Document of THEWORLDBANKGROUP FOR OFFICIAL USEONLY ReportNo. 30541 TRANSITIONAL SUPPORT STRATEGY FOR THE REPUBLICOF HAITI December 10,2004 CaribbeanCountryManagementUnit (LCC3C) LatinAmerica andthe CaribbeanRegion(LCR) This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. CURRENCYAND EXCHANGE RATES US$l.OO: HTG37 (as of 12/10/04) WEIGHTS AND MEASURES 1meter (m) = 3.228 feet 1kilometer (km)=0.62 miles 1hectare (ha) = 2.47 acres (ac) FISCALYEAR October 1to September 31 ABBREVIATIONS AND ACRONYMS AAA Analytical and Advisory services AIDS AcquiredImmuneDeficiency Syndrome BRH Banque de laRCpublique d'HaYti (National Bank of Haiti) CAE Country Assistance Evaluation CARICOM Caribbean Community CARTAC Caribbean Technical Assistance Center CAS Country Assistance Strategy CDD Community DrivenDevelopment CEM Country Economic Memorandum CEP ProvisionalElectoral Council CD Democratic Convergence CNRA National Commission on Administrative Reform CODE Committee on Development Effectiveness CPAR Country Procurement Assessment Report CPI Consumer Price Index DDR Demobilization, disarmament, and reintegration DR Dominican Republic DSA Debt Sustainability Analysis EDH National Electricity Company (Electricite' d'Hai'ti) EERP Emergency Economic Recovery Plan EGRO Economic Governance Reform Operation ERDMP Emergency Recovery and Disaster Mitigation Project EPCA Emergency Post Conflict Assistance ESW Economic and Sector Work EC European Commission EU European Union FL Lavalas Family (Fanmi Lavalas) FY Fiscal Year GAVI Global Alliance for Vaccines and Immunization GDP Gross Domestic Product HDI Human DevelopmentIndex HERO Haiti Economic Recovery and Opportunity Act HIPC Heavily IndebtedPoor Countries Initiative HIV Human Immunodeficiency Virus HLCS HouseholdLiving Conditions Survey (Enquite des Conditions de Vie) ICF Interim Cooperation Framework IDA InternationalDevelopment Association IDB Inter-American Development Bank FOR USEONLY IFAD InternationalFundfor Agricultural Development IFC InternationalFinance Corporation IF1 InternationalFinancialInstitutions IHE National Institute on Childhood (Institut Haytien de 1'Enfance) IHSI National Institute of Statistics and Informatics (Institut Haytien de la Statistique et de 1'Informatique) IOF Intemational Organization of the Francophonie IMF InternationalMonetary Fund LAC Latin America and Caribbean Region LICUS Low Income Countries Under Stress M C N Micro Cr6dit National MGS Imports of Goods and Services ME Multi-national InterimForces MIGA Multilateral Investment Guarantee Agency MINUSTAH UNMissionto Stabilize Haiti NGO Non-Governmental Organization NR Net InternationalReserves NPV Net PresentValue OAS Organization of American States OED Operations EvaluationDepartment OPL StrugglingPeople's Party (Organization du Peuple en Lutte) PAHO Pan American Health Organization PCF Post-Conflict Fund PRSP Poverty Reduction Strategy Paper SDR Standard Drawing Rights SMP Staff MonitoredProgram TSS Transitional Support Strategy TB Tuberculosis UNAIDS The Joint UnitedNations Programme on HIV/AIDS UNDP UnitedNationsDevelopment Programme USAID UnitedStates Agency for InternationalDevelopment WBI World Bank Institute WHO World Health Organization Vice President David de Ferrantipamela Cox Country Director Caroline D.Anstey PREMSector Leader Antonella Bassani Lead Operations Officer Badrul Haque Special RepresentativeKountry Economist Auguste Kouame Task Team Leader Joelle Dehasse Team Production Support Margarita ChBvez-De Silva This document has a restricted distribution and may be used by recipients only in the performance of their official duties. I t s contents may not be otherwise disclosed without W o r l d Bank authorization. TABLE OF CONTENTS EXECUTIVE SUMMARY.................................................................................................................. i A COUNTRY CONTEXT................................................................................................................ 1 . INTRODUCTION ...................................................................................................................................... 1 THEPOLITICAL CONTEXT ...................................................................................................................... 1 THEECONOMICCONTEXT ...................................................................................................................... 5 THESOCIAL CONTEXT ......................................................................................................................... 11 ENVIRONMENTALCHALLENGES .......................................................................................................... 15 INSTITUTIONAL CAPACITY AND ECONOMIC GOVERNANCE ................................................................ 18 B THE GOVERNMENT'SPROGRAMFORPOLITICAL,ECONOMIC AND SOCIAL . RECOVERY: THE INTERIMCOOPERATIONFRAMEWORK ........................................... 19 TOWARDNEWA PARTNERSHIPWITH THE INTERNATIONAL COMMUNITY ......................................... 19 BROAD OVERVIEW OF THE GOVERNMENT'STRANSITIONSTRATEGY ................................................ 21 DONOR COORDINATION ....................................................................................................................... 22 C THE WORLD BANK GROUPAND HAITI............................................................................ . 24 HISTORY OF BANKENGAGEMENT ....................................................................................................... 24 A STRATEGY FOR SCALING UPBANKENGAGEMENT ......................................................................... 26 D MANAGINGRISKS................................................................................................................... . 34 Boxes Box 1. Brief chronology o f key political events .................................................................................. 3 Box 2. Dilapidated Infrastructure - the Cost to Economic Activity ..................................................... 8 Box 3: HIV/AIDS in Haiti ................................................................................................................. 13 Box 4. Donor Areas of Engagement Within the ICF......................................................................... 23 Box 5: The LICUS Trust FundGrants Program................................................................................ 27 Figures Figure 1: Real GDP Growth and Income Per Capita........................................................... 6 Tables Table 1: Real Per Capita GDP Growth in Haiti and Other Countries. 1961-2003............................... 5 Table 2: Key Macroeconomic Indicators............................................................................................. 7 (US$ million. unless otherwise indicated) ............................................................................................ 9 Table 4: Haiti External Debt Indicators ............................................................................................. 10 Table 5: Access to Basic Infrastructure by Household Income ......................................................... 11 Table 6: Patterns of Poverty ............................................................................................................... 12 Table 7: The Millennium Development Goals: Haiti and regional averages* ................................... 14 Table 8: Environmental Indicators..................................................................................................... 17 Table 9: TSS Proposed IDA Financing.............................................................................................. 29 Table 10: IDA 13 Grant Component for IDA Operations in FY05 .................................................... 31 Table 11: Key Performance Areas and Indicators for FY06 IDA Program........................................ 31 Table 12: Ongoing and Planned Analytical and Advisory Activities ................................................ 32 Annexes Annex 1. Pledges by Donors and Sectors for the ICF........................................................................ 37 Annex 2. ICFSectoral Tables.. Donors and InternationalOrganizations .......................................... 38 Annex 3. Progress Indicators Based on ICFResults Matrix" ............................................................ Annex 3. Progress Indicators Based on ICF Results Matrix (continues) ........................................... 41 42 Annex 4: Haiti and the MillenniumDevelopment Goals Indicators.................................................. 43 Annex 5. Arrears ClearancePlan....................................................................................................... 44 Annex 6. Status of World Bank Operations....................................................................................... 50 Annex A2: Haiti At-a-Glance ............................................................................................................. Annex B6.Haiti - Key Economic Indicators.................................................................. 51 Annex B7.Haiti -Key Exposure Indicators.................................................................. 53 54 HAITI TRANSITIONALSUPPORTSTRATEGY EXECUTIVESUMMARY 1. InMarch 2004, the Transitional Government of Haiti, donor agencies, and international and regional organizations launched a new partnership to respond to Haiti's urgent social, economic, and institutional needs. The partnership has been forged around the Government's program and broad international support for it, as outlined in the Interim Cooperation Framework (ICF). 2. The ICF identifies priority interventions and related financing needs to support the country's economic, social and politicalrecovery over the July 2004 to September 2006 period. The Government launched the preparation of the ICF with support from the donor community under the coordination of the European Commission, the Inter-American Development Bank, the United Nations and the World Bank. Over 250 national and international experts from 26 bilateral and multilateral agencies, UN agencies, civil society and the private sector participated in the exercise. Civil society organizations, the private sector and political parties actively participated or were consulted in the preparation of the ICF. Regional workshops and consultations and a national workshop on the ICFwere held inseveral cities and inPort-au-Prince. 3. This document outlines a Transitional Support Strategy (TSS) integrating the World Bank Group's assistance to Haiti with the ICF. The TSS defines a two-year strategy for the Bank to deliver hope to the population and restore credibility in public institutions by helping the Government deliver quick wins-in the provision of basic services and job creation-and launch reforms that promote longer-term economic governance and institutional development. The TSS was defined through additional consultations with the Government, civil society organizations, donors and Bank staff on the Bank's objectives, priorities and activities. 4. The document i s organized as follows: The first section presents an overview of the country context and recent developments in Haiti and discusses some key development challenges. The second section presents the Government's program for political, economic and social recovery and discusses lessons learned from past donor-Haiti cooperation. The third section reviews the Bank's experience in Haiti, including under the Haiti Country Briefdiscussed by the Board in January 2003, and lays out a strategy for scaling up Bank engagement in Haiti. The fourth section discusses how the Bank will manage risks under the TSS. The ProposedBank Strategy for FY05-FY06 5. In the two year period covered by the TSS, the Bank will use a balanced mix of lending operations, trust fund grants and non-lending services to support the transition to economic and social recovery, reduce the potential of a return to conflict and lay the groundwork for the Bank's longer- term objective in Haiti: inclusive growth and poverty reduction through local development, institutional strengthening and support for productive sectors. Specifically, the Bank will focus on: i Delivering hope and quick wins: Meeting basic and urgent needs: This includes community-driven development approaches to build social inclusion, participation, transparency, trust and public-private partnerships at the local level while improving basic social, economic, and infrastructure services; rehabilitating areas affected by the May and September floods and working with communities to reduce vulnerability to future disasters at the local level; and supporting emergency health and school nutritional needs to promote health and education outcomes. Promoting income-generating opportunities: This includes support for government efforts to increase social and economic opportunities for the poor and to rebuild and rehabilitate infrastructure services critical to promoting economic recovery using community-driven development approaches. Restoringcredibility ininstitutions: Strengthening economic governance and contributing to institutional development. This includes fighting corruption and promoting transparency and accountability by improving the management of public finances and coordination of external financing; and strengthening institutions at both the central and local level to underpin economic recovery and improve living standards. This would be addressed through an economic governance program to strengthen the budget process, financial control and public procurement mechanisms; improve accounting practices of public enterprises and modernize their management; strengthen institutional capacity and human resources management to lay the groundwork for civil service reform in the future; and to promote civil society participation in economic governance reforms and public-private partnerships to increase access to social services. An emergency recovery and disaster management program would aim to strengthen institutional capacity to mitigate and respond to natural disasters and improve natural resources management. Inaddition, the Bank would support interventions that link community development activities to national programs and promote public-private partnerships. Promoting inclusion and consensus on development priorities: In addition to emphasizing community-driven development approaches and building public-private partnerships to promote inclusion, the Bank would support communications activities to promote consensus on economic governance reforms and the launch of the PRSP process for a national dialogue on development priorities. Suggested issuesfor discussion Do the proposed objectives and strategic focus offer an adequate response to the development needs of the country? D o Executive Directors support the approach for scaling up Bank engagement in Haiti in the context of the new partnership between the Government and the international community? I s the approach to managing risks adequate in the context of the existing consensus that the international community must be committed to sustained engagement in Haiti? .. 11 A. COUNTRY CONTEXT INTRODUCTION 6. The first and only slave colony to gain national independence in 1804, and the second free republic in the Western Hemisphere, Haiti's history has been fraught with political struggles and acute social inequality. On January 1, 2004, the Republic of Haiti celebrated its independence bicentennial against a backdrop o f deepening political and social turmoil that erupted into low-intensity conflict. Meanwhile, the devastating impact of heavy rains in May and September-made more catastrophic by environmental degradation and weak institutions-underscored the link between poor governance, poverty, social, economic and physical vulnerability and insecurity. 7. InMarch 2004, the installation of a technocratic Transitional Government committed to improving governance opened a new window of opportunity for the country to embark on the road to recovery from political, economic and social challenges with the support of the international community. The reform-oriented Government has been given a mandate to create the conditions conducive to holding local, legislative, and presidential elections in 2005 and support the country's recovery. The Government has pledged not to runfor office and to hand power over to a new elected government in early 2006. While the transition period provides the international community and donors an unprecedented opportunity to support a reform-oriented Government in its efforts to implement high-impact reforms, it will be critical that the Government maintain a transparent and inclusive approach to policy development and governance during its term to lay a strong basis for the 2005-2006 electoral transition. 8. Under this Transitional Support Strategy (TSS), the Bank aims to deliver hope to the population and restore credibility in public institutions by helping the Government deliver quick wins-in the provision of basic services and job creation-and launch reforms that promote longer-term good governance and institutional development. This two-pronged approach i s central to a successful transition and longer-term sustainable development. The Government's ability to deliver on this agenda hinges on the technical and financial support from the international community, including the World Bank Group. THEPOLITICALCONTEXT 9. Political instability has been a dominant theme since the 1986 fall of the Duvalier regime, a 30-year dictatorship markedby predatory governance, corruption and significant civil and human rights abuses. Haiti was subsequently headed by a succession of non- elected short-term governments-including several military regimes. With the promulgation of the Constitution in 1987 and the high voter turn-out in the 1990 elections, expectations were highfor democracy and development to finally take root. 10. Jean-Bertrand Aristide, a former curate o f a parish inthe L a Saline slums of Port-au- Prince and an exponent of liberation theology, announced his candidacy for the presidency just six weeks before the elections which he won with 67 percent of the vote. He was ousted less than a year later by the military. From 1991-1994 an international embargo sought to 1 dislodge the military coup leaders, crippling the economy in the process. Duringthis period it i s estimated that possibly 5,000 people were killed in politically-related violence, at least 300,000 people were internally displaced, and another 60,000-70,000 fled the country (many as part of the large scale exodus of boat people). In October 1994, the United Nations Security Council authorized the deployment of a US-led multinational force of 20,000 to restore constitutional rule. International donors returned to Haiti, pledging US$1.2 billion to support the country's recovery. 11. Despite the restoration of constitutional rule, political and social instability has persisted since 1994. The two administrations of President Aristide (from 1994-1996 and duringhis second term in 2001-2004) and that of Presidents RenC PrCval (1996-2001) were blighted by infighting, corruption, weak institutions and poor political and economic governance. In 1997, Aristide broke from his Organization Populaire de Lavalas (OPL)' to create the Lavalas Family (FL). The split led to a severe institutional crisis with a deadlocked parliament (1997-1998),* which was then suspended in 1999. For several years no major legislation-including budget laws- was approved, reforms could not move forward, and ratification of loans with international creditors, including the World Bank and IDB,was stalled. 