Haiti - Economic Recovery Program Project

Document of The World Bank FOR OFFICIAL USE ONLY ~ (~l~ LL IiReport No. 10 0 80 PROGRAM PERFORMANCE AUDIT REPORT HAITI ECONOMIC RECOVERY PROGRAM (CREDIT 1766-HA) NOVEMBER 15, 1991 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its coutents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit = Gourde (G) G 1.00 US$0.20 US$1.00 = G 5.00 The Courde has been pegged to the U.S. Dollar since 1919 at this rate. WEIGHTS AND MEASURES Metric System FISCAL YEAR October 1 - September 30 ABBREVIATIONS BNDAI - Banque Nationale de Developpement Agricole et Industriel (National Agricultural and Industrial Development Bank) BRH - Banque de la Republique d'Haiti CPNAP - Commissariat a la Promotion Nationale et l'Administration Publique (National Planning and Public Administration Commission) ENAOL - Enterprise Nationale des Oleagineux (edible oil company) ERC - Economic Recovery Crt,dit ESF - Economic Support Fund GDP - Gross Domestic Product IDA - International Development Association IDB - Inter-American Development Bank IMF - International Monetary Fund OED - Operations Evaluation Department PCR - Project Completion Report PPAR - Program Performance Audit Report SAF - Structural Adjustment Facility SGS - Societe Generale de Surveillance (Swiss-based trade inspection company) SOE - Statement of Expenditure TAC - Technical Assistance Credit USAID - United States Agency for International Development USN - Usine Sucriere du Nord (National Sugar Refinory at Citadelle, in northern part of Haiti) THf WORLD $AN.. FOR OFFICIAL USE ONLY Washington. D.C. 20433 U.S A Offte of Drector*00neral Operatioas vailuatio November 15, 1991 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Program Performance Audit Report on Haiti - Economic Recovery Program ,Credit 1766-HA) Attached, for information, is a copy of a report entitled "Program Performance Audit Report on Haiti - Economic Recovery Program (Credit 1766-HA)" prepared by the Operations Evaluation Department. Attachment ThL docuunnt h= S Mtfi=W diStibUtOnd may be uM by .MMsuM in tM pa b of thetf oftials duum Its MWASen nia not 01heiwnn be discimme wmthout WdM atk awb*mwa. FOR OFFICIAL USE ONLY PROGRAM PERFORMANCE AUDIT REPORT HAITI ECONOMIC RECOVERY CREDIT (CREDIT 1766-HA) TABLE OF CONTENTS Page No. Preface ................... . . . . . . . Basic Data Sheet . . . . . . . . . . . . . . . . . . . . . . . iii Evaluation Summary . . . . . . . . . . . . . . . . . . . . . . v PROGRAM PERFORMANCE AUDIT REPORT I. BACKGROUND - THE ECONOMY PRIOR TO 1986.... . . . . .1 II. THE ADJUSTMENT PROGRAM. . ............ . . . 2 III. PERFORMANCE. . ............ . . . . . . . 5 A. Measures Successfully Implemented. ...... . . . 7 B. Second Tranche Conditions Which Were Altered or Waived by the World Bank. . ............ . . . 8 C. Second Tranche Conditions Which Fell Out of Compliance.. .............. . . . 9 D. Second Tranche Conditions Not Met. ...... . . .10 IV. OUTCOME.. ................ . . . .11 A. The Stabilization Impact of Structural Change . . . 11 B. Outstanding Structural Issues. ........ . . .14 V. MAJOR ISSUES.......... ...... . . . . .15 A. Design . . . . . . . . . . . . . . . . . . . . . . . 15 Coverage: Need for a Social Component . . . . . . . 15 Aid Shortfalls: Risk Analysis and Contingency Financing . . . . . . . . . . . . . . . . . . . . 16 Exchange Rate Management and the Appropriateness of a Fixed Exchange Rate. . ......... . o . 18 Sustainability................ . . . 20 B. Implementation. . ............. . . ..21 The Collapse of the Macroeconomic Framework and Credit Cancellation.... .. . ... . . .21 Maintenance of Import Licensing for Seven Agricultural Products. . .......... . ..23 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. 1ABLE OF CONTENTS (CONT'D) V. MAJOR ISSUES (Cont'd) C. Technical Assistance Issues: Delayed Preparation and Processing of the IDA Industrial Restructuring and Development Project (IRDP) .... . . . . . .23 VI. SUMMARY ASSESSMENT AND LESSONS OF EXPERIENCE..... . . .25 TABLES 1 - Key Macroeconomic Indicators, 1990-1998.... . . . . . .12 2 - External Sector Indicators, 1990-1998. ........ . .13 3 - Real Exchange Rate Indicators, 1980-1989. ..... . . .20 ANNEXES 1 - Chronology . . . . . . . . . . . . . . . . . . . . . . . 28 2 - Matrix: The Government's Program and the ERC . . . . . . 30 PROGRAM COMPLETION REPORT PART I. PROJECT REVIEW FROM BANK'S PERSPECTIVE..... . . .35 A. Overview. ........... . . . . . . . . . . . .37 B. Credit Background.. ............. . . ..38 The Emergence of Structural Problems . . . . . . . . 38 The Government's Adjustment and Recovery Program . . 39 C. Role of the Bank.. ............ . . . .40 Formulation of Adjustment Program.... . . . . . .41 The Economic Recovery Program Credit... . . . . .41 The Technical Assistance Credit. ........ . .42 Program of IDA Operations. .......... . . .42 D. Accomplishments of Adjustment Program and Bank Support 43 Program Performance ......... . . . . .43 Interruption of Program. ........... . . .45 E. Implementation and Monitoring of the Economic Recovery Program Credit . . . . . . . . . . . . . . . . . . . 47 Supervision . . . . . . . . . . . . . . . . . . . . 47 Credit Compliance.. ........... . . .47 Disbursement and Procurement under ERC..... . . .50 F. Conclusion ........... . . . . . . . . .51 PART II. PROJECT REVIEW FROM BORROWER'S PERSPECTIVE . . . . . 53 A. The ERC Statistics PCR, Part III. ..... . . . . . .53 B. The Analysis: PCR, Part I. .......... . . . .53 C. The Bank's Performance.. ........... . .56 D. Borrower's Performance.... . . . . . . . . . . . . .57 TABLE OF CONTENTS (CONT'D) PART II. PROJECT REVIEW FROM BORROWER'S PERSPECTIVE (Cont'd) E. Bank-Borrower Relations. . .......... . . .57 F. Lessons for the Future........... ... . .57 ATTACHMENTS 1 - Key Macroeconomic Indicators as Projected in President's Report and Actuals . . . . . . . . . . . 60 2 - Status of Second Tranche Release Conditions on 9/30/88............ ... . . . . . .61 PROGRAM PERFORMANCE AUDIT REPORT HAITI ECONOMIC RECOVERY CREDIT (CREDIT 1766-HA) PREFACE This is a Program Performance Audit Report (PPAR) on the Economic Recovery Program Credit (ERC) to Haiti (Credit 1766-HA). The Credit, for US$40 million, was approved on March 24, 1987, and became effective on April 16, 1987. The second tranche in the amount of US$20 million, was canceled at the end of September 1988, and the credit was closed on December 30, 1988. The PPAR was prepared by the Operations Evaluation Department (OED) and the Program Completion Report (PCR) was prepared by the Latin America and Caribbean Regional Office. The PPAR is based on the attached PCR, the President's Report, the credit documents, economic and sector reports, credit and staff files, and IMF reports. OED staff interviewed present and former Bank staff who had been associated with the ERG or with economic work in Haiti. The PCR provides a satisfactory account and assessment of the program experience, and discusses the performance of the Bank and the Borrower executing agencies. The draft PPAR was sent to the Borrower for comments but none were received. - iii - PROGRAM PERFORMANCE AUDIT REPORT HAITI ECONOMIC RECOVERY CREDIT (CREDIT 1766-HA) BASIC DATA SHEET CREDIT POSITION (Amounts in US$ Million) As of Mar. 31, 1991 Credit Original Disbursed Cancelled Repaid Outstandina 1766-HA 40.0 21.18 20.0 0.0 22.17 CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS FY87 FY88 Appraisal Estimate (US$M) 20.0 20.0 Actual (US$M) 20.0 0.0 Actual as % of Appraisal (%) 100.0 0.0 Date of Final Disbursement: September 7, 1988 PROJECT DATES Original Actual Initiating Memorandum 09/15/86 09/15/86 Letter of Development Policy 11/24/86 01/30/87 Negotiations 02/02/87 01/28/87 Board Approval 03/17/87 03/24/87 Signing 03/26/87 03/27/87 Effectiveness 06/30/87 04/16/87 Credit Closing 06/30/88 12/30/88 Actual Completion 09/30/87 09/30/88 - v . PROGRAM PERFORMANCE AUDIT REPORT HAI1I ECONOMIC RECOVERY CREDIT (CREDIT 1766-HA) EVALUATION SUMMARY Introduction 1. This is the audit of the IDA- revenue and expenditure systems, and Economic Recovery Credit (ERC), a trade reform aimed at phased approved in March 1987, for US$40 elimination of price distortions. million. The principal objective of There was close cooperation between the IDA-ERC was to support Haiti's the World Bank, the IMF, and USAID in fiscal and trade reforms initiated assisting Haiti with its adjustment after the change in political regime effort (para. 2.03). in February 1986. 4. IMF's primary focus was 2. Haiti, the poorest country in stabilization while the Bank's ERC the Western Hemisphere, is a small, was designed to improve incentives, densely populated, open economy promote investments and strengthen dependent on agriculture. It is important institutions in agricul- characterized by a narrow export base ture, industry, and the education with high vulnerability to external sector. The ERC reform package, in shocks and an extreme dependence on addition to requiring the mainte- external aid. After two decades of nance of a satisfactory macroeco- modest growth (averaging 2.4 percent nomic framework, consisted of per year), Haiti's economic specific actions in four policy areas performance deteriorated in the (paras. 2.04-2.07): 1980s, leading to civil unrest and contributing to the fall of the * public expenditures; Duvalier regime after 30 years in public enterprises; power (paras. 