Haiti—Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding

Port-au-Prince, June 16, 2004

Mr. Rodrigo de Rato
Managing Director
International Monetary Fund
700 19th Street, N.W.
Washington, D.C. 20431
U.S.A.

Dear Mr. de Rato:

1. Haiti is in a period of difficult political transition in the aftermath of an internal conflict and a change in government. The transition government that was formed in early March 2004 is committed to leading the country to regional, parliamentary and presidential elections in 2005, while restoring macroeconomic stability. The immediate priority, however, is to re-establish key public services and restore security amidst a grave humanitarian crisis. Beyond the next few months, the government is faced with the daunting task of restarting the economy and rebuilding the institutions of Haiti in the areas of health, education, justice, infrastructure, human rights and police, all of which virtually collapsed during the conflict.

2. The economic impact of the conflict has been severe. The physical damage is estimated at about 5.5 percent of GDP. In addition, the conflict led to the closure of businesses for several weeks and restricted movement of commercial goods, resulting in disruptions in the supply system. This is expected to cause real GDP to decline by about 5 percent in this fiscal year. The decline in economic activity and the breakdown of security undermined the flow of government revenues, severely disrupting the government's already precarious financial position. To avoid monetary financing of the soaring budget deficit, we have been curbing government expenditure. However, these austerity measures are socially and politically unsustainable beyond the next few months, and financial assistance from bilateral and multilateral donors is urgently needed.

3. The transition government is determined to re-establish financial stability and improve governance and transparency in the public sector. To this end, we have formulated an economic program for the period April-September 2004 that focuses on macroeconomic stabilization. We believe that the macroeconomic framework underpinning this program can provide the basis for stabilizing the economy and establishing a track record of policy implementation toward a program that could receive financial support from the Fund. It will also help in mobilizing donor assistance. Key elements of this program are summarized in the attached Memorandum of Economic and Financial Policies. The government requests that IMF staff monitor and follow up the execution of this program over the indicated period.

4. The government will communicate to the IMF the information needed to monitor progress in implementing the program. The authorities intend to review with IMF staff the progress made during the first three months of the program by September 2004 at the latest.

Sincerely yours,

Memorandum of Economic and Financial Policies (MEFP)
for the Second Semester of FY 2003/04

I. Background

1. Haiti has experienced a period of severe and drawn-out political crisis that culminated in an uprising in early 2004. The effects of several months of civil disorder and of the internal conflict have been severe, and have been felt in all spheres of social and economic life. Numerous lives were lost, hundreds of people were injured, and economic activity was disrupted for weeks. There was substantial damage to government infrastructure and to private property. Many businesses are still unable to re-start normal operations, and it is becoming clear, as the full extent of the damage is tabulated, that many others will not recover at all, resulting in the elimination of thousands of direct and indirect jobs. Additional losses have resulted from the devastating floods in the southeastern part of Haiti in late May.

2. The government that took office on March 17 inherited an economy in deep crisis. In the months preceding the change in government, the economy was barely growing while financial discipline was breaking down. The budget deficit widened to 2.3 percent of GDP in the first half of 2003/04 as government spending expanded sharply. As a result, central bank financing of the budget breached the indicative target under the previous SMP by the equivalent of 1.2 percent of GDP at end-March 2004. Haiti's net international reserves had been at a historic low (US$17 million), and external payments arrears continued to accumulate.

3. The severe impact of the political conflict and armed uprising in early 2004 has worsened the already difficult economic situation. Infrastructure and property damages are estimated at about 5.5 percent of GDP, and output is expected to decline by 5 percent in 2003/04. Monthly inflation increased to 6.5 percent in April from 1.5 percent in February reflecting widespread supply constraints. The government's financial position further deteriorated as revenues declined substantially due to the fall in economic activity, weakened administrative capacity and concerns about security. At the same time, the transition government has undertaken emergency outlays to rehabilitate key government facilities and to safeguard the provision of basic public services. Faced with revenue shortfalls, the government has been curbing nonessential expenditures while developing an emergency plan to prioritize other expenditures.

II. Program for April-September 2004

5. The key objective of our program is to stabilize the economy and cope with the immediate economic impact of the political conflict and armed uprising earlier this year, and to gain support of the international community. Toward this goal, we have developed a macroeconomic framework for the months ahead that seeks to balance our objective of financial discipline with the need to safeguard social cohesion and protect the most vulnerable groups. We believe that the policies specified below would provide the basis for stabilizing the economy and facilitate mobilization of assistance ahead of the donors' conference in mid-July.

