2015 budget). The substantial limited (less than 0.1 percent of GDP in their contribution to revenue is very dividends SO that it can consolidate its capital authority (APN) was exempted from distributing port base. basis. This is the case their financial statements on a regular 11. Only a few SOES publish agencies to submit (on a regular basis) their that the law requires SOES and autonomous 13 In EDH has despite of Finance and the Court of Accounts. particular, its financial statements to the Ministry which makes it difficult to have a full picture of its financial statements since 2007, not published financial position. carrying out government missions in the 9 Article 118 (b). SOES differ from several autonomous agencies are defined by Article 118 (a); their budgets See cultural or scientific areas (see Table 3). These agencies and their employees are subject to the civil service administrative, allocations of the central government budget, are financed by can benefit from special statutes. charter, even though they (Law of September 26, 1996), allowing Haiti passed legislation on the modernization of public enterprises could take the form of a management In 1996, by March 1998. Privatization the would retain for the privatization of 9 public enterprises (joint venture). In the case of a joint venture, government of modernization contract, a concession, or a capitalization The privatization process was supervised by the Council from 20 percent to 49 percent established ownership. in 1997. of public enterprises (CMEP) banks (BNC and BPH). 11 Financial public enterprises include two commercial and Challenges for Growth". 12 See the Selected Issues Paper "Opportunities 13 Articles 150 and 151 of the decree of May 17, 2005. budget support operation for FY2005 and FY2006 under two IDA-financed of EDH's 14 EDH, APN and DINEPA were audited With the assistance from the World Bank, an audit Governance Reform Operations I and II). (Economic accounts is being conducted for the period 2007-14. 54 INTERNATIONAL MONETARY FUND BNC and BPH). 11 Financial public enterprises include two commercial and Challenges for Growth". 12 See the Selected Issues Paper "Opportunities 13 Articles 150 and 151 of the decree of May 17, 2005. budget support operation for FY2005 and FY2006 under two IDA-financed of EDH's 14 EDH, APN and DINEPA were audited With the assistance from the World Bank, an audit Governance Reform Operations I and II). (Economic accounts is being conducted for the period 2007-14. 54 INTERNATIONAL MONETARY FUND --- Page 56 --- HAITI vis-à-vis a number of SOES. Some SOES has a creditor position 12. The central government from unpaid taxes or taxes collected accumulated debts vis-à-vis the government, stemming EDH has have (over 0.1 percent of GDP in FY2014). from customers but not transferred to the Treasury power producers, creating a accumulated arrears (almost 172 percent of GDP) to independent authorities have accumulated some liability for the central government. In turn, local framework does not prevent contingent (0.5 of GDP). The legal arrears to EDH related to street lighting percent limited and guaranteed by the central debt, although existing debt it is very in the form of SOES from contracting with the domestic banking system SOES maintain a creditor position government. 2015). deposits (0.6 percent of GDP at end-February D. The Road Maintenance Fund (FER) autonomous agency created by law (of maintenance Fund (FER) is a financial under 13. The Road infrastructure on a sustainable basis. It is July 2003) with the mission to maintain road Like all autonomous agencies, it is also of the Ministry of Public works. to the the technical supervision of Finance, and its activities are submitted under the financial supervision of the Ministry external audit by the Court of Accounts. director, appointed by the Presidency, and operates 14. The FER is headed by a managing order (arrêté) of September 2005. The of a board established by an of under the supervision includes 5 members representing the Ministry Board, chaired by the Minister of Public Works, by the Ministry of the interior), transporters Public Works (2), local authorities (1 currently designed (1) and petroleum companies (1). of roads established by the Ministry The FER is charged with maintaining a list eligible the Board of the FER. 15 15. list is revised every two years, and is proposed by of Public Works; the the Tax and Customs departments, are generated by The domestic resources of FER, collected by the following taxes and fees: of gasoline and diesel) products (1Gourde per gallon A charge on petroleum 5 fees collected on automobiles alcohols, driver's licenses and passports Fees collected on cigarettes, 20 percent of road tolls. roads that are not eligible to the FER. 15 The Ministry of Public Works is charged with maintaining INTERNATIONAL MONETARY FUND 55 . 