1.01-1.05). * competition and fiscal and industrial incentives (includ- Objectives ing the trade regime); and, agricultural pricing and cred- 3. The objective of the transi- it. tional (from February 1986 to February 1988) Government's program Implementation Experience was to restructure the economy and end the former system of privilege 5. The Government began imple- and monopoly and foster sustained menting the agreed actions in the growth. The major policy instru- four policy areas immediately after ments were a fiscal reform to improve taking office in February 1986. efficiency and equity of public Thus, when the ERC became effective - vi - in April 1987, all first tranche 9. The withdrawal of bilateral aid conditions had been complied with. following the November 1987 events, which included direct budget and 6. At the first formal review balance of payments support, left (September 8-22, 1987), the general nearly 10 percent of Haiti's FY88 macroeconomic framework was judged to budgeted expenditures unfinanced and be still on track and all first 30 percent of estimated net external tranche conditions had been sus- capital disbursements unavailable. In tained, notwithstanding major civil addition, the bilateral aid unrest during July and August. withdrawal determined a 70 percent However, only two second-tranche fall in counterpart funds for the conditions had been fully met (paras. investment program. Moreover, the 3.02, 3.05-3.07), and tranche January 1988 revision of the FY88 release was delayed until after budget, following revenue shortfalls, December 15, 1987. cut the Treasury's contribution to the development budget by 30 percent 7. On November 29, 1987 the (paras. 3.03, 3.13-3.14, 5.14-5.18). scheduled elections were canceled The second half of the ERG was thus amid an outbreak of violence which canc.led as of September 30, 1988. prompted suspension of assistance by bilateral donors. By mid-December 10. The implementation record for 1987, second tranche conditions had the various measures included in the not been complied with, and the ERG is detailed in paras. 3.04-3.19 sustainability of the stabilization and is summarized below: effort became problematic. The Bank agreed to postpone the tranche (a) measures-which were effectively cancellation date and the Credit inlemented and, on the whole closing date. The target date for achieved the desired objectives. reviewing progress on the second tranche release conditions was set to 1.1. These include all first tranche June 1988. conditiors leading to extensive reforms in the fiscal and trade 8. In February 1988, electinns areas. On the fiscal side, the took place and the new Government Government addressed the budgetary expressed to the Bank its intention situation by cutting both expendi- of maintaining the economic policy tures and taxes. Total expenditures direction and reforms implemented by and taxes were cut by approximately 2 the transitional Government. How- percent of GDP. Allocations to ever, a military coup d'etat took priority sectors (education, health, place on June 19, 1988, which made agriculture, and internal security) necessary a third postponement of a were increased by over 20 percent in formal progress review of second real terms; education and health, tranche release conditions to August which in FY85 and FY86 represented 1988. The second formal supervision only 22 percent of total expendi- mission took place during September tures, in the three following years 8-9, 1988 and concluded that, while reached 30 percent of total expendi- the first tranche conditions remained tures. Prices and excise taxes on in place, important second tranche basic consumption items were also conditions were still unmet and, in reduced. A new simplified income tax addition, the FY88 macroeconomic law was enacted which was more incoae framework was not sustainable, elastic, more equitable, and easier . vii - to administer than the previous tax 15. This relates to the Govern- system. Two loss-making public ment's inability to maintain a sus- industrial firms were closed down tainable macroeconomic framework in (para. 3.06). FY87 and FY88 and to implement a satisfactory investment program for 12. In the trade area, in June 1986 FY88 (paras. 3.11-3.14); and the Government began the implementation of a major reform of (d) conditions which were not met. the trade regime aiming at liberal- izing trade, stimulating competi- 16. This group includes the audit tion, and revising the incentive of the financial position of the structure. Quotas and specific Central Bank, and improvements in tariffs were replaced with ad valorem competitiveness of the flour and tariffs. The number of products cement companies (paras. 3.15-3.19). subject to quantitative trade restrictions was reduced from 111 to Assessment of Outcome and Issues 7. By March 1987 all specific tariffs had been replaced by ad 17. The ERC, was on the whole well valorem ones, and with the exception conceived and designed and the of five products, the new tariff strategy, objectives, and policy structure lowered the maximum tariff instruments were appropriate. More rate from 180 percent to 40 percent specifically, the package of fiscal (para. 3.06). and trade reforms rnd the timing of the reforms were consistent with the 13. Two second tranche conditions limited objective of starting the were successfully implemented and two liberalization of the economy and the others were partially met, thus rationalization of fiscal accounts. deepening the reforms that began in These objectives were achiev'ed in a FY86. The FY87 education budget was satisfactory manner; the main increased and the audit of the reasons for ERC cancellation resulted Ministry of Finance was completed. mainly from factDrs exogenous to the In the trade area, by October 1987, Government's economic policy, i.e., the coffee export tax and all other civil unrest and aid withdrawal. remaining export taxes were abolished. Petty taxes on imports 18. The ERC, combined with the IMF and exports were also eliminated program, contributed to the imple- (para. 3.07); mentation of the Government's major fiscal and trade reforms and to the (b) measures which were altered or improvement of Haiti's economic were altogether waived by the Bank. indicators during the February 1986 - June 1987 period (para. 4.01). 14. This involves the increase in state land rentals, the dissolution 19. In the fiscal area public of the BNDAI, and the establishment expenditures were reduced and re- of a new agricultural credit bank allocated to priority sectors. On the (paras. 3.08-3.10); revenue side, reforms aimed at simplifying the tax system, lowering (c) measures which were initially its marginal rates, and strengthen- implemented and fell out of ing tax administration were main- coMPliance. tained. However, after the disruption of the program due to - viii - civil strife and aid curtailment, be monopolies subjected to 40-50 revenues decreased and the borrowing percent tariffs even after the 1986 requirement of the public sector reforms, In addition, agricultural increased again, as did extrabudge- exports continued to be implicitly tary spending and expenditures by the taxed through protection afforded to public enterprises. Moreover, not import-substituting crops and by the enough was accomplished in public implicit 13 percent export tax enterprise area and the financial arising from the foreign exchange position of the cement and flour surrendering requirement. It should factories deteriorated. These two be noted, however, that the FY89-90 enterprises have increasingly become program for IDA assistance to Haiti a fiscal burden and the Bank has included a sector adjustment credit suggested to the Go-ernment to for agriculture which was delayed due contract private firms to manage and to the political situation but could 4mprove their finances, open up these possibly have addressed these enterprises to international outstanding issues (para 4.07). competition and pricing so that domestic consumers benefit and Sustainability exports are resumed (para 4.05). 22. The two major accomplishments 20. In the trade area, the liber- of the program - extensive fiscal and alization effort undoubtedly rppre- trade reforms - represented a major sented a change in direction follow- effort to begin the elimination of ing a long period of Government distortions in the economy. Four intervention. All export taxes were different Governments from February abolished, all quantitative import 1986 to September 1988 maintained the restrictions were eliminated with the momentum of the structural reforms exception of seven agricultural implemented in FY86-87. In addition, products, and specific tariffs were notwithstanding the political, replaced with ad-valorem ones (para. economic, and financial difficulties 4.06). of FY88 and FY89, Haiti has kept in place the basic fiscal and trade 27 Notwithstanding the general reforms implemented during 1986-1987. success of the liberalization effort, Structural reforms in the size and not all objectives were achieved in composition of public expenditure the agricultural sector and the anti- with increased spending in the social export bias against agricultural sectors were sustained and not commodities persisted (para 4.07). reversed and the basic trade reforms Major agricultural commodities were that were implemented in 1986-1987 granted special protection in spite have also been kept in place (para. of the overall tariff reform. The 4.04). Government replaced in December 1986 import quotas with licensing without 23. The Government was committed to formal ceilings, for seven the program and it should be stressed agricultural products. Imports of that it was the combination of both maize, sorghum, rice, and beans were aid curtailment with the uncertainty subject to licensing requirements and following the November 1987 events to a 50 percent tariff. Licenses and about the fulfillment of tranche a 40 percent tariff were also conditionality and the sustainability introduced for meat imports while of the macroeconomic framework that sugar and flour imports continued to led to the cancellation of the ERG. - ix - 24. A structural dependence on Second, the success of the adjustment external financing to bridge fiscal program was indeed highly dependent and external gaps and the narrow on pledged external assistance, how- export base are two critical weak- ever, the causality behind program nesses of the Haitian economy. The failure, can be interpreted from two sustainability of the fiscal and sides. On the one hand, as the balance of payments position were Government claims, the withdrawal of intertwined with the timely avail- external support was a major factor ability of foreign financing and the in the destabilization of the Haitian attainment of projected levels of economy at the end of FY87 and during Haiti's two main export products FY88. On the other hand, the (paras. 