6. The government's macroeconomic program for the second half of the fiscal year (April-September 2004) aims at containing inflation at 14 percent (six-month basis) and maintaining net international reserves (NIR) above the program floor of US$22 million. Achievement of these targets depends crucially on budget discipline and easing the burden on monetary policy, in order to create room for bank financing of business recovery. Accordingly, the government is committed to raising fiscal revenues, curtailing discretionary spending, and enhancing transparency and accountability of public sector operations, including in those of the public sector enterprises. The key economic objectives of the program are as follows:

A. Fiscal Policy

7. The 2003/04 budget law envisaged for the period April-September 2004 revenues of G 6.6 billion, expenditures of G 7.8 billion, and the overall deficit of G 1.2 billion, to be financed mostly by net credit from the BRH. Given that the objectives of the original budget law are no longer attainable, the government has formulated an emergency budget plan for the rest of the fiscal year. This plan is centered on containing central bank financing of the deficit to the original budget ceiling of G1.2 billion (0.8 percent of GDP), improving tax compliance, and curbing and prioritizing expenditure. Our revised budget projection for FY 2003/04 are presented in a table below.

8. During April-September 2004, revenues are projected to reach 4.3 percent of GDP, as monthly revenue collection gradually recovers in response to our efforts to strengthen tax administration in the capital city, steps being taken to enhance administrative capacity in the provinces, and forceful recovery of tax arrears. Despite these efforts, however, revenues are expected to reach only about 90 percent of the levels targeted in the original budget. The better-than-expected revenue collection performance during April and May is in part attributable to the collection of arrears.

9. Regarding expenditure, the government has stopped all nonessential outlays, and spending has been authorized only for wages and goods and services necessary to sustain basic government operations. During April-May, expenditure cuts (relative to budgeted levels) amounted to G1.0 billion, consistent with the shortfalls in government revenue. For the period ahead, we have developed a mechanism to authorize expenditure levels consistent with the resources we have at our disposal. We will continue to give priority to essential expenditures such as wages, emergency outlays, and social expenditures that benefit the poor, and all other outlays will be delayed until donor support is mobilized.

10. Even taking into account these expenditure cuts, projected revenues and the central bank financing envisaged in the budget law for April-September 2004, there would still remain a financing gap of G 2.8 billion (2.0 percent of GDP). An even larger financing gap is estimated when the financing needed to clear the arrears to the World Bank and other creditors is taken into account. To close this gap without recourse to potentially destabilizing further expenditure cuts and central bank financing, we have requested donor assistance.

B. Monetary and Exchange Rate Policy

11. The monetary program for the second semester of FY 2003/04 aims at lowering inflation and increasing NIR to US$28 million; NIR in any case will not fall below the program floor of US$22 million. To this end, the BRH will continue to issue bonds to control gourde liquidity. If external financing is insufficient to cover the budget gap during the second half of the present fiscal year, the BRH could temporarily increase its net financing of the government by an additional G400 million, but this financing would be fully sterilized by issuing BRH bonds. The government will repay this amount to the BRH once additional external budgetary support is mobilized. The authorities will avoid foreign exchange market intervention, except for meeting the target on net international reserves of the BRH. Depending on the evolution of official reserves and of the exchange rate, and the progress in lowering inflation, consideration may be given to a gradual easing of monetary policy later in 2004.

12. Although the banking system has not been severely affected by the conflict, the BRH will continue to monitor banks' financial condition, and in particular the evolution of nonperforming loans and capital adequacy. The BRH will consult with Fund staff if emergency measures are necessary to restore the financial health of commercial banks. We have requested technical assistance from the IMF to assess the financial position of the central bank and to review the monetary policy framework. In addition, before end-September 2004 we will undertake an interim external audit of the BRH for the first half of 2003/04 and initiate preparations for an IMF safeguards assessment.

C. Structural Reforms and Governance

13. We are determined to take forceful steps to improve governance and transparency, and in particular implement the measures that had been already initiated under the previous SMP.