12. InMay 2000, long-awaited local and legislative elections were held. The FLwon a sweeping victory but the methods used by the provisional electoral council to count the votes were rejected by opposition parties, which united as the Convergence Democratic (CD) and demanded new elections. InAugust 2000, President PrCval seated the contested Parliament and Presidential elections went forward in November against a backdrop of continued political gridlock and with low voter turn-out. The opposition boycotted the elections and Aristide was reelected President with 92 percent of the vote. 13. Much needed external financial assistance remained on hold pending a resolution of the contested May 2000 election results. Civil unrest, largely in the capital of Port-au- Prince, occurred with increasing frequency in late 2002 and throughout 2003 inthe runup to the country's bicentennial. New civil society groups emerged in opposition to the government, notably the Group of 184 and student movements. On September 4, 2002, the OAS Permanent Council passed Resolution 8223 establishing a number o f critical political milestones leading to credible elections in 2003. Among other things, OAS Resolution 822 called on the international financial institutions to unblock financial assistance to Haiti as quickly as possible while a political solution was being worked out. In July 2003, Haiti cleared arrears to the Inter-American Development Bank (IDB),`unfreezing nearly US$200 million in already approved and ratified loans and lifting the suspension on its existing portfolio of projects. The World Bank stepped up its dialogue with the authorities with a view to clearing arrears owed to the International Development Association (IDA) and securing access to development finance. This resulted in a stronger dialogue between the Bank and Haiti and the government made progress on a number of economic governance The OPL renameditselfthe Organization du Peuple en Lutte (Struggling People'sparty) andbecamethe *leadingoppositionparty. Inaddition, an incompleteelection cycle inthe spring of 1996 left nearly a third of Senate seats unfilled. 3CP/RES822 (1331/02): Supportfor StrengtheningDemocracyinHaiti, September 4, 2002, OAS. 2 issues. The Government's macroeconomic framework in 2003 also improved under an InternationalMonetary Fund(IMF) Staff Monitored Program (SMP). 1986 Fall of the Duvalier regime after 30 year dictatorship December 1990 Jean-BertrandAristide electedpresident September 30, 1991 Military overthrow of Aristide administration 1991- 1994 International embargo 1994 US-led intervention restoresAristide and constitutional rule; 14. Recentpolitical developments. InJanuary 2004, political violence between Aristide supporters and opposition groups escalated sharply. Against this backdrop, in late January, the Caribbean Community (CARICOM), in coordination with the OAS, which played a leading role in mediation efforts, presented a plan to resolve the stand-off and move the country toward elections. The plan called for, inter alia, the "appointment of a new government through the identification of a neutral and independent Prime Minister." Under this plan, Aristide would serve out his term. 15. The opposition rejected the plan and the situation on the ground continued to worsen. On February 5, 2004, a rebel group calling itself the Revolutionary Artibonite Resistance Front seized control of Haiti's fourth-largest city, Gondives, marking the beginning of armed revolts. Former members of Haiti's disbanded military advanced from the Dominican Republic seizing control of towns as they marched toward Port-au-Prince calling for President Aristide to step down. 16. On February 29, seeking to avoid a confrontation in Port-au-Prince, President Aristide resigned and left Haiti. The circumstances surrounding his departure are a matter of controversy. On March 1, 2004, the UN Security Council issued a resolution noting the president's resignation and the transfer of power to Boniface Alexandre, President of the Supreme Court of Appeals, in accordance with the Constitution. The UNcalled on member states to support the succession of power and authorized the deployment of a US-led Multinational Interim Force (MIF). For the next two weeks, chaos reigned and the country experienced tremendous instability duringwhich critical basic services were interrupted, key transport routes for the delivery of humanitarian aid were cut off, businesses and stores closed, and public and private assets were destroyed or looted, resulting in considerable social and physical damage, the harmful impact of which will be felt for years to come. 3 Although exact numbers are difficult to establish, violence during this period claimed the lives of many hundreds. 17. As part of the process of selecting a new leadership inHaiti, a Tripartite Council was formed, comprising one representative o f the FL party, one from the Democratic Convergence platform, and one from the international community (the United Nations), to appoint a Council of Wise Men made up of seven individuals from key sectors of Haitian society. The Council appointed Gerard Latortue to the position of Prime Minister in a Transitional Government. In early April, this Government, the Council of Wise Men, civil society organizations, and the principal political parties signed a political agreement known as the "Political Transition Consensus." The FL party declined to participate in the agreement, which defined measures to be taken on security, development, elections, judicial reforms, and a national dialogue during the transition period. 18. The Transitional Government plans to hold elections in late 2005 and to hand power over to a new government in early 2006. The UN and OAS, with the support of bilateral donors, are providing support for elections. 19. On July 1, the MIF was replaced with a UN peacekeeping mission (MINUSTAH), designed to have a military component of 6,700 men and a civilian police component of 1,622 men. Its mandate i s to help the government reestablish security so that elections can take place. However, with less than half of MINUSTAHforces deployed as of October, the peacekeeping mission has been stretched by security demands in Port-au-Prince, the September flooding disaster in Gonaives and by the former military and armed gangs' resistance to disarmamentefforts. 20. Since August, strikes, demonstrations and violence have plagued the transition period, though disturbances have been largely confined to Port-au-Prince neighborhoods that are strong-holds of discontented FL supporters and gangs, many of whom continue to call for Aristide's return. Confrontations between police and FL supporters and random shooting by gangs claimed some 85 lives in September and October. Disarmament of gangs and the former military remains a challenge given the limited capacity of the national policy and the fragmentation of armed groups. The military seeks to be included once again on the Haitian government payroll and have the army reinstated. The Government has agreed to establish a commission to review their claims for restoring pensions and back-pay. Kidnappings for extortion, which have occurred frequently over the past several years, have continued though largely confined to the metropolitan area. Human rights abuses remain a concern. Inthe aftermath of the GonaYves floods, gangs frequently attacked humanitarian aid convoys and looted aid supplies and the security situation inthe city remaineduncertain. 21. It should be noted that the majority of the country, being isolated from Port-au- Prince and GonaYves by poor infrastructure, has been little affected by the latest violence and turmoil in those cities. Life in most towns and rural areas that have long been disconnected from the capital continues much as before, with the population struggling to survive in the absence of basic public services, including law and order, and under increasingly difficult economic circumstances. This i s where the Bank's support during the transition period can 4 have high rewards by helping to break the cycle of exclusion and reduce the potential for future conflict. THEECONOMIC CONTEXT 22. Violence and poor governance over many years have had a devastating impact on the overall Haitian economy. Haiti's per capita GDP growth, already under-performing compared to averages for the Latin America and Caribbean region in the 1960s and 70s, declined during the 1980s (by 2.3 percent), and more deeply in the 1990s (by 3.1 percent) (see Table 1). The military coup that triggered an international embargo in the early 1990s caused activity in the textile and export-oriented assembly industries-responsible for over three-quarters of export earnings and a significant share of jobs-to come to a virtual stand still, tax collection and expenditure control systems collapsed, and maintenance of economic and social infrastructure was all but abandoned. In late 1994, the government adopted an Emergency and Economic Reconstruction Program (EERP), donors resumed financing and economic activity began to recover. From 1994 to 2000, the combined effect of resumed external aid and the gradual increase in remittances led to some improvements in certain social indicators. 1961-70 1971-80 1981-90 1991-2000 2001-03 Haiti -1.4 2.6 -2.3 -3.1 -2.6 LAC 2.5 3.4 -0.8 1.7 -1.1 L o w Income Countries 1.7 0.7 1.9 2.2 3.3 Sub-Saharan Africa 2.6 0.8 -1.1 -0.4 1.o 23. Political discord and lack of commitment to reforms resulted in the gradual straining of Haiti's relation with international donors and external assistance dwindled between the mid 1990s to the early 2000s, with disbursements falling from US$611 million in 1995 to some US$136 million in 2002, much o f it by then channeled to non-governmental organizations (NGOs). The dramatic contraction of donor assistance following the 2000 electoral dispute led to a significant decline inthe delivery o f basic services. Real per capita GDP growth declined b y 2.6 percent from 2001-03 (Figure l), inflation averaged 19 percent, and the fiscal deficit (excluding grants) averaged 3.2 percent of GDP. In the absence of external financing, the deficit was financed primarily by Central Bank advances and the accumulation of internal and external arrears. 24. Recent developments. Political turmoil inlate 2003 and early 2004 had a significant impact on an already fragile economy. Having improved throughout much of 2003, economic performance under an IMF Staff Monitored Program (SMP) went off track as the government increased spending in an effort to quell street protests and violence and to fund the nation's celebration of the bicentennial independence anniversary. The deficit widened during October 2003 to March 2004 and Central Bank financing of the budget breached the 5 SMP indicative target. Net international reserves fell to a historic low of U S 1 7 million in March. In February and March 2004, property damage and business closures due to the conflict created severe disruptions in the supply system, and private sector confidence weakened. Figure1: RealGDPGrowthand IncomePer Capita I I Real GDP Growth("0)1997-2004 GDPandGNl per Capita,1997-2004 600.0 4 0 I 500.0 400.0 I 300.0 200.0 100.0 0.O4 , , , , , , , I 1997 1998 1999 2000 2001 2002 2003 2004 Source: World Bank Live Database 25. The monthly inflation rate rose to 6.5 percent in April from 1.5 percent in February, reflecting widespread supply constraints (closure of ports and looting o f warehouses) and increases in international commodity prices (monthly inflation has fallen to less than 1 percent in recent months). Property damage in both the public and private sectors was substantial and output i s estimated to have declined by 3.5 percent in Haitian fiscal year 2003-04 (Oct. 2003-Sept. 2004). See Table 2. The Government's financial position further deteriorated as revenues declined sharply with the drop in economic activity and due to weakened administrative capacity. Although activity appears to be picking up in some sectors, commercial banks remain reluctant to extend new credit to the private sector out of concern of an increase in non-performing loans reflecting the conflict's impact on creditworthiness. 26. Faced with revenue shortfalls and seeking to restore financial stability during its first months in office, the Transitional Government curbed nonessential expenditures while developing an emergency plan to rehabilitate key public facilities and infrastructure and safeguard the provision of basic public services. Initial steps to strengthen governance inthe public sector include the appointment of new management in public sector enterprises, increased scrutiny of large-taxpayers and collection of taxes, and a reduction in the use of discretionary accounts. The national currency, the gourde, strengthened since March (from over 40 gourdes to the dollar in February to around 37 gourdes to the dollar in December) reflecting the rebound in remittances, the significant reduction in imports, and expectations of increased foreign aid inflows. While this incipient macroeconomic stabilization favors a recovery of economic activity, other factors constrain it. This includes the continued insecurity, civil unrest (notably strikes and demonstrations that have occurred frequently since August 2004 and the police and gang confrontations that have escalated since end- September 2004), and natural catastrophes inMay and September 2004 which left hundreds of thousands homeless and deprived of their livelihood. 6 27. The Government, in consultation with IMF staff, has successfully completed the implementation of a six month SMP covering the period April-September 2004; All quantitative targets for end-June and end-September were met by wide margins, with net international reserves significantly above the program floor and the overall budget deficit well below target (3.7 percent of GDP compared with an SMP target of 5 percent of GDP), and good progress was made on structural measures. In order to continue maintaining a sound macroeconomic framework, the Government has prepared, and intends to fully implement, a macroeconomic stabilization program for the period October 2004- September 2005 to be supported by IMF Emergency Post-Conflict Assistance (EPCA). EPCA i s scheduled for presentation to the IMF Board on January 7, 2005 (for details of the Government's macroeconomic program, see the Program Document for the Economic Governance Reform Operation which will be discussed by the Boardtogether with the TSS). Table 2: Key Macroeconomic Indicators Actual Projections 19971 19981 19991 20001 20011 20021 2003 20041 20051 2006) 2007 Source: Fund and Bank staff estimates. 28. Sources of growth and medium-term macroeconomic scenarios. Prospects for restoring economic activity remain heavily dependent on the security situation, improvements in the rule of law and economic governance. The dilapidated state of basic infrastructure in Haiti i s also a critical barrier to economic activity and private investment (See Box 2). Under a scenario of improved security and rule of law, an important source of growth would be labor-intensive industrial activities, such as the assembly sector, which has the greatest employment potential and can rapidly expand. It i s estimated that the Haiti Economic Recovery and Opportunity (HERO) Act, a trade bill before the U S Congress that would provide preferential access to US markets, could spur 100,000 new jobs for Haitians. However, the assembly industry i s constrained by a lack o f trained personnel, physical space and infrastructure, and finance. Other potential sources of growth are coffee and mango production and export with substantial implications for peasant incomes. However in the short term, productivity growth in both traditional and non-traditional agricultural goods i s constrained by inadequate technology, distribution systems, transportation, storage and finance. Increasing access to micro-credit for micro-enterprises in rural and urban areas 7 could also generate jobs and income growth. Tourism has potential in the long-term but in the short term suffers from insecurity and inadequate infrastructure. Box 2. Dilapidated Infrastructure the Cost to Economic Activity - As a result of lack of investment and maintenance, basic infrastructure throughout Haiti i s in a state of advanced disrepair. Only 5 percent of roads are considered to be in good shape, while 15 percent are in average shape. Furthermore, half of the tertiary network that provides road access to rural areas where two- thirds of the population lives is extremely deteriorated and largely unusable. The poor quality of port services and the long delays in clearing cargo have increase the cost of doing business. Haiti is also one o f the few countries in the world that does not have high-voltage interconnections between cities and key regions. Less than a third of the population has access to electricity. This has significant implications for health services, the cold chain, as well as many businesses. The lack of reliable telecommunications, notably in rural areas, which have a penetration rate ten times lower than anywhere in the region, has a negative impact on the country as a whole, making Haiti less competitive for businessesand making it more difficult for the government to operate effectively and respond adequately to emergency situations. The lack of dependable water services and the limited service network constitutes another high burden for consumers and businesses with health risk implications for the population. 29. Under a positive macroeconomic scenario, the economy is expected to recover from the 2004 crisis, growing at 3 percent in 2005-07, reflecting the recovery of remittances and external financing from official sources. While exports will take a while to recover fully, increased imports are expected to lead to a widening of the current account deficit (to a projected6-8 percent of GDP) in 2005-07. Generous grant financing and concessional loans will help close the current account deficit without significantly increasing the debt burden of the country. With continued improvements in revenue collection and disbursements of committed external financing, the Authorities expect to reduce to zero the Central Bank financing of the fiscal deficit in 2005 (the central government deficit, excluding grants, i s projected to grow from 3.7 percent to 6.0 percent of GDP in FY2004-05 due to increased spendingon critical basic needs funded by external financing and 7.8 percent in 2006). This will support a tightening of monetary policy, lower inflation (from an annual average of 27 percent in 2004 to a projected 10percent in 2005-07) and a stable gourde. 30. The positive macroeconomic scenario may not materialize if the momentum for maintaining a sound macroeconomic framework i s not kept, the efforts to improve the efficiency of public resource management are slackened, or security problems intensify to the point of significantly disrupting Government and donor activities. Under such an adverse macroeconomic scenario, economic growth would average about 0.8 percent during the period 2005-07, while yearly CPIinflation (averaging 20 percent during 2005-07) would be higher than in the positive scenario in the face of resumed monetary financing of the government deficit and possible disruptions in the supply of goods and services. In fact, under this scenario the government deficit would average 4.5 percent of GDP during the period 2005-07 due to lower donor financing and lower internal revenues that would result from disruptions in the revenue collection system. While this adverse scenario would result in lower exports than in the positive scenario, it would also result in lower imports (as imports related to donor activities would fall significantly). The resulting current account deficit would be lower than under the positive macroeconomic scenario (4.0 on average during 2005-07 compared with an average of 6.0 percent under the positive macroeconomic scenario). 