5.12-5.13). deterioration of the political situation is the event which occurred Major Issues and Lessons of first and the Government did know in Experience advance that bilateral aid is sensitive to political developments. 25. Given the experience with this first ERC, there are issues related 26. In a country structurally de- to program design and implementation pendent on external assistance and in that should be kept in mind for transition to democracy, the future operations in Haiti (Major withdrawal of the financing package issues and lessons of experience are is a downside risk which cannot be detailed in paras. 5.01-5.24 and avoided. As it happened in the case 6.01-6.06, respectively). of Haiti, if the donors' package does not come through the program is * The program as a whole did likely to collapse. It is therefore address priority issues. However, essential to have the program fully given Haiti's status as the poorest funded at the time of Board presen- country in the Western Hemisphere, a tation and in the case of Haiti the social component to directly address financing package was indeed lined up both structural poverty issues and to with a firm commitment by the donors offset the negative social impact of at the time of ERC approval. economic stabilization and adjustment should have been either included in 27. As noted by the PCR and by the the ERC or followed immediately after Haitian Government, the risk of the ERC however, an Economic Social political upheaval followed by aid Fund was eventually presented to the curtailment was not included at the Board only in November 1990 (paras. time of the ERC. During PFP dis- 5.01-5.03, 6.03). cussions in mid-1986 the Region had noted that although the political * The cancellation of the program situation in Haiti had stabilized the did not sit well with the Government risks of renewed political dis- because it Zelt that the main reason turbance remained during the tran- for the collapse of the macroeconomic sition to a democratically elected framework was the bilateral donors' Government, posing substantial risks aid withdrawal. Two considerations for Bank and Fund Operations. Thus, must be noted. First, at the time of even though at the time of Board the c3ncellation the Government had presentation prospective donors had not met conditions pertaining to the been identified and the program was improvement of cost competitiveness appropriately funded, aid withdrawal of the two public enterprises. was indeed a major risk and should have been explicitly mentioned in the of an adjustment program by the new ERC as one of the downside risks of Covernment must be the sustainability the program (paras. 5.04-5.07, 6.06). of the macroeconomic framework and the public sector investment program * The issue of the limited impact (para. 6.08). of the liberalization effort in the agricultural sector, particularly the A necessary condition for the maintenance of import licensing for successful implementation of seven agricultural products, was a structural reform is the commitment very sensitive one. The Government of the whole government to the refor had requested from the Bank a program, and not only the commitment technical study to address the issue. of the technical authorities; the The study unfortunately was never Government must own the program for delivered by the Region. This it to succeed (para. 6.09). occurrence emphasizes the necessity in future operations to ensure a * A regime change provides the timely follow tp by the Bank on best oportunity to implement specific issues which may arise structural adjustment measures. during program negotiation and Thus, when the current political implementation (paras. 5.19-5.20, problems in Haiti are satisfactorily 6.04). resolved, the opportunity is likely to emerge to enable the Government to * The negative impact on tax address outstanding structural issues revenue performance of the opening up in order to achieve a viable of provincial ports and of the macroeconomic situation, encourage weakening of tax administration domestic and international contributed to compromising the competition, and generate growth. viability of the macroeconomic Priority areas include: fiscal framework for FY87 and FY88. Revenue issues requiring improvements in cost collection was negatively affected by competitiveness of the cement and widespread smuggling, worse than flour companies, i.e. comply with the expected performance of the reformed ERC conditions which were not met, tax system, and by the general the ceasing of Central Bank financing lowering of import tariffs and of the deficit, the inclusion of cost reduction of export taxes. The recovery as part of the fiscal negative implications on tax revenues picture, and renewed privatization of the legacy of decades of efforts; lowering of tariffs on protectionist policies and modest external trade, liberalizing the revenue performance should have been agricultural sector, and maintaining explicitly addressed at the time of the absence of price controls; the ERC (paras. 3.12, 6.05.). eliminating exchange rate distortions by merging the official and parallel * The Government's inability to foreign exchange markets; defining maintain a sustainable macroeconomic investment priorities and framework and to Implement a strengthening of institutions to satisfactory investment program in undertake investment in FY88 underscores the fact that the infrastructure; and focusing on the priority area in the implementation social sectors. PROGRAM PERFORMANCE AUDIT REPORT HAITI ECONOMIC RECOVERY CREDIT (CREDIT 1766-HA) I. BACKGROUND - THE ECONOMY PRIOR TO 1986 1.01 Haiti is a small, densely populated, open economy which remains dependent on agriculture with approximately 80 percent of its population living in rural areas. The Haitian external sector is characterized by a narrow export base with high vulnerability to external shocks. However, while approximately half of the country's exports are agricultural, a light assembly industry sector developed during the 1970s, taking advantage of the proximity to the United States market and Haitian wage competitiveness. As coffee production declined the role of the assembly sector increased in importance, now accounting for approximately half of the country's export earnings. The performance of the Haitian economy is influenced by domestic and external factors, i.e., by developments in the United States which is Haiti's main export market, by fluctuations in the international coffee market, and by weather conditions. In addition, Haiti's low income and savings levels have traditionally been responsible for its high dependence on external bilateral assistance for supplementing domestic resources needed to achieve an adequate investment rate. The bulk of this concessional assistance, increasingly provided in the form of grants in the 1980s, was channelet through the general Government. 1.02 After growing at an average annual rate of 0.7 percent in the 1960-1970 period, by 4.3 percent in 1970-75, and 5.0 psrcent in 1975-1980, Haiti's economic performance worsened in the 1980s. Haiti's real GDP declined by 2.7 percent in 1981 and by 3.4 percent in 1982. Following this severe recession, Haiti experienced four years of positive real growth, but only in the order of 1/2 percent per year. Real GDP per capita declined continuously since 1981 and by 1986 Haiti's GDP per capita was 15 percent lower than in 1980. Serious macroeconomic disequilibria emerged during' the 1980s. The 1981/82 recession was attributed mainly to exogenous factors, such as a hurricane and drought which damaged agriculture and the recession in the United States. The deterioration of the balance of payments continued during the 1980s due to lower export receipts from coffee (due to low world prices and hurri- canes), reduced revenues from the assembly industry (due to shakeout in U.S. computer industry), and decreased tourism affected by fears regarding AIDS in Haiti and social unrest. Real GDP and Government revenues also declined. 1.03 Endogenous factors also contributed to the 1980s economic deteriora- tion. Macroeconomic management was characterized until 1980 by conservative fiscal management and limited external commercial borrowing. Beginning in FY81, overly expansive macroeconomic policies in the form of a surge of Government spending resulted in worsening fiscal and external imbalances. Government expenditure policies were negatively affected by widespread waste of resources and corruption. The deficit began to be increasingly financed by central bank credit as compared to grants-in-aid which had covered -2- approximately one-half of the deficit during the 1970s. Stabilization efforts during the 1982-1984 period failed due to renewed public spending especially after the May 1984 civil disorders, and the rise in extrabudgetary expenditures fueled by public enterprises' deficits. 1.04 The agricultuial sector was suffering from declining agricultural output, deficiency of agricultural savings, scarcity of cultivable land, and dependence on imported staples and on coffee - expansion of which was discouraged by an export tax. On the social side, with a GNP per capita of US$360' in 1987 and US$400 in 1989, Haiti was and remains the poorest country in the Western Hemisphere. In 1987 life expectancy at birth was only 53 years; the infant mortality rate was about 120 per 1,000 live births, close to the average in Sub-Saharan Africa; over 25 percent of children suffered from second or third degree malnutrition, and 27 percent died before the age of five. About 65 percent of adult Haitians were illiterate and 50 percent of the labor force was unemployed or underemployed. 