c 40301 INTERNATIONAL DEVELOPMENT ASSOCIATION AND INTERNATIONAL MONETARY FUND REPUBLIC OF HAITI Enhanced Heavily Indebted Poor Countries (HIPC) Initiative- DecisionPoint Document Preparedby the Staffs of the International Development Association andthe InternationalMonetary Fund Approved by PamelaCox andDanny Leipziger (IDA) and Ranjit Teja andMark Plant (IMF) October 25. 2006 I Introduction.................................................................................................................... . 1 I1. BackgroundandEligibility for HIPC InitiativeAssistance ......................................... 2 A. PRGF and IDA Status.............................................................................................. 2 B. Dimensions of Poverty .......................................................................................... 2 4 D. Policy Track Record................................................................................................ C. RecentPolitical and Security Developments........................................................... 4 111 . Macroeconomic Framework and FutureReformAgenda............................................. A. ThePRSPFormulation Process .............................................................................. 9 9 B. Macroeconomic Framework.................................................................................. C Reform Agenda...................................................................................................... . 10 12 IV. Debt Sustainability Analysis (DSA) andEnhancedHIPCAssistance ........................ 15 15 B. Structureof ExternalDebt..................................................................................... A. DebtReconciliation Status .................................................................................... 15 C. PossibleHIPC InitiativeAssistance...................................................................... D. DebtSustainability Analysis.................................................................................. 16 18 E. MDRIandPossibleBilateral Assistance Beyond HIPC ....................................... 19 F Sensitivity Analysis ............................................................................................... . 20 V. The Floating Completion Point ................................................................................... 21 A. Triggers for the Floating Completion Point........................................................... B. Monitoringthe Floating Completion Point Triggers ............................................. 21 22 23 D. The views of the Authorities.................................................................................. C. The Use and Monitoringof EnhancedHIPC InitiativeAssistance ....................... . . 24 VI. Issues for Discussions.................................................................................................. 25 .. 11 Text Tables 1. 2. SelectedPoverty and Social Indicators.......................................................................... 3 6 3. External Debt. end-September2005............................................................................ 16 SelectedEconomic andFinancial Indicators................................................................. Boxes 19 2. 1. Key Macroeconomic Assumptions Underlying the DSA............................................... 22 3. Expenditure Priorities for the Use of EnhancedHIPC Assistance................................. Triggers for the Floating Completion Point ................................................................... 24 Figures l a. Composition of Stock of External Debt at end-September2005 by Creditor 26 lb. Potential Costsof the HIPC Initiativeby Creditor Group............................................. Group............................................................................................................................. 26 2 . 27 3. External Debt Sustainability Indicators, 2005-25 ......................................................... Sensitivity Analysis, 2005-25 ....................................................................................... 28 Tables A1. Nominal Stock andNet Present Value of Debt at end-September 2005........................ A2 HIPC InitiativeAssistance Under a Proportional Burden-Sharing Approach ...............29 30 A3 31 A4 External Debt Service. 2006-25 ..................................................................................... 32 A5 33 A6 External Debt Indicators. 2005-25 ................................................................................. ..... Discount andExchangeRateAssumptions.................................................................... Net PresentValue of External Debt. 2005-25 ............................................................... 34 A7. External Debt Indicators and Sensitivity Analysis. 2005-25 ......................................... 35 A8 EnhancedHIPC Initiative: Status of Country Cases Consideredunderthe Initiative. A9. PossibleDeliveryof IMFAssistance underthe EnhancedHIPC Initiative..................36 May 2006........................................................................................................................ A10 A11.Long-Term Macroeconomic Assumptions. 2005-25 ..................................................... . PossibleDelivery of IDA Assistance underthe EnhancedHIPC Initiative ..................37 38 39 A12. Paris Club Creditors' Delivery of Debt Relief Under Bilateral Initiatives Beyond HIPC Initiative................................................................................................................ 40 Appendices I GovernanceActionsandPolicies................................................................................... 41 . I1. Debt Sustainability Analysis Using the Joint Framework for Low-Income Countries..42 I11 DebtManagementCapacity........................................................................................... . 53 1 1 ... 111 Abbreviationsand Acronyms AAP Assessment andAction Plan AIDS AcquiredImmune DeficiencySyndrome APN PortsAuthority ASYCUDA AutomatedSystemfor Customs Data BRH Banquede la RCpubliqued'HaYti (CentralBank of Haiti) CAMEP Water Authority CEM CountryEconomic Memorandum CNIMP InterimNationalCommissionfor Public Procurement CPI Consumer Price Index CSCCA SupremeAudit Institution DSA Debt SustainabilityAnalysis DHS Demographicand HealthSurvey DMFAS Debt ManagementFinancialAnalysis System GDP Gross DomesticProduct GNI Gross NationalIncome EDH Electricity Utility EPCA EmergencyPost-ConflictAssistance EGRO Economic GovernanceReformOperation EGTAG Economic GovernanceTechnical Assistance Grant FER RoadMaintenanceFund HIPC HeavilyIndebtedPoor Countries HIV HumanImmune-deficiencyVirus IBRD InternationalBank for ReconstructionandDevelopment ICF InterimCooperationFramework IDA InternationalDevelopmentAssociation IDB Inter-AmericanDevelopmentBank IMF InternationalMonetary Fund I-PRSP InterimPoverty ReductionStrategyPaper JSAN Joint Staff Advisory Note LIC Low IncomeCountries MDB Multilateral DevelopmentBank MDG Millennium DevelopmentGoal MDIU Multilateral DebtRelief Initiative MEF Ministry of Economy and Finance MENJS Ministry of Education, Youth andSports MINUSTAH UnitedNations StabilizationMission in Haiti MSPP Ministry of Health NEPO NationalEducationPartnershipOffice NETP NationalEducationandTraining plan NFP NationalPartnershipFund NSPRHS NationalStrategic Planfor the Reformof the HealthSector NPV Net Presentvalue NIR Net InternationalReserves OPEC Organizationof PetroleumExporting Countries PEM PublicExpenditureManagement PRGF Poverty ReductionandGrowthFacility PRSP Poverty ReductionStrategy Paper SDR SpecialDrawingRights SMP Staff MonitoredProgram SYSDEP Automated Systemfor BudgetManagement TELECO Telecoms Utility ULCC Anti-Conuption Unit UNDP UnitedNations DevelopmentProgramme UNAIDS UnitedNations Programmeon HIV/AIDS UNCTAD UnitedNations Conferenceon Trade andDevelopment I. INTRODUCTION 1. This paper presentsan assessmentof Haiti's qualification for assistance under the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative.' The Executive Boards of the IMFand IDA discussed the Preliminary HIPC document for Haition September 6 and 7, 2006, respectively.2 On these occasions, Directors made a preliminary determination that Haiti could qualify for assistance under the HIPC Initiative in view of (i) status as a its PRGF-eligible and IDA-only country; (ii) its NPV of debt-to-exports ratio, which i s above the indicative threshold of the H P C Initiative even after the application of traditional debt relief mechanisms; and (iii)satisfactory performance under the two comprehensive Emergency Post-Conflict Assistance (EPCA) programs (October 2004-September 2006) and the IDA-supported EGRO I(since January 2005), with important achievements in the areas of macroeconomic stabilization and structural reform^.^ Directors also agreed that Haiti could reach its Decision Point before end-2006, together with the approval of a Poverty Reduction and Growth Facility (PRGF) arrangement by the IMFBoard, provided that (i) the country remains on track with its macroeconomic program, supported by the EPCA; (ii) an agreement i s reached on appropriate completion point triggers; and (iii) the Interim Poverty Reduction Strategy Paper (I-PRSP) i s finalized. Directors supported the possible triggers and key policy measures outlined in the preliminary document. 2. Haiti's NPV of debt-to-exports ratio as of end-September 2005, after full application of traditional debt relief mechanisms, is estimated at 176.7 percent and is above the HIPC Initiative threshold. Possible HIPC debt relief i s estimated to be US$140.3 million in end-September 2005 NPV terms (a common reduction factor o f 15.1 percent) and relief associated with the Multilateral Debt Relief Initiative (MDRI), also in NPV terms, i s estimated at about US$243 milli~n.~ relief under the HIPC Initiative and the MDRI Debt would help Haitiaccelerate progress towards the MillenniumDevelopment Goals (MDGs). 3. This paper is organized as follows. Section IIprovides background information on Haiti's eligibility for assistance under the HIPC Initiative; the nature and extent of poverty; recent political and security developments; and the policy track record. Section 111discusses the medium-to-long-term macroeconomic framework and the future reform agenda for poverty reduction. Section IV summarizes the results of the Debt Sustainability Analysis (DSA) and presents possible HIPC and MDRI assistance. Section V discusses the floating completion point triggers, specifies how HPC Initiative assistance after the decision point 'The EnhancedHIPC Initiative will hereafterbe referred to as the HIPC Initiative. See EBS/06/112,August 17,2006, and IDA ReportNo 36917, August 15,2006. Haiti was included inthe list of countriesmeetingthe HIPC Initiative's incomeand indebtednesseligibility criteria. See "Heavily IndebtedPoor Countries(HIPC) Initiative-List of Ring-FencedCountriesthat Meet the Income and IndebtednessCriteria at end-2004", IMF:EBS-06-35,April 11, 2006, and IDA: R2006-0041/2, April 12,2006. Although the two-year track record is relatively short, the HIPC framework has sufficient flexibility to accommodateHaiti's circumstances, including with regardto the length of track record to decisionpoint. See "Assistance to Post-Conflict Countriesand the HIPC Framework", DevelopmentCommittee DC2001-0014, April 20,2001. MDRIdebt relief from IDA i s expected to be US$243 million in NPV terms. Haiti is not expected to have any eligible IMFdebt for MDRIrelief. 2 will be used and tracked, andreports the views of the authorities. Finally, section VI presents issuesfor discussion by the Executive Directors. 11. BACKGROUND ELIGIBILITYFORHIPCINITIATIVE ASSISTANCE AND A. PRGFAND IDA Status 4. Haiti is currently an IDA-only country, with a nominal per capita GNI of about US$450 in 2005 (using the World Bank's Atlas methodology). A PRGF arrangement is scheduled to be discussed by the IMF Board inparallel with this document: Haitiwill continue to need substantialconcessional assistance from the international community and i s likely to remain an IDA-only country and eligible for PRGF resources for the foreseeable future. B. Dimensionsof Poverty 5. Political and economic instability, recurrent deterioration in security, low growth, and high inequality and poverty have been the key challenges confronting Haiti in the past. The impact of prolonged political conflicts and violence, periods of high external assistance followed by the withdrawal o f economic support, and natural disasters has been severe. Real income per capita has declined on average b y 2 percent annually over the past twenty years. Haiti's pattern of socio-economic development has been characterized b y marked inequalities in access to productive assets and public services, which, together with low growth, has resulted inwidespread poverty. 6. Haiti is the poorest country in the Latin America and Caribbean region and amongst the poorest in the world. The 2005 United Nations Human Development Index rankedHaiti 153rd out of 177countries. About 54 percent of Haiti's population lives below the US$1 a day poverty line and 78 percent below US$2 a day (2001 data).7 An overwhelming share of the rural population lives in poverty.* There are also large pockets of urban poverty in slum areas in Port-au-Prince, although many small cities and municipalities have lower poverty rates. Wide disparities exist regionally, with poverty being lowest in the Ouest region (34 percent), which includes the capital Port-au-Prince, and highest inthe Nord- Est region (81 percent). Nonetheless, even in the Ouest region poverty is extremely highby international standards (higher than that of any country in Latin America and the Caribbean). InOctober 2005, the Executive Boardof the IMFapprovedSDR10.25 million(about US$14.7million) in Emergency Post-ConflictAssistance (EPCA) to Haiti, addingto the SDR10.23 million(about US$15.6 million) providedunder the EPCAinJanuary 2005. When approving the EPCA, IMFDirectorsindicated their support for a rapidtransitionto a program supportedby the PRGF. 'Althoughbasedon the EnquCte sur les Conditions de Vie en Haiti (ECVH) 2001, usedfor the estimation of poverty indicatorsincludedinthis document, some poverty indicatorsincluded inthe I-PRSPdiffer slightly from the figures presentedabove, due to differencesinthe methodology used. Incidenceof povertyinrural areas is 69 percentfor the US$1aday poverty line and 86 percent for the US$2 a day poverty line. I 3 Income inequality in Haiti i s also high. Nearly half of national income goes to the richest 10percent of the population.' 7. On social indicators Haiti ranks very low. Although adult illiteracy decreased from 60 percent in 1990to 52 percent in 2003, it remains the highest in the Latin America and the Caribbean region and i s higher than the average for low-income countries. Only 55 percent of children aged 6-12 are enrolled in school; in rural areas this indicator i s even lower at 23 percent. Food deprivation and limited access to health care, due to poor infrastructure and lack of qualified personnel and drugs, have resulted in dire health conditions for Haiti's poor. Haiti also faces a high incidence of HIV/AIDS. UNAIDS estimates that 5.6 percent of the adult population has HIV. Despite all the risk factors in Haiti, there i s some evidence that HIV/AIDS prevalence rates have not increased significantly in the last decade and may even have declined. UNAIDS credits this positive trend to close public-civil collaboration and sustained political commitment to contain the disease. Table 1. Haiti: SelectedPoverty and SocialIndicators Haiti LAC 1/ LIC2/ Population(million, 2002)" 8.3 540 2,615 Of which rural(%) 62.5 23.3 69.8 Annual populationGrowth(2003-15) 1.4 1.3 1.6 Life expectancyat birth (Years, 2003) 51.6 71.9 58.4 GNIper capita (2005 for Haiti, 2004 for LAC andLIC) ` 450 3,576 507 Incidenceof Poverty (% of the populationbelowthe US$1aday povertyline, 53.9 8.9 2001 data for Haiti; 202 data for LAC) Adult literacy ratio ( % of peopleage 15 andabove, 2003) 3/ 51.9 89.6 60.8 Primaryschoolnet enrollment ratio (% of relevant age group, 2001) 55 Infant mortalityrate (per thousand, 2003) 3/ 76 21 80 Childmortalityrate (per thousand, 2002) 3/ 118 32 124 Maternalmortalityrate (per 100,000 live births, 2000) '' 680 194 682 Access to improvedwater source (% of population,2002) 31 71 89 77 Prevalenceof HIVlAIDS (% of persons age 15-49,2003) 3` 5.6 0.7 - 2 1/ LatinAmerican andthe Caribbeanregion. 