8 31. External debt vulnerability and arrears clearance. Haiti's external debt at end- September 2003,4 including arrears, i s estimated to have reached US$1,264 million in nominal terms, equivalent to 44 percent of GDP. O f this amount, 83 percent was held by multilateral institutions and official bilateral creditors accounted for the remaining 17 percent. IDA and the Inter-American Development Bank (IDB) are Haiti's largest external creditors accounting for about 42 and 37 percent of total claims, respectively. Paris Club creditors, mainly Italy and France, hold claims representing about 14 percent of Haiti's total debts (See Table 3). Table3: ExternalDebt Stock at end September 2003, by Creditor (US$million,unlessotherwiseindicated) NYV Nominal Stock Arrears After traditional debt relief Total Debt 1,263.6 56.4 900.0 1. Multilateral Creditors 1,047.5 33.5 748.8 I D A 532.1 32.6 352.0 IDB 461.7 0.0 354.3 IFAD 29.6 0.5 19.8 IMF 17.9 0.0 16.7 OPEC 6.2 0.4 6.0 2. Bilateral creditors 216.0 22.9 151.2 Paris Club 174.7 22.7 117.4 Non Paris Club 41.3 0.2 33.8 32. The Net Present Value (NPV) of Haiti's debt at end-September 2003,5 after full use of traditional debt relief mechanisms,6 i s estimated at US$900 million, equivalent to 201 percent o f export^.^ The NPV of debt to exports ratio at end-September 2004 shows a small improvement reaching 199 percent. Most of the improvement i s explained by increased exports as the conflict left the exports sector almost intact. The NPV of debt-to-exports ratio i s projected at 189 for 2005 (see Table 4). Additionally, Haiti's already precarious debt prospects could be worsened by exchange rates modifications. As of end-September 2003, US$ denominated debt represented only 48 percent of Haiti's total external debt; while SDR and Euro denominated debt accounted for 36 and 9 percent, respectively. As a result, all other things beingequal, a depreciation of the US$ can translate into an increase of the US$ 4 External debt estimates and projections are basedon Haiti's medium and long term Public and Publicly Guaranteed (PPG) debt as at end-FY2003/04.Multilateral debt figures are based loan-by-loan data provided by creditors, while the authorities database was the main source for bilateral debt figures. The NPV of debt was calculated using the averagecurrency-specific Commercial Interest Reference Rate (CIRRs) for the six-month period ending in September 30,2003, and converted to US$ using end-September 2003 exchange rates. Traditional debt relief mechanisms refer to a stock-of-debt operation under Naples terms from Paris Club 'creditorsto and at least comparable treatment from non-Paris Club creditors. Refers the three-year backward-looking moving average of the exports of goods and non-factor services. 9 value of debt, and therefore, higher debt burden indicators. Haiti's debt indicators are also highly vulnerable to exogenous shocks like natural disasters and price changes. Table 4: HaitiExternalDebtIndicators 2003 2004 2005 NPV of debt (after traditional debt relief) 900.0 929.9 954.3 Exports of G&S (3 year average) 446.9 467.5 505.2 NPV of debt-to-exports ratio 201.4 198.9 188.9 Source: Staff calculation based on datafrom creditors 33. Haiti has had long-standing history of debt restructurings. In 1994, Haiti received international support to clear its external debt arrears with several multilateral and bilateral creditors. Subsequently, in May 1995, Haiti benefited from a flow treatment in Naples terms on its obligations towards Paris Club creditors.8 Haiti then remained current on its debt service obligations to all creditors until FY1999. However, starting in FY2000 Haiti accumulated arrears to virtually all external creditors. InJuly 2003, the arrears with the IDB, amounting to approximately US$32 million, were cleared. At end-September 2003, arrears stood at US$56 million, equivalent to about to 145 percent of the Net International Reserves (NIR),mainly due to IDA and Paris Club creditors. DuringFY2004, Haiticleared its arrears with the International Fund for Agricultural Development (FAD) and the OPEC Fund. However, arrears with IDA and the Paris Club continued to accumulate to an estimated US$78 million (or 136 percent of the NE) as at end-September 2004, of which US$48 million to IDA. The Government has prepared a paper outlining a comprehensive yet sequential arrears clearance strategy (see Annex 5). As per this strategy, the government intends to clear IDA arrears before Board presentation of the TSS and plans to initiate discussions with bilateral creditors and address their outstanding arrears. 34. The results of a recent debt sustainability analysis (DSA) suggest that Haiti could potentially be eligible to benefit from assistance under the Heavily Indebted Poor Countries (HIPC) Initiative.' As a result of a decision taken recently by the Boards of IDA and the IMF, the "sunset clause" of the HIPC Initiative has been extended from end-2004 to end- 2006. Countries potentially eligible for HIPC assistance will be identified using HIPC income and indebtedness criteria based on end-2004 data. Future HIPC debt relief will be provided to these countries provided they would have adopted reform programs prior to end- 2006. The results in this document suggest that Haiti could be one of the countries to be added to the current HIPC list. However, Haiti would benefit from HIPC assistance only if a reform program i s adopted under the established timetable; and, if so, the amount of the assistance will be determined when Haiti establishes a track-record of performance, and * The debt consolidated in the agreement corresponded to the arrears (including late interest) as of February 28, 1995 and the debt service falling due through end-March 1996. At the onset of the HIPC Initiative (1996), Haiti was not part of the list of countries potentially eligible for debt relief becauseits debt ratios were found to be below the thresholds established at that time. Three years later, when the framework of the HIPC Initiative was enhanced (1999), Haiti was not added to the list countries due to lack of sufficient information. Still, it was recognized that Haiti may have met the criteria to benefit from debt relief under the Initiative. 10 satisfies other requirements, that would allow it to reach the HIPC decision point, at which time, it will start benefiting of debt relief under the HIPC initiative. In any event, action will be needed from the Government to show its commitment to clear arrears and develop safeguards to avoid an eventual worsening of the debt situation associated with high levels of new borrowing in a volatile economic situation. THESOCIAL CONTEXT 35. Poverty in Haiti i s endemic, inequality severe, and social indicators-among the lowest in the world-point to a chronic humanitarian crisis in various parts of the country. Ina country of 8 million, an estimated 76 percent of the population lives below the poverty line (on less than $2 a day) and 56 percent in extreme poverty (on less than $1 a day). Poverty i s deep and severe, with extremely poor households surviving on incomes significantly below the threshold for extreme poverty." This level of poverty i s almost three times higher than the regional average, and i s comparable to rates in Sub-Saharan Africa.'' The UNranks Haiti 153rdon its Human Development Index (out o f 177 countries). Income inequality i s among the highest inthe world,12 with the poorest 20 percent accounting for 1.5 percent of incomes and the wealthiest 20 percent accounting for 68 percent. 36. Poverty i s most striking in rural areas, where education and economic opportunities are exceptionally limited, basic social services are minimal,and basic infrastructure severely lacking. While basic infrastructure services (water, electricity, telecommunications, and sanitation) are deficient throughout the country, they are virtually absent in rural areas and for the poorest households, reinforcing isolation and exclusion. According to the Household Living Conditions Survey draft report for 2003, prepared b y the Haitian Institute of Statistics and Informatics (MSI), 11 percent of rural households surveyed report having electricity, compared to about 70 percent of the wealthiest quintile (See Table 5). Access to basic Households, by income distribution (in quintiles) % of all public services 1st (poorest 2nd 3rd 4th 5th (wealthiest households 20%) 20%) Electricity 11.0 18.0 23.3 36.5 69.0 31.6 piped water 14.4 16.8 20.6 21.7 34.2 21.5 Sanitation 4.9 3.3 5.9 7.7 22.3 8.6 (trashcollection) 37. Nearly 90 percent of poor households and 67 percent o f extremely poor households live in the country-side. Urban areas tend to have somewhat lower rates of poverty and extreme poverty (76 and 57 percent, respectively), with Port- au-Prince having the lowest lo On averagethe per capita income in the extremely poor householdsi s a mere 44 percentof the extreme poverty line. 'I Haiti Living Conditions Survey 2003 draft report; accordingto international poverty lines of US$2 PPP and US$1PPPper capitaper day. As measuredby a Gini coefficient of 0.65 11 rates, though still significant (45 and 23 percent). The North West and North East Departments have alarming rates of poverty (See Table 6). Table 6: Patternsof Poverty Incidence of Poverty Contribution to national poverty Headcount index (% category) (% of1 pulation) % of national All poor Extreme poor All poor Extreme poor population Total Haiti 100 76 56 100 100 By geographic area PAP Metro area 22.8 45 23 13.3 9.4 Otherurbanareas 13.8 76 57 13.6 14.1 Rural areas 66.4 88 67 72.4 75.8 By Region West 36.8 57 34 22.3 27.2 SouthWest 6.1 87 65 7.1 6.9 North 10.2 85 68 12.4 11.3 North East 3.9 94 84 5.8 4.7 Artinbonite 13.7 89 68 16.7 15.9 Center 6.8 85 62 7.6 7.5 South 8.6 87 69 10.6 9.7 GrandAnse 8.5 88 69 10.2 9.8 North West 5.3 92 71 I L 6.8 6.4 38. Most households in urban and rural areas rely on self-employment as their main source of income. However, households where the main breadwinner earns wages, as opposed to being self-employed or relying on income from other sources, have a much better chance of staying out of poverty. The impact of rural poverty on urban migration i s significant (see section on EnvironmentalChallenges). 39. Development indicators in Haiti rank among the lowest worldwide (see Table 7 ) and the country i s unlikely to achieve the MillenniumDevelopment Goals by 2015 (See Annex 4). Poor health outcomes are reflected in a life expectancy of 49 years, infant and maternal mortality rates of 79 per 1,000 births and 680 per 100,000 and an HlV prevalence rate of 5 to 6 percent (see Box 3). Nearly one out of three Haitian children i s affected by stunting or chronic malnutrition, and 13 percent by acute ma1n~trition.l~For financial and geographic reasons, health services remain out of reach for most, articularly in rural areas. About one infive infants inrural areas receives no vaccinations. IFWomen are most adversely affected by the lack of adequate health care, not only due to the medical attention required for healthy pregnancies, but also their greater vulnerability to sexual violence and sexually transmitted diseases, including HlV/AIDS. 40. Failing public health and sanitation systems, coupled with the high level of poverty, have made many parts o f Haiti extremely vulnerable to the emergence, re-emergence and rapid spread of infectious diseases. The situation i s especially worrisome for tuberculosis (TB), HIV/AIDS and, most recently, polio and human rabies. The widespread lack of l3HLCS, IHSIdraft report, 2003. l4 Although routine vaccination rates have low coverage, PAHOestimates its vaccination campaigns have a 98 percent coverage rate. 12 access to potable water in Haiti also increases risk of cholera outbreaks. A porous border and frequent movement between Haiti and the Dominican Republic complicate efforts to monitor and control these diseases on the island and inthe Caribbean. Box 3: HIV/AIDS inHaiti Haiti bears the largest burden of HIV in the Western hemisphere. At the national level, the 2001 HIV prevalencerate for adults is estimated at between5.0 and 6.3 percent. The number of people living with HIV who do not have AIDS has beenestimatedat between202,000 to 276,000. The number of new AIDS cases in 2001 has been estimated at 27,000 to 32,000 and the number of deaths between 28,000 and 31,000. The estimated cumulative number of deaths is 196,000. In March 2002, the Ministry of Population and Public Health issued a National Strategic Plan for the prevention and control of HIV/AIDS (2002-2006). The National Strategy underpins the activities supported by a $24 million grant from the GlobalFund to Combat HIV/AIDS, Tuberculosis and Malaria (the GlobalFund has approveda total of US$67millionover five years for Haiti). The grant is being managed and implemented through an innovative public-private partnership betweenSogebank, UNDP, andhealthservices organizations. Recentreports suggest that the HIV epidemic in Haiti has stabilized, basedon what canbe monitored, which wouldrepresentan enormousachievement. Source: UNAIDS,2004; Ministry of Public Health and Population 41. Indicators on education are equally dismal. About half of the population, if not more, are illiterate. Six out of ten children aged 6-12 are enrolled inprimary education, with sharp variations between the poor and non-poor and between regions. The net enrollment rate i s estimated to have increased by only 10 to 13 percent during the past decade. The secondary enrollment rate i s at 15 percent, up from 12 percent a decade ago. Learning outcomes for those children who manage to go to school are hampered by malnutrition and poor health, which compromises participation and learning abilities. The education system i s characterized by extremely low quality and internal inefficiency. Only three out of ten children entering first grade reach sixth grade, and it takes on average 15 pupil-years to obtain a sixth grade education. As a result, classrooms are filled with over-age children, particularly in grades 5 and 6. Teenage sexuality, pregnancy and childbearing present major challenges for teen girls and are almost inescapable reasons for highdrop out rates.15 42. Private schools, often run by non-governmental and private organizations, including faith-based groups which play an important role in the education sector, enroll three times more children than public schools. The growth of the private sector in education signals the importance that parents attach to sending children to school. Parents provide the bulk of the financing for education and school fees which are estimated to represent a very high share of households' average annual income (about 5-6 percent of the estimated annual income of rural households). l6However, private education lacks regulation and supervision, and the quality varies greatly across schools and regions. 43. Gender equality remains a key challenge for efforts to promote sustainable and equitable development in Haiti. The country has some of the worst gender-related indicators, such as the staggering maternal mortality rate (see paragraph 38) and an overall fertility level of 4.3 children with huge regional differences. Modern contraceptive use i s the lowest inthe Western Hemisphere, and the HIV infection rate the highest, with women's and men's l5 Basic Education in Haiti, World Bank, Washington, 2002. l6 Ibid. 13 infection rates now being equal. In addition, sexual and domestic violence against women and girls appears to be common. At the height of Haiti's political crisis earlier this year, rape and other human rights violations increased dramatically. Legal and constitutional advances related to women have also been minimal in Haiti, and the legal code remains antiquated in terms of gender equality. Although only a minority of Haitian couples are legally married, the law does not recognize many rightsof women living in informal unions, particularly those related to inheritan~e'~. addition, women have less access to productive In assets, notably land and credit. Table 7: The MillenniumDevelopment Goals: Haitiand regionalaverages* Low Sub- MDG Haiti L A C income Saharan countries African Eradicate extreme poverty and hunger Populationbelow US$1 a day (%) 56 9.5 -_ 46.5 Undemourishedpeople (% of total population) 49 10 24 32 Child malnutrition 17 _ _ 42 -- Achieve universal primary education Net primary enrollmentrate (% of 6 to 11years old) 56 94 80 _ _ Promote gender equality Ratioof girls to boys in primary and secondary school 95 102 84 80 Reduce child mortality Under 5 mortality rate (per 1,000) 123 34 120 178 Infant mortality rate (per 1,000 live births) 79 27 80 108 Immunization(measlesITE!, % of children 1year old) 53 91/95 64/71 58/73 Improve maternal health Maternal mortality (per 100,000 live births,) 680 193 657 917 Births attendedby skilled health staff (%) 24 _ _ _ _ _ _ Combat HIVIAIDS, malaria and other diseases Prevalenceof HIVIAIDS (% ages 15-49) 5 0.5 2.5 9.4 Contraceptiveprevalencerate (%) 27 _ _ _ _ -- Ensure environmental sustainability Access to improvedwater source (% of population) 46 86 76 58 Access to improvedsanitation (% of population) 28 71 43 4 Trad'l fuel consumption (% of energy required) 54 21.4 43.5 62.6 Forestarea (% of total land area) 3.2 47.1 27.1 27.3 Develop a global partnership for development Youthunemploymentrate -- 20 27.1 27.3 Fixedline-mobiletelephones (per 1,000 people) 33 294 40 31 Personalcomputers -_ 67 7.5 12 General indicators Population (millions, 2002) 8.2 _ _ _ _ _ _ Annualpopulationgrowthrate (1975-2002) 1.9 1.9 2.1 2.7 Total fertility rate (birthsper woman, 200-2005) 4 2.5 3.7 5.4 Life expectancy at birth (years, 2002) 49.4 70.5 59.1 46.3 Adult literacyrate (% ages 15 andabove, 2002) 51.9 88.6 63.6 63.2 "Maria Correia, A Review of Gender Issues in the Dominican Republic, Haiti and Jamaica. World Bank, Washington, 2002. 14 44. The informal sector provides 95 percent of employment opportunities. The official national unemployment rate for 2001 was estimated at 35 to 40 percent of the labor force and under-employment at 25 to 50 percent.'* Men are primarily employed in agriculture, manufacturing and other sectors, whereas women are noticeably concentrated in commerce and agriculture. This reflects the traditional gender specialization in rural areas where women have long constituted the backbone of the market for local produce. 45. Remittances, estimated at US$872 million in 2004, account for 25 percent of household incomes (one third of urban household incomes and 15 percent of rural). These transfers represent the main safety net for the Haitian poor given the virtual non-existence of public social protection programs. NGOs that provide social protection services help to compensate for this absence but can only meet a small share of the existing needs and services are inconsistent and are not framed within an overall social protection system. ENVIRONMENTAL CHALLENGES 46. Poverty, demographic pressures, unsustainable agricultural practices, and limited arable land'' have led to the cultivation of increasingly marginal lands and accelerated deforestation and soil erosion, resulting in declining agricultural production and contributing to food shortages. Haitians have been cutting down trees at an unsustainable pace for years to use as firewood and sell as charcoal, as well as to clear land for food crops. This has virtually eliminated the forest cover and today only about 3 percent of the country's natural forest cover remains (See Table 8). 47. Haiti's geographic position exposes it to a large array of natural phenomena that become major disasters.*' Located in the middle of the hurricane belt, the Island of Hispaniola i s particularly vulnerable to severe storms from June to October. Haiti is also located in a seismically active zone. The effects of tropical storms and hurricanes include wind damage, flooding, landslides and coastal surges. The extensive deforestation and the presence of settlements in low lying areas and in floodplains of rivers are key factors in the intensity of the destruction caused by natural disasters. 