French version

Port-au-Prince, Haiti
November 19, 1998

Dear Mr. Camdessus:

1.  Hurricane Georges passed through Haiti on the night of September 22 and early in the morning of September 23, 1998, causing loss of human lives, population dislocation, damage to infrastructure, and substantial loss of agricultural output and livestock. The destruction could seriously set back the government’s capacity to implement financial policies to lower inflation and undertake urgently needed structural reforms to improve governance and remove Haiti’s serious structural bottlenecks to sustained economic development.

2.  The Haitian government’s disaster relief and reconstruction effort is directed at providing emergency shelter, food, water, and medicine to the affected population, while rebuilding priority economic and social infrastructure that was destroyed and rehabilitating the productive capacity of the most severely affected regions. The costs associated with these activities are substantial and cannot be met by domestic efforts alone. The international community has responded positively to Haiti’s request for assistance, and some donors and creditors have begun to support disaster relief efforts with technical and financial assistance. To further mitigate the adverse impact of Hurricane Georges on Haiti’s fragile balance of payments and help meet the immediate financing needs without seriously depleting Haiti’s external reserves, the government of Haiti hereby requests from the IMF a purchase equivalent to 25 percent of quota under the IMF procedures on emergency assistance for natural disasters. To support this request, the government has developed an economic program covering FY 1998/99¹ aimed at maintaining macroeconomic stability and making progress in the structural area while efforts are being made to resolve the political crisis. Satisfactory performance under the program, which the government has requested IMF staff to monitor, is expected to facilitate the disbursement of additional aid from donors and could provide a basis for resuming discussions on an ESAF-supported program once a new government is installed.

3.   The first annual ESAF arrangement covering FY 1996/97 expired without completion of the mid-term review as a political crisis that led to the resignation of the prime minister in June 1997 adversely affected the implementation of structural reforms, the disbursement of external aid flows, and the economic recovery. While attempts to reach a political settlement continued, an economic program covering FY 1997/98 (which the government asked IMF staff to monitor) was put in place in April 1998 to help maintain financial discipline, make progress in the structural area, facilitate some aid disbursements, and establish a basis for an early start of discussions on a program that could be supported by the second annual ESAF arrangement once a new government was installed.

4.  Good progress was made in macroeconomic stabilization and structural reforms under the FY 1997/98 staff-monitored program. Twelve-month inflation declined from 17 percent in September 1997 to 8.3 percent in September 1998 (compared with 12 percent under the program), and output growth is estimated at around 3½ percent (2 percent under the program) as a result of strong export growth and a recovery in agriculture due to better weather conditions. Net international reserves increased by US$33 million (compared to no change under the program). The central government deficit was contained to 1.3 percent of GDP (1.1 percent in the program), as revenue shortfalls experienced in the first half of the fiscal year were more than made up in the second half mainly as a result of steps taken in July 1998 to strengthen the administration of fuel excise taxes and tighten expenditure control procedures.

5.  On the structural front, progress was made in some areas in the context of existing legislation. The civil service downsizing (CSD) law was published in the official gazette in mid-May 1998, and under the program, targets were established for the departure and retraining of at least 5,000 civil servants (about 10 percent of government employment) by end-September 1998. In the event, as of end-October 1998, some 5,200 employees had been separated and indications are that about 200 more employees will be leaving the civil service by mid-December 1998. Also, in conjunction with the implementation of the CSD law, physical verification procedures for wage payments were implemented in May–June 1998, resulting in the elimination of fraudulent wage payments related to some 2,900 employees from the government payroll. Budgetary savings from these actions are estimated at about ½ percent of GDP on an annual basis.

6.  During FY 1997/98, progress also was made toward the modernization of public enterprises. The flour mill was divested and procedures for the capitalization of the cement company were finalized (the transaction awaits the signature of the prime minister). Also, with assistance from the World Bank, the IDB, and U.S. AID, technical work continued in the preparation of the main public enterprises (the airport and the seaport, as well as the electricity and telephone companies) for their modernization.

