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Haiti - Economy : Reserved and cautious optimism of IMF on the economic prospects 03/04/2013 09:39:07
Background "Significant progress has been made since the January 2010 earthquake to safeguard macroeconomic stability. Inflation remains in the single digits, although it has picked up to 7.6 percent in December, reflecting primarily higher international food prices and reduced domestic food supply caused by Hurricanes Isaac and Sandy. The external position has strengthened, with gross international reserves reaching $2.2 billion (6 months of imports) at end-December 2012. Haiti’s debt situation has significantly improved owing to additional debt relief from major partners (including the Fund) after the January 2010 earthquake. However, the pace of the reconstruction and economic recovery has been slow, due to weak administrative and absorptive capacity, persistent socio-political tensions, difficult security situation, and a weak business environment. In addition, the country remains highly vulnerable to exogenous shocks. After contracting by 5.4 percent in FY2010 following the earthquake, economic activity expanded by 5.6 percent in real terms in FY2011. However real GDP growth slowed markedly to 2.8 percent in FY2012, reflecting a spring drought, the impact of Hurricane Isaac, and delays in implementing key public investment projects. The recovery is expected to be firmer in FY2013 and medium-term prospects are promising, albeit with serious downside risks. Growth is projected to accelerate to 6.5 percent in 2013, assuming a pickup in reconstruction and a rebound in agriculture. Inflation should remain stable, in the mid-single digits. In the medium term, maturing ongoing agricultural and industrial projects and persistence in efforts to improve the business environment will help sustain growth and strengthen the external position. However, a worsening in global economic conditions, continued weak capacity, heightened domestic political and social tensions- fueled by pervasive poverty and lack of progress in improving living standards- and natural disasters could impede the fragile recovery and constrain Haiti’s growth prospects. Executive Board Assessment The Executive Directors commended the authorities’ continued commitment to prudent policies despite the challenging domestic environment and exogenous shocks. Inflation has remained in single digits, the external position has strengthened, and the country’s debt situation has improved. However, Haiti remains extremely vulnerable to natural disasters; reconstruction and economic recovery from the 2010 earthquake has been slow; and the country’s growth and development challenges are daunting. Directors encouraged the authorities to take full advantage of external support to improve administrative and absorptive capacity, accelerate the reconstruction, and sustain the recovery while safeguarding macroeconomic stability. Directors underscored that fiscal space for poverty-related and growth-enhancing spending should be secured through increasing revenue and containing current spending. They called for additional reforms to further strengthen revenue administration, reduce tax expenditures, and expand the tax base, including the adoption of a VAT system. Efforts are also needed to further strengthen social safety nets and to increase investment in health and education. Directors welcomed recent progress in enhancing public financial management, in particular towards the establishment of a treasury single account. They stressed the importance of continued efforts to strengthen budget formulation, execution, transparency and reporting, and improve controls. Directors noted that improving the execution rate of public investment is critical to build the necessary infrastructure that would unlock the country’s growth potential. They urged the authorities to work closely with donors to improve project preparation and management, while ensuring the overall quality of public investment. Many Directors also stressed the importance of better coordination and harmonization of procedures amongst donors, and closer alignment of external assistance with Haiti’s domestic priorities. A few Directors considered that competition from NGOs in hiring experienced professionals could potentially negatively impact public sector capacity. Directors endorsed the current neutral stance of monetary policy but encouraged the authorities to keep price inflation in check. Further improvements in liquidity management, financial market deepening, market-based operations, and reducing dollarization will help strengthen monetary transmission mechanisms. Directors also emphasized that moving towards greater exchange rate flexibility, together with efforts to deepen the foreign exchange market, would help absorb external shocks and increase monetary policy effectiveness. In this regard, they welcomed the authorities’ commitment to move gradually to single price foreign exchange auctions after deepening the interbank foreign exchange market. Directors underscored the importance of structural reforms to improve competitiveness, enhance the business environment, and foster higher and inclusive growth. Efforts should focus on streamlining regulations, removing infrastructure bottlenecks, strengthening human capital and deepening financial intermediation. Directors commended the planned energy sector reform. They looked forward to decisive implementation in order to lower the high cost of electricity, improve the reliability and efficiency of energy supply, and reduce the burden on the budget. Directors noted that Haiti’s banking sector remains relatively sound and profitable. Recent strong credit growth has been healthy, but will require close monitoring going forward. Directors were encouraged by progress in implementing the 2008 Financial Sector Assessment Program recommendations and regulating the microfinance and cooperative sectors, and underscored the need to further improve the regulatory and supervisory framework." HL/ HaitiLibre
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