48. The catastrophic impact of heavy rains in May and September 2004 tragically illustrates this point. In both cases, the heavy rainfall drove flash flooding and extensive debris flows over extended regions. Swollen rivers and debris cut off many of the roads traversing the regions along the base of the mountains. As the floodwaters flowed into the relatively flatter lands and broader channels of the alluvial plain below, they spread out, wiping out riverside settlements. The May floods directly impacted some 107,500 people, claimed upwards of 2,500 lives and destroyed 1,700 houses. The September floods directly affected some 300,000 people in the North and Northeastern part of the country, claimed some 3,000 lives, and destroyed about 4,500 houses. l8 HLCS, IHSIdraft report, 2003. l9Seventy-five percent of Haiti i s covered by rugged mountain ranges, steep arid ravines and isolated patches *' of arable land nearly impossible to farm. The World Report on the Reduction of the Risk of Natural Disaster (UNDP, 2004) gives Haiti a natural catastrophe risk index (CRI) that is among the highest in the world. 15 49. The vulnerability to natural disasters is heightened by poverty and lack of management of the rural and urban space. Over 60 percent of Haitians live in rural areas and depend on small-scale subsistence farming. Given their low incomes, agriculture i s characterized by extremely low levels of capital inputs21 and capital-led agricultural intensification i s limited to the Artibonite region (the country's bread basket) and a small part of the West. Two-thirds of the rural labor force, or 45-50 percent of the total Haitian working population, works in agricultural production. Land holdings are small (average surface area of 1.8 ha.), owner-operated, scattered and for the most part characterized by uncertain property rights. Eighty percent of these farmers cannot satisfy the basic food needs of their families and agricultural production provides less than half of annual income for the majority of producers.22 50. A recent IDB report on sources of growth in Haiti skillfully illustrates the relationship between population growth, agricultural practices, environmental degradation and poverty.23 As the population grows and arable land remains constant or shrinks, farmers tend to cultivate more labor-intensive food crops, such as maize, rice, beans, and peas, in lieu of cash crops such as coffee (Haiti's main traditional cash crop), which i s more land- intensive.24 The shift from coffee to food crops i s further reinforced as the population continues to grow, and with it the demand for food and labor, whereas available land further diminishes. The uprooting of trees to clear land for farming, including coffee trees whose roots bind the soil and canopies protect the ground from heavy rains on steep hillsides, not only contributes to deforestation and increases land erosion, but also lowers per capita income inthe countryside. 51. Falling incomes in the countryside, combined with the lack of basic infrastructure and social services and difficult road and transport conditions pushrural populations toward the cities, notably to Port-au-Prince. Although still predominantly rural, the degree of urbanization of the population rose from 25 percent in 1982 to 40 percent in 2003. The average annual growth rate of the urban population was 4.7 percent from 1982-2003, compared with 2.2 percent for the national growth rate. The impact on Port-au-Prince, which absorbs a majority of urban migrants, has been overcrowding (40,000 inhabitants per km2),high under- and un-employment (most of the labor force being in informal self- employment), the uncontrolled growth of slum dwellings and a progressive deterioration of conventional neighborhoods and infrastructure. 52. The high density and lack of economic opportunities aggravate the precariousness and vulnerability of urban populations and also aggravate violence and delinquency. Slum dwellings are often on land that presents health risks or i s environmentally fragile. These urban characteristics, combined with the lack of response capabilities, suggest that a major earthquake would have disastrous consequences. 21 The likelihood that peasantsinvest in the land i s correlated with household income and access to transport infrastructure and to non-household labor. 22Other sources of revenue include remittances, providing labor in other regions o f the country or in the Dominican Republic, and small businesses. 23Mats Lundahl, Sources of Growth in the Haitian Economy, Economic and Sector Study Series, Inter-American Development Bank, Washington, 2004. 24The decline in international coffee prices contributes to this trend. 16 53. The management of solid waste i s a critical issue in urban areas. Most poor neighborhoods do not have trash removal services, which are generally private and therefore expensive. There i s no separation of waste that comes from construction debris, industry, households, or hospitals (the latter having implications for the transmission of diseases, including HIV/AIDS). Waste i s often dumped into ravines and other natural drainage channels often occupied by slum dwellings, which in turn contributes to flash flooding during heavy rains. In some cities, waste i s dumped in rivers and ends up on the coast. Rivers and streams contaminated with human and animal waste and garbage are often the sole source o f water for cleaning, drinking and cooking and cause many illnesses, such as cholera, and preventable deaths inchildren. Table 8: EnvironmentalIndicators Indicator LAC Low Income Haiti Region Countries Environmentalstrategy / action plan (year prepared) 1999 Agriculture Land area (1,000 sq. km) 28 20,053 32,424 Agricultural land (% land area) 58 39 43 Irrigated land (% of crop land) 6.8 12.4 26.3 Fertilizer consumption (100 grams/ ha arable land) 179 846 710 Food production index (1989-91=100) 100 142 136 Population density, rural (people / sq. kmarable land) 664 205 510 Forests Forest area (1,000 sq. km) 1 9,438 9,031 Forest area (% total land area) 3.2 47.1 27.1 Annual deforestation (%, 1990-2000) 5.7 0.5 0.8 GDP per unit of energy use (PPP$ / kg oil equiv) 5.8 5.7 3.6 Energy use per capita (kg oil equiv) 257 1,151 569 Energy imports, net (% commercial energy use) 26 -42 -8 Electric power consumption per capita (kWh) 36 1,493 317 Water and Sanitation Freshwater resourcesper capita (cubic meters) 1,569 30,925 6416 Access to improved water source (% total population) 46 86 76 Rural (% rural population) 45 65 70 Urban(% urbanpopulation) 49 94 90 Access to sanitation (% total population) 28 77 43 Rural areas (% rural population) 16 52 31 Urban areas (% urban population) 50 86 71 Under 5 mortality rate (per 1000 live births) 123 34 120 Source: World Development Indicators 2004, World Bank. Dataare for the most recent year available between 1998and 2002. unlessotherwise noted. 17 INSTITUTIONAL CAPACITY AND ECONOMIC GOVERNANCE 54. Poor economic governance and weak institutional capacity across the entire public administration have been a key impediment to economic growth and poverty reduction in Haiti. For a number of years, the non-transparent management of public finances and procurement and weak financial controls have lent themselves to widespread and impunity, resulting not only inthe poor quality of services but a high-level of distrust of government institutions. Until 2002, Haiti had operated without a budget for five years. Furthermore, until recently, the bulk o f government expenditures were spent through so- called discretionary accounts which are difficult to track and reduce transparency of public expenditure use. In HFY2003, some 60 percent of government expenditures were spent through these discretionary accounts. Weaknesses in key institutions for revenue mobilization and policy formulation and implementation, poor institutional coordination and non-transparent management of public enterprises (used in recent years to serve interests other than the collective good) have further compounded the problem. (For a detailed description of key economic governance issues, see the Program Document of the EGRO which will be discussed by the Board together with the TSS). 55. The government's meager resources, small size and limited capacity contrast with its daunting development challenges. Inrecent years, government expenditures represented 10 to 12 percent of GDP, compared to an average of 21 percent in other developing countries. The Government spends an estimated 2 percent of GDP on education, compared to 5 percent or more in other low income countries. Public institutions are by and large only present in Port-au-Prince and, to a smaller extent, other cities and virtually non-existent in rural areas. Inaddition, humanresourcesarepoorly managedandthere isalackofskills for government operations and development strategy formulation. 56. Rebuilding institutions and improving economic governance are central to any sustainable growth and poverty reduction in Haiti. This, together with strengthening political governance and promoting national dialogue, are the key challenges for the current and future governments. Substantial improvement in the management of public finances and human resources, better articulation and coordination of external financing, greater administrative effectiveness and accountability, and a true effort to promote local development and participation will be particularly critical to promoting economic recovery and improving living conditions. These efforts will require a sustained Government and donor effort over the longterm. 25 In2004, Transparency International ranked Haiti and Bangladeshthe most corrupt countries inthe world. 18 B. THE GOVERNMENT'SPROGRAMFOR POLITICAL, ECONOMIC AND SOCIAL RECOVERY: THE INTERIM COOPERATIONFRAMEWORK TOWARD A NEW PARTNERSHIPWITHTHEINTERNATIONAL COMMUNITY 57. Lessons learnedfrom past assistance to Haiti. Over the past ten years, donors have provided over US$2.5 billion to Haiti in development assistance. Most sectors have benefited from this support, particularly health, infrastructure, agriculture and governance. Nevertheless, it must be noted that the results have fallen far short of the expectations and needs of the country. 58. Prior to launching their new partnership, the Transitional Government and the international community analyzed the reasons for the disappointing outcome of past assistance in an effort to forge a more effective collaboration going forward. Donors acknowledge a lack of coordination, consistency and strategic vision in their past interventions. Project implementation units set up in parallel to government agencies contributed to the weakening of public services. In reaction to the country's political gridlock, many donors interrupted or reduced their assistance to the Government. The lack of continuity in donor interventions, coupled with the institutional crisis in Parliament, proved counter-productive as it severely handicapped the government's ability to implement strategic and sectoral policies. 59. External financial assistance returned to Haiti in the mid-1990s but was gradually withdrawn over the next few years, reflecting: donor fatigue and frustration with the slow pace of implementation and, in some cases, the reversal of key structural reforms; poor economic governance and corruption; the protracted political stalemate; deteriorating security conditions and the effect on project supervision and implementation; the accumulation of arrears to creditors and the lack of access to new lending and suspension of disbursements and project implementation; and the absence o f a sound macroeconomic framework. Structural interventions were largely abandoned and few projects were undertaken to improve the management and governance of institutions. Increasingly, donor resources were channeled through the private sector, contributing to the significant deterioration of the public sector. Under the circumstances, the government was not in a position to coordinate aid or improve national absorptive and execution capacities. 60. The coordination of emergency, rehabilitation and long-term development interventions has been poor. Haiti and the international community must tackle this challenge in the implementation of new development projects. The absorptive capacity of institutions, which i s often overestimated by donors and which takes time to develop must also be taken into account in designing interventions. This will require a concerted and sustained effort between government, non-governmental agencies, regional and international organizations, the UNsystem and donors to improve the effectiveness of development aid. 61. In the past, the lack of political will and ownership of reforms on the part of the government discouraged donors and was a critical constraint to the effective use of development assistance. In addition, the lack of transparency, accountability and broad- based dialogue prevented consensus on the country's broad development priorities. Going 19 forward, national dialogue and reconciliation among major stakeholders i s critical to promote consensus on long-term development priorities. The preparation of a participatory Poverty Reduction Strategy Paper (PRSP) presents an opportunity to build such a consensus. 62. The past ten years have included some positive experiences, however, notably the push for increased local participation and inclusion in development projects and the recognition of the important role of civil society. There i s broad consensus that assistance to promote public-private partnerships and to improve absorptive and execution capacity of both local and national institutions and communities will be critical for the successful implementation of the Transitional Government's development strategy. 63. These lessons echo the recommendations of the Country Assistance Evaluation (CAE)of Bank assistanceto Haiti prepared by OED in2002. The CAE argued infavor of a future focus on building institutions, strengthening economic governance and working with local communities. The World Bank Task Force on Low-Income Countries Under Stress (LICUS) in September 2002 also recommended that the Bank remain engaged in these countries, such as Haiti, to support improvements in policies, institutions, governance, and the provision of basic social services at the local level. Another key recommendation of OED and the LICUS Task Force has been to significantly improve aid coordination and make a long-term commitment to development efforts. 64. The Process of Preparing the Interim Cooperation Framework. The Transitional Government of Haiti, donor agencies, and international and regional organizations agreed in March 2004 to launch a new partnership to respond to the country's urgentsocial, economic, and institutional needs.26 In April 2004, the Transitional Government launched the preparation of the Interim Cooperation Framework (ICF) with support from the donor community under the coordination of the European Commission, the Inter-American Development Bank, the United Nations and the World Bank. Over 250 national and international experts from 26 bilateral and multilateral agencies, UN agencies, civil society and the private sector participated in the exercise. Several civil society organizations, the private sector and political parties either actively participated or were consulted during the preparation of the ICF. Regional workshops and consultations were held in Les Cayes, GonaYves and Cap-Haitien, and a national workshop inPort-au-Prince. 65. The objective o f the ICF was to identify priority interventions and related financing needs to support the country's economic, social and political recovery over the July 2004- September 2006 period.27 Donors and the Government referred to previous international experience ofjoint-assessments and prepared the ICF to be "results-based" and government- led. Building on the ICF, the Transitional Government plans to prepare a medium-term participatory Poverty Reduction Strategy Paper (PRSP) to be validated and completedby the new government that will emerge from the 2005 elections. The PRSP would cover the period 2006-2009. The ICF i s described in greater detail in the next section on the Transitional Government's program. 26The UNlauncheda FlashAppeal for donor support for emergencyhumanitarianaidinparallel. 21 The ICF needsassessmentwas basedon the methodology developedjointlyby the Bank, UNDPNNDG and GTZ. A synthesis report summarizingthe resultsof the needsassessment anddetailedthematic reports are availableat -. 20 BROAD OVERVIEW OF THE GOVERNMENT'S TRANSITIONSTRATEGY 66. To support a process of national reconciliation and ensure a coordinated and rapid response to the country's urgent and medium-term development needs, the Government's program as outlined in the Interim Cooperation Framework report i s organized around four pillars: 1) Strengthening political governance and promoting national dialogue; 2) Strengthening economic governance and contributing to institutional development; 3) Promoting economic recovery; and 4) Improving access to basic services. In addition, the ICF takes into account cross-sectoral issues such as crisis prevention, human rights, gender and HNIAIDS. 67. Strengthening political governance and promoting national dialogue. The Government's program in this area i s centered on reestablishing law and order and promoting national reconciliation to establish an environment conducive to the holding of local, legislative and presidential elections in 2005. This covers programs for: demobilization, disarmament and reintegration; strengthening the national police force through institutional reforms, recruitment and training; strengthening the justice sector; improving the national penitentiary system; promoting human rights; strengthening electoral organizations and organizing elections; and a national dialogue at the central, municipal and departmental levels. The participatory process of the PRSP preparation would promote the national dialogue on development issues. 68. Strengthening economic governance and contributing to institutional development. The Government's program in this area is centered on strengthening the management of public finances, including the coordination of external financing, and strengthening institutions at the local level to underpin economic recovery and improve living standards. This covers an economic governance reform program to strengthen the budget process, financial control and public procurement mechanisms, improve accounting practices of public enterprises and modernize their management; a program to strengthen institutional capacity and human resources management to lay the groundwork for civil service reform in the future; and a program to strengthen institutions at the regional, urban and local level and to follow up on recommendations of the National Commission on Administrative Reform (CNRA). 69. Promoting economic recovery. The Government is seeking to promote a rapid economic recovery to create much needed jobs. In this area, the government's efforts are focused on implementing policies to maintain macro-economic stability in consultation with the IMF; rehabilitating vital infrastructure, notably electricity, roads and transportation; promoting a labor-intensive work program and facilitating micro-finance to generate jobs in the short term; supporting the recovery and governance of the private sector, including micro, small and medium sized enterprises; promoting tourism and establishing investment and export centers, and industrial and commercial free trade zones to promote regional and international integration; promoting agricultural and rural development by contributing to the rapid recovery of agriculture and strengthening agricultural production; and protecting the environment by reducing incentives for cutting trees, natural resources management and improving risk and disaster management. 21 70. Part of the Government's program for promoting economic recovery includes strengthening the management and efficiency of public enterprises, with an emphasis on accounting rehabilitation, audits and issuing management contracts. These steps are expected to lead to privatization under a future government. 