• The government is already designing procedures (with IDB support) to strengthen expenditure management, including by substantially reducing the use of discretionary current accounts. We will reduce the number of current accounts to one per ministry and per government agency by end-June 2004. Spending through these accounts will be limited to small emergency outlays not exceeding 15 percent of budgetary credits by June 2004, and not exceeding 10 percent of said credits by September 2004.
  
  
• We will also carry out a census of employees in all ministries, government agencies, and key public sector enterprises to verify actual employment with payrolls of each entity, by end-July 2004.
  
  
• Regarding revenue collection, we have appointed new managers for public sector enterprises, and assigned tax officers from the large-taxpayer unit to public enterprises to oversee their tax payments.
  
  
• The authorities will begin preparations to extend the operations of the pre-shipment inspection firm (SGS) to ports of entry outside of Port-au-Prince and the border with the Dominican Republic. In particular, by end-July 2004, we intend to agree with SGS on a plan of action and a calendar for the extension of its operations to the above entry points.
  
  
• We will also establish a program for the reinforcement and use of the central taxpayer file on the basis of taxpayers' Fiscal Identification Number (NIF) (end-September 2004).

14. The government is deeply committed to improving governance in the public sector. To this end, external audits of five major public enterprises (based on the terms of reference already prepared by World Bank staff) will be undertaken, once external financing is identified. We have requested financial assistance from the World Bank, IDB, and European Union to help prepare the financial accounts of the electricity company, EDH, and telecommunications company, Teleco, for subsequent management and financial audits by international firms, and to launch international audits of the three smaller public enterprises, AAN (Airport Authority), APN (Seaport Authority) and CAMEP (Metropolitan Port-au-Prince Potable Water Authority). We are setting up an anti-corruption unit within the Ministry of Economy and Finance, and we will strengthen the operational capacity of the Financial Intelligence Unit (UCREF) by September 2004.

15. We intend to publish the letter of intent (LOI) and the MEFP for this program to keep the public informed about the government's policies and objectives and to reaffirm our commitment to transparency and economic reform. We will also publish the interim budget and regularly (at least quarterly) publish budget execution on the web and/or other media. The government will prepare a draft budget for FY 2004/05 before the start of the fiscal year and will discuss this budget with IMF staff by September 2004 at the latest.

D. Financing and Arrears Clearance

16. The Interim Cooperation Framework based on the May 2004 multi-donor needs assessment mission will serve as a basis for pledging financial assistance at the donor's conference, now scheduled for mid-July. Meanwhile, we are contacting our bilateral and multilateral donors to identify possible external budgetary support, and in particular the financing that could be disbursed before end-September 2004. Conditionality for the second tranche of the investment sector loan from the IDB is largely completed and disbursement of US$14.5 million is expected in the last quarter of this fiscal year. Also, discussions have been initiated on the conditionality for a new budget support loan from the IDB of up to US$25 million. The United States has announced its intention to provide a budget support grant of US$35 million, a part of which could be disbursed this fiscal year. In addition to the financing of the budget gap, the government is preparing a number of projects that could be supported by financing from multilateral and bilateral donors.

17. The government is committed to develop a plan for the comprehensive clearance of all of Haiti's external arrears, in consultation with the staffs of the IMF and the World Bank. We intend to mobilize donor financing to enable clearing all arrears to the World Bank by end-September 2004. We are also working with our bilateral creditors to agree on the process for clearing other arrears.

E. Program Monitoring

18. Performance under the program will be monitored using quarterly indicative targets, and quarterly reviews. Indicative targets for end-June 2004 and end-September 2004, as specified in Table 1, relate to net international reserves and net domestic assets of the central bank; net domestic banking sector credit to the nonfinancial public sector; net central bank credit to the central government; and domestic arrears of the central government. The main policy actions envisaged under the program are listed in Table 2. Approval by the management of the Staff-Monitored Program is subject to the implementation of the prior action of establishing a system of timely reporting of daily and weekly monetary and fiscal indicators, as stipulated in the Technical Memorandum of Understanding, to ensure adequate monitoring of the program.

19. The government will not impose restrictions on payments and transfers for international transactions, introduce new or intensify trade restrictions for balance of payments purposes, resort to multiple currency practices, or enter into bilateral payments agreements incorporating restrictive practices with other IMF members. Haiti will consult with the IMF periodically, in accordance with the IMF's policies on such consultations, concerning the progress made by Haiti in the implementation of policies and measures designed to address the country's balance of payments difficulties.

