Country Reports

January 7, 2015

IMF Multi-Country Report: Housing Recoveries: Cluster Report on Denmark, Ireland, Kingdom of the Netherlands—the Netherlands, and Spain

Description: This report examines the experiences of four European countries that have had large house-price declines in recent years. In particular, it examines the experiences of Denmark, Ireland, the Netherlands, and Spain—four countries in which the house-price cycle has been especially large and that share a similar institutional environment (a common monetary policy and the EU’s institutional framework)—with a view to exploring how policies can best support economic recovery in the wake of a house-price bust. The paper draws on and synthesizes related Selected Issues papers that are being or have been drafted as part of the 2014 Article IV consultations with these countries. These countries’ experiences share similarities, but also important differences. Shocks to house prices, unemployment, and bank balance sheets were most severe in Ireland and Spain, reflecting in part a higher amplitude of residential construction. However, the boom- bust cycle has, together with other shocks, left all four countries facing significant output gaps, as well as elevated levels of private-sector debt that pose headwinds for growth. Promoting recovery following a house-price bust requires a multi-pronged strategy. Large house-price busts can leave countries facing wide output gaps, a highly indebted private sector, and weaker bank balance sheets. Addressing these problems simultaneously can be challenging, as efforts often involve trade-offs (e.g., faster deleveraging can widen output gaps). A careful and multi-pronged strategy is thus required to minimize trade-offs and accelerate sustainable recovery. Important progress has been made in this regard in all four countries.

January 5, 2015

Haiti: Ex Post Assessment of Longer-Term Engagement

Description: EXECUTIVE SUMMARY Haiti’s 2006 and 2010 Fund-supported programs started under very different circumstances but shared the main objectives of preserving macroeconomic stability and creating the conditions for a sustained growth takeoff through structural reform. The 2006 program started as Haiti was making progress toward macroeconomic stabilization. Reducing inflation and avoiding fiscal dominance of monetary policy were top priorities. The 2010 program started in the aftermath of a devastating earthquake. It faced the challenges of dealing with a huge inflow of aid and scaling up public investment. Both programs aimed to foster reforms to address long-standing governance and transparency concerns, as well as improving revenue mobilization to increase fiscal space and reduce fiscal vulnerabilities. Growth was to rise to 4-6 percent, an ambitious objective given Haiti’s long history of serious fragility with near zero or negative growth. There were notable successes during the two programs. Despite a series of shocks, inflation remained in single digits and international reserves increased by more than expected, which helped to limit exchange rate volatility in the context of the large aid inflow. Program performance criteria effectively eliminated central bank credit to the government, thus reducing risks of fiscal dominance. Structural reforms also advanced, particularly during the 2006 program which coincided with the HIPC process. Revenue administration improved, with tax revenue rising steadily over the two programs. These achievements were not negligible given Haiti’s history.

January 5, 2015

Haiti: Eighth Review Under the Extended Credit Facility and Request for Waiver of Nonobservance of Performance Criterion

Description: EXECUTIVE SUMMARY This is the final review under the Extended Credit Facility (ECF) arrangement. The program contributed to maintaining macroeconomic stability, and there was progress on structural reforms. The authorities intend to request a successor arrangement under the ECF. A new finance minister was appointed in April; uncertainly remains on the timing of elections. Preliminary data suggest that GDP in FY2014 grew by 3.5–4 percent, while inflation increased slightly to about 5 percent. An increase in fuel prices (in October) should result in fiscal savings of at least 1 percent of GDP during FY2015. The March performance criterion on net international reserves (NIR) was met, but although the deficit was lower than projected, the performance criterion on net central bank credit to the central government was missed. Downside risks are significant and include a pull-back of Venezuela-related flows, a resumption of political tensions, and vulnerability to weather events. A total of SDR 1.638 million will become available upon completion of this review, bringing total disbursements under the ECF to SDR 40.950 million. Key Policy Recommendations: • The policy mix, in particular the adjustment going forward, should come from a lower fiscal deficit rather than from a tighter monetary policy. The FY2015 fiscal deficit should be reduced to mitigate financing risks as part of a medium-term plan to restore fiscal sustainability. • The central bank should let the exchange rate adjust more to market pressures. Intervention should be parsimonious, geared at avoiding excess volatility and disorderly movements in the exchange rate; it should be guided by fundamentals in the medium term. • Progress on structural reforms (including on the energy sector and on public financial management) should catalyze more donor support and is essential for supporting growth. A possible new ECF arrangement would entrench macroeconomic stability and promote policies to generate sustained GDP growth.