71. Improving access to basic services. The Government i s focused on restoring and scaling up basic services, including ensuring food security and restoring water and sanitation services, solid waste disposal and management, health and nutrition services, education and youth programs, upgrading slum areas, strengthening safety nets and social protection and promoting communications and media programs. Meanwhile, the Government's efforts also include ensuring that emergency humanitarian aid and post disaster relief are made available to populations affected by the recent flooding disasters and respond to the needs of those affected by the violence and collapse of basic services. 72. The Government had taken a number of critical steps to improve public services and make initial reforms, though much remains to be done, especially outside the capital: Electricity supply has increased from 3 hours a day in March 2004 to an average of 9 hours in Port-au-Prince in September; garbage collection in Port-au-Prince (which had come to a halt in the aftermath of the February-March events with serious health risks) has improved markedly; revenue collection has increased to levels above those prior to February; expenditures have been contained within the Government's stabilization program; and the proportion of public expenditures executed through discretionary accounts was substantially curtailed. For the first time since 1997, the Government adopted a budget for FY2004-05 before the beginning of the fiscal year, which it first shared with donors and civil society representatives. In September, the Government inaugurated an Anti-Corruption Unitand appointed a director and key personnel. DONOR COORDINATION 73. InJuly 2004, the World Bank, European Commission, IDB and the UNco-hosted an international donors conference on Haiti at the World Bank in Washington, DC. The Government presented the ICF and urged the international community to support its program. Donors, government officials and civil society representatives from Haiti, and national and international NGOs discussed the priorities and next steps for implementing the ICFprogram. Donors endorsed the ICF, pledging over US$1 billion to support it, exceeding the financing gap of US$924 million that hadbeen identified in the ICF (Annex 1). 74. In September, the government and donors met in Port-au-Prince to fine-tune the structure of an overall aid coordination mechanism for the implementation of the ICF. MINUSTAH and a core group o f donors meet monthly to ensure coordination on security and development issues as mandated by UN Resolution 1542. A Joint Committee for the Implementation and Monitoring of the ICF, chaired by the Prime Minister and composed of representatives from the government, civil society and the international community has been set up to define the general policies for coordination of assistance, monitor and evaluate disbursements, use o f resources, and speed up ICF implementation. One of its first tasks i s to review the status o f the actions and outcomes included in the ICF results framework. The Committee will also approve any adjustments to the ICF results framework and troubleshoot 22 implementation bottlenecks. The Committee will be supported by a secretariat which will also ensure coordination with the Ministries of Planning and Finance. The secretariat will also provide support to programming units set up in the key ministries and will coordinate information sharing. In addition, coordination at the sectoral level i s being assured by Sectoral Tables composed of government, donor and civil society representatives (see Annex 2). Annex 1 details donor pledges to the ICF and Box 4 identifies donor areas of engagement within the ICF. Box 4. Donor Areas of EngagementWithinthe ICF In September, donors and the Government agreed on the composition of Sectoral Tables, including donor sectoral focal points, as part of the donor coordination mechanism. The donor focal points will support the national coordinators in ensuring adequate coordination at the sectoral level. The Bank in partnership with the IDB is the donor focal point for economic governance and institutional strengthening. The Bank's efforts in this area are aimed at complementing and leveraging donor support to various sectors, for example by increasing institutional transparency, accountability and effectiveness, not only of public enterprises and line ministriesresponsible for critical basic services, but also institutions such as the Road Maintenance Fund; the Office of Public-Private Partnerships in Education, the National School Feeding Program, and a civil society Oversight Committee and Executive Secretariat to promote and monitor economic governance reforms. The EC and IDB are focal points for transport and roads (and have pledged the bulk of financial support for the sector), and IDB, PAHO and Spain for water and sanitation (to which France has pledged the greatest financial support under the ICF). The US is the largest donor to the electricity sector, while Canada i s the donor focal point and is replicating a successful approach to improving electricity services at the local level. The EC and IDB are the donor focal points for education and PAHO/WHO, which has played a key role in supporting the government's national health strategy, is the donor focal point in the health sector. The US is has pledged the largest donor support to the health sector, where it is focusing efforts on the fight against HIV/AIDS. The Bank's comparative advantage in the education and health sectors, which are dominated by poorly-regulated private providers, is to support public-private partnerships to improve services and leverage the impact of donor support. The Bank would also support donor coordination efforts in the health sector given the public goods implications and IDA'SCaribbean-wide HIV/AIDS program. The IDB i s playing a key role in agriculture and rural development, along with IFAD and France, and the Bank is undertaking analytical work with IDB to look at how to strengthen rural development efforts and rural productive activities. The Bank's planned support for emergency recovery and disaster mitigation has been prepared in close collaboration with the OAS, UNDP (the donor focal point on environment), and key donors (EC, IDB and Canada) to ensure a coordinated approach in this critical sector. The Bank's assistance includes an institutional strengthening component for the Department of Civilian Protection and reducing vulnerability at the local level by supporting community leadership in identifying risks and how to reduce them. The US i s the donor focal point for promoting the private sector (to which the EC has also made a significant pledge of support), which the Bank also supports through income-generating activities at the local level, activities to strengthen public utilities, and IFC's support for micro-finance and investment in the Free Trade Zone. Through its support for the PRSP, the Bank would play a critical role in supporting Government and donor efforts to improve national dialogue on development issues, while the UN (through MINUSTAH, the donor focal point), OAS and bilateral donors such as Brazil, Canada, France, the EC, International Organization of the Francophonie, and U S are playing critical roles to support political governance and national dialogue in anticipation of elections. Japan is largely present infood security, which WFP and UNagencies are supporting through humanitarian assistance efforts (focal points are UNDP and UN Office for Coordination of Humanitarian Assistance, OCHA). To support such efforts, the Bank's grant support for the National School Feeding Program and emergency health interventions has been closely coordinated with UNagencies, notably WFP and PAHO, respectively. Germany has pledged the greatest donor support for the ICF's decentralization program (donor focal points being Canada and IDB). Based on Sectoral Tables composition (September2004) and donor pledges made in July 2004 23 C. THE WORLD BANK GROUPAND HAITI HISTORY BANKENGAGEMENT OF 75. Haiti became a member of the World Bank in 1953. While the first loan, made in 1956, was from the International Bank for Reconstruction and Development (IBRD), all other financing has been channeled through the Bank's soft-loan arm, the International Development Association (IDA). From 1956 through the mid 1980s, some US$260 million were disbursed for infrastructure projects (transport and power), rural and urban development, agriculture, forestry and education. From 1987 to 1991, IDA disbursed some US$142 millionfor projects to support fiscal and trade reforms and projects for basic health services (including HIV/AIDS and TB prevention and treatment), water supply, power services, transport infrastructure, social and economic funds, and industrial restructuring and development. 76. IDA projects were suspended in 1991 and resumed when Constitutional order was restored in 1994. From December 1994 to September 1997, IDA disbursed about US$lOO million to finance an economic recovery program, emergency employment creation, road rehabilitation and maintenance, a first health project and a forest and parks protection technical assistance project. In 1996, the World Bank inaugurated an office in Port-au- Prince and the following year IDA disbursements to Haiti peaked at US$56 million. From 1997 to August 2000, IDA disbursements steadily declined, with less than US$9 million disbursed in 2000. 77. Although no new projects were prepared after 1997, IDA continued to conduct analytical work which included: a Public expenditure Review (FY98) carried out jointly with other donors, a Poverty Report (FY99), a Country Procurement Assessment Report (FY99) and a series of informal sector reviews on infrastructure and health and nutrition. 78. In November 2000 Haiti began accumulating arrears with IDA and in September 2001 was placed into non-accrual with the World Bank. On December 31, 2001, the Forest and Parks Protection technical assistance project and the Road Maintenance and Rehabilitation project closed as scheduled. Due to the reduced size of the portfolio and the uneven dialogue with the Government, the Bank closed its country office and transferred management of the Haiti portfolio to the Santo Doming0 hub office and Washington and maintained a small office at the IDB in Port-au-Prince. 79. The OED Country Assistance Evaluation of Bank Assistance to Haiti from 1986 to 2001 was issued in 2002 and concluded that while the Bank's strategy and activities had been consistent with Haiti's major socio-economic problems, their developmental impact was limited due to weak political, institutional, and economic governance. OED also noted that analytical work in the late 1990s provided a valuable source of knowledge to underpin Bank activities although its application was limited by the political and institutional crisis in the country and the lack of government commitment to reform. 80. The Haiti Country Brief: The Bank's approach in FY03-FY04. On January 9, 2003, the Haiti Country Brief was discussed informally b y the Board of Executive 24 Directors. Building on CAE and LICUS Task Force recommendations, the Country Brief outlined an interim strategy for the Bank to strengthen the knowledge base and country dialogue on economic governance and provide grant financing for basic social services, local development and institution-building. As part of this strategy, the Bank supported a two-year Emergency Health Interventions and Healthy Schools project through a US$2.5 million Post-Conflict Fund Grant (PCF) implemented by the Pan-American Health Organizationin collaboration with the Ministry o f Health and other partners. The grant was signed and began disbursing in FY04. A PCF grant of US$1 million for a Community- Driven Development (CDD) pilot project supporting local services delivery in two isolated communities has been implemented by the Pan-American Development Foundation in coordination with the Ministry of Planning. The Bank also conducted policy dialogue and provided TA on economic governance issues; sponsored dialogues with civil society, the government and donors on economic and social development issues, and continued to chair informal donors meetings inWashington at World Bank headquarters. 81. The PCF grants. The Emergency Health Interventions and Healthy Schools project was signed in October 2003 and implementation began several months later when the conflict in Haiti had subsided. The grant covers immunization activities, essential drugs, rabies epidemic control, nutrition, deworming and healthy school environments (through a combination of safe drinking water, good hygiene practices and urinals and toilets in primary schools). The immunization component completed its full purchase of vaccines under the grant, and met its goal of reaching 80 percent of target population for measles and polio vaccinations during the first round of the national immunization campaign. The Essential Drugs component was particularly useful in March after insurgencies led to vandalism of essential drug stocks in many parts of the country. The CDD Pilot project was signed in December 2003 and carried out satisfactorily in communities in the northeast and southeast along the border with the Dominican republic despite the severe and violent political unrest in the early months of 2004. At the end of October 2004, 44 community projects, of which 92 percent have been fully implemented and completed, had been selected through an open, transparent and democratic process and with strong community ownership and support. These include productive, infrastructure and social projects. Democratically- elected Project Steering Committees were established in each of the two participating communes, and more than 100 community groups and associations received capacity- buildingtraining and technical assistanceto design and implement their projects. 82. Dialogue on economic governance and building the knowledge base. The Bank, in coordination with the IMF, IDB, and the Caribbean Technical Assistance Center (CARTAC), provided technical assistance to the Government for the design and launching of an economic governance reform program. This dialogue and TA have formed the basis for the economic governance focus of the Government's ICF and the design of the Economic Governance Reform Credit which i s accompanying this TSS. A review of Basic Education in Haiti was published in December 2003. Policy notes were also prepared on public expenditure and poverty issues to inform the Bank's dialogue with government, donors and civil society. A report on social vulnerability and risks in Haiti was prepared in FY04. The Bank also stepped up its dialogue with the authorities and other donors to explore options for clearing arrears to IDA and support the preparation of a comprehensive arrears clearance plan. 25 83. Donor coordination and support for dialogue with civil society. The Bank sponsored three conferences with Haitian civil society to consult on development issues in Haiti. Donors and government representatives also participated. The Bank was a member of the Interim-PRSP Steering Committee which was launched in the summer of 2003. The Bank continued to play a key role for donor coordination and chaired regular informal donors meetings in Washington, D C (the Haiti Contact Group). More recently, the Bank provided strong support for the preparation of the ICF, including co-hosting the July 2004 International Donors Conference. A STRATEGY FORSCALING UPBANKENGAGEMENT 84. The transition period provides the World Bank Group with an unprecedented opportunity to support a reform-oriented Government in its efforts to implement high-impact reforms. The TSS aims to deliver hope to the population and restore credibility in public institutions by helping the Government deliver quick wins-in the provision of basic services and job creation-and launch reforms that promote longer-term good governance and institutional development. This two-pronged approach i s central to a successful transition and longer-term sustainable development. The Government's ability to deliver on this agenda hinges not only on political will but also on the technical and financial support from the international community, including the World Bank Group. 85. Assistance to Haiti provided under the framework of a TSS, in accordance with OPBP 2.30 on "Development Cooperation and Conflict," allows IDA to provide financial assistance to help Haiti meet its transitional needs in a timely manner. Criteria for the preparation of a TSS include: a) active conflict has sufficiently diminished for Bank staff to be able to travel to the area for the purpose of identifying and supervising Bank-supported activities, and for the country to prepare and carry out any such activities effectively and achieve their objectives; b) there i s a reasonable expectation of continued stability or sustainable formal cease-fire; c) there i s an effective counterpart for the Bank; and d), there i s evidence of strong international cooperation and the potential for a well-defined role for the Bank. 86. The TSS will support the transition to economic and social stability by helping the government: (1) meet basic and urgent needs; (2) strengthen economic governance and institutional capacity; (3) promote income generating opportunities; and 4) promote inclusion and consensus on development priorities. 87. Given the enormous needs and complex challenges, the TSS intends to focus on selective interventions in areas where the Bank has a comparative advantage and can complement other donor support. The TSS provides a balanced mix of lending operations, trust fund grants and non-lending services that build on the results of the ICF and the lessons of the past and seek to allow some flexibility given the evolving situation on the ground. 88. Trust Fundgrants. The PCF and LICUS trust funds are a critical source of support to kick-start initial reforms and deliver quick wins in the absence o f access to IDA resources. The second phase of the PCF grant for Emergency Health Interventions and Healthy Schools includes a disbursement of US$1.2 million for FY05 (out of a total of 26 US$2.45 million). A LICUS Trust Fund package o f 8 grants of up to US$6.4 million was approved by the Expanded Post Conflict Fund Committee on September 14, 2004 and i s currently being implemented (See Box 5). These grants are aimed at supporting quick results and initial reforms and are linked to future IDA interventions. Once Haiti's arrears to IDA have been cleared, the Bank would pursue other trust fund grant financing for initiatives to leverage remittances for social development and to support the preparation of the PRSP. Box 5: The LICUS Trust FundGrantsProgram The LICUS Trust Fund program includes eight grants approved by the Expanded PCF Committee for a total amount of US$6.4 million to support quick wins and initial reforms: Quick Wins: Delivery of Critical Basic Services and Pilot Projects with Community and Local Government Participation. Several LICUS TF grant activities are supporting delivery of critical basic services and promoting local participation in projects, including: I) Labor-Zntensive Basic Znfrastructure Rehabilitation Pilot Project (US$1 million) to create short term employment for people living in extreme poverty through labor-intensive and community-driven rehabilitation of key basic socio-economic and productive infrastructure; 2) Building Institutional Capacity and StrengtheningProvision of School Feeding Program (US$790,000 grant) to support children's nutritional needs while also boosting school attendance and performance; 3) Disaster Risk Management Pilot to support emergency recovery assistance and the implementation of a community-level rehabilitation plan that integrates risk reduction into longer term land- use planning; 4) Solid Waste Management Improvements project (US$0.5 million) to collect solid waste in Port-au-Prince and major secondary cities thereby reducing public health risks and social tensions; the preparation of an investment plan to ensure that immediate urgent measures can be integrated into sustainable long term waste management system; and the preparation of an institutional framework to ensure that improvements in waste management are sustainable; and 5) Community Managed Rural Water and Sanitation (US$.86 million) to prepare a national strategy and investment plan for providing sustainable community-managed water, sanitation, and hygiene in rural areas and improve the living conditions and health indicators of communities based on an effective and sustained use of improved water and sanitation facilities. Initial Reforms: Improving Economic Governance and Building Institutions. 