IMF Executive Board Cancels Haiti's Debt and Approves New Three-Year Program to Support Reconstruction and Economic Growth
The Executive Board of the International Monetary Fund (IMF) today approved the full cancellation of Haiti’s outstanding liabilities to the Fund, of about SDR 178 million (equivalent to US$268 million). The Board also approved a new three-year arrangement for Haiti under the Extended Credit Facility (ECF) requested by the authorities to support the country’s reconstruction and growth program.
Both decisions form part of a broad strategy to support Haiti’s longer term reconstruction plans, following the devastating earthquake of January 12, 2010. The cancellation of existing debt was advocated by IMF Managing Director Dominique Strauss-Kahn in the days following the disaster as part of a concerted international effort to launch a “Marshall Plan” for the reconstruction of the country. The new program provides a strong and forward-looking framework to support economic stability and reconstruction in the country, and will also help catalyze donors’ contributions.
“Donors must start delivering on their promises to Haiti quickly,” Mr. Strauss-Kahn said, “so reconstruction can be accelerated, living standards quickly improved, and social tensions soothed.” At a high-level donors' conference in March, the international community pledged US$ 9.9 billion to Haiti’s reconstruction, of which US$ 5.3 billion is to be disbursed over the next 18 months.
Resources freed by IMF debt relief will help Haiti to meet substantial balance-of-payments needs exacerbated by the earthquake. The debt relief is financed by the Post-Catastrophe Debt Relief (PCDR) Trust Fund, recently established by the Fund to help very poor countries hit by catastrophic natural disasters (see attached factsheet).
The new ECF arrangement will provide SDR 40.9 million (about US$ 60 million) over three years to boost Haiti’s international reserves and help the central bank manage potential swings in the value of the local currency - important to avoid raises in the prices of basic commodities consumed by the poor - without adding to the country’s net debt. Financing under the ECF carries a zero interest rate until end-2011 and thereafter zero to 0.5 percent, with a maturity of 10 years and a grace period of 5½ years. The temporary interest waiver is part of the package that was approved in July 2009 to support the IMF’s lending to low-income countries, financed from the IMF’s internal resources, including the use of resources linked to the gold sales, and through bilateral contributions (see Factsheet “Financing the Fund’s Concessional Lending to Low-Income Countries”). The new program also includes important policy commitments from the authorities that will help protect macroeconomic stability, and strengthen fiscal governance.
“The new program will provide a coherent macroeconomic framework to support the implementation of our Action Plan and ensure efficient spending and absorption of aid inflows,” Haiti’s Minister of Economy and Finance Ronald Baudin said.
The IMF will also provide a comprehensive medium-term technical assistance program aimed at strengthening state institutions, concentrating in the areas of tax policies, revenue administration, budget preparation and execution, and helping the country in organizing its first ever issuance of government securities.
“Improving the business environment and fostering private credit and investment will be essential to support growth,” Charles Castel, Governor of the Bank of the Republic of Haiti said. “The Fund’s technical assistance will help rebuild economic institutions and build capacity.”
Following the Executive Board discussion on Haiti, Mr. Naoyuki Shinohara Deputy Managing Director and Acting Chair, issued the following statement:
“The January 2010 earthquake was devastating for Haiti, after several years of progress in maintaining economic stability, resuming growth, and implementing essential reforms. The authorities are to be commended for good policy implementation in the six-month period since the earthquake, in spite of limited financial resources and weakened capacity.
“Haiti meets the eligibility and qualification conditions for debt stock relief under the PCDR Trust Fund. Resources freed by debt stock relief under the PCDR Trust Fund are critical to meeting the large and protracted balance-of-payments needs exacerbated by the earthquake and subsequent recovery efforts, and to placing Haiti's debt on a sustainable path. Debt relief from the Fund is part of a concerted international effort to cancel Haiti's remaining debt after the earthquake.
“The newly approved ECF-supported arrangement provides a coherent macroeconomic framework to support the authorities' reconstruction and growth objectives. The macroeconomic outlook, and implementation of the authorities' reconstruction plan, depends crucially on the timely disbursement of the large donor pledges. Furthermore, improvements in infrastructure and the business environment will be essential to raise medium-term growth, by attracting private investment and expanding the export base. The establishment of a partial credit guarantee fund will help restart private sector credit
“The Fund-supported program aims at smoothing the impact on the economy of large expected aid flows, projected to triple to about 15 percent of GDP over in the next 3 years. Fiscal objectives are to raise domestic revenue, align the budget and its financing with reconstruction priorities, and continue strengthening fiscal governance. Monetary and exchange rate policies will be upgraded to facilitate the absorption of aid inflows, while avoiding large swings in the exchange rate and keeping inflation under control The program is supported by a comprehensive medium term technical assistance strategy, coordinated with Haiti's development partners.”
Recent Economic Developments
The earthquake of January 12, 2010 caused unprecedented destruction of human and physical capital, with losses estimated at 120 percent of 2009 GDP. The disaster struck the country at a time when its outlook was improving after several years of prudent macroeconomic management. In 2009, Haiti’s growth reached almost 3 percent, the second-fastest rate in the Western Hemisphere.
A still fragile recovery is taking place after the earthquake. Agricultural production, construction and textile manufacturing are supporting economic activity, while remittances, which grew by 12 percent between January and May of 2010 (over the previous year), are supporting consumption and imports. Exports are recovering, although the trade deficit is still widening.
Main Program Objectives
The program is focused on macroeconomic policies that can support growth and the Haitian authorities’ reconstruction plan, as well as help manage the aid inflows. It includes improving the efficiency and transparency of spending, increasing revenues, modernizing monetary and exchange rate operations, and enhancing credit growth.
Growth: GDP is projected to expand by 9 percent in fiscal year 2011-12, due mostly to reconstruction activity, and 6 percent by 2015.
Inflation: expected to reach 8.5 percent in the current fiscal year and to decline to 7 percent by 2013.
Fiscal strategy: to boost revenue collection to 13 percent of GDP by 2013, from 10% percent currently. The authorities’ objective is to enhance the quality and effectiveness of reconstruction spending and rebuild a more modern and efficient tax administration.
Monetary policy: the program aims at building a sustainable external position while absorbing the reconstruction-related foreign exchange flows. To enhance the effectiveness of monetary policy, further steps will be taken to improve the Bank of the Republic of Haiti’s independence. The authorities also aim at gradually developing a market for government securities.