21Low-IncomeCountries. 3/ UNDP, HumanDevelopmentReport2005. 4/ World Bank, 2006 World DevelopmentIndicators(for LAC and LIC). World Bank, staffestimates (for Haiti). Calculatedusingthe World Bank Atlas method. 5/ World Bank, 2006 World DevelopmentIndicators. 6/ World Bank, staffestimatesbasedon the ECVH2001data. 8. Given the significant gaps indevelopment indicators, Haiti is unlikely to achieve all its Millennium Development Goals (MDGs) by 2015. Public sector contribution to the provision of basic social services has been very limited and, as a result, the majority of the Haitian population does not have access to these services. For instance, 90 percent of primary schools are non-public and charge fees that represent, on average, 20 percent of the incomes of the poorest quintile, thus barring access to many families. Quality is also a problem, 70 percent of schools lack accreditation and 60 percent of teachers are unqualified. As with education, health services are predominantly provided by non-public institutions (70 percent) Estimates based on household surveys suggest that poverty and inequality rates may have not changed substantially over the last two decades. Part of the explanation could be that, while GDP per capita declined, consumption levels were maintained by remittances which have acceleratedsince the mid-1990s. 4 and the quality is generally poor. Overall, only 28 percent of the population has access to health facilities. Similarly, most of the clean water and sanitation services are non-publicly provided. Despite the predominant role of the private sector in the provision of basic social services, the normative and regulatory role of the Government is weak. The Government plans to introduce measures to address immediate social problems while developing and implementing strategies to help Haiti make progress towards reaching the MDGs. With continued external financial assistance (including HIPC and MDRIrelief) Haiti could reach some MDGs, notably goal 2 (achieve universal primary education) and goal 7 (combat HIV/AIDS, malaria and other diseases), and make progress towards reaching the others. C. RecentPolitical and Security Developments 9. Following the insurrection that quickly evolved into a widespread violent conflict in early 2004, President Aristide resigned and left the country. The political crisis that followed was halted with the establishment of a Transition Government mandated to organize elections and undertake measuresinthe areas o f security, development, and creating the ground for a new national dialogue. The Political Transition Agreement established the political framework in which the Transition Government operated. To address the high instability and violence that prevailed, the United Nations Security Council authorized the deployment of a Multinational Interim Force, later replaced by the United Nations Stabilization Mission in Haiti (MINUSTAH). The mandate of the forces was to help the Transition Government reestablish the security and stability required for the advancement of the constitutional and political process in the country. While security has improved since 2004, outbursts of violence are still occurring. 10. The recent successful presidential and parliamentary elections provide an opportunity to overcome the legacy of past decades. A coalition Government has been formed, including ministers from different political parties. The coalition Government received almost unanimous approval inParliament, raisinghopes for moving forward with an ambitious agenda to improve access and quality o f basic social services, modernize the state, pursue and deepen governance reform, wage a war against corruption, and promote private sector investment. 11. The security situation remains fragile, especially inthe capital, Port-au-Prince. The July 2006 International Conference for Haiti's Economic and Social Development underlined the need for a coordinated and rigorous action from all partners to reestablish a climate of security, which i s indispensable to achieve social and economic objectives. President PrCval has shown a determination to reach out to all political and social forces in Haiti in a spirit of reconciliation and dialogue. Also, recently the Government launched a disarmament and community reinsertion program for armed groups and intends to pursue ongoing efforts to reform the police and the judiciary. D. Policy Track Record 12. Since mid-2004, Haiti's economic and social recovery and its structural reforms have been supported by donors under the Interim Cooperation Framework (ICF). The ICF, presented by the Transition Government at the July 2004 donors' conference in 5 Washington, D.C., provided an interim framework until an elected Government was in place. The ICF framework was extended by the current Government to September 2007 at the July 2006 conference. lo The initial macroeconomic framework was established under the Fund's staff-monitored program (SMP) covering the period April-September 2004. Over the following two years, the authorities' macroeconomic program has been supported by the IMF's EPCA, with disbursements in January and October 2005 (US$30.3 million). Following the clearance of arrears to IDA (US$52.3 million) in early 2005, the Government also received support from IDA to implement economic governance reforms (through an Economic Governance Reform Operation, EGRO, of US$61.0 million, and two Economic Governance Technical Assistance grants of US$2.0 million each) and to support the country's recovery through community driven interventions, disaster prevention and management activities, transport and territorial development programs and electricity. The Inter-American Development Bank (IDB), the European Union (EU) and bilateral donors have also provided significant financial and technical assistance. 13. During 2004-06, Haiti made significant progress toward strengthening macroeconomic stability (see Table 2). The economy has gradually recovered from the political turmoil and severe floods experienced in 2004 and annual GDP growth i s expected to increase to 2.5 percent in FY2006 from 1.8percent in FY2005." However, security problems have adversely affected economic activity, donor project implementation and other inflows of foreign exchange. With increased revenues and tighter expenditure controls, the central Government overall deficit (including grants) was reduced from 3.5 percent of GDP in FY2003 to 1.4 percent in FY2006. This has largely eliminated recourse to central bank financing of the central Government deficit. This substantial fiscal adjustment has also helped reduce end-of-period inflation from 37.8 percent in FY2003 to 12.4 percent in FY2006; however this rate of inflation i s still high relative to comparable low income countries. Net international reserves (NE) have increased, raising import coverage from 1?A months of imports of goods and services in FY2003 to an estimated 1.8 months in FY2006. The authorities' program supported by the EPCA remains on track, and preliminary data indicate that key end-September 2006 quantitative targets have been met. IoAt the conference, donors pledgedabout US$750millionfor the periodJuly 2006- September 2007. The Haitianfiscal year runs from October 1to September 30. 6 Table 2. Haiti: Selected Economic and Financial Indicators (Fiscalyear endingSeptember30) 2003 2004 2005 2006 Prel. (Annualpercentagechange, unless otherwiseindicated) GDP at constant prices 0.4 -3.5 1.8 2.5 RealGDP per capita -1.7 -5.4 -0.2 0.8 Consumerprices (end-of-period) 37.8 21.7 14.8 12.4 (In percentof GDP) Centralgovernment overall balance (includinggrants) -3.5 -2.4 -0.7 -1.4 (Changesin percent of beginning-of-periodbroadmoney) Broadmoney (includingforeign currency deposits) 39.8 9.1 20.3 9.1 (Annualpercentagechange, unless otherwiseindicated) Net internationalreserves(in millions of U.S. dollars) 1/ 38.8 54.5 70.6 125.7 Liquidgross reserves(in millionsof U.S. dollars) 2/ 157.1 207.4 228.5 330.8 Inmonths of importsof the followingyear 1.2 1.4 1.4 1.8 Sources: Ministryof Economy and Finance; Bankof the Republicof Haiti; and Fundstaff estimates. 1/Excludescommercialbanks'foreign currency deposits with the BRH. 2/ Gross reservesexcludingcapitalcontributionsto internationalorganizations. 14. Progress has also been achieved inthe implementation of structural and economic governance measures, notably under the EPCA and EGRO. As of early 2004, Haiti was confronted with significant weaknesses in economic governance and management, which impeded the efficient use of both domestic resources and external financing.'* The main weaknesses were in the following areas: (i)budget formulation, execution and reporting; (ii) procurement; (iii)public enterprise management and road maintenance; public (iv) human resource management; and (v) the financial sector. Progress in these areas are as follows: Budget formulation, execution and reporting. Prior to 2004, the Government had at times operated without approved budgets or with budgets approved late into the fiscal year. Procedures for budget formulation and execution were weak and a significant share of public resources was channeled through multiple comptes courants held by individual l2Reflectingthese weaknesses, Transparency International's Corruption PerceptionIndex (as well as other governance indices) has placedHaiti amongthe lowest rankings worldwide and has identifiedcorruption as one of the leading constrainton economic growth and investment. See "La Fondation HCritagepour Hai`ti", L'Etat des Lieux de la Corruption en Hai'ti,2003. 1 7 ministries and used non-transparently.l3In addition, internal controls were impaired by the lack of a well-structured accounting system or external audits of Government budgets. Recent Government measures to address these weaknesses include: (i) passage of a new Organic Budget Law14 and adoption of a new budget classification and chart of accounts; (ii) approval of the budgets for FY2005 and FY2006 before the start of the fiscal year and regular public dissemination of key budget allocations and execution information; (iii) preparation of the FY2006 budget according to the new budget classification and expansion of the automated system for budget management (SYSDEP) from 5 ministries and units to 17;15 (iv) a drastic reduction o f discretionary spending through ministerial comptes courants;l6and (v) strengthening the external audit function with a decree on the organization and functioning of the supreme audit institution, the Cour Supe`rieuredes Comptes et Du Contentieux Administrative (CSCCA). The CSCCA i s in the process o f catching up on Government accounts audits which, together with the resumption of Parliament oversight functions, will strengthen external controls. Other measures have proceeded more slowly: (i)a mechanism for monitoring budgetary transfers to the electricity sector has been established but i s not yet effective and an independent audit of the transfers has not taken place; and (ii)a survey of domestic payment arrears of the central Government has been completed but not yet fully verified and a strategy to address them has not been formulated. In the early 2000s, public procurement operated under a 1989 decree which had not been fully implemented and had several flaws, and sole-source contracts and unadvertised bidding were the norm. Since 2004, the institutional framework for public procurement has been strengthened through: (i) the passage of a new Procurement Decree and the creation of the National Commission for Public Procurement (CNMP) in 2004; (ii) preparationofstandardbiddingdocuments; and(iii) publicationoflistsof the the Government contracts and of a supplier database. The recent hiring of an international procurement consulting firm will help the CNMP to strengthen procurement capacity in line ministries. In2004 an Anti-CorruptionUnit (ULCC) was created and staffed as an autonomous entity under the Ministry of Economy and Finance (MEF). The Unit i s conducting a comprehensive diagnostic survey of the state of governance and the perception of I3The "comptes courants" (Ministries' accounts) were originally meant to be used for unforeseen or non- budgeted needs such as for assistanceto those affected by a natural disaster or unexpected travel by policy makers. 14The Law mandatesthe creation of a new accounting system, creates the position of internal ex-ante controllers and a new internal auditing office. l5The expansion of the SYSDEP is beingundertaken in two phases.The first phase, already completed, includes key ministries and units such as the MEF, the CSCCA, the ministriesof Education (MENJS) and Health (MSPP), and the Tax and Customs Directorates. The secondphase, including all remaining ministries and the National Police, is scheduled to be completed in late 2006. l6The percentageof non-salary current public expenditures disbursedthrough comptes courants was reduced from 62 percent during October 2003-March 2004 to less than 10percent in FY2005-06. 8 corruption in Haiti as an input to the design of a national anti-corru tion strategy and has prepared a draft law for public sector employees' asset declaration.1Y Public enterprises have been characterized by inadequate financial and operating practices and a lack of managerial accountability, often accompanied by the siphoning of budgetary resources. Due to the limited resources for maintenance and investment, the quality and reliability of services provided by these enterprises deteriorated over the years. Poor governance practices were particularly acute in the electricity (EDH) and telecoms (TELECO) utilities, and the port authority (APN), which are critical for economic growth. In 2006, financial audits o f APN, TELECO and EDH andan accounting rehabilitation of TELECO and EDHwere completed. In2005-06, the Government took a number of measures to strengthen the Road Maintenance Fund (FER), created in 2003 as the cornerstone of Haiti's road maintenance strategy. The FER now has reached a basic level of institutional capacity with the recruiting of key staff and the definition of its operational procedures. In the area of public expenditure management (PEM), an Assessment and Action Plan (AAP) to strengthen the capacity of Haiti to track poverty reducing public spending was prepared jointly by IDA and IMF staffs in consultation with the authorities in June 2006. Compared to an informal assessment undertaken in 2004, the 2006 AAP confirms that improvements in PEM performance resulting from the above reforms." The reforms started from a very low base of economic governance and focused on critical institutional and legal changes related to public expenditure and public enterprise management. These efforts will require follow-up actions and additional reforms to ensure that (i) procedures and practices are consistent with the revised legal and institutional framework; (ii) mechanisms to better target public resources are set up; (iii) qualityofmonthlyfiscaldataisimproved; and(iv) citizens areempoweredin the ways that will improve public sector transparency and accountability. In this respect, governance measures aimed at making public service delivery more responsive and effective and improving the comprehensiveness o f the budget are needed to increase the effectiveness and transparency o f public resource use. In 2005 the Government introduced a mechanism for civil society to monitor its program of economic governance reforms. This mechanism became operational in early 2006, following capacity building by both the Government and civil society organizations. A summary of the monitoring reports prepared by civil society organizations has been published on the MEF website. A workshop with the Government relevant agencies and ministries and civil society organizations was held in June 2006 to review the experience in implementing the monitoring mechanism and identify measures to improve its effectiveness. The inadequate quality and quantity of human resources have been an impediment to public sector efficiency in Haiti. This results from the scarcity of skilled people and "ThediagnosticsurveywascompletedinMarch2006.Thefinalreportisexpectedtobecompletedbyend 2006. An informalassessment was undertakenin September 2004 by the IMFstaff. 