Table 2. Haiti: Proposed Main Policy Actions under the SMP
Prior Action
1.	Produce fiscal and monetary indicators as stipulated in the Technical Memorandum of Understanding (one week).
Other Policy Actions
Fiscal Policy
1.	Agreement with Fund staff on an interim budget from April-September 2004, which would contain central bank financing of the deficit to G1.2 billion.
2.	Agreement with SGS by end-July 2004 on an action plan to extend the operations of the pre-shipment inspection firm (SGS) to ports of entry outside of Port-au-Prince and to the border with the Dominican Republic.
3.	Establishment of a program for the reinforcement and use of the central taxpayer file on the basis of taxpayers' Fiscal Identification Number (NIF); (end-September 2004).
4.	Implement revenue and expenditure nomenclature for the 2004/05 budget.
5.	Prepare draft budget for FY 2004/05 before the start of the fiscal year.
Monetary and financial sector policy
1.	Issue central bank bonds as necessary consistent with the monetary framework.
2.	Refrain from intervention in the foreign exchange market except for transactions aimed at smoothing excessive exchange rate fluctuations, and meeting the NIR target.
3.	Undertake an interim external audit of the BRH (end-September 2004).
4.	Initiate preparations for the IMF safeguards assessment.
Program financing and arrears clearance
1.	Develop a plan for the comprehensive clearance of external arrears, in consultation with the staffs of the IMF and World Bank, and present a plan for clearance of arrears to the World Bank during the period covered by this SMP.
Governance
1.	Reduce the number of current accounts to one per Ministry and per government agency by end-June 2004, earmarked for small emergency outlays.
2.	Limit outlays through current accounts to 15 percent of budgetary credits for nonwage current spending by June 2004 and to 10 percent by September 2004.
3.	Prepare the accounts of EDH and Teleco for international audits, and launch international audits of AAN, APN and CAMEP once external financing is identified.
4.	Carry out census of employment in public sector enterprises to eliminate "ghost workers" (end-July 2004).
5.	Establish an anti-corruption unit within the Ministry of Finance.
6.	Publish the interim budget and regularly (at least quarterly) publish budget execution on the web and/or other media.

Technical Memorandum of Understanding

Definition of cumulative targets and adjustments

The Ministry of Economy and Finance, the Bank of the Republic of Haiti (BRH), and Fund staff will use the following definitions of indicative targets and adjustments of the indicative targets to monitor the quarterly performance under the staff monitored program for April 2004-September 2004 (second semester of FY 2003/04).

I. Definitions

A. Net BRH Credit to the Central Government¹

1. The change in net BRH credit to the central government is defined as, and will be measured using:

1. Change in net domestic credit to the central government from the BRH according to Table 10R of the BRH from the stock of end-March 2004;
   
   
2. Change in the stock of special accounts (European Union, PL-480, rice of Japan, and United States) according to Table "Comptes Spéciaux" of the BRH from the stock of end-March 2004 will be excluded from change in net domestic credit to the central government as defined above.²

2. Changes in any other special account (as defined in footnote 2) maintained or established at the BRH will be treated as in 1.b above.

3. The changes will be measured on a cumulative basis from the stock at end-March 2004.

B. Net Domestic Banking Sector Credit to the Nonfinancial Public Sector³

1. The change in net domestic banking sector credit to the nonfinancial public sector is defined as, and will be measured using:

1. Change in the stock of net domestic credit of the public sector from the BRH according to Table 10R of the BRH from the stock of end-March 2004;
   
   
2. Change in the stock of net domestic credit of the public sector from the Banque Nationale de Credit (BNC) according to Table 610 of the BRH from the stock of end-March 2004;
   
   
3. Change in the stock of net domestic credit of the public sector at other domestic banks; and
   
   
4. Change in the stock of special accounts (European Union, PL-480, STABEX, rice of Japan, and United States) according to Table "Comptes Spéciaux" of the BRH from the stock of end-March 2004 will be excluded from the definition of net domestic banking sector credit to the nonfinancial public sector.

2. Changes in any other special account (as defined in footnote 2) maintained or established in the BRH, BNC, or BPH will be excluded.

