I. Economic Performance in FY 1999/2000

1. During FY 1999/2000 the Haitian economy suffered from the effects of a political crisis that has contributed to a slowdown in external assistance and economic growth. The first round of parliamentary and municipal elections was carried out on May 21, 2000, with a high voter participation rate of 55-60 percent of those registered. The second round of elections to decide those posts not won by a majority in the first round took place in July, and the new parliament was sworn into office on August 28, 2000. The presidential election is scheduled for November 26, 2000 along with election of eight senators.

2. Economic performance weakened during FY 1999/2000 in the run-up to the elections. The fiscal deficit increased and, with limited external support, was financed entirely by an expansion of domestic credit. The increase in the fiscal deficit, continuing political uncertainties, and the increase in the world price of oil (Haiti imports all of its petroleum products) led to pressures on the exchange rate, domestic prices and official reserves. To combat these pressures, the central bank tightened monetary policy, and interest rates rose markedly. Investment declined, and economic growth is estimated to have decelerated to 1.2 percent (2.2 percent in FY 1998/99).

3. The central government deficit increased to 2.2 percent of GDP in FY 1999/2000, compared with 1.3 percent of GDP in FY 1998/99. Government revenue declined by almost 1 percent of GDP to 7.8 percent of GDP, mainly reflecting the sharp increase in the world price of oil and the depreciation of the gourde, and the resulting decline in excise tax collections on gasoline, diesel and kerosene. Domestic prices for petroleum products were raised in September 2000 to stem the drain on fiscal revenue. Non-oil tax revenue performed well as a result of successful efforts to improve tax administration, and customs revenue also increased owing to the depreciation of the gourde. Direct income tax revenue increased due to the expansion of the tax base, as self-employed professionals were required to submit income tax returns for the first time, while efforts to increase tax revenue from the provinces led to modest revenue increases. Total spending rose slightly, mostly on account of an increase in capital spending including on special public works projects intended to help create a favorable environment for the elections. This included increased spending on roads, construction of schools, and improving transport services. The wage bill declined slightly to 3.9 percent of GDP, with no general wage increase during the year.

4. The central bank sought to slow the depreciation of the gourde by tightening monetary policy and by intervening in the foreign exchange market by about US$32 million during FY 1999/2000, including US$16 million in direct sales of dollars to oil importers. Nevertheless, the gourde depreciated by 32 percent with respect to the U.S. dollar from end-September 1999 to mid-September 2000. Inflation rose only moderately because of the sharp tightening of monetary policy and weakening economic activity. Twelve-month inflation (CPI) rose from 9.9 percent in September 1999 to 12.5 percent in August 2000. Net official reserves are estimated to have declined by about US$40 million during FY 1999/2000 to US$170 million or 1.8 months of imports of goods and services (15 percent of broad money).

5. The central bank tightened monetary policy throughout the year, raising interest rates on its 91-day bonds from about 11 percent in September 1999 to 23 percent in April 2000 and 27 percent in September 2000. In addition, the central bank raised the reserve requirement on gourde deposits from 26.5 percent to 28 percent in April 2000 and 31 percent in September 2000. It also raised the reserve requirement on U.S.-dollar denominated deposits from 12.5 percent in November 1999 to 17 percent in April 2000 and to 21 percent in September 2000.

6. The external current account deficit of the balance of payments (before grants) is estimated to have declined slightly in FY 1999/2000 to US$295 million (7.1 percent of GDP), despite a doubling in the cost of petroleum product imports to US$137 million. Non-oil imports in U.S. dollar terms declined owing to the slowdown in the economy. Export growth (three-quarters of exports come from the light assembly sector) slowed significantly on account of orders being held up because of the political situation, fears by buyers about the reliability of shipments, and a slowdown in sales to the United States. The capital account surplus declined by about US$65 million to a level of US$17 million as a result of an increase in banking sector deposits abroad, a decline in direct investment, and lower project loan disbursements to the public sector.

7. In the financial sector, the central bank's supervisory capacity and the regulatory framework continued to be strengthened. Six additional specialized staff were assigned to the banking supervision department, and general inspection of four banks was carried out during FY 1999/2000, as well as specific evaluations of assets and verification of the quality of capital in several other banks. The minimum capital to risk-weighted assets ratio was raised as planned, from 8 percent to 10 percent effective September 30, 2000, and all but one private bank had met the requirement as of that date. However, some private commercial banks experienced an increase in their nonperforming loans to total loans ratio as a result of the increase in interest rates and the depreciation of the gourde, and, for the banking system as a whole, the capital to risk-weighted assets ratio declined from 11.9 percent in March 2000 to 11.1 percent in June 2000. The central bank has also revised prudential regulations concerning risk concentration ratios for lending to related and to nonrelated borrowers.