9 the lack of an adequate incentive and accountability system to attract, maintain and motivate civil servants. Public sector employment in Haiti i s very small by international standards. In 2004, public sector employment corresponded to 0.7 percent of the population, compared with 2.0 percent in Africa and 7.7 percent among developed market economies." Dealing with these shortfalls in a manner that supports sustained public sector efficiency will likely require increasing the efficiency of the use of scarce human resources and implementing reforms involving systemic restructuring of the civil service. In 2004, a new Civil Service Decree was enacted. A Coordination Unit in the Prime Minister's Office has taken on the human resource functions as a first step to overseeing the implementation of the Decree and a census of employment in selected ministries has been completed. Financial sector stability has been maintained, but weaknesses have been identified in the mechanism of monetary management and in financial audit and controls of the Central Bank of Haiti (BRH), and the BRH has experienced operational losses. The authorities are preparing a plan to address these weaknesses, including with technical assistance provided by the IMF.A draft of a new bankinglaw i s expected to be finalized and submitted to Parliament later this year. In addition, the financial statements of the BRH for FY 2004 were published, however with a year delay. Financial statements for FY2005 have not yet been published. The BRH was also subject to a safeguards assessment in relation to drawings under the EPCA and the vulnerabilities identified by that assessment are now being addressed; and the BRH has strengthened its surveillance of credit cooperatives. 15. While significant progress has been made in implementing macroeconomic, structural and governance reforms, setting Haiti on a path of economic recovery will remain a major challenge. Economic recovery will critically require restored security, but a sustained improvement in security will in turn depend on the delivery of quick and visible improvements in the living conditions of the Haitian population. Furthermore, strengthened public institutions and improved economic governance are needed to ensure that economic growth i s inclusive and sustained over time. The financial and technical support of the donor community will be critical to help the Government address these challenges. While current conditions in Haitipresent significant risks going forward, the provision of HlPC debt relief will contribute to creating fiscal space for much needed poverty-related expenditures and encourage reforms in public expenditure management. 111. MACROECONOMICFRAMEWORK FUTURE AND REFORMAGENDA A. The PRSP Formulation Process 16. In September 2006, the Government completed the preparation of the I-PRSP which was initially drafted inlate 2005 by the Transition Government and subsequently revised by the current Government to reflect its development priorities. The I-PRSP outlines the main areas of intervention envisaged by the authorities to reduce poverty as well as the steps to be undertaken in the preparation of the full Poverty Reduction Strategy l9 Jaramillo, L.(2005) "Public Sector Employment in Haiti" IMFSelected Issues Paper, www.imf.org. 10 (PRS).20 The Government's main development priorities are to consolidate macroeconomic stability, enhance physical infrastructure, expand access to social services, improve economic governance and strengthen public institutions. This program represents a continuation o f the axes and the strategic objectives of the 2004 ICF, with an increased emphasis on a national development approach including all of Haiti's departments and communes and interventions aimed at meeting pressing social and economic needs in disadvantaged and conflict-prone areas. 17. The Government has begun the preparation of a full PRSP. The participation process will be broadened and deepened in the preparation of the full PRSP. The I-PRSP includes a detailed strategy for the consultations which will include members of Parliament, civil society organizations, affected stakeholders, and the donor community and will target the poor through meetings in communes and departments. The I-PRSP also describes the process through which the mechanism for monitoring and evaluation of the PRSP will be developed. 18. The full PRSP would be expected to build on the I-PRSP by (i) presenting a comprehensive medium and long-term strategy and an agenda for its implementation; (ii) establishing efficient mechanisms and easy-to-monitor indicators for progress, including for the MDGs; (iii) refining the structural reform agenda and providing more detailed and focused sector strategies; (iv) clearly defining priority expenditures within the framework of a strengthened public sector investment program; and (v) identifying interventions to enhance public sector program and project implementation capacity. B. Macroeconomic Framework2' 19. An important objective of the authorities is to achieve robust and sustainable real economic growth. Real output growth i s projected to average 4.2 percent over the period FY2006-25.22 In the short term, real output growth is projected to strengthen sharply from 1.8 percent in FY2005 to 4.0 percent in FY2007, assuming significant improvements in security conditions, continued strong external support, and increased public investment. Over the long term (FY2015-2025), real output growth i s expected to average 4.5 percent. 23 This 2o A joint IDA-IMFStaff Advisory Note on the Interim PRSP, circulated inparallel with the Decision Point document, indicates that the I-PRSP provides an appropriate framework for poverty reduction and use of resourcesthat could become available under the HIPC Initiative. 21 The macroeconomic projections usedinthis analysis cover the next 20 years and were prepared in consultation with the authorities. 22 This is a more conservative projection compared with the one presentedinthe HIPC Preliminary Document, which assumedan average annual growth of 4.7 percent. The downward revision to growth reflects two factors. First,the assumption of a more gradual reduction inthe binding constraints to growth, preventing Haiti from reaching its long-term growth rate rapidly. Inthe preliminary document, Haiti was expected to reach its long- term (steady-state) growth in FY2011, compared to FY2015 in the Decision Point document. Second, the updated projection makes a more conservative assessment of Haiti's long-term economic growth potential (which was reduced from 5.0 percent to 4.5 percent for the period FY201.5-25). 23 While real GDP growth has been low during the past half century, this largely reflects the impact of episodes of political instability. Excluding these shocks, Haiti experienced periods of high growth, notably in the 1970s, with average real GDP growth close to 4.5 percent, fueled by investment in light manufacturing (inparticular the garment assembly industry) and tourism. This sustainedperiod of high growth serves as a benchmark for 11 projected improvement in real output growth depends critically on maintaining security, sustained political and macroeconomic stability, progress on economic governance, and improvements in social and economic infrastructure, contributing to higher private investment, including FDI. 20. The authorities are also aiming for low and stable inflation, to foster an environment conducive to long-term growth. End-of-period inflation has declined from 37.8 percent in FY2003 to an estimated 12.4 percent in FY2006following substantial fiscal adjustment. Buildingon recent strengthening of fiscal discipline and change in the conduct of monetary policy, inflation i s expected to decline gradually to 5.0 percent by FY2011. 21. Macroeconomic stability is also expectedto be supported by fiscal prudence. Over the projection period, the central Government overall deficit i s expected to average about 2.0 percent of GDP. The Government i s expected to increase revenues and seek concessional external financing to allow for increased pro-poor spending, higher investment and the institutional development of central and local Governments, while maintaining debt sustainability after the delivery of HIPC Initiative assistance. 22. Fiscal revenues are projected to increase gradually to about 16.0 percent of GDP by FY2025, compared to about 9.6 percent over FY2004-06. The Government intends to implement measures to boost revenues, including through the strengthening of customs control in the provinces, enhanced computerization of tax and customs administration offices, and reinforcing the tax audit mechanism. 23. Government expenditures are expectedto be re-oriented toward strengthening the institutional capacity of the Government and increasing spending in key areas such as security, health and education. Rebuilding social and economic infrastructure is expected to be the core of the public investment program which i s expected to be financed largely b y external donors. The framework assumes that the share of pro-poor spending in overall outlays will increase to assist inpoverty reduction andmeeting the MDGs. 24. For the long-term growth projection to materialize, Haiti's level of investment has to increase markedly, by more than 4.0 percentage points of GDP over the projection horizon.24Initially, higher investment will come from higher public investment, especially in public infrastructure, helping to create the conditions for private sector development. An improvement in security is pivotal to ensure this outcome. As infrastructure constraints are gradually removed, agricultural production and exports are expected to pick up. Improvement in tourism infrastructure would create favorable conditions for the tourism industrywhich notably caters to the large Haitian diaspora. 25. The external current account deficit (excluding grants) is expected to decline from 7.5 percent of GDP inFY2006 to about 5.2 percent of GDP at the end of the projection Haiti's growth potential, and the long-term projection assumes that Haiti enters a path of restored security. However, the sensitivity analysis detailed in section IV F includes a scenario with lower growth. 24The investment numbersin the macroeconomic framework reflect the reporting in the Haitian national accounts, which may significantly overestimate investment as a share of GDP. Investmentwas reported at 27.4 percent of GDP in FY2005. 12 period largely due to improvements in net exports. The import-to-GDP ratio i s projected to decline by 2.4 percentage points of GDP in the long term due to lower aid flows and increases in local production, e.g., in the agricultural sector. Rising exports (by 2.0percentage points of GDP) are also expected to contribute to the improvement in the current ac~ount.~'International reserves are expected to increase from 1.6months of imports of goods andservices inFY2005 to over three months fromFY2011. C. ReformAgenda 26. The reform agenda going forward is reflected in the I-PRSP prepared by the Government and presented to IDA and the IMF in September 2006. The Government has expressed its commitment to maintaining macroeconomic stability, pursuing and deepening the structural and economic governance reform agenda of the last two years and making significant efforts in fighting corruption. The agenda i s strong in cross-cutting governance initiatives which, in addition to strengthening security, are necessary if Haitii s to achieve the high, sustained and shared economic growth that is required to reduce overty andbringabout meaningfulchange inthe livingconditions of the Haitianpopulation.E.3 27. The Government intends to continue to strengthen public expenditure management. Specifically, the Government plans to: (i) align public spending with the priorities identified in the I-PRSP and, when completed, the PRSP, reflecting emphasis on pro-poor growth; (ii)introduce a medium term framework which will include budget projections consistent with the PRSP expenditure priorities; (iii)adopt an automated mechanism to track poverty-reducing public expenditure and publicly disseminate quarterly expenditure reports; and (iv) ensure accountability and oversight of its accounts in strict observance of the prevailing legal framework. In addition, the Government intends to strengthen the procurement function, by adopting and implementing a new law in line with international best practice and ensuring compliance by all Government purchasing agencies, and continue to publish Government contracts awarded. The IMF and IDA staffs will assist the authorities in the evaluation of existing systems of public finance management and the identification of additional areas where further reforms and technical assistance are needed.27 28. The Government also plans to improve the management of public enterprises and road maintenance. The Government will modernize public enterprises to increase their efficiency and maximize their profitability. Particular emphasis will be given to improving governance and transparency. The Government intends to enforce annual audits of key public enterprises in line with the prevailing legal and regulatory framework guiding them and to ensure that key audit recommendations are addressed. In the electricity sector, all 25Exports of some agricultural products, such as mango and coffee, are expected to be strong, followed by exports of textiles and apparel industry, which are expected to be less robust given the ongoing changes in the world market following the phasing out o f the Multi-FiberAgreement. A potential offsetting impact may result from the HOPE Act and possible future joint production arrangements with Dominican Republic producers. Nevertheless, an increase in textile exports or tourism would not lead to a substantial increase in net exports due to their high import components. 26Please see Appendix 1for a summary of governance measuresrelated to participation, accountability and oversight, and transparency included in the Government's reform agenda. 21IDA is conducting an integrated Public Expenditure, Financial Accountability and Procurement Assessment. The IMFwill provide further technical assistanceto improve public financial management. 13 Government transfers to the electricity utility (EDH) will be monitored and will be independently verified and a competitive bidding process for petroleum purchases for the sector will be introduced. Also, the Government intends to continue the improvement of the institutional capacity of the road maintenance agency (FER) to ensure good management practices, including transparency and accountability of its operations. 29. To increase public sector employees' accountability, the Government intends to adopt and implement a law on asset declaration, including sanctions for non-compliance. Inaddition, in2007 the Anti-Corruption Unit (ULCC) will submitfor Government approval a multi-sectoral strategy to fight corruption2*. The Government also intends to continue to support the ongoing mechanism for civil society to monitor economic governance reforms. 30. Reforms will also focus on improving the monetary policy framework and policy instruments to reduce inflation. Measures and reforms will include the auction mechanism for central bank bonds, recapitalizationof the central bank, which will also cease its non-core activities, and submission to Parliament of a new central bank law. Financial statements of the BRH will be subject to annual audits and their results published. The Government also intends to submit a new banking law and issue implementing regulations. Additional measures may be taken in the financial sector following a Financial Sector Assessment to be conducted at the request of the Government by the IMFand IDA in early 2007. 