1.05 The 1980s economic stagnation led to increasing political dissatisfac- tion and civil unrest and contributed to the fall of the Duvalier regime after 30 years in power. A provisional Government took power in February 1986 and an electoral calendar was established scheduling presidential elections for November 1987, with the new Government expected to take office on February 7, 1988. On November 29, 1987 the elections were canceled amid an outburst of violence. On January 17, 1988 controlled elections took place with less than fifteen percent voting and a month later Leslie Manigat took office. In June General Namphy fired President Manigat, abolished the constitution and dissolved the parliament. In September Namphy was over- thrown by General Avril. On March 10, 1990 A-rril abdicated and General Abraham succeeded him, vowing to turn power over to a civilian. Three days later Ertha Pascal Trouillot was inaugurated as provisional president. On December 16 +he first open presidential elections were held, won by Reverend Jean Bertrand Aristide. II. THE ADJUSTMENT PROGRAM 2.01 As discussed in the ERC, the diagnosis of the Haitian economy at the time when the transitional Government took office in February 1986 centered on the following fundamental disequilibria and structural weaknesses: - Macroeconomic disequilibria, inflationary and balance of payments pressures, decreasing reserves, external debt servicing arrears, a widening parallel market premium resulting from excessive expenditure and extra-budgetary spending, declining public savings, and a central ' Atlas methodology. 2 Given the interrelations between economic and political events, Annex 1 provides a brief chronology of the Haitian political developments from February 1986 to the recent election of President Aristide. -3- Government fiscal deficit averaging 9 percent of GDP in 1980-85, increasingly financed by money creation. - Structural fiscal issues at the revenue, expenditure, and public enter- prise level. Tax revenues were unequitable and low - approximating 10 percent of GDP through FY85 (October 1,1984 - September 30, 1985) - and tax evasion was high. There were two major resource allocation and public expenditure control issues3. First, the development-oriented ministries - agriculture, public works, education, and health - were not receiving adequate non-salary operating funds. Second, there were several issues related to the size and composition of the public investment program. Furthermore, public enterprises enjoyed trade privileges which .ed to inefficiency, lack of cost competitiveness, and high prices. Finilly, there had been a deterioration in public sector management at both the central Government and public enterprise level. - On the incentives side, import-substitution policies followed by balance of payment constraints had led to progressively higher tariffs and barriers to trade. High protection of the domestic :.arket led to uncompetitive and inefficient local production, high consumer prices, and an anti-export bias. - In the agricultural sector the Government's intervention was exemplified by export taxes on coffee, cocoa, sisal, cotton, and essential oils; and import duties and excise taxes on sugar and wheat flour. Moreover, as stressed by a recent agricultural sector review the Government was involved in price fixing and had a monopely on imports and sales of sugar and wheat flour4. Additional issues included policy-induced rents and limited access to credit. 2.02 The transitional Government - which was expected to remain in office from February 1986 to February 1988 - was committed to the implementation of an adjustment program to begin restructuring the economy to end the former system of privilege and monopoly and foster sustained growth. The overall objectives of the Government's adjustment program supported by the ERC were to pursue adjustment in the areas numbered above and to establish conditions for a viable, growing economy and relieve the average Haitian of the excessive burden of high consumer prices arising from past anti-competition policies. Because the credit was negotiated with a provisional Government, the ERC represented only the first step of continuing efforts to pursue adjustment in the areas identified above. The major policy instruments were (a) a fiscal reform to improve efficiency and equity of public revenue and expenditure systems: and (b) a trade reform aimed at phased elimination of prige distortions. In the process, the Government expected to decrease financial imbalances, decrease inflation, increase international reserves, At President's Report, paras. 30-31. i Report No. 9357-HA, Haiti - Agricultural Sector Review (ASR), April 30, 1991, para. 1.10. -4- and promote economic expansion through export-led growth (initially coffee and assembly industry exports). 2.03 There was close cooperation between the World Bank, the International Monetary Fund (IMF), and United States Agency for International Development (USAID) in assisting Haiti with its adjustment effort. Haiti's program was to be supported, during FY87-89, by the US$40 million International Development Association (IDA) -Economic Recovery Credit (ERC), a US$36 million Structural Adjustment Facility (SAF) from the IMF, and a US$77 million Economic Support Fund (ESF) from the USAID. The primary focus of the IMF-SAF was macroeconomic stabilization, including reduction of public sector deficits; improved balance of payments performance; reduction of public debt to the domestic banking system; and relaxation of controls over interest rates. The USAID-ESF emphasized management and financial audits of Government entities, and the strengthening of the programming and revenue administration capabilities of the Ministry of Finance. 2.04 The Bank's ERC was designed to improve the economic incentives, invest- ments and important institutions in agriculture, industry, and the education sector. The ERC in addition to requiring satisfactory macro-economic stabilization, included specific actions in four policy areas: (a) public expenditures; (b) public enterprises; (c) competition and industrial incentives (including the trade regime and fiscal incentives); and, (d) agricultural pricing and credit. The transitional Government which took office in February 1986 began addressing these four areas immediately; therefore, at the time of Board presentation of the ERC, substantial measures addressing these issues had already been implemented. 2.05 In addition to continued satisfactory economic stabilization the ten other specific actions that were to be taken prior to release of the second tranche. as stipulated in the loan agreement were: * preparation of a satisfactory public investment program for FY88; " improvements in recurrent budgeting for education; a completion of the Ministry of Finance's audit; " completion of the Central Bank's audit; O implementation of auditors' recommendations and further improvements in cost competitiveness at Ciment d'Haiti and La Minoterie; o elimination of petty taxes on imports and exports; O elimination of the coffee export tax; * dissolution of the national Agricultural and Industrial Development Bank (BNDAI); " legal establishment of a new agricultural credit bank; and, - 5 - 0 preparation and implementation of a program to raise rentals on State lands. 2.06 A summary of the ERC to Haiti is presented in Annex 2. The Annex lists the structural issues to be addressed for all of the above areas, describes the measures that were to be taken under the ERC, and the implementation record of such measures. 2.07 A Technical Assistance Credit (TAC) to complement the ERC was provided by IDA. The credit was designed to assist Haiti in three key areas: - diagnostic studies necessary for the preparation of a proposed Industrial Restructuring Project to address the restructuring needs of industrial firms affected by the trade regime reform; - other studies to strengthen and advance Haiti's adjustment agenda, including the design and implementation of a trade drawback system, and the analysis and rationalization of the civil service establishment and pay schemes; and, - support for the Ministry of Finance and the public investment planning body with equipment and advisers and trainers in macroeconomic and public expenditure training. III. PERFORMANCE 3.01 Political events and economic developments were closely intertwined during the implementation of the program. To set the stage for the analysis of the implementation and results of the program three distinct phases in the political economy of Haiti during the ERC implementation should be kept in mind. The first phase, from the fall of Duvalier in February 1986 to June 1987 (i.e., the first three quarters of FY87) witnessed the transitional Government's efforts at reducing macroeconomic imbalances and implementing a structural adjustment program. The second phase, i.e., the fourth quarter of FY87 (July-September), saw the beginning of civil unrest which increasingly disrupted all economic activity, including the collection of taxes and public utility charges. The third phase, coinciding with FY88 (October 1987 - September 1988), saw the full blown explosion of political instability, work stoppages, investor uncertainties, distraction of Government's attention from economic policy reforms, shortfalls in public revenues, and the suspension of external assistance. 3.02 The ERC became effective on April 16, 1987, and it was expected that the second tranche conditions would have been met by September 30, 1987. At the first formal review (September 8-22, 1987), the general macroeconomic framework was judged to be still on track and all first tranche conditions had been met and were sustained, notwithstanding major civil unrest during July and August. However, only two second-trance conditions had been fully met, the completion of FY86 audit of the Ministry of Finance and the elimina- tion of petty taxes on imports and exports. The following four other condi- tions had not been met: the FY88 Investment program, the FY88 budget for the -6- Ministry of Education; the elimination of the coffee export tax, and the audit of the Banque de la Republique D'Haiti. In addition, the Bank manage- ment indicated that it would modify two of the other tranche release condi- tions - the creation of a new agricultural credit bank and the raising of state land rentals - because of delays in recruiting specialist consultants to carry out the necessary studies. The Bank also concurred with the Govern- ment on the closure of only the agricultural window of BNDAI5. Given this situation, second tranche release was delayed until after December 15, 1987. 