1)Support for Economic Governance Reforms (USSl.5 million): This grant i s providing technical assistance and support to the Ministry of Economy and Finance in the areas o f financial management and budget procedures. Grant activities also support: cleaning up accounts of the national electricity and telephone companies to prepare them for international audits; establishing a central procurement unit in the Prime Minister's Office; and supporting the establishment of an anti-corruption unit. 2) Supportfor Government Communications and Coordination Efforts (US$0.3 million). This component will support a communications program around the economic governance reform program and coordination and monitoring of donor assistance. 3) Public-Private Partnerships for Education (USS0.5 million). This project is helping to set up a unit in the Ministry of Education responsible for establishing and managing a public-private partnerships program. This unit will increase access to school for the poorest children by helping reduce the costs of primary schooling for poor families through certain forms of subsidies. The reforms initiated through the public-private partnerships in education will strengthen the process of public accreditation of private schools and financial transfers to private schools serving poor families and render these processesmore transparent. 27 89. The IDA Lendingand Grants Program.The IDA envelope for the TSS period is expected to be up to US$l50 million, representing an exceptional increase in Haiti's IDA allocation. IDA resources would be made available to Haiti to support its transition to economic and social recovery, reduce the potential of a return to conflict and lay the groundwork for the Bank's longer-term objectives in Haiti: inclusive growth and poverty reduction through local development, institutional strengthening and support for productive sectors. IDA interventions will focus on the near-term objectives of 1) delivering hope through quick wins such as improved basic services delivery and job creation; and 2) restoring credibility in institutions through reforms that promote longer-term economic governance and institutional development 90. O f the US$150 million IDA envelope, US$75 million would be committed in FY05 and up to US$75 million in FY06, based on performance (see paragraph 99) and provided that the resources are available due to a fully successful IDA 14 replenishment (now being negotiated). Haiti would become eligible for resumed IDA assistance upon clearance of arrears to IDA. The TSS would be presented to the Board along with an emergency reconstruction operation (see paragraph 93) and an adjustment operation to support the government's economic governance reform program (see paragraph 94). Disbursement under the adjustment operation will require a satisfactory macro-economic framework as evidenced by sustained implementation of the Government's stabilization program. A technical assistance operation i s being prepared for FY05 to support further progress in economic governance reforms beyond the proposed adjustment operation. 91. To provide a sound incentive framework for the government to sustain reforms and to ensure effective use of scarce IDA resources, the Bank's FY06 program would be determined through a two-step process: Base LendingProgram:The Bank would present a Community-Driven Development operation to the Board for initial IDA assistance in FY06, subject to broad satisfactory progress against the results of the ICF and progress toward the preparation of a participatory PRSP. Scaled-up Program: As the second step, upon confirmation of further satisfactory progress in reforms in mid-FY06, the Bank would scale up assistance and present to the Board two additional operations, a multi-sector investment operation and a follow- up technical assistance operation (see Tables 9 and 11 on the lending program and performance indicators, respectively). In the event that the government were to accrue arrears to IDA and/or if the security situation were to deteriorate to the point of preventing the preparation and execution of Bank financed project activities, the Bank would remain engaged in Haiti through implementation of the PCF and LICUS grant activities, policy dialogue, analytical work and donor coordination. 28 Table 9: TSS ProposedIDA Financing ProposedOperations US$M 1 Remarks FYO! upon cleL znce of arrears) Economic Governance Reform Operation 61 - Requires sound macroeconomic framework; (adjustment) reforms initiated with LICUS TF support. Emergency Recovery and Disaster 12 -Activities initiated with LICUS TF support Management Project Institutional Development TA 2 -To support reforms beyondEGRO Total FY05 75 Community Driven Development 38 -Project designed around PCF and LICUS TF lessons, analytical work and dialogue. Tntnl 18 Multi-sector Investment Operation 35 -Based on LICUS TF pilots, analytical work and dialogue Institutional Development TA I1 2 -To support additional institutional reforms Total FY06 - 75 92. To support urgent reconstruction needs and restore basic services for the poor in the aftermath of floods in May and September 2004, the Bank has prepared an Emergency Recovery and Disaster Management Project (ERDMP) for US$12 million under OPBP 8.50 to be presented to the Board with the TSS. This operation would support the near-term objective of improving basic services and job creation while also building institutions. Specifically, this operation will finance activities to: (i) rehabilitate areas devastated by flooding (ii) strengthen the country's capacity to manage natural disaster risks and respond to emergencies resulting from adverse natural events; and (iii) reduce vulnerability at the local level using an approach that involves communities in identifying risks and mitigating them. Some 50 percent of the operation's financing would be used to help communities identify and reduce risks. A community-driven development approach would be used to implement most activities under this component and ensure local ownership, build local institutions and generate employment. The LICUS grants for disaster risk mitigation and labor-intensive basic infrastructure are supporting initial reforms associated with this operation and creating rapid employment opportunities. The project has been prepared in coordination with development partners involved in supporting the ICF's environmental protection and rehabilitation program, notably IDB, UNDP and the OAS, whose complementary activities would be coordinated through the same implementation unit. 29 93. The Economic Governance Reform Operation to be presented to the Board with the TSS and ERDMP, and an Institutional Development Technical Assistance Operation (to be presented to the Board in FY05) would support the Government's economic governance reform program and efforts to restore credibility in public institutions. The EGRO for US$61 million would consist of a first tranche to be disbursed following Board approval and credit effectiveness, followed by a floating tranche expected to be disbursed in the following 6 months. The EGRO will promote critical economic governance reforms identified in the ICF to increase transparency and efficiency in the use o f public resources and external assistance and would help improve the policy environment for increased Bank and other donor-supported investment lending in key sectors. Specifically, the EGRO would support reforms in the area of budget management and financial controls; institutional capacity and human resources; financial management and accounting o f public enterprises; public sector procurement practices; and economic governance reforms at the sectoral level, such as to strengthen the road maintenance fund and promote public-private partnerships that increase access to health and education services. The EGRO includes a communications program and involves civil society and private sector organizations in the monitoring and evaluation of the reforms supported by the credit. The LICUS grant for economic governance i s supporting initial capacity-building in these areas. The Technical Assistance operation would support further progress in economic governance reforms beyond the proposed EGRO. The EGRO and the TA are being prepared in coordination with development partners, notably the IDB, LMF, CARTAC, the European Commission, Canada, France, USAID, UNDP and the OAS, who are also supporting the Government's economic governance reform program. 94. Duringthe TSS period, investment operations would be eligible to be prepared under OP/BP 8.50 on Emergency Recovery Assistance which can be provided following any "extraordinary event of limited duration, such as a war, civil disturbance, or natural disaster." This i s particularly relevant to Haiti given its vulnerability to shocks from natural disasters and civil disturbances. 95. The Bank has prepared separately the Country Financing Parameters for the overall framework for cost sharing arrangements; and the financing of recurrent costs, local costs, and taxes and duties for all projects inthe country. 96. IDA 13and Grant Eligibility inFY05.Quarterly data indicate a 7.9 percent decline of GDP during the January to March 2004 quarter and sluggish growth of 2 percent during the April to June 2004 quarter, causing GNI per capita to fall to an estimated $320 and $330 for those quarters. Haiti i s also a debt vulnerable country, as discussed inparagraph 32. On this basis, and consistent with IDA 13 guidelines, 45 percent of Haiti's FY05 IDA allocation of US$75 million i s eligible as IDA grants under the "Debt Vulnerable IDA-only countries with GNIper capita equal or less than $360" criteria. 97. Inaddition, 40 percent of the ERDMPproject is also eligible for IDA grant under the "Natural Disaster Reconstruction" criteria. The total grant component of Haiti's FY05 IDA allocation would come to $38.55 million. To simplify the financing parameters of the FY05 portfolio, this total grant component has been distributed over the portfolio so as to have 30 only one operation with blend credit-grant financing, while the other two operations are fully grant-financed (see Table 10). Table 10: IDA 13 Grant Component for IDA OperationsinFY05 *,TotalFY05 Portfolio , Debt Vulnerable IDA-only countries with GNIper capita equal or less than $360 98. As discussed inparagraph 91, IDA assistance in FY06 would be structured around a base lendingprogram including a Community-Driven Development Project and a scaled-up program including a Multi-Sector Investment Operation and a follow-up Institutional Development TA. These investment operations aim to support government efforts to increase social and economic opportunities for the poor and to rebuild and rehabilitate infrastructure services critical to economic activity. The projects would be designed to ensure a link between development efforts at the local and community level and at the national level and to promote public and private partnerships. The projects will buildon the lessons learned from the PCF and LICUS Trust Fundgrants, as well as the Bank's analytical work described in paragraph 101. Table 11 presents performance areas and associated indicators to assess whether the policy and implementation environment are adequate for the lendingprograminFY06. Table 11:Key PerformanceAreas and Indicatorsfor FY06IDA Program 31 99. Additional progress and outcome indicators would be used to evaluate the results and status of the ICF and Bank interventions under the TSS to guide the Bank's assistance strategy in Haiti beyond the TSS. These indicators are presented inAnnex 3. 100. Program of analytical and advisory activities. The Bank's analytical and advisory work in FY05 and FY06 will focus on improving the Bank's understanding of the development issues facing Haiti and underpin the TSS program and future Bank assistance to the country. The program will focus on AAAs oriented toward helping the Government deliver quick wins-in the provision of basic services andjob creation-and launch reforms that promote longer-term good governance and institutional development: (1) The Challenge of Pro-Poor Growth and Inclusion inHaiti (CEM, FY06); (2) a review of the rural sector and recommendations on a strategy for agricultural intensification and rural development (FY0.5); (3) a social protection strategy (FY06); (4) a review of the household energy situation in Haiti (FY05); and (5) a Public Procurement and Financial Management review (FY06). The Bank i s also providing support for developing the structures and key parameters for a possible management contract for the national electricity company; and reviewing options for strengthening the Road Maintenance Fund. Just-in-time policy notes (including on public finance issues) will also be used to inform our policy dialogue with the Government (see Table 12). The Bank will explore opportunities to undertake analytical work jointly with other donors (the review o f the rural sector i s being prepared in coordination with the IDB, as would be the public procurement and financial management review). Table 12: OngoingandPlannedAnalyticalandAdvisory Activities Fiscal Improve basic services,job creation for the Launch reforms for longer-term economic Year Poor governance and institutional development FY05 -Agricultural Intensification andRural -Strengtheningthe RoadMaintenance Fund Development (on-going) (on-going) -Householdenergy study w/focus on -Background note for preparationof wood and wood-fuel management contract of EDH FT06 -The Challenge of Pro-PoorGrowth and -Public Procurementand Financial Inclusion inHaiti (CEM) Managementreview -Social ProtectionStrategy - just-in-time policy notes -just-in-time policy notes 101. Dialogue and in-country presence. The Bank is transferring management of the Haiti portfolio from Santo Doming0 to Port-au-Prince to strengthen dialogue with the Government, donors and civil society. The Bank appointed a Special Representative to Haiti in September and i s relocating from IDB offices to a Bank country-office in Pition- Ville. The country office will also be staffed with an Operations Analyst, a Team Assistant and a Driver and would be scaled up in conjunction with the portfolio. Washington will continue to support the Port-au-Prince office and dialogue with partners inHaiti. 32 102. Donor coordination. Since 1997 the Bank has regularly convened informal quarterly donor meetings in Washington (incoordination with monthly donor meetings held inPort-au-Prince chaired by the UNDP)to exchange information and promote a coordinated approach to development in Haiti. The Bank has also played a key role in the donors' support for the preparation of the ICF in May 2004 and co-organized the July 2004 donors pledging conference in Washington. Recently, the Bank has assumed responsibility for supporting the Government in the thematic table on "economic governance" (together with the IDB) to coordinate donor engagement in this area. In the coming years, the Bank will continue to play a key role for donor coordination, in close partnership with the UNDP, by continuing to regularly hold informal donors meetings, by participating in the Joint Committee for the Implementation and Monitoring of the ICF, and playing a leading donor role on economic governance activities. Harmonization of donor policies and procedures would greatly facilitate Government development efforts. However, beyond the current donor coordination activities described above and in paragraph 74, harmonization of fiduciary and environmental safeguards, i s hampered b y inadequate Government policies in these areas. The Bank's proposed interventions under the TSS will strengthen Government procurement and financial management policies and practices. As government procedures and policies are strengthened during the transitional period, the Government and donors could begin to look more closely at areas for harmonizing policies and procedures. 103. Consultationsand communication activities: The Bank will support consultations and workshops in FY05 to raise awareness of the role of the Bank within the framework of the ICF and to garner broad-based input for the design of Bank lending operations and analytical work in FY06 and beyond. It will be critical for the Bank's dialogue and consultations in Haiti to build bridges with all key stakeholders of civil society, including to ensure an early dialogue with potential members of a future administration. In addition, at the request of the Government, the Bank would provide technical assistance for the preparation of a PRSP emphasizing broad-based participation and ensuring civil society involvement in diagnosing poverty and prioritizing policies that promote inclusion and reduce poverty. As indicated above, the EGRO also supports communications activities and mechanisms to involve civil society and private sector organizations in the monitoring and evaluation of economic governance reforms. 104. The World Bank Institute. WBI staff have participated as full members of the Bank's EGRO preparation team and played a key role in supporting the establishment of an Anti-Corruption Unit in Haiti. Bank staff will continue to work with WBI to develop learning activities on economic governance issues, including outreach and education to stakeholders such as parliamentarians, public opinion and community leaders and journalists. 105. The International Finance Corporation. IFC's priorities inHaitiinclude assisting in the strengthening of domestic financial institutions andjob creation. InFY04, the Board approved a $20 million investment in Gmpo M, a garment manufacturing textile producer based in the Dominican Republic. Part o f the proceeds are beingused to finance the start-up of an industrial parklfree trade zone located just across the border in Ouanaminthe, Haiti. The project in Haiti could eventually employ up to 20,000 Haitians representing the single- largest source of new employment in recent history. 33 106. IFC also supports the Haitian microfinance and small and medium enterprises sectors through its US$0.4 million equity investment to create Micro Credit National, S.A. (MCN), the first financial institution dedicated exclusively to lending on a commercial basis to micro-enterprises. MCN, which offers loans ranging in size from US$200 to US$lO,OOO to customers inthe informal sector and which celebrated its fifth year anniversary inNovember 2004, i s today the largest microfinance institution in Haiti. Today, MCN's network comprises 12branches operating in nine cities throughout the country's provinces. Since its founding, M C N has injected a total of HTG 1.0 billion (about US$30 million equivalent) into Haiti's economy by disbursing a total of 19,000 loans to Haitian entrepreneurs in small industry,commerce and service sectors. 