15 15. list is revised every two years, and is proposed by of Public Works; the the Tax and Customs departments, are generated by The domestic resources of FER, collected by the following taxes and fees: of gasoline and diesel) products (1Gourde per gallon A charge on petroleum 5 fees collected on automobiles alcohols, driver's licenses and passports Fees collected on cigarettes, 20 percent of road tolls. roads that are not eligible to the FER. 15 The Ministry of Public Works is charged with maintaining INTERNATIONAL MONETARY FUND 55 --- Page 57 --- HAITI Table 3.1 Haiti: list of Autonomous Entities per Ministry andCategory Autonomous entities per Ministry Entities witha administrative, cultural and scientific Financial, commercial and industrial entitities (Statemission owned enterprises) MinistryofEconmya yandFinance(MEF) Mutontgrtaergonucpny X Okedfawmm-@eilntcoen tiers(OAVCT) X Unitéd delutted scontelacomption(utcq X Sociétér nationale desparcsi industriels(SONAPI) X Fondsd'assistance économiquee ets sociale (FAES) X Banque delaRépubliqued d'Haiti( (BRH), organe det tutelle delaNATCOMetduFDI X Banquer nationale de crédit(BNC) X Directiong générale desl Impôts(DGI) X Bureaud de monéisation(BMPAD) X Administration généraled des douanes(AGD) X Banquer populairehatenneBPH) Fondsd de développement tfrontalier X X Instituthaitien des statistiques setd'informatiquel (IHSI) X MinistryofPlanninga andexternal cooperation Centred edetechniquesd de planification etc d'économie appliquée (CTPEA) X Centre national Idelinformnationg géo-spatiale(CNIGS. X Conseilr national Ides coopératives(CNC). X Obsenvatairenationale aldelapauvreté etdel l'exclusion sociale(ONPES) X Ministryo yofPublicy works, transport and communications Autorité aéroportuaire nationale (AAN) X Bureau desn minesetd del l'énergie (BME) X Conseiln Inational 16nskemmsororfOUmHl X Electricité d'Haiti(Ed'H) Fondsd'entretienr routier(FER) X Laboratoirer national dut ubâtiment et dest travaux publics(LNBTP) X Office national del l'aviationcivile (OFNAC) X Officer national du.cadastre (ONACA) X Servicer maritime den navigationd'Haitif (SEMANAH) X Directionn nationale d'eaup potable eetd'assainissement (DINEPA) X Servicer métropolitain de collecte desrésiduss solides(SMCRS) X LCentrenational des équipements(CNE) X MinistryofJustice Officer ratonaldidenticatonOh X Policenationaled d'Haiti( (PNH) X Unité centrale der ensogemeatifoucenloij X 56 INTERNATIONAL MONETARY FUND maritime den navigationd'Haitif (SEMANAH) X Directionn nationale d'eaup potable eetd'assainissement (DINEPA) X Servicer métropolitain de collecte desrésiduss solides(SMCRS) X LCentrenational des équipements(CNE) X MinistryofJustice Officer ratonaldidenticatonOh X Policenationaled d'Haiti( (PNH) X Unité centrale der ensogemeatifoucenloij X 56 INTERNATIONAL MONETARY FUND --- Page 58 --- HAITI Table 3. Haiti: List of Autonomous Entities per Ministry and Category (continued) Autonomous entities per Ministry Entities with administrative, culturala and scientific Financial, commercial andi industrial entitities (Statemission owned lenterprises) MinistryofofSocial: affairs(MAS): Ofcenstionaldaswurances vieillesse (ONA) Caisse d'assistances sociale(CAS) X X Institut del bien-êtres socialeto de recherche( (IBESR) X Officer national del l'artisanat (ONART) X Officed d'assurancet travaile letr maternité (OFATMA) Officer national Idelan migration(ONM) X X Ministryo of Education and professionalt Itraining Institutr national def formation professionnelle( (INFP) X Officer national de partenariate en éducation (ONAPE) X Programmer national de cantines scolaires(PNCS) X Ministryo ofCulture Archivesn nationalesd'Haiti X Biblothèquen nationale d'Haiti X Écoler nationale desarts(ENARTS) X Théâtrer national X Muséed dup panthéon nationalhaîtien X Bureaun national d'ethnologie X Institutd des sauvegarde du patrimoine national (ISPAN) X Pressesr nationalese etl Let Moniteur X Radionationale X Télévisionnationale d'Haiti (TNH) X Journall'Union (nont fonctionnel) X Bureaut haîtien du droitd d'auteur (BHDA) X Ministryo yofCommercea andi industry Centred def facilitation desii investisements(CFI) X Office despostesd d'Haiti X MinistryofA Agriculture, natural resources andr rural development Institutinational Idel laréforme agraire( (INARA) X Organisme de développement tdelaValléed del'Artibonite (ODVA) X Institutr nationalo du café haitien)( (INCAH) X Bureau de crédit agricole (BCA)/ nonf fonctionnel X Coordinationnationale des sécurité alimentaire( (CNSA) X Usines sucrièreJ Jeanl Léopold Dominiqued del Darbonne (USILDD) X Ministryc