3.03 On November 29, 1987 the scheduled elections were canceled amid an outbreak of violence which prompted suspension of assistance by the United States and other bilateral donors. By mid-December 1987, the second tranche conditions mentioned above had not been complied with and the FY87 macro- economic viability had fallen out of compliance. At the request of the Government, the Bank agreed to postpone the tranche cancellation date (from December 31, 1987 to September 30, 1988) and the Credit closing date (from June 30, 1988 to December 31, 1988). The target date for reviewing progress on the second tranche release conditions was set to June 30, 1988. In February 1988 elections took place and the new Government expressed to the Bank its intention of maintaining the economic policy direction and reforms implemented by the transitional Government. However, a military coup d'etat took place on June 19, 1988 which made necessary a third postponement of a formal progress review of second tranche release conditions to August 31, 1988. The second formal supervision mission took place during September 8-9, 1988 and concluded that, while the first tranche conditions remained in place, there were still important unmet second tranche conditions and, in addition, the FY88 macroeconomic framework was not viable. The second half of the ERC loan was thus canceled as of September 30, 1988, while the associated Technical Assistance Credit was kept alive. 3.04 The implementation record for the various measures included in the ERC is as follows: - a first category consists of those measures which were effectively implemented and, on the whole, achieved the desired objectives. This is particularly true for all first tranche conditions and the following second tranche conditions: improvements in recurrent budgeting for education; completion of the Ministry of Finance's audit; elimination of petty taxes on imports and exports; and, elimination of the coffee export tax; - a second group of measures were altered or were altogether waived by the Bank. This is the case for the increase in state land rentals, the dissolution of the BNDAI, and the establishment of a new agricultural credit bank; - the third group of measures which were initially implemented and fell out of compliance. This is true for the Government's inability to i PCR, paras. 45 and 46 and Memo dated October 19, 1987. - 7 - maintain a sustainable macroeconomic framework and to implement a satisfactory investment program for FY88; and - the fourth category consists of conditions which were not met. This group includes the audit of the financial position of the Central Bank, and improvements in cost competitiveness of the flour and cement companies. These four categories of measures are reviewed in depth below. A. Measures Successfully Implemented 3.05 The new Government acted immediately after taking office to stabilize the economy, and began implementing structural reforms in the four policy 6 areas supported by the ERC. As indicated by the PCR , the new Government began the implementation of several of the Bank's proposals even as the ERC was being prepared and appraised and pursued the stabilization and adjustment measures up to the third quarter of FY87 (i.e., June 1987). Four different Governments from February 1986 to September 1988 maintained the structural reforms implemented in FY86-87. 3.06 All first tranche conditions had been met at the time of the ERC. Extensive reforms in the fiscal and trade areas were implemented. On the fiscal side, to address the issues discussed above (para. 2.01), fiscal adjustments in the areas of public expenditure, taxation, and public enter- prises were implemented. The new Government addressed the budgetary situa- tion by cutting both expenditures and taxes. Total expenditures and taxes were cut by approximately 2 percent of GDP. The Government eliminated from the original FY86 budget approximately 20 percent of total appropriations which were considered wasteful or unnecessary. The resulting savings were used to increase allocations to priority sectors (education, health, agricul- ture, and internal security) by over 20 percent in real terms, and to reduce prices and excise taxes on basic consumption items (flour, sugar, vegetable oil, and petroleum products). A new simplified income tax law was enacted in September 1986, which was more income elastic, more-equitable, and easier to administer than the previous tax system. Income taxes were simplified, top marginal rates lowered, and measures to strengthen tax collection intiated. Two loss-making public industrial firms (the Darbonne sugar factory and the ENAOL vegetable oil mill) were closed down to increase competition in the domestic market by removing both private and public monopolies. The public investment program was improved and the size and composition of the FY87 program were determined by the needs to meet the local counterpart require- ments of projects and to consolidate and rehabil-itate existing and on-going investmentso. In the trade area, in June 1986 the Government began the 1i See para. 21. PCR, para 29. gi PR, para. 38. - 8 - implementation of a major reform of the trade regime aiming at liberalizing trade, stimulating competition, and revising the incentive structureg. Quotas and specific tariffs were replaced with ad valorem tariffs. The number of products subject to quantitative trade restrictions was reduced from 111 to 7, to which import licensing requirements still applied, but formal ceilings did not. By March 1987 all specific tariffs had been replaced by ad valorem ones, and with the exception of five products (rice, maize, millet, flour, and gasoline), the new tariff structure lowered the maximum tariff rate from 180 percent to 40 percent. 3.07 Two second tranche conditions were successfully implemented and two others were partially met, thus deepening the reforms that began in FY86. The FY87 investment program focused on the completion of on-going priority projects and the education budget was improved. The audit of the Ministry of Finance was also completed. In the trade area, in October 1986, the coffee export tax was reduced from 22 to 10 percent and the other agricultural export taxes were eliminated. By October 1987, the coffee export tax and all other remaining export taxes were abolished. Petty taxes on imports and exports were also eliminated. B. Second Tranche Conditions Which Were Altered or Waived by the World Bank 3.08 Following the first formal supervision mission, the Bank's management indicated that it would modify three tranche release conditions: complete BNDAI closure, the creation of a new agricultural credit bank, and the raising of state land rentals. 3.09 The Bank's management agreed to waive the establishment of a new agricultural credit bank if all other second-tranche conditions were met because, even though at the time of the first supervision an IDB financed study on the organization and functions of this new bank had begun, it was felt that it would have been better to first complete a full study which would require approximately seven months. Moreover, the Bank's original interest had been the closure of BNDAI rather than the opening of a new bank and this condition had been included at the request of the Government0. The Bank also concurred with the Government on the closure of only the agricul- tural window of BNDAI, since the industrial portfolio was improving and an IDB line of credit to BNDAI was then disbursing". 3.10 The program to raise state land rentals was altered because of dela7s in starting the study, which was eventually begun only in October 1987 The condition on the increase in state land rentals as altered by the Bank - !I President's Report, para. 59. 1L0 Memo, September 23, 1987. L" PCR, paras. 45 and 46 and Memo dated October 19, 1987. -" Memo, June 17, 1987. - 9 - i.e., the consultant was to be hired to carry out the study and had to submit a work schedule to IDA through the Government - was met by the time of the second formal supervision. C. Second Tranche Conditions Which Fell out of Compliance 3.11 The two conditions which had been met by September 1987, but fell out of compliance were the continuation of a stable and sustainable macroeconomic policy framework and the preparation of a satisfactory pt-blic investment program for FY88. As stated above, the first formal supervision mission's (September 8-22, 1987) back-to-office report clearly stated that the FY87 macroeconomic framework established in cooperation with the IMF remained intact through the third quarter of FY87 (June 1987). Since ther however, serious divergences from the program occurred because the macroeconomic policy framework was disrupted by the impact on tax revenues and the fiscal balance of smuggling following the opening of the ports, the weakening of tax administration, and civil unrest during July and August, by the collapse of coffee prices, by the curtailment of external aid flows, and by a period of recurring political changes that followed. 3.12 The principal cause of the worsening fiscal deficit in FY87 and FY88 was a drop in revenues. While expenditures remained under control, tax revenue performance throughout FY87 and FY88 was negatively impacted by the general lowering of import tariffs and reduced export taxes. Moreover, the reformed income tax introduced in FY86 did not perform as well as it had been anticipated. During the final quarter of FY87, the situation worsened as all tax collections were disrupted by civil unrest and widespread strikes. The following succession of political crises in FY88 brought the Government machinery to a standstill, particularly the Tax Department and the Customs Administration, worsening revenue shortfalls. Moreover, smuggling acceler- ated tremendously following the 1986 opening-up of provincial ports, previ- ously closed for political reasons, and the weakening of Haiti's adminis- trative structure following the end of Duvalier's regime. The increase in smuggled merchandise - particularly basic foodstuffs - affected receipts from customs duties and the financial performance of the Government-owned flour and sugar mills. 