8. In July 1999, the central bank, concerned by the growth of U.S. dollar-denominated loans relative to dollar-denominated deposits, suggested in a letter to commercial banks to reduce the ratio of their U.S. dollar loans to U.S. dollar deposits to no more than 50 percent. In practice, lending in dollars was already slowing, while deposits in dollars continued to increase, owing to the depreciation of the gourde; the ratio of dollar loans to dollar deposits declined from 67 percent in September 1999 to 57 percent in July 2000. The banking supervision department issued a regulation in September 2000 requiring that all banks meet a limit of 50 percent in the ratio of nonguaranteed dollar loans to dollar liabilities by January 1, 2001.

9. Progress was made in the restructuring of the troubled state-owned bank, Banque Nationale de Credit (BNC). Downsizing of the bank's employment by about half (224 employees) was completed in June 2000, with associated severance benefits of about

G 70 million (0.1 percent of GDP), and one branch office was closed in June 2000. The bank's capitalization and operating results improved mainly as a result of the placement of government bonds in exchange for nonperforming loans of BNC that had been guaranteed by the government, and receipts of about G 70 million from asset recovery.

10. The government continues to fully support international efforts against money laundering and trafficking in drugs, and has taken significant additional preventive steps since July 2000. The ministry of justice has prepared draft laws against money laundering (which, inter alia makes money laundering a crime subject to incarceration and/or fines), and trafficking in drugs, respectively. Central bank officials have consulted with staff of the International Monetary Fund, the United States Treasury, and the Caribbean Financial Action Task Force (CFATF) concerning best practices and measures in preventing money laundering. The government of the Republic of Haiti has formally requested to become a member of CFATF. The central bank has also developed and promulgated new reporting forms to strengthen the "know-your-customer" provisions for deposits. A special anti-money laundering unit has been established at the justice ministry, which will use electronic data processing to scrutinize the declarations of banks about the origin of funds.

11. Improvements were made in tax administration during FY 1999/2000. Direct income taxes were collected from self-employed professionals and all candidates for the recent elections were required to submit income tax returns. The large-taxpayer unit carried out 66 on-site audits during the year and has begun to audit oil importers and commercial banks. Emphasis was also placed on improving revenue collection from the provinces, and tax inspectors were assigned to provincial offices.

12. The increase in the world price of oil and the depreciation of the gourde made it essential to raise domestic prices of gasoline, diesel, and kerosene, which had not been changed since 1996. The government raised prices of these products by an average of about 45 percent in early September 2000. Pricing of these products will be adjusted regularly in line with the changes in the gourde-converted landed cost, whenever this cost changes on a cumulative basis by more than five percent, and with a maximum delay of six weeks. The price of liquid gas will remain freely determined in the market.

II. Program for FY 2000/01

13. The government is committed to reducing the fiscal deficit in FY 2000/01 so as to eliminate pressure on the exchange rate and to restore inflation to a downward path by the second half of the year. Monetary policy will be kept tight until the reduction in the fiscal deficit begins to take hold. The program aims to contain 12-month inflation in a range from 12 percent to 14 percent in September 2001, and to achieve an increase in official net international reserves of US$16 million. The program assumes a modest rebound in real GDP growth to about 2.5 percent during the year, reflecting some return of confidence and increase in investment following the presidential elections. At the same time the government will continue with structural reforms, including in the financial sector, in improving public expenditure management, in strengthening tax revenue, in restructuring public enterprises, and in health, education, and justice.

14. The fiscal program aims at reducing the central government budget deficit (including spending for the presidential and senate elections and severance payments to workers at the port) to 1.3 percent of GDP in FY 2000/01. Financing by the central bank to the central government would be reduced to about 0.8 percent of GDP, compared with 2.2 percent of GDP in FY 1999/2000. The government intends to eliminate the stock of domestic arrears (which amounted to about 0.3 percent of GDP as of October 1, 2000) during the course of the year by cash payments and the issuance of bonds to the private sector. Net external financing is projected at 0.8 percent of GDP, including US$30 million in concessional loans from a special oil facility agreed with the government of Venezuela. Given the already low level of public revenue and the need to at least maintain government spending by the ministries of education, justice, and health, the fiscal program will target a recovery in central government revenue by 0.7 percent of GDP in FY 2000/01. Most of this increase would come from the full-year effects of the increase in petroleum product prices in September 2000 and the maintenance of the system for regular adjustments of these prices whenever cumulative economic costs change by at least five percent. Customs and sales tax revenue are also projected to increase as a result of the depreciation of the gourde.

15. The program envisages continued implementation of the cash management and monthly budget allocation system so as to limit monthly government outlays to monthly revenue collections, realized external financing, and programmed financing from the central bank. The program incorporates monthly interest payments of G 25 million by the government on its debt to the central bank. A protocol formalizing these arrangements for FY 2000/01 was signed by the Ministry of Economy and Finance and the Bank of the Republic of Haiti on September 20, 2000. The program incorporates hiring of 300 police officers and magistrates to improve security; there will be no other increase in the number of civil servants. The government will abstain from granting wage increases in FY 2000/01 in order to keep the wage bill under control. Steps will be taken to reduce the use of the ministerial discretionary accounts ("comptes courants"), including returning to the Treasury all unused non-project and inactive project current account balances by November 2000. For this purpose, the central bank and the ministry of finance will classify existing current accounts into categories to separate operational from inactive current accounts and project from ministerial or other current accounts.