7.  The implementation of financial sector reforms continued. New prudential regulations applicable to the banking system were put in effect through the issuance and implementation of circulars on loan classification and provisioning, loan concentration, internal controls, extension of internal audit standards to branches, and standardization of financial statements provided by banks. Proposals for phasing in capital adequacy requirements over a three-year period were discussed with the commercial banks with a view to issuing them by end-1998. Also, the previous management of the large, state-owned Banque Nationale du Credit (BNC) was replaced in April 1998 by an intervention team that has begun to restructure it.

8.  Although a full assessment of the impact of Hurricane George has not yet been completed, it is clear that the hurricane has inflicted substantial human suffering and financial losses, and caused extensive damage to the agricultural sector and the infrastructure. The latest reports indicate about 240 persons dead, and more than 324,000 directly affected by damage to or destruction of their homes, and dislocation from flood-prone areas. Damage to the country’s infrastructure, including roads, bridges, the port of Port-au-Prince, irrigation systems, as well as schools, hospitals and other buildings, has been substantial. The agriculture sector was most severely affected, mainly as a result of substantial damage to rice, plantain, beans, coffee, and sugarcane crops, as well as losses of livestock. In particular, in the Artibonite Valley (the country’s breadbasket) heavy flooding destroyed a substantial part of the September rice crop; furthermore, the next rice crop is threatened by lack of inputs and the poor state of irrigation infrastructure. Preliminary reports estimate the total losses, including the loss of crops and livestock and damage to infrastructure, at about US$80 million (1.9 percent of GDP). As a result of hurricane-related damages, it is projected that output growth in 1998/99 could be about 1–2 percentage points lower than would have been otherwise.

9.  Hurricane Georges also will adversely affect Haiti’s budgetary and balance of payments position. It is estimated that the fiscal impact would amount to some G 580 million (0.8 percent of GDP) in FY 1998/99 (of which about two-fifths is included in the government budget and the remainder is direct donor-financed expenditure) largely reflecting additional expenditure needed for relief and reconstruction operations. The external current account deficit (excluding grants) is estimated to widen by some US$37 million (0.9 percent of GDP). This deterioration is mainly on account of higher food imports and imports associated with relief and reconstruction operations, including infrastructure repairs; exports of agricultural products, which account for a small proportion of total exports, also are expected to be adversely affected. Donor emergency assistance announced so far totals about US$22 million (½ percent of GDP), mostly humanitarian assistance and food aid from the U.S. government and the reprogramming of some existing loans from the IDB.

10.  Despite the setback caused by Hurricane Georges, the government remains committed to ensuring macroeconomic stability and pressing ahead with key structural reforms in a manner consistent with existing legislation. To that effect, it has developed an economic program covering FY 1998/99 which is predicated on an assumed real GDP growth of around 2 percent and aims at maintaining an inflation rate of about 8–10 percent while containing the loss of official net international reserves to US$10 million. The program envisages a financing gap of about US$37½ million (after the IMF’s emergency assistance), which is expected to be met through support from Haiti’s donors.

11.  The fiscal program aims at holding the central government budget deficit (including the high priority expenditures associated with hurricane-related reconstruction and the costs of structural reforms) to G 1,256 million (1.7 percent of GDP) in FY 1998/99. In order to meet the deficit target, expenditure will be kept under tight control and steps will be taken to strengthen tax collection. Thus, the program would envisage continued implementation of the cash management and monthly budget allocation system that was put in place toward the end of FY 1997/98 so as to limit monthly government outlays to monthly revenue collections and programmed financing. To formally give effect to this arrangement, a protocol will be signed by the Ministry of Economy and Finance and the Bank of the Republic of Haiti by early December 1998. The wage bill will be kept under control by tightening hiring procedures and the government will abstain from granting across the board wage increases to civil servants. However, selective wage increases will be phased in in the context of the implementation of donor-backed sectoral reforms to attract and retain qualified personnel, and improve efficiency in service delivery. Also, steps will be taken to restrict the use of ministerial discretionary accounts ("comptes courants"), restrain nonreconstruction related capital outlays, and rehabilitate the regular requisition procedure for spending (consistent with IMF technical assistance recommendations).