ofInterior andlocal authorities Direction delaProtection Civile Ministryo ofEnvironment Agence nationale desa sairesprotégéesTANAP) X Source: Haitian Authorities INTERNATIONAL MONETARY FUND 57 --- Page 59 --- HAITI donors (EU, France, and Canada) and contributions of bilateral 16. The FER also receives circumstances, the FER can borrow institutions (World Bank, IDB). Under exceptional multilateral to finance its current spending, with Board approval. on a Table 4: Haiti: Operations of the Road Fund (FER), 2013-2015 17. Resources of the FER are deposited (in millions of Gourdes) account with the BRH (compte FER). By law, 2013 2014 2015 special of FER resources is used for current Proj. up to 10 percent is used for road spending, while the remainder 346 641 600 under regular activities (85 percent) Revenue 166 197 maintenance The Ministry Fuel fees 175 180 and in case of emergencies (5 percent). Other fees : Operations of the Road Fund (FER), 2013-2015 17. Resources of the FER are deposited (in millions of Gourdes) account with the BRH (compte FER). By law, 2013 2014 2015 special of FER resources is used for current Proj. up to 10 percent is used for road spending, while the remainder 346 641 600 under regular activities (85 percent) Revenue 166 197 maintenance The Ministry Fuel fees 175 180 and in case of emergencies (5 percent). Other fees spending related to road Treasury subsidies of Public Works manages European Union 2 202 maintenance while the FER's DG manages current Other revenue for road maintenance is used 769 995 600 spending. The budget Expenditure for the national road network under the Wage bill (70 Goods and services responsibility of the central government Other current spending 737 961 and the rest to roads under the Capital spending percent), FER resources are of Economy and Finance and Fund staff estimates responsibility of local authorities. Sources: FER, Ministry limited, with allocations of only FY2013-2015 (Table 4),16 G350-650 million (0.1 percent of GDP) during E. The PSUGO Fund in May 2011 as one of the President's 5-year 18. The PSUGO Fund was announced needed resources to provide compulsory and The objective of the Fund was to mobilize free and compulsory priorities. children, under the universal, free school access to 1.5 million disadvantaged allocations to PSUGO that are (PSUGO). 17 The Fund would complement budgetary (ME). The authorities decided program investment budget of the Ministry of education executed under the telephone calls and money the following fees on international that the Fund would be financed by transfers: call minute, to be collected by the National Telecommunications US$0.05 on each incoming Council (CONATEL); the country), to be collected by financial transfers (incoming or outgoing (US$1.5 on money central bank (BRH). institutions, and transferred to the from June 2011. Initial projections had The PSUGO Fund was expected to be effective with from 19. US$360 million for the 5 years, equal contributions established the collection capacity at investment, financed with laws included FER spending under government fiscal tables add FER 16. The FY2014 and FY 2015 budget financing. Starting from FY2015, staff withdrawals on FER's bank account under domestic the FER's bank account affect net bank credit to the central of GDP) to revenue. Movements on bank to G220 million (10.05 percent revenue government 2015, FER's deposits with the central amounted government. In February South, the Great North and the West and Central Plateau. 17 The PSUGO Fund would benefit primarily the Greater 2012 with 350,000 children. The first schooling was to take place in September INTERNATIONAL MONETARY FUND --- Page 60 --- HAITI council of 15 members, including BRH, and an The Fund was to be managed by a the two sources. be for its audit. international firm would responsible independent framework, since the bill on the the Fund is operational but without a legal the 20. At present, of the Fund is still pending adoption by establishment, organization and functioning passed a bill on the Fund, with 2012, the lower house of the parliament been parliament. In August committee. But the bill has not yet clarifications on the composition of the managing collected. With regard to the fee on the Senate. In the meantime fees have been for "cost of considered by 2011 instituted the fee on money transfers transfers, BRH's circular 98 of May money operation and inspection" testing, certification, Resources of the have essentially been extra budgetary. 