3.13 In addition, whereas in FY86 Haiti benefitted from an improvement in terms of trade, in FY87 coffee prices sharply dropped from US$208 per 60 kg. bag in 1986 to US$164. Between FY86 and FY87 coffee export earnings decreased from US$57.5 million to US$36.5 million, and in FY88 remained at only US$32.5 million. Even though exports of light assembly products net the levels projected by the ERC, coffee exports were well below the projected US$54 million in FY87 and US$56 million in FY88 (Table 2). The withdrawal of bilateral aid following the November 1987 events, which included direct budget and balance of payments support, left nearly 10 percent of Haiti's FY88 budgeted expenditures unfinanced and 30 percent of estimated net external capital disbursements unavailable. Thus, the viability of the FY88 fiscal and external accounts became an issue and the condition of maintaining - 10 - satisfactory macroeconomic performance, met in October, was out of compliance by December 1987". 3.14 The level of the FY88 Investment Program which had been met when the FY88 budget and Investment programs were agreed upon in October 1987, also fell out of compliance. The January 1988 revision of the FY88 budget, fol- lowing revenue shortfalls, cut the Treasury's contribution to the develop.. ment budget by 30 percent. In addition, the bilateral aid withdrawal deter- mined a 69 percent fall in counterpart funds for the investment program D. Second Tranche Conditions Not Met 3.15 At the time of cancellation (September 30, 1988), three conditions had not been met: the improvement of cost competitiveness of "La Minoterie" and "Ciment D'Haiti", and the final audit of the financial position of the Banque de la Republique D'Haiti which had only been submitted in draft form by the time of the second supervision mission. 3.16 The improvement of cost competitiveness of "Ciment d'Haiti" and "La Minoterie" was part of the Government's effort to either close, restructure, or privatize the five major public industrial enterprises, two of which had already been closed as part of the initial implementation of the adjustment program. The Government had acquired a 90 percent shareholding in the cement factory in October 1983. IFC was contracted in 1986 to study and assist the Government with the possible privatization of the company. The company's inefficiency resulted from excessive labor force, high wages and salaries, and high energy consumption due to the plant's outdated power generating equipment. Notwithstanding its high production costs, the company was profitable up to 1986 by virtue of its de-facto monopoly over cement lales given import licensing requirements and the high import tariffs levied. 3.17 At the time of the first supervision mission (September 1987) the Government argued that a detailed cost reduction plan was unnecessary as the cement plant by that time was successfully competing with smuggled cement. The mission was unable to verify this15. At the time of cancellation, the condition had not yet been met since production costs in July 1988 were not lowered compared to the year before. Even though the temporary work force was cut from 352 in July 1987 to 180 by August 1988, the old power plant had yet to be modernized and remained the main problem. Cost of power remained approximately five times the cost in cement factories in the United States and more than twice the price of power in neighboring countries. The initial intention at the time of ERC design had been to replace the old power plant. However, a new plant could not be purchased because negotiations between the company and the Ministry of Finance on the possible source of financing for - Memo dated December 17, 1987. 1L/ Memo dated September 19, 1988. Ls Memo, September 23, 1987, para. 25. - 11 - the new plant dragged on indefinitely. The focus then shifted towards rehabilitating the old power plant; however, because the existing power plant essential for the factory's continued operation it could not be shut off for maintenance. By the time of the second ERC supervision financing arrange- ments had not been completed and the plant had not been rehabilitated. 3.18 Despite "La Minoterie"'s high production costs, this public agro- industrial enterprise was profitable as a result of its monopoly on wheat and flour imports, production, and sales. Moreover, the price of flour was established by the Ministry of Finance at approximately twice the landed price of flour imported from the US, thus ensuring the profitability of the flour mill. Additional issues included overstaffing and pervasive distortions and corruption in the financial management of the company. 3.19 As in the case of the cement factory, no actions had been taken to implement satisfactory cost reductions at the time of the first formal review. The Government reduced the price of flour to compete with smugglers, and argued that a detailed cost reduction plan was unnecessary. The cost competitiveness was not improved, and at the second formal review, the cost of producing flour was US$17.1/100 lb. Lag in June 1988, compared to US$14.4/100 lb. bag in September 1987. The total work force at the mill remained the same in August 1988 (698) as in September 1987 (697), and the composition of work force had changed with more regular personnel than the year before. As was the case with the cement factory, the Government did not focu. enough on the major issues facing the factories and was not successful in removing the causes of inefficieiicy of the companies. IV. OUTCOME A. The Stabilization Impact of Structural Change 4.01 The ERC, combined with the IMF program, contributed to the preparation of the Government's stabilization and adjustment program and to the improve- ment of Haiti's economic indicators until June 1987. As a result of these extensive and swift efforts aimed at redressing financial imbalances there was a marked improvement in both public sector finances and external accounts especially in FY86 (October 1, 1985 - September 30, 1986). In contrast, in FY87 the Haitian economy was negatively impacted by the fall in coffee prices and exported volume, and in the fourth quarter by the beginning of civil unrest. The industrial sector in particular was affected by the massive increase in smuggling, widespread labor unrest following the growth of a militant trade union movement, the prevailing political uncertainty, and the removal of protective trade barriers. Tables 1 and 2 provide an overview of the behavior of key macroindicators during the period and compares them with the projections prepared for the ERC. 4.02 The overall deficit of the consolidated public sector accounts (before grants) narrowed from 7.1 percent of GDP in FY85 to 4.8 percent in FY86. The resource gap on the balance of payments also improved from 8.2 percent of GDP in FY85 to 5.9 percent of GDP in FY86 and the current account deficit (excluding official grants) narrowed by two percent of GDP to 4.3 percent in 12 - FY86. Inflation decreased by 4 percentage points between February and September 1986 reaching 8.5 percent at the end of the period. The parallel market premium of the Gourde fell to approximately 5-7 percent after July 1986, compared to over 20 percent by the end of FY85. Table la KEY MACROECONOIC INDICATORS, 1990-1998 HAITI - ERC (Credit 1766-HA) FV85 FY86 FY87 F188 FY89 acEum acT ieTiii actual projected actual projected 'truil National Accounts (Annual percentage change)i GDP (constant market prices) 0.2 0.6 (1,4)al 0.6 4.5 (2.51 5.0 (0.5) !DP per capita (constant market prices) (1.1) (0.9) (3.1) (0.9) 2.7 (4.1) 3.1 (1.9) Total Consumption 3.3 3.4 n.a. 1.8 U.a. (2.7) n.a. 0.4 Total Consumption per capita 1.9 1.8 (0.2) 0.3 3.1 (4.3) 2.8 (1.0) Public Consumption 13.4 (9.8) a.a. (7.0) n.a. (5.4) n.e. 4.4 Private Consumption 1.9 5.3 n.a. 2.9 n.a. (2.4) n.S. (0.1) Total Investment (13.6) (14.5) n.a. 4.6 n.a. (1.0) U.a. (1.0) Public Investment (27.0) (19.1) n.a. 5.9 n.a. (11.1) U.e. (7.7) Private Investment 12.0 (8.8) n.a. 3.0 n.a. 10.6 U.a. 5.3 Agriculture 0.5 2.6 (1.6) (0.3) 5.5 (1.8) 5.5 (2.0) Manufacturing (2.9) (2.8) 0.2 (2.0) 5.1 (0.8) 5.1 1.6 National Accounts (share of current GDP): Total Consumption 93.9 94.9 94.4 95.0 94.8 95.5 92.5 95.4 Public Consumption 11.9 10.4 n.a. 10.1 n.a. 9.6 n.a. 10.0 Private Consumption 82.0 84.5 n.a. 84.8 n.a. 85.8 U.a. 85.3 Total Investment 14.2 10.9 12.1 12.9 13.5 12.5 14.3 12.4 Public Investment 8.2 5.7 6.2 6.9 7.4 5.5 8.0 5.3 Private Investment 6.0 5.2 5.9 6.0 6.1 7.0 6.3 7.1 Exports of Goods & NFS 15.1 13.0 13.8 13.0 13.0 12.5 12.6 12.3 Imports of Goods & NFS 23.3 18.9 20.3 20.8 21.3 20.5 21.4 20.0 Gross Domestic Savings 5.0 5.0 5.6 5.0 5.2 4.5 5.5 4.6 Prices and Exchange Rates Average Domestic Inflation (Haitian PY) 8.4 8.5 8.5 (11.1) 4.0 (0.1) 4.0 7.3 Average Domestic Inflation (IFS Annual Data) 10.6 3.2 n.. (11.4) n.a. 4.0 n.e. n.a. Coffee Export Price (US$/60 kg. bag) 181.8 208.1 n.e. 164.4 I.a. 142.6 n.a. 153.9 Public Finance (As 2 of Current GDP) GENERAL GOVERNMENT Current Rcvenues 11.2 10.1 10.5 9.3 10.2 .3 10.9 9.7 Total Expenditure 19.0 15.3 16.4 17.3 16.4 15.4 17.1 15.2 Current Expenditures 12.8 11.4 11.5 11.7 n.m. 11.2 n.a. 11.8 Capital Expenditure 6.3 3.9 4.9 5.6 n.a. 4.2 n.a. 3.4 Overall Deficit (before grants, cash basis) (7.9) (5.2) (5.2) (8.0) (6.8) (6.0) (7.2) (5.5) CONSOLIDATED PUBLIC SECTOR Current Revenuea 19.9 18.1 n.a. 17.0 n.a. 17.7 n.a. 17.9 Total Expenditure 27.0 23.0 n.a. 25.0 U.a. 22.8 n.a. 23.2 Current Expenditures 18.9 17.7 n.e. 17.7 n.a. 17.4 n.e. 18.6 Capital Expenditure 8.1 5.3 n.m. 7.3 n.m. 5.4 n.e. 4.6 Overall Deficit (before grants, cash basis) (7.1) (4.8) n.e. (8.0) n.a. (5.1) n.e. (5.4) External Financing 5.0 5.6 n.e. 6.8 n.e. 4.5 n.m. 2.7 Grants-in-aid 3.6 4.2 n.a. 4.6 n.m. 3.3 n.*. 