31. The Government is committed to forcefully implement measures to boost revenue and fight fraud and tax evasion. Inparticular, it plans to establish customs control at all ports of entry and borders, reinforce and restructure tax collection agencies, increase the accountability of collection agents, and enhance computerization of tax and customs administration offices. In addition, to reduce the vulnerability of the budget to external shocks, the Government will continue to implement a flexible price-setting mechanism for petroleumprices. 32. Private sector development is key for growth in Haiti. The Government intends to promote the sector by improving security and stability, enhancing infrastructure and protecting property rights, establishing one facilitation center for investors, and over the medium term revising the relevant investment and tax laws. With 62.5 percent of the Haitian population living in rural areas, most of which are poor, increasing agricultural productivity and diversification are amongst the Government's priorities to revitalize the economy and reduce poverty. The actions and reforms that the Government plansto introduce inthis sector include: (i)increasing smallholder access to credit and other agricultural inputs: (ii) rehabilitating agricultural infrastructure; (iii)improving land tenure rights to promote investment in irrigation and storage; and (iv) increasing extension activities and the promotion of new seed varieties. 33. The authorities intend to modernize and strengthen the Central Government. This will involve first determining the number, mission, and function of ministries and autonomous entities and later rationalizing employment and the salary policy in the public sector. Such systemic restructuring of the civil service will help increase the efficiency of the *'Informationfrom ~ ~~ the diagnostic survey referredinfootnote 17 will informthe preparationof the strategy. 14 use of scarce human resources. Over the coming year, the Government plans to update the public sector employee database and ensure its regular use, and define the system, applicability and procedures for new recruitments and promotions based on performance. Decentralization of Government authority and public services, through a medium-term plan requiring significant strengthening of institutional capacity for effective local Government functioning, will help Government services to be closer to the users and promote inclusion and participation of all levels of the population. 34. The Government's plan for the Education Sector is described in the National Education and Training Plan (NETP). The NETP, and most recently the I-PRSP, define key actions and reforms required to improve the education system and broaden access, particularly o f the poor: (i)increase public resources allocated to education for both improved access and quality; (ii) strengthen the capacity of the Government to fulfill its planning, coordination and normative responsibilities; and (iii)establish the National Education Partnership Office (NEPO) and the National Partnership Fund (NPF). The NEPO i s designed to promote policy dialogue and operational coordination between the public and non-public sectors, including supervision and evaluation of non-public schools by the State while the companion NPFwould provide a public financing mechanismto help poor families pay for the school fees of their children in non-public schools. This is the first real sector governance structure which encompasses all key education stakeholders, promoting not just effective dialogue between the public and non-public sectors but also accountability and transparency in the use of ublic education funds, particularly those channeled through the National Partnership Fund. 8 35. The Government is preparing a National Strategic Plan for the Reform of the Health Sector (NSPRHS). The NSPRHS and also the I-PRSP, define as key actions and reforms to increase the access and quality of heath service provision: (i) increase public resources to improve access and quality of health care; (ii) strengthen the capacity of the Government to fulfill its planning, coordination and normative responsibilities; (iii) promote policy dialogue and operational coordination between the public and non-public sectors; (iv) enhance preventive measures, particularly by introducing mass immunization campaigns for infants and school children; (iv) increase the number of health units at the commune level that can provide a minimum service package; (v) expand the availability of essential drugs; and (vi) introduce a transparent and accountable mechanism to provide free access to health services to the poorest Haitians. 36. The Government plans to prepare a strategy to combat HIV/AIDS in consultation with civil society and the donor community. The I-PRSP indicates that the strategy will also define the institutional framework needed for the planning, coordination and monitoring of the actions andreforms introduced inthe context of the strategy. Inparallel, the authorities intend to continue the ongoing efforts to improve care for those already infected and to raise awareness andprevention. 29The NEPO is expected to be governed by an eight-member Board of Directors which will include representatives from non-public education service providers, parents' associations, teachers' unions, the Ministry of Finance and the Ministry of Education. 15 37. T o improve access and the quality of water as well as the provision of sanitation, the Government plans to implement the following actions and reforms: (i) reorganize the public institutions of the water sector; (ii) improve and protect water sources; and (iii) ensure the regular collection of solid residues. The Government plans to define its agenda for other sectors, notably environment, infrastructure, manufacturing and tourism. The I-PRSP introduces the broad lines for the development o f these sectoral strategies. Given the nature and depth of the challenges facing Haiti and the existing weak institutional capacity, the impact of the reforms i s expected to be incremental andhave a medium to longterm horizon. IV. DEBTSUSTAINABILITYANALYSIS(DSA) AND ENHANCED ASSISTANCE HIPC A. Debt ReconciliationStatus 38. The DSA presented below was prepared jointly by the authorities and the staffs of I D A and the IMF, based on loan-by-loan data for public and publicly-guaranteed debt outstanding and disbursed as of end-September 2005 provided by the authorities and creditors. The reconciliation process was completed in September 2006, with 100percent of multilateral and bilateral debt re~onciled.~' B. Structure of ExternalDebt 39. Haiti's public and publicly guaranteed external debt was estimated at US$1.3 billion innominal terms as of end-September 2005, equivalent to US$932.9 million inNPV terms (Table 3 and Al).31Multilateral creditors accounted for 82.2 percent of the total, with IDA and the IDB representing 37.9 percent and 40.0 percent of total claims, re~pectively.~~ Bilateral creditors accounted for 17.8 percent o f Haiti's external debt, with Paris Club creditors accounting for 14.4 percent.33 40. Bilateral creditors have indicated their willingness to reschedule arrears and debt service payments inthe context of the PRGF arrangement and the HIPC decision point. Italy, France, and Spain are the largest bilateral creditors, with 5.2 percent, 4.8 percent and 2.9 percent of total claims, respectively. Claims by these creditors include approximately US$35.4 million in arrears. Haiti has obtained an informal deferral on debt service payments from Italy, France, and Spain duringthe program supported by the EPCA. ~ 30Compared to the preliminary document, the decision point document includes bilateral loans administered by IDA. This translates into an increase inthe stock of outstanding debt at end-September 2005 of approximately US$4 million (US$1.5 million inNPV terms). Furthermore, a loan administered by the IDB for the Venezuelan TrustFundhas beenreclassified from multilateral to bilateral. The decision point document also incorporates a small revision to the NPV of multilateral debt at end-September 2005, compared to the estimate in the preliminary HIPC document. Inthe preliminary document, the concessionality included in the arrears clearance . operation of IDA was estimated at US$32.8 million in NPV terms, which has beenrevised to US$33.1 million. The estimate for the IDB Group remains unchanged. 31These estimates are based on scheduled debt service of current maturities and, therefore, do not reflect the simulation of full delivery of traditional debt relief. 32 The IDBis one of Haiti's main donors, supporting actions and policies inmany areas, including public expenditure management, infrastructure and the provision of basic social services. 33 Haiti has no external commercial creditors. 16 million % of total Total 1,336.3 100.0 Multilateral 1,097.8 82.2 IDA 507.1 37.9 IDBGroup 533.9 40.0 Other 56.8 4.2 Bilateral 238.5 17.8 MemorandumItems: NPV of debt after traditional debt relief 928.3 ... % of exports 176.7 ... 41. Arrears to all multilateral creditors have been cleared. In2004, Haiti cleared about US$1 million in arrears to the International Fund for Agricultural Development (FAD) and the OPEC Fund for Development. Concessional arrears clearance operations were also approved by the IDB and IDA. In particular, Haiti cleared US$30.9 million in arrears to the IDB in July 2003, and US$52.3 million to IDA in January 2005. The NPV reduction contained inthese operations i s estimated at US$33.1 million for IDA and US$9.7 million for the IDB Group. In accordance with the methodology agreed with multilateral development banks, the NPV of Haiti's external debt (as of end-September 2005) includes the NPV reductioncontained inthe arrears clearance operations of the IDB and IDA.34 C. Possible HIPC Initiative Assistance 42. Haiti's debt in NPV terms, after full application of traditional debt relief mechanisms, is estimated at US$928.3 million (as of end-September 2005). This i s equivalent to 176.7 percent of exports of goods and services (Table AL!).~~Haiti qualifies for debt relief under the HIPC Initiative's export window, having an NPV o f debt-to-exports ratio above the 150 percent threshold. 43. The reduction of Haiti's NPV of debt-to-exports ratio from 176.7 percent to 150 percent would require HIPC debt relief of US$140.3 million in NPV terms. This implies a common reduction factor of 15.1 percent. Based on proportional burden sharing, multilateral assistance would amount to US$120.0 million (in NPV terms) and bilateral assistanceto US$20.4 million (inNPV terms). 44. The modalities and timing of the delivery of the HIPC Initiative assistance will be decided by each creditor following the approval o f the decision point. Nevertheless, in order 34See the attachment to "HIPC Debt Initiative: the Chairman's Summary of the Multilateral Development Banks' Meeting," March 6, 1998, IDNSec M98-90. 35The NPV of debt-to-export ratio is calculated using a backward-looking three-year average of exports of goods and services. 17 to assess the impact of the HIPC Initiative assistance the following assumptions have been made36: IDA will provide assistance amounting to US$52.8 million in NPV terms, including US$33.1 million already provided through the concessional rescheduling of arrears. Immediately following the approval of the decision point by the Boards of IDA and the IMF, IDA will begin to provide the remaining assistance (US$19.7 million) in the form of debt-service reduction on debt outstanding and disbursed as of end-September 2005. IMF assistance is estimated at US$3.1 million in NPV terms. Immediately following the approval of the decision point by the Boards of IDA and the IMF, the IMF will extend interim assistance-provided that the necessary financing assurances are in place-in the form of debt-service reduction. Following the approval of the prospective PRGF arrangement, Haiti i s expected to repurchase the amounts outstanding under the EPCA with more concessional PRGF resources. This would result in relatively low levels of debt service falling due during the interim period. As a consequence, most of the IMF's HIPC Initiative assistance is expected to be disbursed after the completion point.37 The IDB assistance will amount to US$60.4 million in NPV terms, including US$9.7 million already provided through the concessional rescheduling of arrears.38 The remaining US$50.7 million (in NPV terms) in assistance i s expected to be delivered through a reduction indebt service. All other multilateral creditors are assumed to provide debt-service reduction starting at the decision point or the completion point, until their contributions meet the requirement under the HIPC Initiative. Paris Club bilateral creditors are assumed to provide a flow rescheduling on Cologne terms-i.e., a 90 percent NPV reduction-after Haiti reaches the decision point, with delivery of the remaining required assistance at the completion point through a stock-of-debt operation. The rescheduling on Cologne terms i s expected to translate into US$14.9 million inNPV terms. Comparable treatment would be provided by non-Paris Club official bilateral creditors. 36Inline with the government's objectives, Haiti is assumedto reach completion point in September 2008. 37The preliminary HIPC document did not take into account the repurchaseof the amounts outstanding under the EPCA with PRGF resources becauseit had not yet been approved by the IMFBoard. The decision point document i s presentedtogether with the request for a PRGF arrangement, and hence incorporates the repurchase.This implies revisions, relative to the preliminary document, of the NPV of debt to the IMFand debt service to the IMFfrom 2007 onwards. 38The IMFand IDA have requestedthe IDB, as well as other multilateral creditors, to confirm their intention to provide assistance to Haiti under the HIPC Initiative. The IMFand IDA have also requested the views of the IDB on the estimateof the concessionality provided through its rescheduling of arrears. 18 45. Based on these assumptions, the HIPC Initiative would provide debt relief totaling US$212.9 million (in nominal terms) over time. This represents a contribution of US$ 110.9 million from multilateral creditors and US$ 102.0 million from bilateral creditors. Interim debt relief i s estimated to amount to US$19.8 million, US$13.3 million in FY2007 andUS$6.5 millioninFY2008 (Table A4).39 46. Status of creditor participation. IDA and IMF staffs have initiated consultations with multilateral creditors and the Paris Club. So far, IDA, IMF, IDB, IFAD and Paris Club creditors have indicated their willingness to provide HIPC Initiative debt relief to Haiti4' These creditors account for 95.7 percent of total HIPC Initiative relief. D. Debt Sustainability Analysis 47. The debt sustainability analysis presented in this section is based on an updated macroeconomic framework compared to the preliminary document (see Box 1). However, the main assumptions underpinning the macroeconomic framework remain broadly unchanged. The framework assumes sustained economic growth, underpinned by improved security and political stability, the decisive implementation o f structural reforms, particularly in the areas of economic governance, and infrastructure improvement to promote private investment. The framework also assumes the continuation of sound macroeconomic policies, including maintaining fiscal prudence while increasing revenues and seeking concessional external financing. 48. Under the updated macroeconomic framework and assuming the unconditional delivery of HIPC Initiative assistance, Haiti's NPV of debt-to-exports ratio is expected to fall gradually from 150 percent as of end-September 2005, to approximately 99 percent by 2025 (Table A5).41The NPV of debt-to-exports ratio is expected to remain consistently below the HIPC threshold of 150 percent throughout the projection period. External debt service as a ratio of exports i s also expected to decline gradually. 39 Interim assistance i s estimatedto fall inFY2008, reflectinga decline ininterimassistance from IDA due to the limitation of the one third limit on NPV of assistance during the interimperiod(Table A10). 40 The IDB and IFAD have agreed, inprinciple,to provideHIPCdebt relief to Haiti. 4' Calculationsbased on staffprojections for end-September2006 suggest that Haiti's debt inNPV terms could reach 150percent of exports of goods and services in 2007 without receivingHIPCInitiative assistance. 