16. The program is particularly sensitive to the price of oil, over which Haiti has no control. In the event the world price of oil (West Texas Intermediate) rises above US$35 a barrel on average for more than three consecutive months, the government will request a consultation with Fund staff to discuss the appropriate measures and to agree on adjustments to the quantitative benchmarks of the program.

17. The program envisages that the deficit of the combined nonfinancial public sector will be limited to 3.4 percent of GDP in FY 2000/01. The public enterprises are expected to restrain their capital spending so as to refrain from using domestic financing, as was the case in FY 1999/2000. It is expected that about US$73 million of project loans will be disbursed in FY 2000/01, mostly for road rehabilitation and the social investment fund.

18. The government intends to maintain the floating exchange regime. In this context, monetary and credit policies will be set in line with the program's inflation and reserves objectives during FY 2000/01. Accordingly, and consistent with the program's performance indicators on the central bank's net domestic assets and net international reserves, liquidity will be controlled mainly through required reserves and the placement of central bank bonds at market rates of interest. Assuming that government financing needs ease in line with the fiscal program, interest rates and required reserves ratios could decline from present levels later in 2001.

19. The current account deficit (before grants) of the balance of payments is projected to remain at about US$290 million in FY 2000/01, but would increase to 7.8 percent of GDP because of the depreciation of the gourde. Exports are projected to increase by 13 percent, based on recent agreement by the United States and Central American and Caribbean countries on textiles and clothing quota increases. Imports and investment would pick up with economic recovery. Imports of petroleum are projected to increase in U.S. dollar terms by about 13 percent, assuming an increase in the average world price relevant for Haiti of about 10 percent. The capital account surplus would improve to about US$95 million, mostly from public loan disbursements, including US$30 million from the special loan facility for oil imports under the San José agreement.

20. The program envisages the further strengthening of the financial sector through: continued general inspection of banks on a rotating basis; the application of penalties for nonobservance of the new prudential regulations on loan concentration and on dollar-denominated loans to total liabilities; and improvements in offsite assessments of banks. The restructuring committee for BNC will complete the first stage of its work by December 2000 and the Commission for the Modernization of Public Enterprises (CMEP) will prepare a plan for its privatization by March 2001. Also, an action plan will be prepared to restructure the other government-owned commercial bank, BPH, and an actuarial audit of pension liabilities at the Central Bank, BNC, and BPH will be carried out by June 2001. Legislation to modernize the banking system and bring the system into conformity with international standards will be presented to parliament by March 2001. This will include a new banking law which will, inter alia, make other financial institutions such as credit unions and exchange bureaus subject to the prudential regulations applying to the commercial banks; and a new organic law of the central bank to give it independence in the conduct of monetary policy.

21. Virtually all of the technical work has been completed toward the modernization/privatization of the main public enterprises (the electricity, telephone, and water companies, port, and airport), with assistance from the World Bank, the Inter-American Development Bank, and USAID. However, carrying out the final steps toward privatization has been delayed, mainly because the government does not expect that privatization (either through management contract or sale of shares through capitalization) can be carried out successfully under present political circumstances. Progress is most advanced toward privatization of the port, where the administration of port facilities has been separated from the port authority, the latter being temporarily responsible for large excess employment. The government intends to issue an invitation to bid for management of the port by November 2000. Downsizing of redundant workers at the port authority will be completed by June 2001, with severance payments of about 0.1 percent of GDP, as provided in the fiscal program. The government will submit a draft regulatory framework for the telecommunications sector to parliament by November 2000.

22. The government will strengthen its efforts to improve the delivery of services in the areas of justice, education and health. To this end, the program for FY 2000/01 provides for increases in spending on health and justice and for maintaining spending on education relative to GDP. Actions in justice will include securing parliamentary approval of the anti-money-laundering and anti-drug-trafficking legislation that have already been prepared in draft form. The special anti-money-laundering unit will become fully operational. In addition, continued efforts will be undertaken to reduce the maximum length between imprisonment and trial to six months and to provide for regular visits to prisons by special commissaires du gouvernment. In education, the government will seek to obtain parliamentary approval for legislation to set the standards for public subsidies to private schools and for licensing private schools. In health, as part of the government's agreement with the European Union in January 2000 to improve basic health, some measures have been taken but others are awaiting parliamentary or prime-ministerial approval, or are in need of technical assistance from international donors. Also, data from the survey on mortality, morbidity and use of services (EMMUS-III), which was published in September 2000, will be analyzed and used as part of the basis for establishing benchmarks for improvements in these basic indicators in the development of an eventual poverty reduction strategy.

23. 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.

Haiti--Technical Memorandum of Understanding

Definition of quantitative benchmarks 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 quantitative benchmarks and adjustments of the quantitative benchmarks to monitor the quarterly performance under the staff monitored program for October 2000-September 2001 (FY 2000/01).

I. Definitions