2.2 Foreign Loans 1.5 1.4 U.S. 2.2 n.m. 1.2 U.m. 0.5 Domestic Financing 2.0 (0.8) n.e. 1.2 U.a. 0.6 n.m. 2.7 Memos (As % of Current Expenditures) Interior, Defence, and Armed Forces 14.0 14.1 n.e. 17.0 n.a. 19.8 U.S. 18,8 Social Services (Education and Health) 21.4 22.0 n.e. 32.9 U.S. 33.9 n.a. 29.7 (As 2 of Current GDP) Interior, Defence, and Armed Forces 1.4 1.3 n.e. 1.6 n.a. 1.8 n.e. 1.9 Social Indicators Unemployment Rate (2) U.e. 30.6 n.S. 39.3 n.S. 40.4 n.a. n.S. Real Wages (% change) 4.8 (7,P) n.e. 12.5 n.m. 0.2 n.a. (6.9) Memos GDP (Million US$) 2,009 2,244 2,149 2,162 2,320 2,211 2,561 2,349 Population (Million) 5.28 5.36 n.a, 5.44 n.e. 5.53 n.a. 5.61 aI The parenthesis denotes a negative number. Sources, President's Report. PCR, Draft CEM Statistical Appendix, 1991; Population - IFS-IMF, March 1991. - 13 - 4.03 In the final quarter of FY87 : d during FY88, economic activity and public sector revenue collections were severely affected by smuggling, civil unrest, declining coffee prices, and bilateral aid withdrawal. In FY87 investment experienced a 4.6 percent growth but real exports declined by approximately 4 percentage points and real GDP grew at only 0.6 percent, the same as in FY86, but below the projected 4.5 percent estimated at the time of the ERC. After the November 1987 events which led to aid withdrawal and a deterioration of the macroeconomic environment, there was a considerable worsening of economic performance. In FY88 exports and investment declined by approximately 1 percentage point each and real GDP declined by 2.5 percentage points. Inflation accelerated to 4 percent by the end of calendar year 1988 after a negative growth in 1987. Moreover, the parallel market premium doubled to approximately 35 percent in the 12 months to August 1989, and Haiti was not able to meet its debt service obligations in a timely fashion. As a result of the reduced economic activity, real imports declined in FY88 by 1 percent as opposed to a projected increase of 11 percent in the President's report and the resource gap was reduced by 1 percentage point of GDP in FY88. In FY88 and FY89 the fiscal and external imbalances forced the Government to implement sharp cuts in capital expenditures and imports. Table 21 EXTERNAL SECTOR INDICATORS, 1990-1998 HAITI - ERC (Credit 1766-HA) FY85 FY86 FY87 FY88 FY89 acTuT scFu T sTMited actual projected actual projected actual Balance of Payments (Real Growth Rates) Exports of Goods f. NES (5.9)al (9.2) (9.2) (3.7) 4.8 (0.8) 5.0 (0.5) Traditional n.e. 14.8 14.8 (12.5) 5.5 11.9 5.5 n.e. Non-traditional n.a. (13.2) (13.2) (7.0) 6.2 (0.6) 6.2 n.a. Imports of Goods & NFS (4.0) (6.4) (5.7) 4.6 19.5 (1.1) 11.1 2.3 (In Million US Dollars) Exports of Goods & NFS 304.0 291.6 294.0 281.5 303.0 273.4 320.0 259.3 Coffee 48.6 57.5 55.0 34.4 54.0 32.5 56.0 34.7 Light Assembly Industry 126.9 129.7 121.0 131.8 130.0 138.1 141.0 133.6 Lesource Balance (164.3) (131.7) (14X.4) (170.3) (195.0) (152.0) (226.0) (164.2) Current Account (excl. official grants) (130.8) (96.4) (105.3) (129.3) (154.0) (106.0) (179.3) (126.9) Current Account (incl. official transfers) (43.5) 10.3 11.9 (7.5) 9.0 7.1 (24.3) (34.9) Official Grants (Million US$) 87.3 106.7 117.2 121.8 163.0 113.1 155.0 92.0 To private sector 14.0 12.7 n.a. 22.4 n.a. 40.2 n.a. 41.0 To public sector 73.3 94.0 n.a. 99.4 n.a. 72.9 n.a. 51.0 (As Z of Current GDP) Resource Gap/Current GDP (8.2) (5.9) (6.6) (7.9) (8.4) (6.9) (8.8) (7.0) Current Account (excl. official transfers) (6.5) (4.3) (4.9) (6.0) (6.6) (4.8) (7.0) (5.4) Current Account (incl. official transfers) (2.2) 0.5 0.6 (0.3) 0.4 0.3 (0.9) (1.5) Official Grants 4.3 4.8 5.5 5.6 7.0 5.1 6.1 3.9 To private sector 0.7 0.6 n.a. 1.0 n.a. 1.8 u.s. 1.7 To public sector 3.6 4.2 u.s. 4.6 n.a. 3.3 u.s. 2.2 (As 2 of Total Exports, FOB) Coffee 22.4 26.6 n.a. 17.4 n.a. 16.5 D a. 17.8 Light Assembly Industry 58.4 60.0 u.a. 66.7 n.a. 70.2 n.a. 68.6 Memoi GDP (Million US$) 2.009 2.244 2,149 2,162 2,720 2,211 2,561 2,349 Exports (FOB) 217.2 216.2 n.a. 197.5 t.a. 196.7 n.a. 194.7 al The parenthesis denotes a negative number. Sourceso President's Report, PCR, Draft CEM Statistical Appendix, 1991; Population - IFS-IMP. March 1991. - 14 - B. Outstanding Structural Issues 4.04 The ERC's major aim was to support the Haitian's Government adjustment program implemented after the February 1986 regime change, i.e., "to estab- lish conditions for a viable, growing economy, and relieve the average Haitian of the excessive burden of high consumer prices arising from past policies of suppressing competition". It is fair to say that the two major accomplishments of the program -1 extensive fiscal and trade reforms - represented a major effort to begin the elimination of distortions in the economy. Structural reforms in the size and composition of public expendi- ture with increased spending in the social sectors were sustained and not reversed even though there were three regime changes between February 1986 and September 1988. The basic trade reforms that were implemented in 1986- 1987 have also been kept in place. 4.05 As shown in Table 1, in the fiscal area public expenditures were reduced in FY86 by almost 2 percentage points of GDP, even though they increased in FY87 total expenditures declined again in FY88 and remained at approximately 22 percent of GDP also in FY89. Expenditures were reallocated to education and health, which in FY85 and FY86 iepresented only 22 percent of total expenditures while in the three following years reached 30 percent of total expenditures. (Table 1). On -he revenue side, reforms aimed at simplifying the tax system, lowering its marginal rates, and strengthening tax administration were maintained. However, after the disruption of the program due to civil strife and aid curtailment, revenues decreased and the borrowing requirement of the public sector increased again, as did extra- budgetary spending and expenditures by the public enterprises. Moreover, not enough was accomplished in the public enterprise area and the financial position of the cement and flour factories deteriorated. Overstaffing and inefficiency problem persisted. More recently, these two enterprises have increasingly become a fiscal burden. As recommended by a recent Bank report17, "the Government should contract private firms to manage and improve their finances, open up these enterprises to international competition and pricing so that domestic consumers benefit and exports are resumed." 4.06 In the trade area, the liberalization effort undoubtedly represented a change in direction following a long period of Government intervention. In an effort to eliminate distortions and improve resource allocation all export taxes were abolished, import liberalization policies were implemented by lifting all quantitative import restrictions with the exception of seven agricultural products, by replacing specific tariffs with ad-valorem ones, and by eliminating price interventions in most commodities. The 1986 reforms also envisaged a boost to the coffee sector through the elimination of the export tax. Although the abolishment of the tax did indeed bring about an At PCR, para. 13. L7i Report No. 9523-HA, Haiti - Restoration of Growth and Development, May 20, 1991, para. xiv. - 15 - increase in the producer's share of the FOB export priceg, coffee producers have been facing severe problems because the relative price of coffee with respect to competing crops (i.e., maize and sorghum) has not improved significantly due to the fill in world coffee prices (Table 1). 4.07 Notwithstanding the general success of the liberalization effort, not all objectives were achieved in the agricultural sector and the anti-export bias against agricultural commodities persists. The reforms succeeded in eliminating direct Government price controls, liberalizing imports of agri- cultural inputs, and abolishing export taxes. Nevertheless, a recent agri- cultural sector review" highlights the limitations of the 1986-1987 reforms in the agricultural sector. Major agricultural commodities were granted special protection in spite of the overall tariff reform that decreased the country's average tariff level from approximately 40 percent to 20 percent. The Government replaced in December 1986 import quotas with licensing without formal ceilings, for seven agricultural products: rice, maize, millet, beans, sugar, chicken parts, and pork meat parts. Imports of maize, sorghum, rice, and beans were subject to licensing requirements and to a 50 percent tariff. Licenses and a 40 percent tariff were also introduced for meat imports while sugar and flour imports continued to be monopolies subjected to 40-50 percent tariffs even after the 1986 reforms. In addition, despite the comprehensive economic reforms introduced in 1986, the agricultural sector's allocation of resources continues to be distorted in favor of import substi- tuting crops. Agricultural exports currently continue to be implicitly taxed through protection afforded to import-substituting crops and by the implicit 13 percent export tax arising from the foreign exchange surrendering require- ment. Thus, resources have not been directed to areas of comparative advan- tage, and Haiti has become a net importer of agricultural commodities. It should be noted, however, that the FY89-90 program for IDA assistance to Haiti included a sector adjustment credit for agriculture which was delayed due to the political situation but could possibly have addressed these outstanding issues". V. MAJOR ISSUES A. Desin Coverage: Need for a Social Component 5.01 The ERC's main focus was to support the Government's program and pave the way for future operations. Medium and long-term structural problems such as supply side actions, export promotion, and environmental issues were not covered by the credit, but were to be tackled by follow-up Bank operations, L ASR, para. 2.21. Li See Report No. 9357-HA, Haiti - Agricultural Sector Review (ASR), April 30, 1991. L0 PCR, part I, para. 27. - 16 - since certain structural aspects could not be addressed by a quick-disbursing ERG operation negotiated with a provisional government. However, the provi- sional Government that took power in February 1986 was supposed to remain in power for two years until February 1988. Therefore, given the fact stressed by the ERC itself that "absolute poverty in Haiti is unmatched in the Western Hemisphere"21 and malnutrition, illiteracy, skewed income distribution, and unemployment/underemployment are pervasive issues in Haiti, actions in the social arena to directly address both structural poverty issues and the impact of adjustment should have either been included in the ERG or followed immediately after the ERG. 5.02 The ERC addresses the social issue only indirectly by removing distortions in the incentive system and eliminating trade barriers, thus reducing consumer prices, and only in the longer-term through the impact of the increase in the education budget. Price reduction measures, however, favor consumption over investment but do not necessarily benefit the poor. No measures were included to explicitly address Haiti's status as the poorest nation in the Western Hemisphere and to offset the costs of adjustment. 