19 Box 1.Key MacroeconomicAssumptions Underlying the DSA Key medium-to-long term macroeconomic assumptions used in the baseline DSA scenario include: Annual real GDPgrowth averages4.2 percent over the projection period (FY2006-25). CPIinflationis projected to deceleratefrom 12.4percent inFY2006 to 5.0 percent in the long term. Investment ratio is projected to increase by over 4.0 percentage points of GDP in the long term. Public investment is expected to increase from 5.0 percent of GDP in 2006 to about 7.6 percent of GDP in FY2009. Fiscal policy aims at achieving the Government's spending priorities while maintaining macroeconomic stability. Central Government revenues are expected to increase gradually from 10.2 percent of GDP in 2006 to about 16.0percent of GDP by FY2025. Expenditures are expected to increase to almost 21 percent of GDP in the long term with an increased share of pro-poor spending in overall outlays. The central Government overall deficit and external financing requirements, before HIPC Initiative assistance, are projected to average 2.0 percent of GDP over the projection period. Official loan financing (excluding the IMF) is assumed to be on concessional terms over the projection period, in line with historical experience. IMF loans are expected to be on PRGF terms. Other official loan financing i s assumed to be mainly on concessional rates on terms comparable to IDA and the IDB (95 percent of total). The remaining 5 percent are assumed to be covered by bilateral donors on less concessional terms. The resulting grant element for new disbursements is estimated at about 45 percent. External grants are expected to increase at a lower rate than GDP, declining from 5.6 percent of GDP in FY2007 to 2.9 percent by FY2025, as the overall political situation and per capita GDP improve. The external current account deficit (excluding external grants) i s projected to decline gradually from an average of 8.2 percent over the FY2006-2015 period, to 5.2 percent by FY2025. E. MDFUand PossibleBilateralAssistance BeyondHIPC 49. Haiti would qualify for MDRI debt relief from IDA upon reaching the completion point. However, at completion point Haiti i s not expected to have eligible debt for MDRI relief from the IMF.42The MDRI debt relief provided by IDA would cover all outstanding debt disbursedprior to end-December 2003 (that is not already subject to HIPC debt relief), and MDRIdebt relief would start at the beginning of the quarter following the completion point. I 50. MDRI debt relief from IDA could amount to US$464.4 million in nominal terms (US$243.3 million inNPV terms), assumingthat Haitireaches the completion point by end- September 2008. This compares with possible HIPC Initiative assistance of US$212.9 million (US$140.3 million in NPV terms). Haiti would forgo an estimated US$18.6 million indebt relief inthe event of aone year delay inreaching completion point. 51. After conditional delivery of HIPC assistance and MDFU, Haiti's NPV of debt-to- exports ratio is expected to fall significantly to 91.2 percent at completion point, from an estimated 153.5 percent at the end of FY2007 (Table A6 and Figure 2). It is expectedto 42Haiti is scheduled to repay all eligible debt-debt that was outstanding to the IMFbefore December 31,2004 -by December 2006. 20 remain within the 91-102 percent range over the projection period.43 Compared to the projection including only HIPC assistance, this represents a reduction of almost 40 percentage points at completion point (Table A 6 and Figure 2). 52. The expected delivery of bilateral assistance beyond that required by the HIPC Initiative would further reduce the NPV of debt-to-exports ratio to about 94.1 percent by FY2025, compared with the 98.6 percent that would be attained under the HIPCInitiative alone. The amount of possible bilateral assistance beyond HIPC i s estimated at about US$118.1 million in nominal terms. F. Sensitivity Analysis 53. Three scenarios are suggested to test the sustainability of Haiti's external debt, after assumingfull delivery of HIPC Initiativeassistance (Table A7 and Figure 2). 0 The first scenario considers the sensitivity of the projections to less favorable concessionality on new borrowing. Interest rates in this scenario are assumed to be 100 basis points higher than in the baseline scenario. Under this scenario, Haiti's NPV of debt-to-exports ratio slowly deteriorates, compared to the baseline scenario. This deterioration would reach 17.2 percentage points inFY2025, leaving the ratio at about 115.7 percent in2025. 0 The second scenario considers the sensitivity of the projections to lower exports growth. In this scenario, exports are assumed to grow at 5.0 percent, an average reduction of about 2.5 percentage points compared to the baseline scenario.44Lower export growth i s assumed to reduce Government revenues, through lower GDP, and to increase the need for new financing. Based on these assumptions, the NPV of debt- to-exports would breach the HIPC threshold in FY2011 and reach 171.7 percent in FY2025 (Table A7). Compared to the baseline scenario, this represents a deterioration of approximately 0.4 percentage points in FY2006, steadily increasing to almost 73.2 percentage points by FY2025. The third scenario considers the sensitivity o f the projections to lower GDP growth. Inthis scenario, GDPgrowth is assumedto be 2.0 percentage points lower on average than in the baseline scenario. Inability to significantly enhance security, improve social and economic infrastructure, and implement structural reforms would weaken private sector confidence and investment. The resulting lower GDP growth would translate into lower Government revenues and the need for increased new borrowing. Under this scenario, the NPV of debt-to-exports would slowly decline until FY2012, reaching 131.8 percent. Thereafter, the NPV of debt-to-exports would gradually increase reaching 161.8 percent by FY2025. Compared to the baseline scenario, this represents an increase in Haiti's NPV of debt-to-exports ratio of about 0.4 percentage points inFY2006 increasing to 63.2 percentage points by FY2025. 43This assumesthat MDRIhas no impact on Haiti's new borrowing or economic growth over the projection gyiod. I n this scenario, export growth is set at 5.0 percent, equivalent to the average over the last three years (12 percent) minus one standard deviation (7 percent). 21 54. The sensitivity analysis indicates that Haiti's exports performance is pivotal to service its external debt after HIPC as~istance.~~ A robust external debt position would also be contingent on vigorous real GDP growth and the composition and terms of external assistance. The analysis also underscores the importance of strong and sustained Government's efforts to: (i) re-establish security; (ii) a conducive environment for provide private investment, notably through infrastructure improvement and strengthening of state institutions, to develop exportable production (traditional and nontraditional); and (iii)implement a prudent debt management strategy. For their part, donors will need to ensure that external assistance i s heavily weighted toward grants. V. THEFLOATING COMPLETIONPOINT A. Triggers for the FloatingCompletion Point 55. IDA and IMF staffs have reached understandings with the authorities on the completion point triggers, summarized in Box 2. The triggers incorporate the views expressed by Executive Directors during the discussions of the preliminary HIPC document. In addition to the standard triggers on the PRSP, macroeconomic stability, medium-term macroeconomic framework, tracking of poverty related expenditures, and alignment o f priority expenditures with those identified in the I-PRSP and PRSP, there are specific and monitorable policy measures on public finance management and governance, tax policy and administration, social sectors, and external debt management. These triggers support the economic and social development of Haiti and are considered essential to the success o f the HIPC Initiative in the country. Public finance management and governance triggers reflect the need to (i) strengthen public finance management and transparency, notably in the areas of budget management, public expenditure controls and procurement; (ii)enhance accountability of high public sector officials for their sources of income and assets; and (iii) promote governance and transparency in key public enterprises. Triggers on tax policy and administration are intended to increase the revenue-to-GDP ratio, which i s considerably lower in Haiti than in other PRGF-eligible countries. The Government plans to meet the triggers within two years of the HIPC DecisionPoint46. 45 However, the sensitivity analysis does not consider the impact of MDFUor additional bilateral assistance. 46 The triggers were formulated in consultation with the authorities. The actions and policies included are part of the Government's agenda, as specified inthe I-PRSP and the extended ICF, and have ongoing or planned financial support from many donors and are expected to benefit also from HIPC resources. 22 Box. 2 Triggers for the Floating Completion Point 1. PRSP: Preparation of a full PRSP through a participatory process and satisfactory implementation of its recommended actions for at least one year, as evidenced by an Annual Progress Report submitted by the Government to satisfaction of IDA and the IMF. 2. Macroeconomic Stability: Maintenance of macroeconomic stability as evidenced by satisfactory performance under the PRGF-supported program. 3. Public Finance Management and Governance: (a) Adoption o f an automated mechanism to track public expenditures for poverty reduction on the basis of existing expenditure classification, publication of quarterly reports on these expenditures executed over a period of at least six months preceding completion point; (b) Alignment of public spending priorities with the I-PRSP, and, when completed, the PRSP, reflecting emphasis on pro-poor growth; (c) Up-to-date preparation of Government accounts by the MEF and their annual audit by the CSCCA, submission to Parliament and publication of audited Government accounts following generally accepted audit standards and legally mandated timetable; (d) Adoption and satisfactory implementation of a new public procurement law, in line with international best practice. Compliance by all Government purchasing agencies evidenced by independent audit of contracts above US$lm equivalent and also of a representative random sample of all other Government contracts, awarded during the 6 months preceding the audit; (e) Adoption of a law on asset declaration and submission to the CSCCA and to the Parliamentary ethics and anti-corruption commissions of at least one annual compliance report on the monitoring of the asset declarations covering the preceding year. 47 4. Structural Reforms: Strengthen tax administration and policy by: (a) reinforcing and establishing customs control in Cap Ha'itien, Gonaives, Saint Marc, Miragoane, Malpasse, Ouanaminthe and Belladere, including by installing ASYCUDA; (b) extending use of the central taxpayer file to all taxpayers in the Port- au-Prince metropolitan zone and registering in it all the taxpayers identified in the tax centers of Cayes, Miragoane, Saint Marc, Port de Paix, Cap Ha'itien and Fort LibertB. 5. Social sectors: Education (a) Adoption and satisfactory implementation of a public financing mechanism to help poor families pay for costs of school fees in non-public schools to allow enrollment of an additional 50,000 out-of-school children inprimary school as evidenced by the results of an independent audit of schools receiving public transfers; (b) Actual recurrent expenditures for education reach at least 21% of actual total recurrent Government spending, of which at least 50% is spent on primary education, over the 12 months preceding completion point, enabling inter alia the training of 2,500 new primary teachers (at least 1year) and on average two visits per year of all primary schools by MENJS inspectors. Health and HIV/AIDS: Increase by at least 10 percentagepoints immunization rates for DPT3, BCG and measles; approval by the Government of National Policy, Strategic Plan and Scale up Operational Plan for HIV/AIDS prevention and treatment. 6. Debt management: (a) Centralization of all information on public external and domestic foreign currency debt in a single database; (b) publication of two consecutive up-to-date quarterly reports on external debt data with a maximum 3 month lag in the period immediately before the completion point. B. Monitoring the Floating Completion Point Triggers 56. IDA and IMF staffs will work together to monitor the completion point triggers, with each institution leading on issues where its staff has primary competence, while also incorporating contributions of the staff from the other institution. IMF staff will 47 The law would 1) require, at a minimum, that the individuals formally identified by the Constitution and public officials designated as comptablesdes denierspublics declare annually i)all assets they, their spouses, and dependentchildren own or have the beneficial use of, (ii)all income received from whatever source; 2) sanction all individuals who either do not submit a declaration or submit a false one; and 3) assign to the ULCC the responsibility to ensure the monitoring of the evolution of the assets of the aforementioned individuals and to present to the CSCCA and the Parliamentary ethics and anti-corruption commissions the results of its monitoring through annual compliance reports. 23 take the lead in monitoring macroeconomic stability and budget control and management. IDA staff will take the lead in monitoring progress in the preparation of the PRSP, as well progress on sector-related triggers, including those pertaining to governance, service delivery, and tracking poverty-related expenditures (including those financed by HIPC Initiative assistance). IDA and IMF staffs will jointly monitor structural reform and progress inimproving external debt management. C. The Use andMonitoringof Enhanced HIPCInitiative Assistance 57. The Government is committed to ensuring that assistance under the HIPC Initiative is used to enhance poverty related spending. Securing the effective use of debt relief assistance for poverty reduction and, more generally, the capacity to implement and monitor a shift in the composition of expenditure toward poverty-related objectives i s a key element of the HIPC Initiative. The authorities will continue their ongoing efforts to strengthen the programming, management and control of public expenditures, and to improve service delivery in key sectors. Within this framework, the technical assistancethat i s already being provided by IDA, IMF, IDB and other donors will be important to establish adequate budget management capacity. 58. While Haiti does not have a budget classification by program or a fully functional budget classification, there are mechanisms in place that can be used to adequately monitor the use of resources made available by the HIPC Initiative. The June 2006joint IMF and IDA Assessment and Action Plan (AAP) for tracking poverty-related expenditure concluded that the recently introduced budget and accounting classifications allow monitoring of budget allocations and expenditures following two dimensions: (i) administrative (ministries, central and regional departments) including development projects; and (ii) economic (expenditure types). The budget i s also presented in the annexes of the budget law following a functional classification with 10 broad categories (such as education and health). The functional classification is prepared from broad estimates from the administrative classification. Also, in the absence of a program budget, projects are individually coded within the administrative classification allowing recording and reporting on projects' expenditures. 59. On the basis of the AAP recommendations, the use of resources made available by the HIPC Initiative prior to completion point will be monitored at the entity (e.g., ministries, public institutions, and executing agencies) and the project levels. Entities, which are already coded inthe budget classification, will be identified according to their core mandate in relation with poverty reduction. The same process will be followed to identify individual projects in areas which contribute to poverty reduction as defined in the I-PRSP. There are already mechanisms inplace to record expenditures according to their destinations. This will allow monitoringboth budget allocations and expenditures for both the entities and projects identified as contributing to poverty red~ction.