21. The PSUGO Fund's operations within the definition of Net Credit to the Central in a special account at the BRH, from the Fund are deposited targets. Changes in deposits, resulting Government (NCG), captured within the program through the change in NCG; however affect government financing as Fund's revenue or expenditures, recorded in the table of budget execution a the Fund's revenues and expenditures are not from FY2013, information on revenues starting counterpart: 18 For program monitoring purposes, fiscal operations. included in the ECF's table of government and expenditure was Table 5. Haiti: Operations of the PSUGO Fund, 2012-15 1/2/ Revenue Fees on End-of year Expenditure Initial international Fees on Total resources balance Implied balance PCDR phone calls international (BRH) (CONATEL) transfers (BRH) (BRH) (millions of gourdes) the Fund's revenues and expenditures are not from FY2013, information on revenues starting counterpart: 18 For program monitoring purposes, fiscal operations. included in the ECF's table of government and expenditure was Table 5. Haiti: Operations of the PSUGO Fund, 2012-15 1/2/ Revenue Fees on End-of year Expenditure Initial international Fees on Total resources balance Implied balance PCDR phone calls international (BRH) (CONATEL) transfers (BRH) (BRH) (millions of gourdes) Q1 (percent of GDP) 0.6 0.0 0.5 0.0 0.1 0.3 0.1 0.5 0.1 0.5 0.0 0.0 0.3 0.2 0.4 0.0 0.4 0.0 0.2 0.1 0.0 0.4 0.1 0.0 0.2 0.3 0.5 0.1 0.1 0.0 0.1 0.1 0.2 Q1 0.0 0.0 Sources: Ministry of Economy and Finance; and staff estimates and estimates projections. for previous years. 1/ Expenditure for FY2014 as provided by the Budget Department; and execution for the first quarter of FY2015. 2/ Data for 2015 are based on the budget law for FY2015, estimated using for FY2012 and FY2013 was tentatively 22. The PSUGO Fund's spending The Fund's resources averaged and changes in end-year deposits. information on FNE revenues under government investment, while laws however included the Fund's spending account). In 18 The FY2014 and FY 2015 budget financing (assumed withdrawals on the Fund's special the Fund's revenue is recorded under domestic to revenue. staff fiscal tables the Fund's revenue is added government INTERNATIONAL MONETARY FUND 59 on the budget law for FY2015, estimated using for FY2012 and FY2013 was tentatively 22. The PSUGO Fund's spending The Fund's resources averaged and changes in end-year deposits. information on FNE revenues under government investment, while laws however included the Fund's spending account). In 18 The FY2014 and FY 2015 budget financing (assumed withdrawals on the Fund's special the Fund's revenue is recorded under domestic to revenue. staff fiscal tables the Fund's revenue is added government INTERNATIONAL MONETARY FUND 59 --- Page 61 --- HAITI of which G 1.6 billion (US$38.7 million) FY2012-FY2013, G1.9 billion (US$45 million) a year during transfer fees and G 0.3 billion from transfers from collected from telecommunications and money year, with the difference remaining (Table 5). Expenditure averaged G 1.7 billion per lower at G 1.6 billion, PCDR resources central bank. In FY2014, the Fund'srevenue was in the Fund'sdeposits with the for in the FY2015 budget show an increase both in estimated at G 1.5 billion. Figures with spending and spending (G 1.8 billion). revenue (G 1.9 billion) F. The Pension System sector mandatory plan; and (ii) a civil system comprises: (i) a private have 23. Haiti's pension the private sector plan, major corporations service mandatory pension plan. To supplement But such schemes are protected by no voluntary pension schemes for their employees. available. 19 developed and therefore no information is readily legislation and are not supervised, is managed by ONA (Office National d'Assurance24. The private sector mandatory plan by a law of 1965 (modified by the organic law Viellesse). ONA is State-owned enterprise regulated and is under the technical supervision of the of August 28, 1967 and other subsequent decrees) with of employers, workers Social Affairs. The law provides for a board representatives Ministry of contributions by employees (6 percent of member's The plan is funded by and the government). wages). and employers (6 percent of member's wages) Coverage includes (i) for old age, disability and survivors. 25. ONA provides coverage commercial, agricultural firms); and (ii) certain employees of formal private sector (industrial, enterprises (SOES). 