3. The changes will be measured on a cumulative basis from the stock at end-March 2004.

C. Net International Reserves

1. The change in net international reserves will be measured using:

1. Change in net international reserves ("Réserves de change nettes" of the BRH Table 10R) from the stock of end-March 2004; and
   
   
2. Minus the change in U.S. dollars deposits of commercial banks at the BRH ("Dépôts à vue US$ des bcm à la BRH" of the BRH Table 10R) from the stock of end-March 2004.

2. Data will be valued at the corresponding end-period market exchange rate.

3. For definition purposes, net international reserves are the difference between the BRH's gross foreign assets (comprising gold, special drawing rights, all claims on nonresidents, and claims in foreign currency on domestic financial institutions) and reserve liabilities (including liabilities to nonresidents of one-year maturity or less, use of Fund credit, excluding trust funds, and any revolving credit from external financial institutions). Swaps in foreign currency with domestic financial institutions and pledged or otherwise encumbered reserve assets are excluded from net international reserves.

4. The changes will be measured on a cumulative basis from the stock at end-March 2004.

D. Net Domestic Assets of the BRH

1. The change in net domestic assets of the BRH is defined as, and will be measured using:

1. Change in currency in circulation ("Monnaie en circulation" of the BRH Table 10R); and
   
   
2. Minus the change in the U.S. dollar amount of net international reserves (program definition according to C above), converted into gourdes at the program exchange rate.

2. The program definition of net domestic assets of the BRH will use a program exchange rate of G 40 per U.S. dollar for the period April 2004-September 2004.

3. The changes will be measured on a cumulative basis from the stock at end-March 2004.

E. Nonconcessional Debt

1. The definition of debt comprises all instruments, including new financial instruments that share the characteristics of debt, as set forth in paragraph No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No.12274-(00/85), August 24, 2000).

2. Concessional loans are those loans that provide a grant element of at least 35 percent based on the corresponding OECD's Commercial Interest Reference Rates (CIRRs) as of September 2000.

3. The indicative target limits exclude conventional short-term import-related credits.

4. The ceilings for contracting nonconcessional loans by the central government will be set at zero throughout the program period.

F. Government Current Accounts

1. Ministerial discretionary accounts are mechanisms for channeling expenditures. In principle, the use of these accounts should be limited to unforeseen emergency outlays.

2. The BRH will be providing monthly information to the Fund staff on the stock of these current accounts for the central government. Central government is as defined in footnote 1.

3. The Ministry of Economy and Finance will be providing monthly information to the Fund staff on transfers to these current accounts for the central government. Central government is as defined in footnote 1.

II. Quarterly Adjustments

The quarterly indicative targets will be adjusted for the following amounts:

A. Adjustment for Domestic Arrears Accumulation

The ceilings for net BRH credit to the central government and the net domestic banking sector credit to the nonfinancial public sector will be adjusted downwards for the amount of domestic arrears accumulation.

B. Adjustment for External Loan Budgetary Support

1. If external budgetary support (other than for arrears clearance) falls short of the budget gap by September 30 (as identified in paragraph 10 of the MEFP), the ceilings on BRH financing of the government, the public sector and on BRH net domestic assets will be adjusted upward by such a shortfall or G 400 million, whichever is smaller, converted into gourdes at the program exchange rate. The floor on the NIR will not be adjusted downward by the corresponding amount. The adjusters will be calculated on a cumulative basis and apply to the September 30, 2004 test date.

2. If external loan disbursements for budgetary support (other than for arrears clearance) exceed the budget gap by September 30, 2004, the ceilings on BRH financing of the government, the public sector and on the net domestic assets will be adjusted downward, and the floor on the NIR will be adjusted upward, by the amount of excess financing. The adjusters will be calculated on a cumulative basis from April 1, 2004.

III. Provision of Information to IMF Staff

To ensure adequate monitoring of the program, the authorities will provide daily and weekly monetary and fiscal indicators to IMF staff.

A. Daily

Monetary Indicators: (a) exchange rate; (b) volume of foreign exchange transactions, of which BRH sales and purchases; (c) gross international reserves; and (d) net international reserves.

These data will be reported with maximum three-day lag (14-day final).

B. Weekly

Monetary Indicators: (a) stock of BRH bonds; (b) deposits at commercial banks (in gourdes and U.S. dollars); (c) Credit to private sector (in gourdes and U.S. dollars); (d) credit to public sector (net); and (e) currency in circulation.

Fiscal Indicators: (a) receipts and (b) expenditures.

These data will be reported with maximum five-day lag (four-week final).