~' 48The process of identificationof entities and projects is ongoing. IDA staff will be assessingprogressin early November2006. 24 60. The Government intends to use HIPC related savings to fund activities identified in the I-PRSP and which will be included in the PRSP. The relatively limited resources from HIPC initiative assistance would focus largely on health, education, water and environment while other areas, such as major infrastructure programs, would be financed by other external resources (Box 3). The poverty-related programs and projects to be financed within the interimassistancehave been included in the FY2007 budget and would needto be included in subsequent budgets. Inaddition, IDA'Songoing Economic GovernanceTechnical Assistance Grant II(EGTAG11) and a follow-on Economic GovernanceReform Operation 11 (EGRO 11) currently under preparation will provide resources to strengthen and modernize the public prpcurement system with the above mentioned adoption and implementation of a new procurement law promoting transparency and competition in line with international best practices. Box 3. Expenditure Priorities for the Use of Enhanced HIPC Assistance Education Educationfor All (EFA)program. Training of new primary level teachers Provision of textbooks, teaching material and uniforms. School feeding program. Health Improving the availability of drugs, immunization programs (including in remote areas using mobile brigades), preventioncampaigns against malaria, parasite control in schools. Surveys on the prevalence of iodine and micronutrient deficiencies and programs to address these deficiencies. Equipment and supplies for maternity wards of health centers and hospitals. HIV/AIDS prevention and general health education activities. Strengthening epidemiology services. Water Supply and Sanitation Improving access to potable water and sanitation for poor urban and rural households. Environment Environmental protection and natural disaster prevention activities. 61. The periodic budget execution reports published by the MEF on its web page provide a tool to monitor and publicly disseminate the use of resources made available by the HIPC Initiative in-year. Measures are also being taken to become current with the audit of the annual Government accounts by the CSCCA. This will provide external and independent validation of the budget execution reports. The Government intends to institutionalize monitoring and evaluation mechanisms in the context of the PRSP, which will have an important role in providing oversight on the allocation of resources for poverty reduction, notably savings from debt relief. D.The Views of the Authorities 62. The authorities have emphasized that Haiti's external debt burden and debt service are unsustainably high and could delay the economic and social reform 25 programs. They have also noted that Haiti i s the poorest country inthe Western Hemisphere and one of the poorest in the world, with a significant share of the population lacking access to basic services such as education, health and safe water. The authorities have indicated that the violence and political instability that marred the country aggravated the level of poverty, especially inurban slums. Debt relief that could be available under the HIPC Initiative would help free resources to finance critical social and infrastructure programs as well as improve access to primary education, preventive health care and the fight against HIV/AIDS. For the authorities, the resulting improvements in social conditions will help in the efforts to reverse violence and political instability. VI. ISSUES FOR DISCUSSION 63. This paper presents a decision point assessment of Haiti's qualification for assistance under the HIPC Initiative. Executive Directors' views and guidance are sought inparticular on the following issues: Qualification and decision point: D o Directors agree that Haiti qualifies for assistance under the HIPC Initiative, and do they recommend approval of a decision point? Amount and delivery of assistance: In order to reduce the NPV of debt to exports ratio to 150 percent, the total amount of assistance under the HIPC Initiative is estimated at US$140.3 million in NPV terms (Table A2). Of this amount, IDA would provide total assistance amounting to US$52.8 million in NPV terms, including an estimated US$33.1 million related to the concessional rescheduling of arrears in early 2005. JMF assistance would total US$3.1 million in NPV terms. The staff and management recommend that IDA andthe IMFprovide interim assistance inline with existing guidelines. D o Directors agree that the IMF and IDA should provide interim assistance between the decision and completion points, inline with existing guidelines? Completion Point: D o Executive Directors agree that the floating completion point will be reached when the triggers in Box 2 have been met? Debt relief will be provided unconditionally only when the completion point triggers have been met and satisfactory assurances have been received of other creditors' participation under the enhanced HIPC Initiative for Haiti. 26 Figure 1A. Haiti: Compositionof Stock ofExternalDebt at End-September2005 by creditor group (Nominalstock: $1.336 million) Other Official Paris Club Bilaterals World Bank Group Other multilaterals 38% 3% 2% Figue 1B. Haiti: Potentialcosts of the MPCInitiative by creditor group (TotalEstimated HIPC Enhanced Assistance: $140million, end-September2005 NPV terms) Other Official Bilatemls Paris Club 4% Other multilatera World Bank Group 3% 38% 42% 2% 27 Figure 2. Haiti: External Debt SustainabilityIndicators, 2005-25 NPVofDebt to Exports (Inpercent ofExports) 80.0' I ' ""I ' ' ' I ' ' I ' ""I ' 2004105 2 W 0 7 2008109 2010/11 201U13 201415 2016'17 2018/19 2020/21 2022l23 2024122 Debt Service to Exports (InpercentofExports) 14.0 13.0 A 12.0 - I \ - 11.0 10.0 9.0 8.0 7.0 6.0 5.O 4.0 3.01 I ' I ' I I ' I ' I ' , / I l l 2005106 2007108 2009110 2011112 2013114 2015116 2017118 2019120 2021122 2023124 28 Figure 3. Haiti: Sensitivity Analysis, 2005-25 NPV ofDebtto Exports 200.0 (Inpercent ofExports) Lower Export Growth Scenario 180.0 160.0 140.0 120.0 100.0 Baseline Scenario 80.0 60.0 I , I I I I I l I I I I I 1 I I , , I 1 2 W 0 5 2006/07 2008109 2010111 201Y13 2014115 2016117 2018119 2020121 202Y23 2024125 DebtService to Exports (Inpercent ofF3ports) 12.0 A T nwpr Fmnrt - 1 1 - 1 uyv.. 10.0 Growth ~ e s concessional s New Borrowing 0 Scenario 8.0 --._. -.-.. 6.0 BaseheScel/ario 4.0' I I 1 1 I l l l I 1 1 I I I I I I ' 2004105 206107 2008109 2010111 201Y13 2014115 2016/17 2018119 2020121 202Y23 29 Table Al. Haiti: NominalStock andNet PresentValue of Debtat end-September2005 by Creditor Groups (Inmillion of US$unless otherwisespecified) NPV of Debt After Traditional NominalDebt Stock Arrears NPV of Debt Debt Relief I/2/ Percent Percent Percent Percent of total of total of total of total Total 1,336.3 100.0 35.4 100.0 932.9 100.0 928.3 100.0 Multilateral 1,097.8 82.2 0.0 0.0 750.6 80.5 793.5 85.5 World Bank 507.1 37.9 0.0 0.0 316.3 33.9 349.4 37.6 IMF 21.4 1.6 0.0 0.0 20.6 2.2 20.6 2.2 IADB Group 533.9 40.0 0.0 0.0 389.9 41.8 399.6 43.1 IFAD 31.7 2.4 0.0 0.0 20.3 2.2 20.3 2.2 OPEC 3.7 0.3 0.0 0.0 3.4 0.4 3.4 0.4 Bilateraland commercial 238.5 17.8 35.4 100.0 182.2 19.5 134.8 14.5 ParisClub 192.7 14.4 35.4 100.0 145.7 15.6 98.4 10.6 Canada 2.0 0.2 0.0 0.0 2.1 0.2 2.1 0.2 EEC IDA administered 4.0 0.3 0.0 0.0 2.7 0.3 I.5 0.2 France 64.1 4.8 23.3 65.9 59.7 6.4 45.7 4.9 Italy 68.9 5.2 7.8 22.0 44.2 4.7 24.2 2.6 Spain 38.6 2.9 4.3 12.0 24.1 2.6 13.6 1.5 UnitedStates 15.1 1.1 0.0 0.0 13.0 1.4 11.4 1.2 Other Official Bilateral 45.8 3.4 0.0 0.0 36.5 3.9 36.4 3.9 Taiwan, People'sRepublicof China 45.7 3.4 0.0 0.0 36.3 3.9 36.3 3.9 VenezueIa 0.1 0.0 0.0 0.0 0.1 0.0 0.0 0.0 Sources: Haitianauthoritiesand staffestimates. I/Includesastock-of-debtoperationonNaplestermsatend-September2005;andcomparableactionbyotherofficialbilateralcreditorsoneligibledebt(pre- cutoff and non-ODA). 21The increasein the NPV of debtfor the lADB Groupand the World Bankreflectsthe impact of the arrears clearance operationsundertakenin2003 and 2005, respectively.The NPV reduction containedin these operations is estimatedat US$9.7 million for the IADB Groupand US$33.1million for the World Bank. They are consideredas part of HIPC reliefeffort. The IADB Group usedconcessionalresourcesfrom its Fundfor Special Operations(FSO). 30 Table A2. Haiti: HIPC Initiative -- AssistanceUndera ProportionalBurden-SharingApproach 1/2/ (Inmillionsof U.S.dollars, unlessotherwise indicated) Total Bilateral 31 Multilateral Common Reduction NPV of debt- Factor 41 to-exports-target (in percent) (InNPV terms at end-September2005) (Percent) 150 140.3 20.4 120.0 15.1 Memorandumitems: NPV of debt 51 928.3 134.8 193.5 Pans Club creditors 98.4 Of which: pre-cutoff date non-ODAdebt 50.4 Non-ParisClub creditors 36.4 Of which: pre-cutoffdate non-ODA debt 0.0 Three-yearaverage of exports 525.3 Current-yearexports 597.3 NPV of debt-to-exportsratio 61 176.7 Sources: Haitian authorities and staff estimatesand projections. 11The proportional burden sharing approach i s described in "HIPC Initiative--Estimated Costs and Burden Sharing Approaches" (EBS/97/127,7/7/97and IDNSECM 97-306,717197). 21 Includesa hypothetical stock-of-debtoperationon Naples terms (end-September2005) and comparable treatment by other official bilateral creditors. 31 Includesall official bilateral creditors. 41 Each creditor's NPV reduction in percent of its exposure at the decision point. 51 Basedon end-September2005 data after full application of traditional debt reliefmechanisms.The NPV reduction containedin the arrears clearanceoperationsundertakenby IDA and the IADB Group is included inthe NPV of debt. 61Basedonthe three-year export average (backward-looking average, Le., 2005-03). Note that this includesthe impact of the concessional reschedulingof arrears by the World Bank and the IADB Group. 31 Table A3. Haiti: DiscountandExchangeRateAssumptions at End-September2005 Discount Rate 1/ ExchangeRate 21 Currency Name (In percentper annum) (Currency per US.dollar) CanadianDollar 4.80 1.16 DanishKroner 4.06 6.20 Euro 4.11 0.83 Great Britain Sterling 5.51 0.57 Japanese Yen 1.85 113.15 NorwegianKroner 4.21 6.54 Special Drawing Rights 4.35 0.69 Swedish Kroner 4.21 7.75 Swiss Franc 2.82 1.29 United States Dollar 5.05 1.oo Venezuelan Bolivar 4.35 2147 Memorandum item: ParisClub cutoff date October 1, 1993 Sources: OECD; and IMF,International Financial Statistics. I /The discountrates used are the average commercial interestreferencerates over the six-monthperiod prior to end-September 2005, Le., the end of the period for which actual debt and export data are available. 2/ The exchange rates are expressedas nationalcurrency per US. dollar at end-September2005. p I -. Y v1 Table A9. Haiti: Possible Delivery of IMFAssistance under the Enhanced HIPC Initiative, FY2007-2017 1/ (In millions of U.S. dollars, unless otherwise indicated) (Based on the US$/SDR exchange rate as of September 27,2006) Delivery schedule of IMF assistance (m percent of the total ass~stance) 2.0 3.5 3.5 3.5 3.5 2.0 15.0 15.0 15.0 15.0 22.0 Debt Service due on IMF obligations 21 Principal Interest and charges of which, PRGF interest IMF assistance--deposits into Haiti's Umbrella Account Interm assistance Completion point assistance 5/ IMF assistance--drawdown schedule from Haiti's Umbrella Account IMF assistance without interest Estimated interest earnings 61 Debt senice due on current IMF obligations after IhW assistance 0.4 0.5 0.5 0.5 0.5 4.1 8.2 Share of debt sewice due on IMF obligations covered by IMF assistance (in percent) Memorandum items: (Based on debt service data and exchange rates as of end-September 2005) Debt service due on IMF obligations (in millions of U.S. dollars) 31 0.5 0.6 0.6 0.6 0.6 4.7 8.9 8.8 8.8 8.7 4.5 Debt senice due on current IMF obligations after IMF assistance 0.4 0.5 0.5 0.5 0.5 4.1 8.2 8.2 8.2 8.2 3.8 (in percent of current year exports of goods and nonfactor services) 0.1 0.1 0.1 0.1 0.0 0.4 0.7 0.7 0.7 0.6 0.3 Source: Fund staff estin~atesand projections I/ Total Ihm assistance under the enhanced HIPC Initiative is US$ 3.120 million in NPV terms calculated on the basis of data available at the decision point, excluding interest earned on Haiti's account and on committed but undisbursed amounts as described in footnotes 5 and 6. Assistance assumed to be delivered each fiscal year. Fiscal year ends in September. 2/ Forthcoming obligations estimated based on schedules in effect as of November 8,2006, retlecting first disbursement under the new PRGF arrangement. Interest obligations include net SDR charges and assessments. 3/ Debt service for FY2007 are obligations from November 8,2006 onwards. 41The first delivery of interim assistance will be deposited into Haiti's account at the expected decision point in Novenlber 2006 to cover PRGF interest obligations falling due to the Fund over the next 12months. HlPC assistance is expected to cover PRGF interest obligations falling due between December 2006 and December 2011 as there are no principal obligations falling due to the Fund until May 2012. 51Most of the IMF's grant HIPC assistance assumed to be disbursed Into Haiti's account at the assumed wmpletion point in September 2008, which is reflected in the calculation of interest. 61 Includes estimated interest earnings on: (a) amounts held in Haiti's Umbrella Account; and (h) up to the completion point, amounts committed but not yet disbursed. The projected interest earnings are estimated based on assumed interest rates which are gradually rising to 5 percent in 201I; actual interest earnings may be higher or lower. Interest accrued during a calendm year will be used toward the first repayment obligation(s) falling due in the following calendar year except in the final year, when it will be used toward payment of the final obligation(s) falling due in that year. Interest accrued during the interim period will be used toward the repayment of obligations falling due during FYZOIZ-14. 36 Table A8. HIPC Initiative: Status of CountryCasesConsideredUnderthe Initiative, September 26,2006 Target EstimatedTotal NPV of Debt-to- Assistance Levels I/ Percentage NominalDebt Decision Completion Gov. (Inmillionsof US.dollan, presentvalue) Reduction Service Relief Country Point Point Exports revenue Bilateral and Multi- World inNPV of (Inmillions of (in percent) Total commercial lateral IMF Bank Debt 2/ U.S.dollars) Completion point reachedunder enhancedframework Benin Jul.00 Mar.03 150 265 7 1 189 24 84 31 464 Bolivia 1,302 425 876 84 194 2,060 originalframework Sep. 97 Sep. 98 225 448 157 291 29 54 14 760 enhancedframework Feb.W Jun.01 IS0 . 854 268 585 55 140 30 1,3W BurkinaFaso 553 83 469 57 23I 930 originalframework Sep 97 Jul. 00 205 229 32 196 22 91 27 4W enhancedframework JuLW Apr.02 I50 I95 35 161 22 79 30 3W topping-up ... Apr.02 150 129 16 112 14 61 24 230 Cameroon Oct.00 Apr.06 150 1,267 879 322 37 176 27 4,917 Ethiopia 1,982 637 1,315 60 832 3,275 enhancedframework Nou.01 Apr. 04 IS0 1,275 482 763 34 463 47 1,941 topping-up Apr.04 150 707 I55 552 26 369 31 1,334 Ghana Feb.02 Ju1.04 144 250 2.186 1,084 1,102 112 78I 56 3,500 Guyana 591 223 367 75 68 1.354 originalframework Dec. 97 May99 107 280 256 91 165 35 27 24 634 enhancedfiamework Nov. W Dec-03 150 250 335 132 202 40 41 40 719 Honduras Jul. 00 Mar-05 110 250 556 215 340 30 98 18 1,ooo Madagascar Dec.00 Ocr-04 150 836 474 362 19 252 40 1,900 Malawi 1,057 171 886 45 622 1,628 enhancedframework Dec.00 Aug-M I50 646 164 482 30 333 44 1,025 lopping-up ... Aug-06 150 411 7 404 15 289 35 603 Mali 539 169 370 59 I85 895 originalframework Sep. 98 Sep. W 2W I21 37 84 14 43 9 220 enhancedfiamework Sep. W Mar. 03 150 417 132 285 45 143 29 675 Mauritania Feb.OO Jun.02 137 250 622 261 361 41 100 50 1,100 Mozambique 2,023 1,270 753 143 443 4,300 originalframework Apr. 98 Jun. 99 2W 1.717 1,076 641 125 381 63 3.7W enhancedframework Apr.W Sep.01 I50 3 M 194 112 18 62 27 6W Nicaragua Dec.00 Jan.04 150 3,308 2.175 1.134 82 191 73 4,500 Niger 663 235 428 42 240 1,190 enhancedframework Dec.W Apr.04 I50 521 211 309 28 170 53 944 topping-up ... Apr.04 I50 143 23 119 14 70 25 246 Rwanda 696 65 631 63 383 1,316 enhancedframework Dec. 00 Apr-05 150 452 56 397 44 228 71 839 topping-up .. Apr-OS 150 243 9 235 20 154 53 477 Senegal Jun.00 Apr.04 133 250 488 212 276 45 124 19 850 Tanzania Apr.00 Nov.01 150 2.026 1.m 1,020 120 695 54 3,000 Uganda 1.003 183 820 160 517 1,950 originalframework Apr. 97 Apr. 98 202 347 73 274 69 160 20 650 enhancedfiamework Feb. W MayW 150 656 110 546 91 357 37 1,3W Zambia Dec. 00 Apr-05 150 2,499 1,168 1,331 602 493 63 3,900 Decisionpoint reachedunder enhancedframework Burundi Aug.05 Floating 150 826 124 701 28 425 92 1.465 Chad May.O1 Floating 150 170 35 134 18 68 30 260 Congo, DemocraticRep. of Jul.03 Floating 150 6.311 3,837 2,474 472 83I 80 10.389 Congo Rep.of Mar.06 Floating 250 1,679 1,561 118 8 49 32 2,881 Gambi.