Haiti - Forestry and Environmental Protection Project

- ecumm of The World Bank FM OFFICLAL USE ONLY RIpwt NQ P-5468-HA HUORANDUZ4 AND RECOIINDATION 0r THE INTEATIONL DEVELOPMENT ASSOCMION TO Tim EXCUTIVE bIRECTORS ON A PROPOSED DEVELOPMENT CREDIT -OF $DR 19.7 MILLION TO THE REPUBLIC 3F HAITI FOR A FOITRY AND ENVIROMETAL PROTECTION PROJECT Septaub.r 3. 1991 is doumet bass resticted ditrbutio snd may be used by cipiteat OOly in the petrformnce of dteim offcl duties. Its contens may not otherwise be disclosed wit World Bank authWoriation.  CURRENCY EQUIVALEE1E Currency Unit Gourde (G) Exchange Rate Effective May 1991 US$1.00 - G 5.00 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS BME - Bureau des Mines et de 1'Energie CG - Consultative Group CGCED - Caribbean Group for Cooperation in Economic Development CEM - Country Economic Memorandum DRN - Direction des Ressources Naturelles (MARNDR) ERC - Economic Recovery Credit GDP - Gross Domestic Product GNP - Gross National Product HA - Hectare ICB - International Competitive Bidding IDA - International Development Association IFC - International rinance Corporation IMF - International Monetary Fund LCB - Local Competitive Bidding MARNDR - Minist6re de l'Agriculture, des Ressources Naturelles et du D6veloppement Rural MIGA - Multilateral Investment Guarantee Agency NGO - Non-Governmental Organization PPF - Project Preparation Facility SAF - Structural Adjustment Facility SDR - Special Drawing Right TA - Technical Assistance Credit UNDP - United Nations Development Programme USAID - U.S. Agency for International Development GOVERNMENT OF HAITI FISCAL YEAR October 1 - September 30  FOR OFFICIAL USE ONLY A~ ~ ~ ~ ~ ~ ~~~~~AT A~ ~ ~ ~ ~ ~ ~~~~~A, FORESIRY AND ENmmRONN3NTaL PRO IECTION PROWICT Credit and Proicot -SuMMar Borrowerz Government of Haiti egcficiarisgs Farmers within and in the surrounding buffer zones of national parks and forestas urban consumers of wood-based fuels; general population through the strengthening of the natural resource protection mechanisms #B.UIts SDR 19.7 million (US$26.1 million equivalent) Z11mat Standard, with 40 years maturity onleain4 .Terms: Not applicable nijans RI Plamt Government USS 2.9 million IDA USS26.2. million TOTAL USS29.0 million Economic Rate of Return: Not applicable Staff Arsaisal 9307-HA Revorts Kant IBRD No. 22561 This document has a restricted distribution and may be used by recipients only in it e perforvance of their official duties. Its contents may not otherwise be disclosed without World Bark autb'irzation.  EMORANDUM AND RECOMMOnAsTIO OF THE PRES IOT OF TME ZNTBRNATIONAL DEVELOPNKNT ASSOCIATION TO THE E%ECUTIVE DIRECTORS OX A PROPOSED CREDIT TO TEE REPUBLIC OP HAITI tOR A FORZSCRY AnD EN!IRONMENTAL PROTECTION PROJECT 1. The following memorandum, and recommendation on a proposed Development Credit to Haiti for SDR 19.7 million (US$26.1 million equivalent) is submitted for approval. Part I of the document discusses Haiti's development problems and pro3pects, key priority areas for economic reform and the Bank Group's Assistance Strategy. It draws upon Report No. 9523-HA, "Haiti - Restoration of Growth and Development" dated May 20, 1991. Part 11 of the document describes the proposed project. I. COUNTRY POLICIES AND BANK GROUP ASSISTANCE STRATEGY Introduction 1.1. Haiti is a small, densely populated, predominantly rural, and open economy. its 6.4 million inhabitants occupy 28,000 square kilometers in the western end of the Island of Hispaniola, and are among the poorest in the world, with a per capita GNP of US$400 (1989). About 25%-30% of the labor force is unemployed. Three-quarters of tha population live in the rural areas, and depend on agriculture, the output of which has increased little since the early 1970s. Physical production per capita has fallen steadily as relentless population pressure has forced peasants to cultivate ever more marginal hillside land. A shortage of cultivable land, coupled with insecurity of tenure and the demand for wood for energy, has generated an unrelenting process of deforestation and soil erosion. In recent decades, output and employment have shifted toward urban activity. Agriculture now accounts for only one third of GDP compared with one half in the early 1950s. Coffee remains the largest agricultural export, accounting for about 17.5 of total exports in 1989. This is considerably less than manufacturing exports (mostly export assembly) which accounted for about 69% of total exports in 1989. 1.2. Between 1980-85, Haiti pursued policies that led to an inefficient and inequitable economic system. The system was based on inefficient fiscal and trade regimes, as well as on restrictive practices such as trade monopolies and discriminatory administration of investment promotion schemes. Large portions of public revenues accruing from that system, and public borrowing, were deployed to administer the system ai..n to undertake capital expenditures that were uneconomic or unaccounted for, rather than to expand the country's productive capacity or provide essential public services. The economic distortions and the financial drain inherent in Haiti's policies from 1980-85 led to significant deterioration of the country's income, living standards anM finances. 