Haiti - Second Highway Project

RESTRICTED Report No. P-297 FILE COPY This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF HAITI FOR THE INTERIM HIGHWAY PROJECT October 24, 1962  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CGJEDIT rO THE REPUBLIC 0:' :iAT1I i TT: IjIGIiJAY PROJECT I submit herewith the following report and recommendations on a proposed Credit in various currencies equivalent to $350,000 to the Republic of Haiti to assist in financing highway maintenance and rehabilitation for a period of about one yearo PART I - HISTORICAL 2. In my memorandum to the Executive Directors dated August 8, 1962 (IDA/R62-19) I recommended that, pending clarification of con- ditions in Haiti, the Association should be prepared to make an in- terim credit equivalent to $350,000 to finance the foreign exchange costs of completing work now under wzay and of continuing, for approxi- mately one year, the road maintenance and rehabilitation program started under the Bank Loan l1l-HA. This recommendation was approved in principle by the Executive Directors on August 1h. 3. Negotiations for the proposed Interim Credit were completed during the first week of October. The Government was represented by Dr. Louis lMars, the Haitian Ambassador to the United States. PART II - DESCRIPTION OF THE PROPOSED CREDIT 4. Purpose: To finance the foreign exchange cost of continuing for a period of approximately one year the highway maintenance and re- habilitation program started under the Loan Agreement between the Borrower and the Bank, dated May 7, 1956 (Highway M,aintenance Project). Borrower: The Republic of Haiti. Amount: The equivalent, in various currencies, of $350,000. Amortization: 80 semi-annual repayments of the prin- cipal from August 15, 1972 to February 15, 2012.  Service Charge: 3/4 of 1% per annum of the amount dis- bursed and outstanding; payable semi- annually. Payment Dates: February 15 and August 15. PART III - PURPOSE OF THE PROPOSED CREDIT 5. As explained more fully in -DA/R62-19 (referred to in paragraph 2 of this report) the proposed interim highway maintenance credit is a holding operation designed to preserve and extend the beneficial results obtained from Bank Loan 141-HA by continuing out- side support for highway maintenance and Haiti's semi-autonomous highway organization (the Service Special dtEntretien et d'Ameliora- tion des Routes) hereafter referred to as the Service. It would finance the foreign exchange costs of completing work now under way and of continuing road maintenance and rehabilitation at the present level of operations for approximately one year. 6. Four-fifths of the land area of Haiti is mountainous and production is confined to Pnmall fertile valleys and coastal plains. Poor roads and high transport costs have discouraged farmers from producing cash crops and, thereby, from increasing production above the subsistence level. By shortening vehicle trip-time and reducing transport costs, particularly on the 550 km of Road Network No. 1, the Bank highway project has stimulated agricultural output in cen- tral and northern Haiti and permitted locally produced crops to re- place imported foods. 7. As indicated in the attached Cost Estimate (No. 1) the total cost of the Project is estimated at the equivalent of US$974,000 of which IJS$350,000 equivalent would be in foreign ex- change and US$624,000 equivalent (Gourdes 3.12 million) in local currency. The Haitian Government has allocated US$52,000 equiva- lent per month for the past three years to the existing maintenance program and agrees to continue to make this sum available each month through September 30, 1963. 8. A map showing Road Network No. 1, the principal roads in the Project, is also attached (No. 2). PART IV - LEGAL INSTRUIENTS AND LEGAL AUTHORITY 9. A draft Credit Agreement between the Association and the Republic of Haiti is attached (No. 3). The draft Credit Agreement conforms generally to the normal pattern of the Association's credit agreements. Attention is drawn to the following provisions:  Section 4-05 stipulates that the Borrower shall continue to develop and strengthen the Service as a step to- wards its eventual assumption of responsibility for all roads in the Republic of Haiti. Section 6.02 stipulates that the Borrower shall employ engineering consultants on terms satisfactory to the Association as a condition of effectiveness. 10. The report of the Committee provided for in Article V, Section 1 (d) of the Articles of Agreement of the Association is attached (No. 4). PART V - ECONOMIC POSITION 11. A report (R61-99) on the "Current Economic Position and Prospects of Haiti" was distributed on September 21, 1961. As that report emphasized, Haiti is one of the most densely settled, the poorest and the least developed of the Latin American republics. It has the lowest per capita exports ($10 in 1960), the lowest per capita income (less than $70 in 1960) ar.d the highest rate of illiteracy (approximately 90%) in the Western Hemisphere. W4hile subsistence production is the primary concern of the majority of the people, coffee is growm by the peasants and provides more than half of total exports. With the decline in coffee prices since 1954, export earnings have fallen and per capita income is estimated to have declined by more than a quarter in the past eight years. 12. The economy has benefitted from a record coffee crop in the 1961/62 season, which increased exports and government revenues. Nevertheless, with the cessation of U. S. budget support in fiscal 1962, a deficit amounting to about 5% of Government expenditures was incurred. Appropriations for external debt service, which were the equivalent of about $0.1 million in the 1960/61 budget, were in- creased to about $3.0 million in the 1961/62 budget (about 10% of total budgetary expenditure). The servicing of long-term debt - on some of which Haiti was for a time in arrears - has now been fully resumed, although there are still some outstanding, overdue claims of suppliers. In 1962 the service on the existing external debt will absorb about 9% of estimated foreign exchange earnings. 13. Under the guidance of the IMF, a conservative monetary policy has been followed. Nevertheless, despite increased export earnings and restrictive credit policies, foreign exchange reserves declined during the past year as a consequence of some capital flight and a decline in grant aid - from an average of over $10 million in 1960 and 1961 to about $3 million in 1962.  - 4 e 14. The good export performance in 1962 does not basically alter the prospects for longer-term growth. Next year will be a bad coffee year which will be reflected in a drop in Government revenues. Political uncertainties continue to inhibit private investment. Government funds available for development projects are, and will remain, extremely limited. Projects currently being executed or considered, are being financed, or are likely to be financed, through "soft" loans or grants. 15. Because of Haitits very low per capita income and limited growth prospects, there is little basis for new borrowings on con- ventional terms during the next few years. External aid, therefore, should continue to take the form mainly of grants and loans on special terms, and if it is to be used effectively, it is essential that it be associated with appropriate technical assistance. PART VI - COMPLIANCE WITH ARTICLES OF AGREEMENT 16. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association. PART VII - RECOMMNDATIONS 17. I recommend that the Association make a Credit to the Republic of Haiti in an amount in various currencies equivalent to $350,000 for a term of 50 years, including a grace period of 10 years, with a service charge of 3/4 of 1% per annum and on such other terms as are specified in the draft Development Credit Agree- rent, and that the Executive Directors adopt a resolution to that effect in the form attached (No. 5). Eugene R. Black President Washington, D. C. October 24 , 1962