December 30, 2014

Iceland: Technical Assistance Report - IPSAS in Iceland: Towards Enhanced Fiscal Transparency

Description: This Technical Assistance report on Iceland discusses that the issue of maintaining alignment with budgets and budgetary reports that are expected to focus on Government Finance Statistics Manual of 2001 (GFSM 2001) indicators. Consolidated “whole-of-government” financial statements of the central government will facilitate fiscal policy informed by a broader view of public finances. Recognition and systematic accounting of physical assets are expected to enhance transparency and facilitate management and budgetary decisions. Under the current framework such assets—including roads, bridges, tunnels, land, and buildings—are treated as expenses and written off in the year in which they are acquired. Some changes in valuation of financial assets and liabilities may also be required. The cash flow statement should provide information about key revenues and expenditures. The budget should recognize depreciation as an expense but need not appropriate for depreciation at this stage. The budgeted operating statement should include depreciation as an expense to determine the operating result.

December 30, 2014

Grenada: First Review Under the Extended Credit Facility Arrangement and Financing Assurances Review

Description: EXECUTIVE SUMMARY Extended Credit Facility (ECF) Arrangement: On June 26th, 2014, the Executive Board approved a three-year arrangement for a total amount equivalent to SDR 14.04 million (about US$21.7 million, 120 percent of quota). The equivalent of SDR 2.04 million was disbursed upon approval of the arrangement. The equivalent of SDR 2 million (about US$3 million) will be made available upon Executive Board completion of the first review. Recent Developments: The economy is slowly recovering from a protracted recession, but domestic demand remains weak. Financial balance sheets are strained by non- performing loans, private credit continues to contract, and inflation has been negative or low. Growth is expected to remain positive but below potential over the next two years, as private and public balance sheets are repaired. Discussions with creditors on a comprehensive restructuring of public debt have intensified. Program Performance: Policy implementation is off to a good start. The fiscal consolidation is proceeding as programmed and all quantitative performance criteria for the first review were met. Progress has also been made on the structural reform agenda, with two structural benchmarks met or expected to be met, and two to be finalized soon. In particular, the authorities overhauled the public financial management framework, prepared an initial strategy to strengthen weak public institutions and are modernizing the investment promotion framework. First Review: No substantive changes were made to the macroeconomic framework. Discussions focused on the fiscal outlook for 2014-15, and on structural reforms going forward. No changes are proposed to the programmed fiscal targets. Proposed new structural conditionality focuses on a continued strengthening of the fiscal policy framework through implementing regulations, debt management and revenue administration reforms, as well as a framework for sustainable use of receipts under the new citizenship-by-investment program. The program is still in early stages, and implementation risks remain.

December 30, 2014

Sudan: Staff Report for the 2014 Article IV Consultation and Second Review Under the Staff-Monitored Program

Description: KEY ISSUES Context: Sudan’s economy has yet to recover from the shock of South Sudan’s secession three years ago, which took away three-quarters of oil production, half of its fiscal revenues, and two-thirds of its international payments capacity. Despite progress in implementing policies to address the resulting imbalances, inflation remains high and growth sluggish. Macroeconomic adjustment has been complicated by structural weaknesses, a heavy debt burden, U.S. sanctions, and volatile domestic and regional political factors. The authorities embarked earlier this year on a stabilization program supported by a Staff-Monitored Program (SMP). The program runs through end-2014, and the authorities have not yet decided if they want a new SMP; the mission for the third SMP review in December will discuss the matter with them. Developments, outlook, and risks. Economic performance this year has been mixed as growth has remained subdued and inflation still high at about 40 percent. Growth is expected to rebound in 2015, but the outlook remains uncertain. The risks are largely tilted to the downside, although prospects of a successful national dialogue could lead to resolution of domestic conflicts and improved international relations. Article IV. Discussions focused on policies to secure macroeconomic stability, strengthen social safety nets, and a move to sustainable and inclusive growth. Fiscal consolidation (through revenue mobilization and expenditure rationalization, including a gradual phase-out of fuel subsidies) should continue, accompanied by increased public investment and social spending. Tight monetary policy and lower central bank financing of the government should help lower inflation. There is also a need for steps to lower the large premium in the foreign exchange market. Stronger supervision is needed to improve banks’ resilience. More should be done to improve the business climate to boost growth. Program performance: The program remains on track. The authorities continue to minimize non-concessional borrowing and maintain satisfactory track record of payments to the Fund. They recently devalued the official exchange rate by 3 percent to help address external imbalances, which together with a large appreciation of the parallel market rate, has helped lower the premium. Going forward, priority should be given to further reducing inflation by continuing fiscal consolidation, tightening monetary policy, and gradually closing the gap between the official and parallel exchange rates. Debt relief. Relief requires reaching out to creditors, normalizing relations with international financial institutions, and continuing to establish a track record of cooperation with the IMF on policies and payments. The authorities’ agreement with South Sudan to extend the “zero option” by two years is a positive step.