107. MIGA. Haiti joined MIGA in 1996, although the Agency has yet to issue a guarantee for a foreign investment inHaiti. The political uncertainty inthe country has been a key obstacle to foreign direct investment. Investors have expressed interest in MIGA's coverage for investments inthe agribusiness, mining, power and tourism sectors. D. MANAGINGRISKS 108. This transitional support strategy will be carried out in an environment of highrisks. In the staff`s assessment, the risks are worth taking at this juncture of Bank-Haiti cooperation. The transition period provides a window of opportunity for supporting a reform-oriented Government in its efforts to implement high-impact reforms. The strategy has been designed to manage these risks and provide flexibility to adjust IDA interventions as conditions may warrant. In addition, the strategy has been framed within a coordinated donor re-engagement program to maximize the impact of donor technical and financial assistance in managing risks. Below are the main risks facing the implementation of the TSS and how the Bank proposes to manage them. 109. Absence of a National Assembly to ratify the proposed IDA operations. The Constitution of Haiti provides that the National Assembly must approve or reject any treaty or international convention (Article 98-3). Presently, however, there i s no sitting Assembly that may exercise this power. However, there are precedents where Haiti (as per legal opinion issued by Haiti's Legal Counsel in 1995) maintained that, in an attempt to solve the legal vacuum (absence of the National Assembly) and based upon a theory of "residual powers," the Executive Branch of the Government should be empowered temporarily to exercise certain functions of the Legislative Branch such as the ratification of international agreements. Intheir relations with IDA, prior Haitian Governments have followed the above procedure to sign and ratify IDA CreditdGrant, relying on prior authorization by the Haitian Cabinet Council and further ratification through a Presidential Decree. IDA would be in a position to accept Executive Branch ratification of proposed IDA CreditdGrants under the TSS, provided that the Haitian authorities confirm, through duly authorized Legal Counsel, that: (a) an appropriate legal framework i s in place, i.e. a Presidential Decree specifying the powers of the National Assembly that on an interim basis the Government's Executive Branch has been empowered to exercise, including the power to approve or reject international agreements; and (b) that they intend to apply the same approach for signing 34 and ratifying IDA CrediUGrant Agreements until a new Parliament has been elected and seated in accordance with the Constitution. 110. Insecurity and political violence. The lack of security and political instability have hindered implementation of projects and significantly weakened their development impact in the past. Security continues to be a concern. The ICF includes technical and financial support to the Government to support the establishment of an environment that is stable and conducive to organizing and holding national elections in 2005. These activities are supported by the UN (MINUSTAH), OAS and some key bilateral donors. It will be critical for the Government in tandem to proceed with a national dialogue and to promote an inclusive political process. The Government will need to maintain a transparent and inclusive approach with support from the international community to lay the basis for successful elections in late 2005. Restoring economic activity will also be critical for social stability. Donor support for the Transitional Government to deliver services and create jobs will help to minimize social unrest and boost confidence inpublic institutions. 111. Arrears clearance and debt sustainability. In the past, Haiti's performance on debt service and arrear accumulation has been poor. The Transitional Government has committed to avoiding arrears accumulation and has made satisfactory allocations in the FY2004-05 Budget for external debt servicing (including to IDA); there i s also a high degree of confidence that the Transition Government i s committed to sound macroeconomic and public finance management. Despite this, past experience would tend to suggest that external arrears accumulation could resume in the future, especially beyond the transition period (2004-2005), if the country were to enter another period of major political turmoil and instability. Haiti's availability of resources to pay arrears will depend on the country's overall macro performance, sustained economic recovery and sustained flows of external assistance as per the ICF donor commitments. Continued grant donor financing and possibly HIPC eligibility (see paragraph 28) will be key to improve Haiti's debt sustainability prospects. 112. Weak institutional capacity and fiduciary risks can limit the effectiveness of the Bank assistance. Despite the efforts of the Government on human resources management and capacity-building in the public sector-notably for financial management and procurement-the transition period may prove too short to see significant improvements in execution capacity. To address this risk, the donor community has responded with significant technical assistance and efforts to coordinate it effectively. In close coordination with other donors, IDA i s providing significant technical assistance in key areas supported by the TSS, notably through the series of LICUS grants and the technical assistance operation under preparation. Also, while capacity i s built up, the Bank will incorporate in the design of its operations strong fiduciary arrangements. 113. Donor coordination and disbursements. Weak donor coordination and delayed disbursements risk undermining Government efforts to deliver much needed basic services and stabilize the country situation. The preparation of the ICF initiated the dialogue and collaboration-between government, donors and civil society-required for well- coordinated donor support of the ICF. The ICF coordination mechanism agreed to by the Government and donors will play an important role to ensure that coordination continues, 35 the capacity of the government's sectoral program units i s strengthened, pledges are turned into disbursements, and results on the ground are monitored. 114. Future governments' commitmentto reforms. A new government i s expected to be elected and to be in office in early 2006 when the Bank's TSS program would be under full implementation, under a high case scenario. The new government's priorities may be different from the current one and their commitment to economic governance reforms and poverty reduction i s unknown. To manage this, the program supported by the EGRO i s aimed at putting into place practices and policies that strengthen institutions, promote transparency and are less likely to be rolled back by a new administration. In addition, the communications and civil society components of the EGRO seek to raise awareness about the benefits of the economic governance reform program. To assure the Bank's credibility as a neutral development partner, the Bank will continue to buildbridges with all sectors of Haitian civil society through its dialogue and consultations activities. The PRSP process also provides an opportunity for members of a future elected government to support the economic governance agenda. 115. Inthe staff`s assessment, the above risks are worth taking at this juncture of Bank- Haiti cooperation. The transition period provides a window of opportunity for supporting a reform-oriented Government inits efforts to implement high-impact reforms. Moreover, the staff believes that the coordinated approach of donors allows the Bank to leverage its support for critical reforms and policy actions. As indicated inparagraph 85, should country conditions deteriorate or not be sufficiently favorable to warrant implementation of this Transitional Support Strategy, the Bank's program would be limited to the LICUS TF implementation, analytical work, continued dialogue with the government and civil society and coordination with donors. 36 k E s a, h sc 0 e0 Y 0 IA a, a e0 n P h 3 8 E i a, X 4El 3 - s = 3 6 o T t r a E m 00 M 3 .? e e - (d .-a,0 8 .2 9 Y .- Y Y cI1 3 .=2g h h a w u - E I I.. Y x .-0 .e Y L 5e, 0 2 Annex 3. ProgressIndicators Basedon ICF ResultsMatrix* I Bank-supported activities under the TSS in bold text 1. PoliticalGovernance andNationalDialogue Progress indicator I Output/outcome indicator MINUSTAHfully deployed IAdequate security established for and armed groups hinder return to stability - (schools, businesses) Security: Haitian National Adequate numbers of police officers National police capacity for Police not capable of are hired and trained to protect citizens, maintaining law and order providing adequate protection in accordance with ICF targets strengthened Impaired electoral process Voter registration system is improved; A transparent and credible electoral and lack of national dialogue elections are held; Participatory PRSP process; inclusive national process is launched discussion identifies long-term dev priorities 2. Economic Governance and nstitutional Development Issue Progress indicator Output/outcome indicator Budget formulation: Weak No more than 10% of cumulative Budgetary process streamlined to capacity for planning, non-salary current public be more efficient, transparent and controlling and evaluating expenditures since beginning of capable of translating government's expenditures; opaque system FY2004-05 disbursed through priorities of managing public resources discretionary accounts; New Information Management System installed OR existing system expanded to cover at least 50 percent of spending agencies; accountants andfinancial comptrollers posted in key ministries and agencies Public procurement Examinationby the National Interim Public procurement mechanisms conducted by ministries Procurement Commission of all are more transparent, credible and without coordination, control public procurement above certain effective and handle increased or use of international calls threshold ;Bids launchedusing volume of activities for bids standard bidding documents and procedures Lack of transparent Financial audits by international Increased transparency and management and political firms for A A N (airports), CAMEP improved management of public interference of public (water), EDH(electricity), APN enterprises in key sectors enterprises (ports) and TELECO (Telecommunications) completed * Modeled on Post-Conflict Pelformance Indicators 41 Annex 3. ProgressIndicators Basedon ICFResultsMatrix (continues) 3. Economic Recovery ~ ~~~~~ ~ ~ h u e Progress indicator Output/outcome indicator Macroeconomic stability and Maintenance of sound Sound macroeconomic framework budget management macroeconomic framework ; and strengthened role of the budget as FY2004-2005 budget executed an instrument of efficient and according to I C F priorities; wide transparent management of public dissemination of budget expenditures. execution data Unreliable and infrequent Management contract for EDH Fewer power blackouts and shorter electricity services; 2-3 hours finalized inlast quarter of 2006; interruptions of service when they of service per day with high Increase in hours of service to 18 occur losses per day in Port-au-Prince and provincial networks Roads in advanced state of Road Maintenance Fundis Maintenance and longevity of roads disrepair; 90% of roads not operational and road improved; essential transport links regularly maintained maintenance work on-going between farmers and markets imtxoved Agriculture: high rural poverty Three RegionalResearch- Capacity for rural income in with weak economic Development Center pilots are in agriculture and non-farm activities i s opportunities in agriculture place increased Environment: weak Establish 50 local civil protection Vulnerability to natural disasters at government capacity to mitigate committees inhigh risk regions the local level is reduced impact of natural disasters on communities 4. Access to Basic Services Issue Progressindicator Output/outcome indicator Inadequate health care services, 60% of children under one year Child mortality rate i s contained or particularly outside of Port-au- have received DTP3 reduced Prince metropolitan area Lack of access to quality Office of Public-Private Increased access to education for poor education services; no partnerships inMinistry of families and improved quality of coordination between public Education is operational; Budget education and private sector for education allocated for subsidizing school Increased primary school enrollment fees, supplies and uniforms for by 40,000 children disadvantaged students in FY2005-06; 600 new schools constructed No reliable social safety net for Create Social Assistance Fundfor Increased capacity for public sector to large share of economically most vulnerable population provide social assistanceto most vulnerable DoDulation vulnerable 42 Annex 4: HaitiandtheMillenniumDevelopmentGoalsIndicators Likelihood of achieving MDGsby MDGIndicators 1990 2001/2002 2015 1.Eradicate extreme povertyandhunger Unlikely Population below US$1a day (%) _ _ 56 Undernourishedpeople (% of total population) 65 49 Child malnutrition 17 27 2. Achieve universal primary education Net primary enrollmentrate (% of 6 to 11years old) 22 56 Unlikely 3. Promote gender equality Possible Ratio of girls to boys inprimary and secondary school 95 _ _ 4. Reduce child mortality Under 5 mortality rate (per 1,000) 150 123 Unlikely Infant mortality rate (per 1,000 live births) 102 79 Immunization (measles, % of children 1year old) 31 53 5. Improve maternal health -- Unlikely Maternal mortality (per 100,000 live births) 680 Births attended by skilled health staff (%) 23 24 6. Combat HIV/AIDS, malaria and other diseases -- Possible Prevalence of HIV/AIDS (% ages 15-49) 5 Contraceptiveprevalencerate (%) 11 27 7. Ensure environmental sustainability Access to improved water source (% of population) 53 46 Unlikely Access to improved sanitation (% of population) . 23 28 Forestarea (% of total land area) 5.7 3.2 Source: for Haiti indicators, World DevelopmentIndicatoi Database,\r l d Bank.. Fr likelihood to achieveby 2015, A Common Vision of SustainableDevelopment: National Report on MDG Goals, UNDP and Government of Haiti, 2004. 43 Annex 5. Proposalfor the Clearance of Haiti's ExternalDebt Arrears Introduction 1. The purpose of this note i s to present a strategy for the clearance of Haiti's external debt arrears. The proposed strategy seeks to create the opportunity for a sustainable normalization of relations with the international community. The design of the strategy has followed four guidingprinciples: comprehensiveness, transparency, provision of positive net transfers to Haiti and enhancement of the debt management capacity. 2. This document i s organized into six sections. Following the introduction, section two examines Haiti's external debt situation and its repayment capacity. The third section discusses in detail the guidingprinciples underlying the strategy. Section four focuses on the proposed mechanisms for the clearance of the arrears towards the InternationalDevelopment Association (IDA). The sixth section presents the strategy for the clearance of Haiti's arrears towards the Paris Club creditors. Haiti's external debt and arrears situation and capacity of repayment External debt and arrears situation 3. External debt at end-September 200428amounts to US$ 1,316 million in nominal terms29. O f this amount, 83 percent was held b y multilateral institutions, while official bilateral creditors accounted for the remaining 17 percent. The International Development Association (IDA) and the Inter-American Development Bank (IADB) are Haiti's largest external creditors representing approximately 41and 37 percent of total claims, respectively. Paris Club creditors, mainly Italy and France, hold claims representing about 13 percent of Haiti's total debt. Taiwan, province o f China, Haiti's only non-Paris Club creditor, represents about 4 percent of total debt. Table 1.Haiti: ExternalDebt Stock at End-September 2004 by Creditor I Nominal Stock Arrears i (US$ million) (percent) (US$ million) (percent) Total Debt 1.316.3 100.0 72.5 100.0 1. Mutilateral Creditors 1,091.3 82.9 44.3 61.1 IDA 540.5 41.1 43.8 60.4 ID6 481.4 36.6 0.5 0.7 IFAD 30.9 2.3 0.0 0.0 IMF 33.5 2.5 0.0 0.0 OPEC 5.0 0.4 0.0 0.0 2. Bilateral 225.0 17.1 28.2 38.9 Paris Club 169.3 12.9 28.2 38.9 Non Paris Club 55.7 4.2 0 0.0 28Externaldebt estimatesand projectionsare basedon Haiti's mediumand long term Public and Publicly Guaranteed (PPG) debt as at end-FY2003/04. 29The nominal US$value of debt was calculated using end-September 2004 exchangerates. 44 4. Notwithstanding a long history debt restructurings, external debt arrears continue to accumulate. Arrears towards several multilateral and bilateral creditors were cleared in 1994 with the support of the international community. Subsequently, arrears towards Paris Club creditors were treated in May 1995 within the context of a flow rescheduling under Naples terms3'. Obligations to all creditors were serviced in time until FY1999. However, starting inFY2000 arrears started to accumulate to virtually all external creditors. InJuly 2003, the arrears with the IDB, amounting to approximately US$32 million, were cleared by the Haitian authorities. However, arrears with IDA and some Paris Club creditors continued to accumulate to amount an estimated US$ 72.5 million (126 percent of the NIR) as at end- September 2004, of which US$ 44.3 million correspond to IDA and the remaining 28.2 million to Paris Club creditors with the following detail: France US$ 18.41 million, Italy US$ 6.5 million, Spain U S $ 3.41 million. 5. Given Haiti's weak repayment capacity - as evidenced by the low level of net international reserves (US$ 57,49 million as of end-September, 2004) and the chronically weak revenue mobilization capacity - the clearance of arrears would require external support and a prompt solution to this problem would represent the best option. According to the budget for FY05 approved by the Council of Ministers on September 29, domestic revenues are projected to reach about G 15.921 billion for a projected expenditure envelope of about G 26.084 billion, which leaves a financing need of about G 10.162 billion. Full repayment of arrears in FY2003 and the servicing of Haiti debt to all its international creditors would entail a larger financing need (all else being equal). Going forward, government revenues may benefit from recent steps taken by the authorities to tax collection performance. Even with the full effect of these measures, domestic revenues are likely to be constrained in the short-term by low level of economic activity and weak capacity for revenue collection. 6. The results presented above suggest that Haiti i s a debt vulnerable country: its external debt indicators are high, and, in the absence of remedial action, they are likely to remain highinthe medium term. This situation would call for a careful consideration of debt relief to Haiti in particular in a context of major rehabilitation and recovery efforts and the urgent need for an effective action to break the cycle of low growth, poverty and violence. Such a situation also calls for a concerted action of the international community and the Government to ensure that external support i s provided primarily through grants and that, when grants are not available, loans are provided interms and amounts compatible with the objective of debt sustainability, after factoring in the high probability of shocks. Lastly, prospective macroeconomic programs should take into account the vulnerability of Haiti's economy to domestic and external shocks, and include prudent elements of contingency planning. 7. In this context, it is clear that the country will require external financial support to clear the existing stock of external arrears. Similarly, once arrears are cleared, for Haiti to remain current on its debt service, it will require an increased support from international 30The debt consolidated inthe agreement corresponded to the arrears (including late interest) as of February 28, 1995 and the debt service falling due through end-March 1996. 