12.  On the revenue side, efforts to increase tax collection and enhance tax administration will continue, including through the collection at customs of the vehicle registration tax and the excises on imports of alcoholic beverages and tobacco; the implementation of steps to strengthen the large taxpayer unit (UGCF) and the Customs Office; and tightening of the administrative procedures for granting tax exemptions and limiting the granting of discretionary exemptions, in line with IMF technical assistance recommendations.

13.  The program envisages that the public enterprises will restrain their capital spending so as to refrain from using domestic financing as was the case in FY 1997/98. The program incorporates increases in interest payments by the government on its debt to the central bank to G 22 million a month beginning in October 1998.

14.  In the context of the managed floating exchange regime, monetary and credit policies will be set in line with the program’s inflation and reserves objectives during FY 1998/99. For this purpose and in accordance with the program’s performance indicators on the central bank’s net domestic assets and net international reserves, liquidity will be controlled mainly through the placement of central bank bonds with interest rates that would remain positive in real terms. Also, the provision of new credit by the state-owned banks, particularly the BNC, will continue to be strictly limited. It is expected that satisfactory performance under the program would allow a substantial lowering of the central banks’ intervention interest rates during the fiscal year.

15.  The government will conclude the downsizing of the civil service by mid-December 1998 and will initiate the implementation of administrative reforms and institutional strengthening of the public sector with technical and financial assistance from donors. In order to help alleviate poverty and improve governance, the government will take steps to raise efficiency in the delivery of justice and security, health and education, and infrastructure rehabilitation and maintenance. These steps will be fully specified over the next three months in consultation with the donors and creditors involved in each sector.

16.  Technical work toward the modernization of the main public enterprises (airport, port, and the electricity and telephone companies) will continue. With assistance from the World Bank, the IDB, and U.S. AID, specific actions will be taken including the design of plans for the downsizing of employment, the transfer of certain enterprise liabilities to the government, putting in place regulatory frameworks, the start of bidding processes for the divestment of the enterprises under various modalities, and the selection of winning bidders.

17.  As regards financial sector reforms, the strengthening of banking supervision and prudential regulations will continue with technical assistance from the IDB and the IMF and, as part of this process, regulations on banks’ capital adequacy requirements will be issued by end-December 1998. Steps have been taken to bolster the financial health of private commercial banks. Also, an action plan for the restructuring of the BNC will be drawn up by end-February 1999 with technical assistance from the IMF and the IDB. The plan will include, inter alia, proposals for an orderly downsizing of employment and the number of branches, strengthening the managerial and operating controls of the bank, and improving lending operations and loan recovery. A decision on the modality and the level of recapitalization of the bank will be taken by end-April 1999 with a view to its eventual divestment.

18.  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.

19.  To help monitor performance under the program, the government has established quarterly performance indicators for end-December 1998, and end-March, end-June, and end-September 1999, as specified in attached Table 1, on net international reserves and net domestic assets of the central bank; net bank credit expansion to both the nonfinancial public sector and the central government; the government wage bill; arrears on external public debt; and the contracting and guaranteeing of nonconcessional external loans. Also, the government has established structural benchmarks in the following areas: tax collection; government expenditure control; and the modernization of public enterprises and the financial sector, as specified in attached Table 2. Structural benchmarks in the areas of justice and security, and education and health will be specified by end-February 1999 in consultation with Haiti’s donors and creditors. The government intends to review with IMF staff the progress made in implementing the program in February, May, and August 1999.