Notes: Also available in Arabic

December 29, 2014

Tunisia: Fifth Review Under the Stand-by Arrangement, Request for Modification of Performance Criteria, and Rephasing of Access–Staff Report; Press Release; and Statement by the Executive Director for Tunisia

Description: EXECUTIVE SUMMARY Context. On June 7, 2013, the Executive Board approved a 24-month Stand-By Arrangement in an amount equivalent to 400 percent of quota (SDR 1.146 billion or about $1.75 billion). To date, SDR 716.25 million, equivalent to $1.1 billion, has been disbursed. Background. Tunisia is completing a successful political transition to democracy while navigating a challenging environment marked by high social and security tensions, slow growth in trading partners, and spillovers from regional conflicts. At the same time, large external and fiscal imbalances, high unemployment, and increased banking fragilities remain the main challenges. Program implementation has been mixed. All quantitative performance criteria have been met. However, progress on the structural reform agenda has been slow, with considerable delays in the recapitalization of public banks and the legislative agenda on the tax, investment and bank asset recovery fronts. Program strategy. The focus should continue to be on short-term macroeconomic stabilization and laying foundations for higher and more inclusive growth, including by moving forcefully on banking reforms. Prudent fiscal and monetary policy, along with improved budget composition and greater exchange rate flexibility, need to be directed to containing high imbalances and anchoring inflationary expectations. Recapitalizing public banks in line with good international practices is urgent in view of mounting risks to financial stability, and is also important in light of its impact on financial intermediation and growth. Progress on structural reforms is necessary to generate the conditions conducive to private sector–led and inclusive growth and protect the most vulnerable. Risks to program implementation are important. The main risks relate to regional and domestic security tensions, delays in forming a new government, shortfalls in official and market financing, or a further deterioration of the international economic environment. The implementation of program policies will continue to be tested by opposition from vested interests; however, support for the reform agenda among the authorities and a broad spectrum of political parties represents a key risk-mitigating measure. The completion of the fifth review will make SDR 71.625 million (about $110 million) available.

Notes: Also available in French

December 24, 2014

Honduras: Request for a Stand-By Arrangement and an Arrangement Under the Standby Credit Facility

Description: The government of President Hernandez inherited a difficult macroeconomic situation upon taking office in January 2014. Economic growth decelerated significantly in 2013, driven mainly by lower private demand from policy uncertainty and by weaker trade-partner growth. The fiscal accounts weakened considerably in 2011–13, reflecting sizeable increases in government spending and in the deficit of the state-owned electricity company. The relaxation of fiscal policy has led to a rapid increase in public debt, which would continue into the medium term absent a change in economic policies. The balance of payments position has also weakened over the last three years, reflecting both expansionary macroeconomic policies and a less favorable terms of trade.

December 23, 2014

St. Vincent and The Grenadines: Request For Disbursement Under The Rapid Credit Facility and Purchase Under The Rapid Financing Instrument

Description: On December 24, 2013, a tropical trough system impacted St. Vincent and the Grenadines. The heavy rains resulted in severe floods and landslides, with damages and losses estimated to be equivalent to about 15 percent of GDP. With most of the impact falling on infrastructure, including bridges, roads and hydroelectric facilities, emergency relief costs and rehabilitation and reconstruction expenses are opening a balance of payments gap in 2014.

December 23, 2014

Jamaica: Sixth Review Under the Arrangement Under the Extended Fund Facility

Description: Discussions centered on the preparations for the 2015/16 budget, and reforms to strengthen the financial sector and boost growth. The authorities have deepened their efforts in supporting their ambitious fiscal goals by strengthening public financial management and revenue administration, and they reiterated their resolve to continue containing the wage bill. Steps have also been identified to advance the reform of the securities dealers and to increase the resilience of the financial system.