1.3. As a result, the confidence of the Haitian peopla, the private sector and the international donor community eroded. Beginning in 1984, there was intermittent givil unrest. The export assembly sector, which had been vibrant in the 1970's, stagnated. Donors expressed concern over inappropriate  -2- investments, the lack of overall investment priorities and the poor policies in agriculture and industry. As the Government took no action to address these concerns, foreign aid declined from 7% to 5% of GDP from 1983-85. Sevaral donors withdrew their assistance from the public sector and directed it instead toward non-governmental organizations. By late 1985, civil unrest had become widespread and the economic deterioration had worsened. By early 1986, the situation had become unsustainable and on February 7, 1986, the Duvalierist regime collapsed and a National Government Council (CNG) came to power with a pledge to hold eloctions and promote economic recovery. Adiustmnt P_ ocss 1.4. The cgnomie Regovegy Proargm 19*6-87. To reform the economic system the CNG, with assistance from IDA and the IMF, instituted a program of economic policies between March 1986 and November 1987 which focussed on the reform of the tax system, trade regime, public expenditure, public enterprise, the private sector role in the economy, industrial incentives, and agricultural pricing. Total expenditure and taxes were cut by about 2% of GDP, and the expenditures reallocated such that education and health spending were increased by over 20% in real terms. Taxes on basic food item were reduced, helping to lower prices and raise private consumption among the low- income population. Income taxes were simplified, top marginal rates lowered and measures to strengthen tax collection initiated. The piblic investment program was pruned and concentrated on completion of priority ongoing projects while the public sector's debt to the domestic banking system was reduced. Trade monopolLes, both public and private were dismantled. Of the five public industrial firms, two which were uneconomic were closed. In a major reform of the trade regime, all but seven of the 111 quantitative restrictions on imports were eliminated. The remaining seven products, representing less than 20% of imports, became subject to import licensing without formal ceilings. rurther, specific tariffs were all replaced by ad valorem ones, and the general level of protection was reduced drastically. The export tax on coffee was phased out wad other agricultural export taxes were abrogated. 1.5. The reform measures began to stabilize and restructure the economy during 1986-87. Bconomic growth in 1986-87 averaged about 0.6% per year. In large part, economic growth in those years was marred by the collapse of coffee export volumes and prices. In mid-1987, a series of political crises erupted. Until the advent of the current Government, economic developments in Haiti were characterized by work stoppages, uncertainties for private investors, increased contraband activity, shortfalls in public revenues, curtailment of external assistance, accumulation of external payments arrears, and pervasive economic deterioration. In 1989, although the service sectors improved their economic performance, their growth was not sufficient to offset the decline in value added in agriculture for a third consecutive year. Investment activities also declined. Consumer prices rose by slightly over 10% in 1989. At the same time the premium on the U.S. dollar in the parallel market rose from about 20% in September 1988 to over 35% in September 1989.  -3- Table 1: HAITI - BASIC XCONOMIC XNDICATORS Averaae growth Rates t% per vear) 1980-85 1986-87 1988-f9 1990 Bst Prelim Real Gross Domestic Product at Market Price -0.9 0.6 -1.5 -3.0 Agriculture -1.3 1.1 -1.9 n.a. Industry -2.5 -2.1 0.5 n.a. Services -0.8 2.8 -0.6 n.a. Real GNP per Capita at Market Prices -2.6 -0.4 -3.4 n.a. Private Real Consumption per Capita -3.1 2.4 -3.9 n.a. Export Volume -1.3 -7.2 -3.8 n.a. Import Volume -2.9 -3.8 -10.4 n.a. Consumer Price Index (Inflation) 8.3 2.0 10.2 25.2 1.6. Thg Stabilization Proaram of Sentember. 1989. In order to correct the macroeconomic imbalances, the 6overnment of General Avril, which came to office in April, 1989 (the fourth since the departure of Jean-Claude Duvalier in 1986), adopted an economic program which formed the basis of a 15-month standby arrangement with the IMP. On September 18, 1989, after Haiti cleared its arrears to the IMP, a Stand-by Arrangement for SDR 21 million was approved to sustain the program. The objective of the program was to reduce inflationary pressures, strengthen the balance of payments and help reverse the decline in investment and economic activities. Specifically, the program called for the reduction of domestic financing of the public sector deficit from 2.4% to 0.6 GDP in FY90, the expansion of the coverage of the value added tax and an increase of 30% in customs valuation. The Government introduced new controls on public enterprises, including their wage bills, and raised wheat flour and millfeed prices. overall, the public sector deficit was expected to be reduced to 4.5% of GDP in FY89/90. The Government authorized conmercial banks and exchange houses to operate freely in the parallel market and reduced the surrender requirement on export receipts at the official exchange rate from SO% to 40%. In addition, commercial banks were authorized to accept deposits in foreign currency. 