20 Self-employed, categories of public sector employees, mainly in state-owned on a voluntary basis, on the informal sector, and even civil servants can participate workers in the contribution of 12 percent of their salary. condition that they provide a total plan provides the following benefits: 26. The mandatory for salary during the last 10 years of contributions, Old-age pension: 1/3 of average monthly Benefits are neither indexed nor contributed during a period of at least years. those who have for employees who do not meet the adjusted for inflation. ONA has a restitution system the 20 year contribution period). The conditions for benefiting from the old-age pension (mainly benefits. represents more than 70 percent of total old-age pension earning in monthly pension is based on 1/5 of average monthly Permanent disability pension: have contributed between 10 and 20 years. the last 10 years before disability, for those who Benefits are neither indexed nor adjusted for inflation. 19 See the 2008 Financial System Stability Assessment (FSSA). 60 for women and 65 years for men in is low compared with LAC countries; e.g. years with over 20 The retirement age (55 years) at birth (64 years in 2011) is also the lowest (compared is also Chile (World Bank, 2009). But also life expectancy ratio (old in percent of working age population) 70 years in most Caribbean countries). The age dependency the lowest (7.5 percent in 2012). 60 INTERNATIONAL MONETARY FUND for inflation. 19 See the 2008 Financial System Stability Assessment (FSSA). 60 for women and 65 years for men in is low compared with LAC countries; e.g. years with over 20 The retirement age (55 years) at birth (64 years in 2011) is also the lowest (compared is also Chile (World Bank, 2009). But also life expectancy ratio (old in percent of working age population) 70 years in most Caribbean countries). The age dependency the lowest (7.5 percent in 2012). 60 INTERNATIONAL MONETARY FUND --- Page 62 --- HAITI the surviving spouse and minor dependents Survivor pension: 1/2 of the pension, split among indexed nor adjusted for inflation. (less than 18). Benefits are neither significant surpluses, ONA's financial 27. While the very low dependency ratio generates individuals contributed to the pension system remains weak.? 21 At end-2010, some 200k of the population). position beneficiaries. The coverage rate is small (about percent compared with only 2k to G 1.5 billion, for retiree benefits of only Annual contributions during FY2011 amounted because of weak management and 80 million and restitutions of G 20 millions. However, (in part due G the Board is not functional), the low return on investments supervision (in part because for NPLS, the various shocks to domestic activity, and limited the high provision of total to opportunities), bill is unusually high, representing 50 percent the high administrative costs (the wage actuarial study (Delarue, 2014) found that ONA ONA's financial position is weak. A recent become less attractive (pension spending), as the ONA scheme has has been recording no new contributors, of mortgage loans). It concluded that benefits based on only 1/3 of the salary and discontinuation ONA's situation called for deep structural reforms. by the Direction de la Pension Civile The Civil Service Pension Plan is administered 28. Sector Employees (DPC) within the Table 6. Haiti: Benefits for Public Ministry of Restitution Rate Monthly ceiling (G) Finance. 22 The plan is Age Years of contribution mandatory for civil 12,500 15,000 servants and is open 25,000 to public sector contractual 30,000 employees willing to de la Pension Civile (DPC) contribute. Benefits Source: MEF, Direction are available at the contributed to the plan (8 percent of the base of 55 for public sector employees who have contribution; age matched 100 percent of the employee salary). Until mid-1990, the government but the government intends to increase contribution has been reduced to 2-3 percent, old age benefits government The majority of retirement benefits represent its contribution in future budgets. contribution period, with a 20-year minimum to the length of the to (pensions), which vary according benefits for non-remarried spouses and children up contribution. 23 The plan also offers survivor benefits only twenty years later in 1985, which resulted in 21 ONA was created in 1965, but started providing pension opportunities, ONA ventured into extensive and risky accumulation of surpluses. Given the limited investment which it lacked the expertise, and with low repayment an including mortgage loans from 1974, for In 2015, ONA's deposits with the banking lending programs, loans were discontinued in 2007. February rates (Rajput, amounted 201). to Mortgage G 4.7 billion (1.1 percent of GDP). unit assists system essentially acts as a benefit payment agency. A coordination 22 The Direction de la Pension Civile (DPC) regional departments. the DPC in the provision of benefits in various less than 20 years. reimbursements to agents who have contributed 23 Since 2004, the plan provides INTERNATIONAL MONETARY FUND 61 , ONA's deposits with the banking lending programs, loans were discontinued in 2007. February