%The Dec.00 Floating 150 61 17 49 2 22 27 90 Guinea Dec.00 Floating 150 545 215 328 31 152 32 800 Guinea-Bissau Dec.00 Floating 150 416 212 204 12 93 85 790 SBo Tom6 and Rincipe Dec.00 Floating 150 97 29 68 - 24 83 200 Sierra Leone Mar.02 Floating 150 600 205 354 123 122 80 950 Total asistance providedlcommitted 35,170 17,248 17,783 2,@3 5/ 8,494 61,849 Sources: IMF and World BankBoarddecisions,completion pointdocuments. decisionpointdocuments, preliminaryH E documents, and staff calculations. I/Assistancelevelsareatcountries'respectivedecisionorcompletionpoints,asapplicable. 2/ Inpercentof the net present value of debt at the decisionor completion point(as applicable).afterthe full use of traditionaldebt-reliefmechanism. 3/ CatedIvoire reached iudecisionpoint under the original frameworkinMarch 1998. The totalamount of assistance committed thereunder was US345 million in NPV t e r n . 4/ Nonreschedulable debt to non-Paris Club official bilateralcreditorsandthe LondonClub, which was already subject to a highlyconcessionalrestructuring,is excluded from the NPVof debt at the completionpoint in the calculation of this ratio. 5/ Equivalentto SDR 1,757 million at an SDRNSD exchangerate of 0.6749, as of September 26,2006. 61 It is suggested that enhancedHIPC relief for Cdtedlvoire overtakethe commitments madeunder the original HIPC framework , '4'4 % * 099 2" 2 " T"! av! 2 " * F 00 b " m , 40 Table A12 Paris ClubCreditors' Delivery of Debt Relief Under Bilateral Initiatives Beyond the HIPCInitiative 1/ Countries covered ODA (inpercent) Non-ODA (in percent) Provision o f relief Pre-cutoff date debt Post-cutoff date debt Pre-cutoff date debt Post-cutoffdate debt Decision point Completion (In percent) pint (1) (2) (3) (4) (5) (6) (7) Australia HIPCs 100 100 100 l 0 0 V II I Austria HIPCs 100 100 - Case-bysase, flow Stock Belgium HlPCs 100 100 IW lOOfl0w Stock Canada HlPCs 31 -41 - 41 100 100 lOOfl0w Stock Denmark HIPCs 100 I00 51 100 10051 100flow Stock France HIPCs 100 100 1W 100flow61 Stock Finland HIPCs 100 - 11 100 11 Germany HIPCs I00 100 100 --81 100flow Stock Ireland Italy HIPCs 100 10091 100 I00 91 100flow Stock Japan HIPCs 100 100 100 Stock Netherlands,the HlPCs 100 IO/ 100 100 90-100flow 101 Stock Norway HIPCs 1I/ 1l i 121 I21 Russia Case-by-case Stock Spain HIPCs 100 Case-by-cax 100 Case-by-case Stock Sweden HIPCs - 131 100 Stock Switzerland HIPCs 100 100 Case-by-case i00, flow 141 Stock United Kingdom HIPCs 100 100 100 100 I51 IOOflow 151 Stock United States HIPCs 100 100 100 100 1.w 100flow Stock Source: Paris Club Secretanat I/ Columns(I) (7) describetheadditionaldebtreliefprovidedfollowing aspecificmethodologyunderbilateralinitiativesandneedtobereadasawholeforeachcreditor. to Incolumn (I). "HIPCs" standsfor eligible countries effectively qualifying for the HIPCprocess. A "100 percent" mention in the table indicates that the debt relief pmvided under the enhanced HIPC Initiative framework will be topped up to 100percentthrough abilateral initiative. 21 Australia: post-cutoff date non-ODA relief to apply to debts incurred before adate to be finalized; timing details for both flow and stock relief are to be tinallzed. 31 Canada: including Bangladesh. Canadahas granted a moratorium of debt service as of January 2001 on all debt disbursed before end-March 1999 for 13 out of 17 HIFCs with debt service due to Canada. Eligible countries are Benin, Bolivia, Camenwn, Dem.Rep. Of Congo, Ethiopia, Ghana Guyana, Honduras,Madagascar.Rwanda. Senegal, Tanzania,and Zambia. IWW cancellation will be granted at completion point. As of July 2004, Canada has provided completion point stock of debt cancellation for Benin, Bolivia, Guyana, Senegaland Tanzania. 41 100percentof ODA claims have alreadybeencancelled on HIPCs, with the exceptionof Myanmafs debt to Canada 51 Denmark provides 100percentcancellation o f ODA loans and non-ODA credits contracted and disbursed before September 27, 1999 61 France:cancellation of 100percentof debt service on precutoff date c o m r c i a l claims on the government as they falldue staning at the decision point. Once countries have reachedtheir completionpoint. debt reliefon ODA claims on the government will go to a special account and will be usedfor specific development projects. 71 Finland: no post-COD claims 81 Germany proposesto cancelall debtsincurred before June 20, 1999dependingon aconsensuswithin Pans Club creditors 91 Italy: cancellation of I00 percentof all debts (pre- and post-cutoff date, ODA and non-ODA) incurred before June 20, 1999(the Colognc Summit). At decision point, cancellation of the related amounts falling due in the interim period. At completion point. cancellation of the stock of remaining debt. 101 The Netherlands: 100percentODA (pre- and postatoff date debt will be cancelled at decision point). for non-ODA: in some particular cases (Bean, Bolivia, Burkina Faso, Ethiopia, Ghana, Mali, Mozambique, Nicaragua, Rwanda, Tanzania. Ugandaand Zambia), the Netherlands will write off IW percentofthe consolidated amounts on the flow at decision point: all other HlPCs will receive interim relief up to 90 percentreduction of the consolidated amounts. At completion point, all HlPCs will receive 100percent cancellation of the remailung stock of the pn-cutoff date debt. 1I1 Norway has cancelled all ODA claims. 121 Due to the current World BanwIMF methodology for recalculating debt reduction needs at HIPC completion point. Norway haspostponedthe decisionson whether or not to grant 100%debt reduction until after the completion point. 131 Swedenhas no ODA claims. 141 Switzerland Inprinciple 100percent cancellation of Presutoff date non-ODA debt. However, Swtzerlandclaims the right at the decision point to forgive only 90 percentin cax of major political andtor political weaknesses. 151 United Kingdom: "beyond 100percent" full writedf of all debts of HIPCs as oftheir decision points. and reimbursementat the decision point of any debt service paid before the decision point. 161 United States: 100percentpost-cutoff date non-ODA treatedon debt assumd prior to June 20, 1999 (the Cologne Summit). , 41 Participation Accountability/Oversight Transparency Recently completed actions ?reparation of Extended Creationof Anti-Corruption Unit (ULCC) in2004. !egular public disseminationof key [nterimCooperation udget allocations and execution Framework presentedat Financialaudits of EDH(electricity),TELECO nformation. luly 2006 conference (telecoms) andAPN (ports authority) completed; account ittendedby civil society rehabilitation of EDH andTELECOcompleted. iignificant reduction of discretionary representativesand pendingthrough ministerialcomptes ionors. Strengtheningof supremeaudit institution (CSCCA) with 'ourants (from 62% of non-salary 2006decreeon its organizationandfunctioning. urrent public expenditure during Completionin 2006 of kt.2OOS-March 2004 to less than 10% diagnosticsurvey of Consultativecommittee andexecutive secretariatof the .inceSept. 2004). state of governance and monitoringgroup of civil society organizations perceptionof corruption established. )issemination of summary of progress inHaiti as inputto eportson economic governance reforms design of national anti- )reparedby civil society organizations. corruptionstrategy under preparation. :reation of NationalCommissionfor 'ublic Procurementin 2004 and2005 iew procurementdecree; preparationof itandardbiddingdocuments; publication )fGovernmentcontractsandsupplier Iatabase. Plannedactions (HIPC CompletionPoint Trigger R bold) Participatory process Mechanisminplacefor monitoringjevaluationof PRSP Disseminationof PRSannual for preparation of implementation. progress reports. Poverty Reduction Strategy (PRS). Adoption of automated mechanismto track public Publication of quarterly reports on expenditures for poverty reduction. public expenditures for poverty reduction basedon automated Creationof National Adoption and satisfactory implementationof public tracking mechanism. PartnershipOffice fmancing mechanismto help poor families pay for fees (NEPO) and National innon-public primary schoolsfor enrollment of Oversight of public financing PartnershipFundto additional50,000 out-of-school children. mechanismfor non-publicschool transfersby NEPOBoardandby promotepolicy Accountabilityfor financingmechanism at schoollevel through schoolmanagementcommitteesincluding independent audit of schools receiving dialogueand parents' representatives. public transfers; informationon per- coordination between capitaallocations to schools availableto key education sector Adoption of Asset Declaration Law applying to people parents. stakeholders (including identified by Constitution and public resource non-public education managers, with sanctionsfor non compliance. Adoption and satisfactory service providers, Definition of system, applicability andprocedures for new implementation of a new procurement parents' associations, civil servicerecruitmentsandpromotions. law, promotingtransparency and teachersunions, competition inline with international government), and Adoption andsatisfactory implementationof Anti- best practice. accountability and CorruptionStrategy. transparency in use of public education funds. Up-to-datepreparation of Governmentaccounts, their annual audit by CSCCA and their submissionto Publicationof audited Government Parliament; preparationand implementationof action accounts. planto addresskey audit findings. Up-to-dateannual audit of key public enterprises' financialstatements; preparationand satisfactory implementationof actionplanto address key audit recommendations. 42 APPENDIX 2 HAITI:JOINT BANK-FUNDDEBTSUSTAINABILITY ANALYSIS - The low-income country debt sustainability analysis (LIC DSA) indicates that Haiti's risk of debt distress is high, even after full delivery of HIPC debt relief and additional bilateral debt relie$49Debt relief from IDA under the MDRI would signiJicantly reduce Haiti's risk of debt distress at the decision point. The inclusion of domestic debt in the debt sustainability analysis does not change the assessment of Haiti's risk of debt distress. A. Introduction The debt sustainability analysis presented in this appendix is based on the common standard framework for low-income countriesapproved by the IDA and IMFBoards in 2005.50It presents the projected path of Haiti's debt burden indicators under the LIC DSA methodology and draws conclusion on the forward-looking sustainability o f external and public sector debt. B. BaselineScenario The baselinescenario assumes the same long-run macroeconomicframework as the one underlying the HIPC debt sustainability analysis (Box 1 in the main text). Real GDP is projected to grow, on average, by 4.2 percent from FY2006 to FY2026, reflecting better security conditions, sustained political and macroeconomic stability, progress on economic governance, and improvements in social and economic infrastructure, contributing to higher private investment, including FDI. Inflation i s expected to gradually decline from 12.0 percent in FY2006, stabilizing at 5.0 percent from 2011. The external current account deficit i s anticipated to slowly improve from 7.6 percent of GDP in FY2006, to 5.2 percent by 2026. The improvement would reflect, to a large extent, robust export growth combined with a slowdown of import growth. The baseline scenario assumes HIPC interim assistance after the decision point and irrevocable debt relief starting at the completion point, assumed at end-September 2008. This i s consistent with the "conditional delivery of HIPC Initiative assistance'' scenario in the HIPC DSA. 49 The World Bank's Country Policy and Institutional Assessment (CPIA) rates Haiti as a poor performer. Under thejoint World BanMMFdebt sustainability framework, the corresponding thresholds are 30 percent for the NPV of debt to GDP ratio, 100percent for the NPV of debt to exports ratio, and 15 percent for the debt service to exports ratio (Operational Framework for Debt Sustainability Framework in Low-Income Countries - Further Considerations, SM/05/109). 50 See"Debt Sustainability inLow-Income Countries: Proposal for an Operational Framework and Policy Implications" and "Debt Sustainability in Low-Income Countries: FurtherConsiderations on an Operational Framework and Policy Implications". 43 Box Al. Differences in methodologiesand results between LIC and HIPC debt sustainability analysis. Under the LIC DSA framework, Haiti's NPV of debt-to-exports ratio is estimated at 132.6 percent at end-2005, assuming unconditional delivery of HIPC Initiative assistance. This i s 17.4 percentage points lower than the NPV of debt-to-exports ratio of 150 percent obtained using the HIPC methodology, after unconditional delivery 2f HIPC Initiative assistance (Table AP1). Three methodological differences between the HIPC and LIC DSA Frameworkscan explain the differences: Discount rates. Under the HIPC Initiative the rates used are the six-month averages of the currency-specific long-term commercial interest reference rates (CIRRs), which correspond to a maturity of approximately ten years. These are used to calculate the NPV on a loan-by-loan basis. The LIC DSA relies on aggregate debt service projections in US dollars, using the single discount rate for the US dollar (currently approximated 5 percent), which i s higher than the average discount rate usedfor the HIPC DSA. Exchange rates. The HIPC DSA uses end-September 2005 exchange rates whereas the LIC DSA is based on WE0 projections. Variations after end-September 2005 have a small positive impact (2.9 percent) on the debt indicator. Denominator used to calculate the NPV of debt-to-exports ratios. The denominator used under the HIPC Initiative is derived as a backward-looking three-year average. The LIC DSA framework focuses on the future path of the NPV of debt-to-exports ratio, and applies current-year's exports. Haiti:Decompositionofthe decrease inthe NPV ofdebt-to-exports ratio at end-ZOO5 Factors explaining the change in Impact of methodological change the NPV of debt-to-exDortsratio HIPCmethodologv 150.0 Total change -17.4 Exchange rates 2.9 Discount rate -2.2 Exports of goods and services -18.1 DSA methodology 132.6 Memorandum items: Current year's exports 597 Backward-lookingthree-year average 525 C. External Debt Sustainability The baseline scenario, which assumes full delivery of HIPC Initiative assistance, indicates that Haiti is at high risk of debt distress. The NPV of debt-to-exports ratio 44 remains above the indicative threshold (100 percent) until FY2021. However, Haiti's debt service-to-exports ratio remains below the indicative threshold (15 percent) over the entire projection period. The sensitivity analysis suggests that the external debt indicators could rapidly deteriorate if confronted by adverse shocks (see Table AP2). The sensitivity analysis examines the impact on debt indicators o f permanent changes to baseline assumptions (alternative scenarios) as well as of temporary shocks to main variables (bound tests). The scenario based on historical averages of key variables gives the same conclusion as the baseline scenario. The NPV of debt-to-exports ratio i s consistently above the threshold, but the other indicators remain below the indicative threshold over the projection period. The debt indicators under the historical scenario follow a somewhat higher trajectory than under the baseline scenario, reflecting the expected improvements in macroeconomic conditions compared to the last decade. Financial assistance provided under the MDRIwould improve Haiti's debt situation. Including MDRI, which would reduce Haiti's debt by approximately US$464.4 million in nominal terms, the NPV of external debt-to-exports ratio would fall below the 100percent threshold at the completion point anticipated at end-September 2008. Participation inPetroCaribe could worsen debt sustainability, but does not lead to any additional breaches of indicative thresholds compared to the baseline scenario (see Box A2). The bound tests reveal some underlying vulnerabilities, particularly with respect to the export-based debt indicator. The export-based debt indicator worsens significantly in all scenarios. However, the GDP-based debt indicator remains below the indicative threshold with the exception of a combined adverse shock to all key variables (real GDP growth, export growth, U S dollar GDP deflator, and non-debt creating capital inflows). The debt service indicators never breach the indicative threshold. 