45 partners in order to prevent debt service payment from causing a net negative transfer of financial resources from Haitito them. Guidingprinciplesunderlyingthe proposedstrategy 8. The strategy for the clearance o f arrears presented in this document was designed based on four guiding principles that, in the view of the Government, would help ensure a positive outcome of the process. These principles, mentioned earlier in the document, are described indetail below. a) Comprehensiveness. The proposed strategy should give a global solution the arrears problem. Therefore, the aim should be to clear the arrears to all external creditors with the full support of the international community. b) Transparency. Haiti will contact all relevant creditors as early as possible and will provide transparent information regarding: 0 the country's financial situation, in particular its current and projected repayment capacity, 0 tentative plans for the clearance of the arrears, and 0 the status of the arrears clearance arrangements with all creditors. Doing so, would allow creditors to have the information needed to work out arrangements to treat arrears and avoid the misperception that some creditors could be receiving privileged treatment and that Haiti could not be taking into account the views and constraints of the others. c) Provision of positivenet transfers. The outcome of the process will have to ensure positive net transfers to Haiti so as to meet its urgent and vast development needs. In this regard: 0 arrears clearance mechanisms would have to be designed with due consideration of Haiti's financial constraints (adequate repayment terms and conditions, including an appropriate grace period, would have to be negotiated), and 0 creditors will be requested to accelerate the preparation o f projects and disbursements inline with the Interim Cooperation Framework. d) Enhancement of debt managementcapacity. The arrears clearance strategy is only one component of Haiti's debt management strategy. Together with the clearance of the arrears, the Government will develop safeguards to avoid potential payment disruptions once agreements are inplace. Inthis regard, the Government intends to: 0 identify legal, institutional and procedural bottlenecks for an effective debt management, 0 adopt and enforce an adequate institutional and governance framework for debt management (legal framework, institutional organization, and coordination mechanisms), 46 e improve the functionality of the debt units through adequate staffing and equipment, and identify, prioritise and respond to the needs for capacity building. The Government of Haiti will request the support of donors, IFI, NGOs and other external providers of technical assistance and capacity building in external debt management to undertake this task. Proposed mechanismfor the clearance of the arrears with IDA 9. Haiti started to accumulate arrears to IDA since November 2000; and, since September 2001, Haiti has been in non-accrual status31.By end-September 2004, Haiti's arrears with IDA stood at US$ 44 million. Clearance of these arrears, i s a prerequisite for normalizing relations between Haiti and IDA; in particular, the clearance of arrears would allow IDA to materialize its pledged support (in the amount of US$150 million) to the Interim Cooperation Framework (ICF). Financing strategy 10. The Government i s committed to clear its stock of arrears to IDA in early January 2005 through a combination of several sources. The clearance of the arrears will, in turn, enable IDA to approve new commitments and disburse to Haiti3*. Below are presented the mechanisms that Haiti i s consideringto use to finance the IDA arrear clearance operation: Source 1: Grant support from donors. Under this option, Haiti would receive grants from donors to pay off, in full or partially, the outstanding arrears to IDA. Clearance of the arrears using solely grant financing would ensure that new commitments from IDA result in a positive net transfer. Canada has confirmed its willingness to provide US$ 6.4 million in grant resources to Haiti for this purpose. Source 2: Bridge-financing through bilateral donors. Under this option, a short-term bridge-loan from one or several bilateral donors would be obtained to pay off the arrears. This option, unlike the precedent, has the disadvantage of not ensuring positive net transfers to Haiti if the terms of the financing include interests payments. The cost of the operation will also depend on the time elapsed between the disbursement of the bridge- loan and its repayment. Source 3: Use of reserves. Under this option, Haiti would use part o f its reserves to pay off the arrears to IDA. Given the short-term nature of the operation (Le. short time between arrears clearance and disbursement of IDA credit), the use of reserves for this purpose should not, in principle, jeopardize the reserves position. The cost associated to this operation would be the forgone earnings, relative to an alternative use of the reserves (lost of investment revenue. However, the current levels o f reserves would call for a cautious approach when considering this option, as it could lead to negative 31Footnote indicating what non-accrual status is. 32Footnote indicating the amount that will be disbursed by IDA immediately after the arrears are cleared. 47 expectations in the local foreign exchange market that could imply increasing risk of capital outflows and accelerated exchange rate depreciation. 11. Finally, with view of freezing the arrears at its end-December 2004 levels, Haiti has resumed its payments to IDA. On the basis on these options, the Government of Haiti has decided to choose the combination below: Table 1: Arrears clearanceFinancingPlan amount US $ millions Source 1 12.31% Source2 35.60 68.46% Source3 I 10.00 19.23% Total I 52.00 100.00% Implementation strategy 12. The resources that Haiti will use to payback the financing for the arrears clearance operation will come, for a large part, from the Economic Governance and Reform Operation (EGRO), envisaged under the IDA Transitional Support Strategy (TSS). This credit, for an amount of US$ 61 million, will be disbursed in two tranches. It i s expected that the EGRO will be discussed by the Executive Board of IDA on January 6, 2005. It will be needed that Haiti clears the arrears to IDA before, and, in order to minimize the cost of the operation, as closely as possible of that date. 13. Haiti intends to make the arrangements necessary to have the resources for the clearance o f the arrears available 2 day before the Board discussion of the EGRO. The arrears to IDA will be cleared [the day before the Board discussion]. Then, the resources from the first tranche of the EGRO (1 or 2 days after) will be used the day after to payback the financing. Strategyfor the clearanceof the arrears with the Paris Club 14. As of end-September 2004, arrears to Paris Club amounted to approximately US$ 28.2 million. The treatment of arrears to the Paris Club can be applied only if the country i s experiencing payment difficulties and i s implementing reforms to resolve them. Inpractice, such a conditionality i s provided by the existence of a Poverty Reduction and Growth Facility (PRGF) supported by the IMF, which demonstrates the need for debt relief. 15. Haiti i s currently negotiating an Emergency Post Conflict Assistance (EPCA) with the IMF. However, under the current rules, Haiti would not be able to benefit from a treatment on the basis of such an agreement. Nonetheless, in view of the current situation of the country, Haiti intends to contact, as soon as possible, the Paris Club Secretariat requesting to put to consideration of Paris Club creditors a debt moratorium until a PRGF with the IMFi s concluded. At that time, on the basis of an analysis of the payment capacity 48 of the country, Paris Club creditors may grant a treatment to Haiti's obligations that would include the arrears. 16. If Clubcreditorsdonotagree,asagroupofcreditors,onthedebtmoratorium, Paris thenHaiti will start bilateral contact with some favorable credit01-s.~~ Arrangements for Sound Debt Management. For sound debt management, the following arrangements have to be made: Enactment law on the state debt and state loan guarantees of Republic of Haiti; Building up a rationalized information system related to the public debt in such a way that the Direction of Public Debt can obtain on time and on a regular basis all information needed for its data base: Use of an adequate debt management software such as SYSGADE which permits not only to record, follow and analyze debt but also to build a detailed and aggregated data base; Improvement of the production of reliable and actualized data; Training of the staff; and Necessity for the staff of the Direction to participate in national and international meetings and discussions on debt. 33Underthe Paris Club rules, the creditor will have to inform the Secretariat of the demarche 49 Annex 6. Status of World Bank Operations HAITI: IBRDand IDA Operations as of October 31,2004 Financier P&xJ Amount Disbursed AourovalDate ClosingDate I IBRD HIGHWAY MAINTENANCE 2,600,000.00 2,600,000.00 4-May-56 31-Dec-62 IDA INTERIM HIGHWAY PROJ 421,997.00 421,852.00 1-NOV-62 30-Sep-63 IDA NORTHERNHIGHWAY 10,000,000.00 10,000,000.00 16-May-74 31- M ~ - 7 9 IDA FOURTHHIGHWAYS 20,000,000.00 20,000,000.00 5-Jun-75 31-May-79 IDA EDUCATION I 5,500,000.00 5,500,000.00 24-Feb-76 30-Jun-81 IDA POWERI 16,000,000.00 16,000,000.00 17-Jun-76 31-De078 IDA RURAL DEVELOPMENT I 10,000,000.00 10,000,000.00 28-Dec-76 30-Jun-83 IDA WATER SUPPLY I 6,600,000.00 6,596,845.00 13-Dec-77 31-Dec-83 IDA EDUCATION I1 10,000,000.00 10,000,000.00 21-Feb-78 31-Dec-84 IDA HIGHWAY VPORTS 15,000,000.00 15,000,000.00 18-May-78 30-Jun-83 IDA POWER I1 16,500,000.00 16,500,000.00 17-Apr-79 31-Dec-85 IDA AGRIC REHAB-HURRICAN 3,200,000.00 2,766,944.00 17-MU-81 30-Sep-83 IDA PORTS I 11,000,000.00 9,256,199.00 26-Mar-81 28-Jun-85 IDA INDUSTRIALCREDIT 7,000,000.00 5,729,378.00 14-Apr-81 31-Mar-87 IDA HIGHWAYS VI 14,000,000.00 13,545,010.00 1-Apr-82 30-Jun-87 IDA FORESTRY 4,000,000.00 4,249,380.00 3-Jun-82 30-Dec-89 IDA POWER I11(SDR-23.1) 26,000,000.00 24,850,653.00 6-Jul-82 30-Jun-86 IDA EDUCATION 111(SDR-8 9,000,000.00 9,152,688.00 30-NOV-82 31-Dec-87 IDA URBANDEVT I(SDR-19 8,000,000.00 7,023,8 16.00 22-MU-83 31-Dec-91 IDA RURAL DEVT I1(SDR-1 19,100,000.00 20,611,973.00 23-Aug-83 30-Dec-89 IDA POWERIV-A 22,100,000.00 26,660,946.00 20-NOV-84 30-Jun-90 IDA EDUCATION IV-A 10,000,000.00 10,343,327.00 7-May-85 31-Mar-92 IDA TRNSPRT VI1 20,000,000.00 22,430,260.00 3-Feb-87 30-Jun-96 IDA ECONRECOV CRD 40,000,000.00 21,177,707.00 24-Mar-87 30-Dec-88 IDA TAL 3,000,000.00 2,904,267.00 28-Apr-87 28-Feb-91 IDA PAU PRINCEWTR 20,000,000.00 20,491,473.00 27-Jun-89 30-Jun-99 IDA POWERV 24,000,000.00 25,545,540.00 27-Jun-89 31-Jan-99 IDA INDUSTRIAL RESTRUCTURING& DEV 11,400,000.00 9,615,487.00 5-Dec-89 31-Mu-OO IDA HT- FIRSTHEALTH PROJECT 28,200,000.00 29,062,881.OO 16-Jan-90 31-Mar-01 IDA ECON& SOC FUND 11,300,000.00 11,007,586.00 17-Jan-91 30-Jun-98 IDA ED V 12,610,000.00 0 11-Jun-91 31-Dec-95 IDA FORSTRY & ENVIRON 26,100,000.00 0 24-Sep-91 31-Mar-99 IDA EMERGENCYECONOMIC R 40,000,000.00 40,337,246.00 20-Dec-94 31-Dec-95 IDA RD MAINT & RHB 50,000,000.00 25,124,846.00 23-Mar-95 31-Dec-01 IDA EMPLOYMENT GENERATIO 50,000,000.00 45,709,280.00 11-Jul-95 30-Apr-97 IDA HTTAP I1 12,000,000.00 0 17-Sep-96 30-Jun-02 IDA FOREST& PARKSTA (TAL) 21,500,000.00 15,291,544.00 17-Sep-96 31-Dec-01 ]IDA URBANDEVT I(SDR-19 13,000,000.00 12,759,454.00 22-Mar-83 31-Dec-911 TOTAL: 629,131,997.00 528,266,582.00 50 Annex A 2 Haiti at a Glance - Latin Low POVERTYand SOCIAL Haiti America Income I Developmentdiamond` 2003 Population,mid-year (mrllions) 8.2 534 2,310 GNI per capita (Atlas method, US$) 390 3,260 450 I GNI (Atlasmethod, US$bdlions) 3.3 1,741 1,038 Life expectancy Average annual growth, 1997-03 Population (%) 1.9 1.9 2.1 Labor force (%) 1.9 2.1 2.3 Most recent estimate (latest year available, 1997-03) Poverty("4of population belownationalpoverty /me) 65 capita enrollment Urban population (% of totalpopulatron) 37 77 30 Life expectancyat birth (years) 49 71 59 I infant mortality (per 1,000l1vebirths) 79 28 82 I Chiid malnutrition (% ofchrldrenunder5) 23 42 Access to improvedwater source Access to an improvedwater source (% of populatron) 46 86 76 Illiteracy(% ofpopulatron age 15+) 48 11 36 Net primaryenrollment (% of school-aqepopulatron) 56 129 92 Male Low-incomegroup 56 131 99 ~ Female 56 126 85 KEY ECONOMIC RATIOSand LONG-TERMTRENDS 1983 1993 2002 2003 Economic ratios' GDP (US$brllrons) 1.6 1.7 3.5 2.9 Gross domestic investmentlGDP 16.3 6.9 25.0 31.1 Trade Exportsof goods and services/GDP 17.5 9.0 12.2 16.4 Gross domestic savinqs/GDP 5.9 -6.9 1.6 0.2 T Gross national savinqdGDP -3.5 22.0 28.8 Currentaccount balance/GDP -9.7 -4.9 -4.8 - savings Domestic Investment Interestpayments/GDP 0.4 0.0 0.2 0.3 Total debVGDP 37.5 46.9 36.1 45.0 Total debt service/exports 4.3 1.8 3.1 L Presentvalue of debffGDP Presentvalue of debffexports Indebtedness 1983-93 1993-03 2002 2003 2003-07 (average annualgrowth) GDP -0.7 0.7 -0.5 0.4 1.7 Hartr Low-incomegroup ~ GDP per capita -2.6 -1.4 -2.4 -1.8 -0.4 Exportsof goods and services 0.8 4.7 -2.2 35.6 4.3 STRUCTUREof the ECONOMY 1983 1993 2002 2003 ("A of GDP) Agriculture 28.0 27.9 Industry 16.9 17.0 Manufacturing 8.4 8.4 10 Services 55.2 55.1 0 Privateconsumption 83.4 100.1 89.2 91.3 10 Generalgovernmentconsumption 10.7 6.8 9.3 8.4 i -GDI - O I G D P Importsof goods and services 27.9 22.8 35.6 47.2 1983-93 1993-03 2002 2003 Growthof exports and imports ("A) (average annualgrowth) / L O - Agriculture .. 1.7 -1.2 -3.7 0.3 lndustrv -5.2 -3.6 1.3 1.o 20 Manufacturlng -1.5 -7.0 1.6 0.5 10 Services 1.6 3.0 -0.5 0.4 0 Privateconsumption 2.2 -10 Generalgovernmentconsumption -6.8 Grossdomestic investment -6.1 10.1 -3.9 24.9 Importsof goods and services 3.9 6.3 -2.1 33.4 Note:2003 data are preliminaryestimates. 'Thediamondsshowfourkeyindicatorsinthecountry(inbold)comparedwithitsincome-groupaverage.Ifdataaremissing,thediamondwill be incomplete. 51 Annex A 2 (Continued) Haiti at a Glance - PRICESand GOVERNMENTFINANCE 1983 1993 2002 2003 Domesticprices (% change) Consumerprices 20.2 8.7 32.5 ImplicitGDP deflator 8.9 32.5 10.0 25.4 Governmentfinance ("9 of GDP, includescurrentgrants) Current revenue 7.4 8.3 9.1 I Currentbudget balance -1.5 -1.1 -0.3 I 98 99 00 01 02 031 Overallsurpiusldeficit -2.4 -3.1 -3.7 -GDP deflator *CPI TRADE I 1983 1993 2002 2003 (US$ millions) Export and import levels (USS mill.) Total exports (fob) 166 131 304 361 Coffee 9 Sisal and sisal strings 2 1wo Manufactures 108 273 330 800 Total imports (cif) 346 983 1,116 600 Food 144 400 Fueland energy 71 200 Capitalgoods 22 i o 1 Export price index (1995=100) 97 98 99 00 01 02 O3 I Importprice index (1995=100) Terms of trade (1995=100) BALANCEof PAYMENTS 1983 1993 2002 2003 (US$ millions) urrent account balanceto GDP(%) I Exportsof goods and services 180 437 461 0 Importsof goods and sewices 409 1,239 1,400 1 Resource balance -229 -802 -939 2 Net income -11 -15 -12 3 Net currenttransfers 70 649 811 4 Currentaccountbalance -169 -168 -140 5 6 Financingitems (net) 200 127 130 7 Changesin net reserves -31 41 10 -81 Memo: Reservesincludinggold (US$millions) 20 36 228 207 Conversionrate (DEC, loca//US$) 5.0 12.2 27.1 40.5 EXTERNAL DEBT and RESOURCEFLOWS 1983 1993 2002 2003 (US$ mil/ions) (Compositionof 2002 debt (US$ mill.) Total debt outstandingand disbursed 610 817 1,251 1,313 IBRD 0 0 0 0 IDA 122 337 496 491 I 245 351 Total debt service 25 8 19 39 IBRD 0 0 0 0 IDA 1 0 0 0 1899 Compositionof net resourceflows Officialgrants 49 72 135 96 Officialcreditors 38 -3 -3 -2 Privatecreditors -6 0 41 30 Foreigndirect investment 8 -3 5 8 Portfolioequity 0 0 0 0 I 1608 World Bank program Commitments 49 0 0 0 A - IBRD E Bilateral Disbursements 26 0 0 0 B IDA D Othermultilateral - F Private -- Principalrepayments 0 0 0 0 C IMF -- G - Short-term Net flows 26 0 0 0 Interest payments 1 0 0 0 Net transfers 26 0 0 0 __ DevelopmentEconomics 12/7/04 52 Gross domestic producta 100 100 100 100 100 100 100 100 100 100 100 100 Agriculture 22 22 24 28 29 28 28 21 21 26 27 28 Industry 34 36 34 17 16 17 17 16 16 16 15 14 Services 44 42 42 55 55 55 55 57 57 58 58 58 Total Consumption 91 91 90 93 98 98 100 104 99 99 99 99 Gross domestic fixed investment 25 26 28 27 26 25 31 23 27 27 21 21 Governmentinvestment 1 2 3 3 2 2 3 2 6 4 4 4 Privateinvestment 23 24 25 24 24 23 28 21 21 23 23 23 Exports(GNFS)b 11 10 12 13 12 12 16 14 12 12 12 12 Imports (GNFS) 27 26 30 33 36 36 47 40 39 38 39 38 Gross domestic savings 9 9 10 7 2 2 0 -4 1 1 1 1 Gross nationalsavings' 17 18 21 21 20 22 29 20 20 20 21 21 Memorandum items Gross domestic product 3223 3779 4107 3697 3596 3465 2918 3619 4477 4676 4875 5241 (US$millionat currentprices) GNIper capita(US$,Atlas method) 430 430 470 490 460 430 390 370 400 480 530 540 Realannual growthrates Gross domestic product at market prices 2.7 2.2 2.7 0.9 -1.0 -0.5 0.4 -3.5 2.5 3.0 4.0 4.0 Realannual per capita growth rates Gross domestic product at market prices 0.6 0.1 0.6 -1.1 -3.1 -2.4 -1.8 -5.5 0.4 0.9 1.9 1.9 Total consumption 2.5 -0.6 -0.4 2.9 1.5 -1.9 -0.5 0.6 4.5 1.o 1.2 1.4 Balanceof Payments(US$ millions) E X P O ~ ~(GNFS)~ S 380 479 528 503 443 437 461 502 549 554 598 646 MerchandiseFOB 206 299 340 331 305 273 330 366 381 384 420 454 Imports (GNFS)~ 881 1022 1255 1355 1301 1239 1400 1456 1727 1770 1879 1990 MerchandiseFOB 703 822 1018 1087 1055 983 1116 1164 1302 1329 1451 1679 Resourcebalance -501 -542 -727 -852 -858 -802 -939 -953 -1177 -1216 -1281 -1344 Net current transfers 256 321 422 578 624 649 811 863 844 866 996 1046 Currentaccount balance -232 -205 -298 -260 -233 -168 -140 -98 -336 -346 -280 -296 Net privateforeign direct investment 4 11 30 8 2 5 8 6 7 19 29 31 Long-termloans (net) 147 121 103 38 72 37 28 51 2 56 33 17 Official 81 78 59 33 2 -3 -2 -5 18 57 33 19 Private 66 43 44 5 69 41 30 56 -16 -1 -1 -2 Other capitalnet. incl. errors & ommissions 109 106 189 169 163 85 94 100 367 347 255 318 Changein reservesd(-= increase) -28 -32 -24 46 -4 41 10 -59 -40 -76 -37 -70 Memorandum items Resourcebalance (% of GDP) -15.5 -14.4 -11.7 -23.0 -23.9 -23.1 -32.2 -26.3 -26.3 -26.0 -26.3 -25.6 Current Account Balance(% of GDP) -7.2 -5.4 -7.3 -7.0 -6.5 -4.9 -4.8 -2.7 -7.5 -7.4 -5.7 -5.6 Publicfinance (as % of GDP at marketprices)' Current revenues 9.0 8.5 9.0 8.0 7.6 8.3 9.1 8.7 9.3 9.8 10.2 10.5 Current expenditures 8.1 7.4 7.6 7.4 8.3 9.4 9.4 9.0 9.1 10.0 11.2 10.3 Current account surplus (+) or deficit (-) 0.9 1.1 1.4 0.6 -0.7 -1.1 -0.3 -0.3 0.2 -0.2 -1.0 0.2 Capitalexpenditure 1.4 2.2 2.8 3.1 2.1 2.0 3.3 3.4 6.2 4.7 4.2 4.2 Foreignfinancing 0.4 0.6 -0.4 0.0 0.2 0.4 0.7 1.7 5.0 6.9 4.0 4.0 Monetary indicators M2lGDP 31.8 32.2 35.1 38.6 41.5 46.9 48.5 38.0 32.8 35.5 35.6 35.8 Growth of M2 (%) 5.0 19.4 19.7 23.8 17.7 23.8 30.0 -4.5 1.7 23.6 13.9 13.8 Privatesector credit growth/ 165.4 66.7 28.9 93.4 -36.9 34.7 49.8 231.8 94.4 94.4 94.4 94.4 total credit growth (%) Consumer priceindex (% change) e.0.p. 17.0 8.3 9.9 15.3 12.3 10.1 42.5 22.5 12.0 11.0 9.2 8.6 Consumer priceindex (% change) p.a. 16.2 12.7 8.1 11.5 16.8 8.7 32.5 27.1 16.6 12.0 10.0 9.0 GDP deflator(% change) 16.3 13.1 7.6 11.2 11.6 10.1 25.5 26.2 15.0 11.0 9.0 9.0 a. GDP at factor cost b. "GNFS" denotes "goodsand nonfactor services." c. Includes net unrequitedtransfers excludingofficialcapital grants d. Includes use of IMF resources. 53 Total debt outstandingand disbursed 1052 1123 1198 1105 1208 1251 1313 1325 1358 1410 1468 1444 Total debt service (TDS) 36 36 39 38 26 19 39 26 96 47 51 62 (US$m)a Debt and debt service indicators TDOIXGS~ 159.2 135.3 122.5 99.6 112.0 118.5 105.4 95.7 91.8 90.8 87.4 79.6 TDOIGDP 32.6 29.7 29.2 29.9 33.6 36.1 45.0 36.6 30.3 30.2 30.1 27.6 TDSIXGS 5.4 4.4 4.0 3.5 2.4 1.8 3.1 1.9 6.5 3.0 3.0 3.4 IBRD exposure indicators (%) IBRD DS/public DS 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Preferredcreditor DSlpublic 72.9 76.1 77.8 75.2 61.6 64.5 70.8 82.9 89.3 83.9 84.8 86.6 DS (%)' IBRD DSiXGS 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 IBRD TDO (us$m)d 0 0 0 0 0 0 0 0 0 0 0 0 Of which present value of guarantees(USSm) Share of IBRD portfolio (%) 0 0 0 0 0 0 0 0 0 0 0 0 IDA TDO (US$mId 458 503 515 486 485 496 491 481 465 460 455 450 a. Includespublic and publicly guaranteeddebt, privatenonguaranteed, use of IMFcredits and net short- termcapital. b. "XGS" denotes exportsof goods and services, including workers' remittances. c. Preferred creditorsare definedas IBRD. IDA, the regionalmultilateral development banks,the IMF,and the Bank for Intemational Settlements. d. Includespresent value of guarantees. e. Includesequity and quasi-equitytypes of bothloan and equityinstruments. 54