rates (Rajput, amounted 201). to Mortgage G 4.7 billion (1.1 percent of GDP). unit assists system essentially acts as a benefit payment agency. A coordination 22 The Direction de la Pension Civile (DPC) regional departments. the DPC in the provision of benefits in various less than 20 years. reimbursements to agents who have contributed 23 Since 2004, the plan provides INTERNATIONAL MONETARY FUND 61 --- Page 63 --- HAITI for inflation 24 Old age benefits are not adjusted 24. A few exceptions apply to a few categories. age (Table 6). (MEF, 2014). Since 2007, benefits Civil servants benefit from other non-contributory fully covered by 29. medical insurance (medical and funeral services) public sector retirees benefit from introduced in favor of government employees the government. Also, a few initiatives were recently the Civil Service Pension Plan are including: (i) since 2005, loans guaranteed by since 2008, and retirees, haîtienne to retirees at an 18 percent interest rate; (ii) extended by the Banque populaire advances to employees at a 12 percent interest to the Direction de la Pension Civile (DPC) extends retirement benefits are progressively paid the of the income tax; (ii) since 2009, a service is allow payment checks are costly and prone to errors; and (iv) through bank transfers, as payments by formalities for the annual re-registration. provided to retirees in filling out administrative ratio, the system generates modest 30. Due to a relatively less favorable dependency active contributors." 25 Monthly employee In 2014, the number of retirees was 14k for 70k (G 69 million). Surpluses are savings. retirement pensions contributions (G 79 million) barely cover monthly 2014) mainly invested in bank account (0.4 percent of GDP at end-March the kept on a commercial and social sectors are expected to increase plan's T-bills. Recruitments in the police government revenue base. G. Municipalities at below 2 percent of GDP. Due to spending by Municipalities is estimated out all the 31. Aggregate municipalities do not carry responsibilities limited financial and technical constraints, the Decree of February 2006 on local established under the Constitution of Mars 1987and include social services related ("charter of local authorities)? Spending by municipalities and health services, authorities butcheries, the protection of sites, basic hygiene to police, cemeteries, markets, municipalities (Carrefour, Port-au-Prince, civil protection, and cultural infrastructure. Large services and public lighting. There are a total of Pétionville and Delmas) provide garbage collection urban area and Cap located in the Port-au-Prince 140 municipalities, with the largest municipalities Haïtien. include of national and local taxes. Resources is financed by a combination of GDP), 32. Spending and earmarked taxes (amounting to about percent transfers from the central government of the Interior. Other revenues include to Municipalities through the Ministry that are transferred treatment, as well as high government officers Prime Ministers and Ministers enjoy a special the health sector with a 25-year career Former Presidents, in the education sector and some employees in (Grands Commis). Employees of their remuneration, up to G10,000. also receive 100percent with monthly pensions of about G10 million. Following 25 The number of retirees includes about 3k retired military system, payments to the military retirees are reimbursed by the dissolution of the army and of the military pension the central government budget. and Local Authorities preparer in 2011 a compendium of 26 With USAID financial support, the Ministry of the Interior laws and decrees governing local authorities in Haiti. 62 INTERNATIONAL MONETARY FUND sector and some employees in (Grands Commis). Employees of their remuneration, up to G10,000. also receive 100percent with monthly pensions of about G10 million. Following 25 The number of retirees includes about 3k retired military system, payments to the military retirees are reimbursed by the dissolution of the army and of the military pension the central government budget. and Local Authorities preparer in 2011 a compendium of 26 With USAID financial support, the Ministry of the Interior laws and decrees governing local authorities in Haiti. 62 INTERNATIONAL MONETARY FUND --- Page 64 --- HAITI local taxes, (essentially real estate taxation), and fees on services provided by municipalities: 27 Municipalities have accumulated arrears to EDH related to public lighting (0.5 percent of GDP at end-FY2014). They currently owe no debt to the domestic banking system. 