1 7. Unfortunately the IMF Stand-by program could not be maintained because of continued fiscal deterioration brought on by the intermittent civil unrest and the attendant increased public spending by the transition Government, which took office in March 1990, weak revenue growth, and increased Central Bank deficit financing. Political uncertainty surrounding the electoral process at that time and the inability of the transition Government to reverse existing policies led to an unsatisfactory fiscal situation.  -4- 7h Reform Proaram of 1991 and the Medium-Term Strategic Framework 1.3. The freely elected Government of PresAdent Ariatide, which came to office in February 1991, plans to move Haiti towards sustained social and economic progress. This calls for maintaining a stable macroe onomic environment and for investing in human resource development, infrastructure and institution b ilding. To help stabilize the macroeconomic situation, the Government has begun to elaborate a comprehensive medium-term program for economic recovery which entails positive growth in real GOP, reduction in inflation and improvement in the balance of payments to rebuild the Central Bank's resrves. The program, which is being prepared with IMF asistance, will include a major overhaul of the tax system and & restructuring of the finances of the public enterprises. The Government has also been assisted In its formulation of the program through recent World Bank documents: the Economic Memorandum dated May 20, 1991 (Report No. 9523-MA); and the Agricultural Sector Review dated April 30, 1991 (Report No. 9357-HA). Following completion of the preparation of the program, the Government plans to eek implementation assistance in the form of adjustment loans (or grants) from the bilateral and multilateral donors, including the World Bank and IMF (under the Enhanced Structural Adjustment Facility). 1.9. Specific measures have already been undertaken by the Government to improve its fiscal revenues, counter the contraband activity, promote tourism, and encourage the private sector. import duties have been reduced on rice, pork, iron, tin sheets and tools. There are no price controls, but the Government did intervene to control the prices of some essential items during March-April 1991. This was for a short duration as hoarding and speculation drove up the prices of some essential items. The import licensing system is now flexible and even cement can be imported freely. The Government has strengthened the Customs Administration by tightening up control over ports, changing custom officials, and introducing new rules, which has resulted in increasing revenues and lowering of contraband activity. A small bureau of tourism has been established and negotiations with tourist agencies/shipping lines are in incubation. Steps have been taken to eliminate unjustified expenditures and to reduce excess employment in the ministries and iablic enterprises. It is estimated that over 8,000 jobs have been eliminated so far. 1.10. While these measures are necessary to put Haiti on the path to sustained economic growth, some of them, particularly elimination of public sector jobs within the Haitian context of wide-spread unemployment and under- employment, carry the risk of social unrest. To mitigate this risk, these actions need to be taken in tandem with measures to increase opportunities for alternative sources of employment in the private sector as well as to expand the coverage of the social safety net. In addition, the Government is intensifying its dialogue with all elements of Haitian society to help prepare them for the additional steps that will be needed to revitalize the Haitian economy.  -5s flank 2rou2 gnerat ions 1.11. IDA played an important role in the design and implementation of Haiti's 1986-87 economic recovery program and in the mobilization of the financial resources needed to finance economic and social development. Successive Governments, following the fall of the Duvalier regime have utilized IDA's economic analysis in designing their economic development programs. IDA has supported these programs through a series of operations. Until 1985, the Bank Group financed projects in transportation (7), power (4), education (4), water supply (1), rural development (2), agriculture (2), industrial credit (1) and urban development (1). IFC made one investment. Haiti has signed the MIGA convention, but has not yet ratified it or subscribed to any shares. From FY86 through FY91, IDA financed 9 projects as shown in Table 2. Table 2: HAITI - DISTRIBUTION F LgENDING Pt86-21 (USS million) sector Amount I No. o