45 Box A2 :The impact on debt sustainability of PetroCaribe. Under the PetroCaribe agreement, Haiti could obtain new concessional external financing from Venezuela. The agreement was ratified by the Parliament in August. At :urrent oil prices, the accord provides for upfront payment of 60 percent of oil imported :hrough the accord and payments for the remaining 40 percent over 25 years with a two year grace period at 1 percent annual interest. The underlying grant element is estimated at 49 percent at current US dollar discount rates. Despitehighconcessionality, PetroCaribe could leadto a significant increaseinexternal debt service payments in the medium and long run. The agreement does not specify the amount that could be imported under PetroCaribe, but based on earlier assessments, the staff projects that Haiti could receive about 4,500 barrels per day, or about 1/3 of NPV ofdebt-to-exports ratio, PetmCaribe current oil imports. Assuming oil 160.0 ....................................... .. .................................. ..................................................................................... ...............: imports of about 1.6 millions barrels a , i year under the PetroCaribe agreement 1I\ RimCarlbe I over the next five years (FY2007-ll), with oil prices in line with WE0 assumptions, Haiti would accumulate annual gross flows of concessional resources of about 0.8 percent of GDP during FY2007-11. However, from Y"." FY2012, transfers become negative. 2006 201I 2016 202I 2026 Debt service payments related to PetroCaribe would peak at about 1 Debt service-to-exports ratio, PetmCaribe percent of exports inFY2013. I-'" I 11.0 - The increase in the external debt 10.0 - service payments reflects to fact that 9.0 - the authorities intend to use resources 8.0 - from PetroCaribe will be used to 7.0 - finance investment projects. It will be 6.0 - important to ensure that the returns to 5.0 - these projects, which can be expected to 4.0 4 materialize in the long run, are adequate 2co6 2011 2016 2021 2026 to amortize the accumulated debt. D. Public SectorDebtSustainability Underthe baselinescenario, Haiti's publicdebt (including domestic debt) is expectedto remain broadly constant (see Table AP3). In the short run the country is expected to continue to rely heavily on external financing, especially external grants. This, together with 46 highrevenue efforts and a slow expansion of the public sector, should contain debt-creating financing of the budget and thereby help to maintain fiscal sustainability. A relatively low initial public debt burden and the positive outlook for revenue performance and growth would allow the country to run a primary deficit o f on average 1.2percent of GDP over the long run without threatening long-term sustainability. A projected slowdown in external grant financing is expected to be counterbalanced by higher internal revenues and a gradual increase of domestic borrowing. Domestic debt i s expected to increase from about 2.0 percent o f GDP in the medium term to 7.4 percent of GDP by FY2026. The expected increase in domestic debt is anticipated to contribute to the development of the domestic financial market. The evolution of public debt remains robust under alternative scenarios and bound tests (see Table AP4). However, low growth (scenario Bl) could distort the debt trajectory leading to an increase of 11 percentage points in the NPV o f debt-to-GDP ratio between FY2006 and FY2026. In the short and medium-term, projected debt trends shown in the baseline scenarios are closely aligned with trends prevailing under macroeconomic assumptions in line with historical trends. Given growth and revenue projections above historical trends, debt projections divert from historical developments in the long run. E. Debt Distress Classificationand Conclusion Haiti's risk of debt distress is high. Under the baseline scenario - which includes HIPC Initiative assistance- the NPV of debt-to-exports ratio remains above the LIC DSA threshold (100 percent) until FY2021, whereas the other debt indicators remain below the threshold over the projection period. The sensitivity analysis has highlighted the fact that Haiti's external debt situation i s vulnerable to shocks. Public sector domestic debt is not projected to add significant risk to the debt outlook. Increased revenue efforts and a slow expansion o f the public sector will help to maintain fiscal sustainability in the medium and long run. 48 Table A n . Hati: Sensitivity Analyses for Key Indicators of Public and Publicly Guaranteed External Debt, 2006-26 (In percent) Projections 2006 2007 2008 2009 2010 2011 2016 2026 NPV of debt-to-GDP ratio Baseline 20 18 16 16 17 17 15 14 A. Allernative Scenarios AI. Key variables at their historicalaverages in2007-2611 17 17 17 18 19 19 17 15 A2. Newpublic sector loanson less favorableterms in 2007-2621 17 16 17 18 19 19 21 21 A3. Petrdaribe agreement 20 18 17 18 18 19 17 14 A4. MDRI 20 18 II 12 12 13 13 13 B. Bound Tests Bl. RealGDP growth at historicalaverage minus one standarddeviation in 200708 17 17 17 I 8 18 18 17 15 B2. Export value growthat historicalaverage minus one standarddeviationin 2007-0831 17 17 18 19 19 19 18 I 5 83. USdollar GDP deflator at historicalaverage mints one standarddeviation in 200708 17 18 21 22 22 22 21 18 B4. Net non-debtcreatingflowsat historicalaverageminusone standarddeviation in 2007-084/ 17 23 29 29 29 29 26 19 B5.Combinationof B1-B4usingone-half standard deviarionshocks 17 26 38 39 39 38 35 24 B6.One-time30 percent nominaldepreciationrelativeto the baselinein 2007 51 17 22 22 22 23 23 21 19 NPV of debt-to-exports ratio Baseline 147 137 118 119 118 117 88 A. Alternative Scenarios AI. Key variables at their historicalaverages in2007-26 I/ 130 I25 129 132 133 I35 117 101 A2. New publicsector loans on less favorableterms in 2007-2621 130 121 124 129 133 136 143 139 A3. PetrcCaribeagreement 130 137 125 130 132 133 117 90 A4. MDRI 147 137 83 86 87 89 87 83 B. BoundTesls B1. Real GDPgrowthat historicalaverage minus one standarddeviation in200708 130 120 117 119 118 117 107 88 B2. Expon value growthat historicalaverage minus one standarddeviation in 2007-08 3/ 130 146 183 184 181 179 163 127 B3. USdollar GDP deflator at historicalaverage minus one standarddeviationin 200708 130 120 117 119 118 117 1M 88 84. Net nondebtcreatineflows at historicalaveraee minus one standarddeviation in 2007-0841 130 174 217 215 209 205 184 121 B5.Combinationof B1-& usingone-halfstandaridenation shccks 130 183 255 252 246 240 215 140 B6.One-time30 percent nominaldepreciationrelative to the baseline in2007 5/ 130 120 117 119 118 117 1Cn 88 Debt semce ratio Baseline 9 11 7 6 6 7 7 5 A. Alternative Scenarios AI. Key variables at t k i i historicalaverages in 2007-26I/ 9 12 8 6 7 A2. New publicsector loans on less favorableterms in 2007-2621 9 11 7 6 7 A3. Peudaribeagreement 9 11 7 6 7 A4. MDRI 9 II 7 5 5 B. Bound Tests B1. RealGDP growthat historicalaverage minusone standarddeviation in 2007-08 9 11 7 6 6 7 5 BZ. Export value growthat historicalaverage minusone standarddeviation in 2007-08 31 9 13 I O 8 9 10 7 83. USdollar GDP deflator at historicalaverage minus one standarddeviation in200708 9 I 1 7 6 6 7 84. Netnondebt creatingflows at historicalaverage minus one standarddeviation in 2007-08 4/ 9 I1 8 8 8 10 B5. Combinationof 81-84usingone-half standard deviation shocks 9 12 9 9 9 12 B6.One-time30 percent nonunaldepreciationrelativeto the baselinein2007 51 9 11 7 6 6 7 Memomdm irem: Grantelement assumedon residualfinancmg &e.. financing requiredabove baseline) 6/ 51 51 51 51 51 - - 51 51 51 Source: Staffprojectionsand simulations. I/VariablesincluderealGDPgrowth, growthofGDPdeflator(inU Sdollartern), non-interestcurrentaccountinpercentofGDP, andnondebtcreatingflows. 21Assumesthat the interest rate on new borrowingis 2 percentagepoints higherthan in the baseline., whilegrace andmaturityperiodsarethe same as in the baseline. 3/ Exponsvalues are assumedto remainpermanentlyat the lower level, but the currentaccount as ashare of GDP isassumedto return to its baselinelevel after the shock (implicitly assuming an offsetting adjustment in importlevels). 4Includesofficialandprivatetransfers andFDI. 5/ Depreciationis defmed as percentagedecline indollarnccalcurrencyrate, suchthat it never exceeds 100percent. 61Applies to all stressscenariosexcept for A2 (lessfavorablefinancing) inwhichthe terms on all new fmancingare as specifiedin footnote 2. I w, 5 50 Table AP4. Haiti:Sensitivity Analysis for Key Indicators of Public Debt 2006-2026 Projections 2006 2007 2008 2009 2010 2011 2016 2026 NPV of Debt-to-GDP Ratio Baseline 24 21 I S 18 18 18 19 21 A. Alternative scenarios AI. RealGDP growthand primarybalanceare at historical averages 24 22 19 19 19 19 21 28 A2. Primarybalancei s unchangedfrom 2006 24 21 17 17 16 16 14 11 A3. Permanentlylower GDPgrowth I/ 24 21 19 19 19 19 22 29 B. Bound tests B1. RealGDPgrowthis at historicalaverageminusone standarddeviationsin 2007-2008 24 23 21 22 23 23 27 35 B2. Primarybalanceis at historicalaverageminusone standarddeviationsin2007-2008 24 22 19 19 19 19 20 21 B3. Combinationof B1-B2 usingone half standarddeviationshocks 24 22 20 20 20 19 19 20 B4. One-time 30percentreal depreciationin 2007 24 30 26 26 25 24 23 23 B5. 10percentof GDP increaseinother debt-creatingflows in 2007 24 27 23 23 23 23 23 24 NPV of Debt-to-RevenueRatio 21 Baseline 174 138 118 114 113 109 110 110 A. Alternative scenarios AI. RealGDPgrowthand primary balanceare at historical averages 174 139 119 116 114 110 111 127 A2. Primarybalancei s unchangedfrom 2006 174 135 112 105 99 92 78 60 A3. Permanentlylower GDP growth I/ 174 138 119 116 116 113 122 151 B. Bound tests B1. RealGDPgrowthis at historicalaverageminusone standarddeviationsin2007-2008 174 144 132 132 134 133 151 181 B2. Primarybalanceis at historicalaverageminusone standard deviations in2007-2008 174 141 123 119 118 114 114 113 B3. Combinationof BI-BZ usingone half standarddeviationshocks 174 142 125 120 117 111 106 101 B4.One-time 30 percentrealdepreciationin 2007 174 197 169 159 152 143 130 121 85. 10percentof GDP increaseinother debt-creatingflows in 2007 174 172 149 144 141 136 133 124 Debt Service-to-RevenueRatio Y Baseline 1 5 1 2 1 0 9 9 8 8 9 A. Alternative scenarios AI. RealGDPgrowthand primary balanceare at historical averages 15 12 10 9 9 8 9 12 A2. Primarybalanceis unchangedfrom 2006 15 12 9 8 8 7 7 6 A3. Permanentlylower GDP growth I! 15 12 I O 9 9 8 9 11 B. Bound tests B1. RealGDPgrowthis at historical averageminusone standarddeviationsin 2007-2008 15 12 11 11 10 9 10 13 BZ. Primarybalancei s at historicalaverageminusone standarddeviationsin 2007-2008 15 12 11 10 9 8 8 9 B3. Combinationof B1-BZusingone half standarddeviationshocks 15 12 11 10 9 8 8 9 B4. One-time30 percentreal depreciationin 2007 15 12 11 10 9 9 9 10 B5. 10percentof GDP increaseinotherdebt-creatingflows in 2007 15 12 17 10 9 8 8 10 Sources:Fund staffestimatesand projections. I/AssumesthatrealGDPgrowthisatbaselineminusonestandarddeviationdividedbythesquarerwtof20(Le., thelengthoftheprojectionperiod). 2/ Revenuesare definedinclusiveof grants. 51 Figure APl. Haiti:Indicators of Public and Publicly GuaranteedExternal Debt Under Alternative Scenarios, 2006-2026 45 40 NPV of debt-to-GDPratio 35 30 25 20 15 10 t --- Historical scenario 5 Most extreme stress test *x e jw After MDRI 0 1 a m . n I ~ " " " " " " " 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 300 NPV of debt-to-exports ratio 250 200 150 100 -Baseline 50 - ---Hstoncalscenano Most extreme stress test 0 , * y -(\AerMpRl , , , , ---bstooncal scenano 2 - Most extreme stress test *Am '* After MDRI 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Source: Staffprojectionsand simulations. 52 Figure A n . Haiti:Indicators of Public Debt Under Alternative Scenarios, 2006-2026 1/ NPVof debt-to-GDP ratio 35 30 25 20 15 - - 1 0 - ---Baseline Historicalscenario 5 - Most extreme stresstest 0 200 I NPV of Debt-to-Revenue Ratio 2/ 181 127 --_--- _---- -#-- ::[ - 100 - 110 ---Baseline Historical scenario Most extreme stress test 20 18 - Debt Service-to-Revenue Ratio 2/ 16 15.07635675 14 - 13.1 12 - 10 - - 8 - 6 - ---Baseline 4 - Historicalscenario Most extreme stresstest 2 - 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Source: Staffprojectionsand simulations. 1/ Mostextreme stress test i s test that yields highestratio in 2016. 2/ Revenueincludinggrants. 53 Appendix 3- DebtManagementCapacity Currently, the Central Bank of the Republic of Haiti (Banque Centrale de la RCpublique d'Haiti, BRH) and the Ministry of Economy and Finances (Minist2re de I'Economie et des Finances, MEF) arejointly responsible for debt management inHaiti. While the BRHhas a relatively complete debt database, the archives of the MEFwere devastated by a fire in 2002. The MEFwith support from the BRHi s currently rebuilding its database. Overall, the coverage of public debt (external and domestic) i s appropriate. The BRHupdates its database at every payment cycle, ensuring that the authorities' database i s broadly in line with the creditors. A modem debt reporting system is installed at the BRH, while the MEFis preparingto acquire such a system. Currently, the BRHuses an old version o f UNCTAD's debt management system (DMFAS, version 5.2). Both the BRHand the MEF are considering acquiring an updated version of DMFAS. This would be contingent on the receipt of appropriate financing from donors and i s also dependent on an assessment by a mission from UNCTAD. Inaddition to DMFAS, UNCTAD would also provide training to the staff of the BRHand the MEF. The use of an appropriate software and adequate training will be critical for improving debt management. The following debt service procedures are typically followed. Every month, the BRHsends the MEF a statement of all debt service falling due inthe following month. At the end of the months, the MEFissues a payment order for the full amount o f debt service for the following month. The BRHdebits the Treasury account to pay each creditor as debt service falls due. The BRHcannot legally pay a creditor without having information about the associated disbursement. The BRHproduces monthly, quarterly and annual reports which contain data on external debt. These reports cover the transactions (disbursements and payments) as well as the stock of debt and the accumulation of arrears. The reports are disseminated throughout the Central Bank and MEF. This allows the authorities to integrate the relevant information into the macroeconomic framework. The data are available to the public upon request within one month after the reference period, and are subsequently published with some additional delay. Looking ahead, Haiti needsto further strengthen its debt management capacity by: (i)clarifying by law the debt management responsibility of the BRHand the MEF; (ii)improving information sharing, including frequent debt reconciliation exercises, between the BRHand the MEF; (iii) shortening the procedures for debt service payments; (iv) improving the tracking o f disbursements; (v) acquiring a modern debt reporting system; (vi) training of staff; and (vii) improving the capacity to produce debt sustainability analyses.