33. Municipalities follow accountability rules governing the use of public resources. Their activities, conducted in the context of annual budgets, are subject to ex-post controls by the Court of Accounts. Spending must be in line with the procurement framework; a Decree of September 5, 2009 (on procurement) sets the thresholds for municipalities at lower levels, with even lower levels for smaller municipalities. Economic data on municipalities is lacking and reporting is delayed, sometimes by more than one year, making monitoring difficult. These taxes are notably instituted by the Law of August 20, 1996 on the Contribution to the Fund for the Management and Development of Local Authorities, and the Law of September 28, 1987 on the business tax (patente). INTERNATIONAL MONETARY FUND 63 of Accounts. Spending must be in line with the procurement framework; a Decree of September 5, 2009 (on procurement) sets the thresholds for municipalities at lower levels, with even lower levels for smaller municipalities. Economic data on municipalities is lacking and reporting is delayed, sometimes by more than one year, making monitoring difficult. These taxes are notably instituted by the Law of August 20, 1996 on the Contribution to the Fund for the Management and Development of Local Authorities, and the Law of September 28, 1987 on the business tax (patente). INTERNATIONAL MONETARY FUND 63 --- Page 65 --- HAITI References Financial Statements for FY2013. December 2014, Banque de la République d'Haiti (BRH), Audited financiers 2013.pdf. available at atpo/bwooebrhnetisuts. 2", Appendix II to a report 2014, "Rapport composante actuarielle - Composante Delarue, Antoine, on Hait's pension system. prepared for the government la période allant du 1er octobre 2013 d'Entretien Routier (FER), 2015, < Etats Financiers pour Fonds 2015. au 20 septembre 2014 >, FER, February National Fund for Educatuion (FNE) by Martelly", Libre, 2011, "Haiti - Education: launch of the - Haiti Sararemhweabasr Three-Year Arrangement Under the Poverty Monetary Fund, 2006, "Haiti: Request for a Board Discussion; International Report; Staff Press Release on the Executive Reduction and Growth Facility-Staff Report No. 06/441, Washington D.C.). Statement by the Executive Director for Haiti" (Country and No. Financial System Stability Assessment", I Coutry Report International Monetary Fund, 2008, "Haiti: 08/112, march 2008, Washington D.C. Article IV Consultation and Request for a Three-Year International Monetary Fund, 2010, "Haiti: 2010 Staff Supplement; Public Information Arrangement Under the Extended Credit Facility-Staff Report; the Executive Director for Haiti" Executive Board Discussion; and Statement by Notice on the (Country Report 10/263, Washington D.C.). under the Extended Credit Facility, Requests for Fund, 2014 "Haiti: Seventh Review Criteria- -Staff IMF Monetary Criterion, and Modification of Performance Waiver of Nonobservance of Performance Executive Director for Haiti. Report; Press Release; and Statement by the Centrale de l'Etat >, September Portant Organisation de l'Administration Le Moniteur, 2005, < Décret 27, 2005. Professionnelle (MENFP), 2014, < Programme Ministère de l'Education Nationale et de la Formation annuel Exercice 2013-14 >, Gratuite et Obligatoire (PSUGO) - Bilan de Scolarisation Universelle, MENFP, October 2014. Entreprises Publiques (Oct 2012 à Fév and Finances (MEF), 2014, < Créances Ministry of Economy (DGC), MEF. 2014) >, Direction Générale des Impots system for public employees and Finances (MEF), 2014, "Note on the pension Ministry of Economy Direction de la Pension Civile (DPC). prepared" by the 64 INTERNATIONAL MONETARY FUND (PSUGO) - Bilan de Scolarisation Universelle, MENFP, October 2014. Entreprises Publiques (Oct 2012 à Fév and Finances (MEF), 2014, < Créances Ministry of Economy (DGC), MEF. 2014) >, Direction Générale des Impots system for public employees and Finances (MEF), 2014, "Note on the pension Ministry of Economy Direction de la Pension Civile (DPC). prepared" by the 64 INTERNATIONAL MONETARY FUND --- Page 66 --- HAITI Ministère de l'Intérieur et des Collectivités territoriales de la Republique d'Haïti (MICT), 2011, < Recueil de textes normatifs annotés entourant l'action locale >, MICT, April 2011. Organic Law of August 28, 1967 creating and organizing Office National d'Assurance (ONA). Rajput, Vishal, 2013, "Pension Reforms in Haiti: Retirement Savings Plan Along With a Credible Plan, 2013 - ojs.geneseo.edu. "Social Security Programs Throughout the World: The Americas, 2009 - Haiti." Ssa.gov. Web. 15 Apr. 2012. <http://www.pension-watch.net/pensions/about-social-pensions/about-social-pensions/whysocial-pensions/>, The World Bank, 2009, Strengthening Caribbean Pensions: Improving Equity and Sustainability", Report No. 47673-LAC, Washington D.C. INTERNATIONAL MONETARY FUND 65