5.03 According to the Haitian Government, there had been an "intention" to set up an Economic Social Fund (ESF) similar to that implemented in Bolivia, but this plan did not materialize. The ERC contains no comment on this issue. Apparently the reason for not including a social fund in the program was that there were at the time of the ERC negotiations several NGOs and bilateral organizations implementing social programs within Haiti. However, evidence shows that poverty is so widespread, and the public sector so inefficient in its efforts to fight such poverty, that social issues should have been part of the ERC. In any case, since the ERC was very short-term, the ESF should have followed immediately thereafter; however, it was even- tually presented to the Board only in November 1990. The Economic and Social Fund has the objective of assisting the Haitian Government to improve health, nutrition, education services, and provide physical infrastructure, employ- ment opportunities and income to the poor. In addition, it aims at providing an effective channel for critically required donor financing, at coordinating scattered domestic efforts, and at strengthening the capacity of community groups, NGOs, and grass roots organizations in preparing and implementing social assistance programs. All of these elements were undoubtedly needed four years before and may have dampened the negative impact of the suspension of bilateral assistance on job loss and social services deprivation. Aid Shortfalls: Risk Analysis and Contingency Financing 5.04 The cancellation of the program did not sit well with the Government because it felt that the main reason for the collapse of the macroeconomic framework was the bilateral donors' aid withdrawal. According to the Government, both (a) macroeconomic stabilization and structural reforms, and Ly President's Report, para. 3. 12 PCR, Part II, para. 88. - 17 - (b) bilateral and multilateral support, were conditions to be met for program success . The Government stressed that the program was highly dependent on "politically tied" aid; the risk of civil unrest and bilateral aid with- drawal, however, was overlooked and there were no contingency financing provisions in the event of bilateral aid suspension for reasons other than 25 economic ones. . 5.05 Two considerations must be noted. First, at the time of the cancel- lation the Government had not met conditions pertaining to the improvement of cost competitiveness of the two public enterprises. Second, the success of the adjustment program was indeed highly dependent on pledged external assis- tance, however, the causality behind program failure, can be interpreted from two sides. On the one hand, as the Government claims, the withdrawal of external support was a major factor in the destabilization of the Haitian economy at the end of FY87 and during FY88. On the other hand, the deterio- ration of the political situation is the event which occurred first and the Government did know in advance that bilateral aid is sensitive to political developments. In any case, civil unrest and possible aid withdrawal should have been foreseen as a downside risk and taken into account in the program. 5.06 The World Bank faces a dilemma in the implementation of adjustment programs in recently democratized/politically unstable countries such as Haiti, which are also structurally dependent of external financing. Follow- ing a transition to democracy, the World Bank and the IMF play a very important role both directly by helping tie country in the implementation of economic reforms, and indirectly by generating further support from bilateral donors. Given the dependence of developing countries on external savings and the limited export potential, tied bilateral aid is often a necessary condi- tion for program success. Even when the country, such as in the case of Haiti, is implementing the reform program, the risk of political upheavals and the withdrawal of bilateral aid is always present. 5.07 As noted by the PCR and by the Haitian Government, the risk of political upheaval followed by aid curtailment was not included at the time of the ERC. During PFP discussions in mid-1986 the Region had noted that although the political situation in Haiti had stabilized the risks of renewed political disturbance remained during the transition to a democratically elected Government, posing substantial risks for Bank and Fund Operations. Thus, even though at the time of Board presentation prospective donors had been identified and the program was appropriately funded, aid withdrawal was indeed a major risk and should have been explicitly mentioned in the ERC as one of the downside risks of the program. -U PCR, Part II, para. 76. L PCR, Part II, para. 79. 1i PCR, Part II, para. 100. - 18 - Exchange Rate Management and the Appropriateness of a Fixed Exchange Rate 5.08 The Haitian Government's program sought to promote economic expansion through export-led growth (initially coffee and assembly products) emphasiz- ing fiscal and monetary restraint rather than exchange rate policy (PCR, para. 3). The Haitian gourde has been pegged to the US dollar at the same rate (5 gourdes per US$1) since 1919 and the position taken by the Haitian Government in the 1986/97-1988/89 Policy Framework Paper (PFP), by the IMF, and by the Bank's ERC (PR, para. 84) was that the fixed parity would be main- tained. Given the impact of real depreciation in the export sector's supply response, and particularly in conjunction with a major trade liberalization effort, the role of exchange rate policy in a stabilization and adjustment program must be explicitly addressed. The preservation the fixed parity raises the issue of the appropriateness of excluding exchange rate management as a policy instrument and whether restrictive demand policies would be sufficient to ensure competitiveness of Haitian products and an adequate supply response. 5.09 This issue was raised within the Bank during PFP discussions and doubts were expressed on the feasibility of very restrictive fiscal and monetary policies and on the export sector's supply response. As discussed in the minutes of the OPSC Meeting", the decision not to depreciate the gourde was based on the following three reasons: (a) the adjustment of the exchange rate was not deemed politically feasible by the provisional Government; (b) the IMF stated that by August 1986 the Haitian economy had already adjusted quite severely so that the fixed parity appeared sustainable. Moreover, the maintenance of the parity was required to ensure the continuation of fiscal discipline and to restore confidence in the Haitian economy. Finally, (c) it was hoped that the removal of export taxes would provide adequate short-run incentives for export production. In the medium term, the projected supply response required not only renewed confidence in the economy which the stabilization program was expected to ensure, but also policy measures beyond the program to address major sector issues. Once the stabilization was achieved and the new Government took office in February 1988, the medium-term issues would be addressed. Finally, it was recognized that the exchange rate regime potentially restricted Haiti's future economic flexibility, and the issue would be revisited in due course, after a period of successful fiscal discipline. This issue, however, should be addressed by future adjustment efforts, particularly because the new Government is currently confronting a wide divergence in rates between the official and parallel foreign exchange markets. 5.10 Nonetheless, the following additional reasons support the appropri- ateness of the decision to maintain the fixed parity at the time of the ERC: (a) pressv-es on the external sector were driven by the fiscal imbalances, i.e., excessive expenditures and low revenue collections. Therefore stabili- zation and adjustment measures, by tackling the fundamental causes of 2i Memo, August 28, 1986. - 19 - external disequilibrium, would restore a competitive exchange rate; (b) the export assembly sector accounted for 60 percent of total exports in FY86 and assembly exporters had expressed a preference for exchange rate stability; therefore, any movement in the exchange rate was perceived as counterproduc- tive. Finally, (c) at the time of the ERC, the Haitian foreign exchange market was split between an official market, where transactions were conducted at the fixed 5 Gourdes to 1 US$ rate and a parallel market fed by private transfers from abroad. Exchange rate differentials between the two markets were showing a downward trend beginning February 1986 explained by: (a) the first positive results of the new monetary and fiscal policies on the balance of payments; (b) the reduction of the oil imports bill; (c) an increase in foreign remittances brought by Haitians going back to the country after Duvalier's departure; and, (d) the elimination of capital outflows by Duvalier and his close entourage . 5.11 Finally, OED's calculation of a series of real exchange rate indices shown in Table 3 lead to the same conclusion. Real exchange rate indices" (RERFY and RERCY based on fiscal and calendar year end of period consumer prices indices, respectively) indicate a real appreciation of the gourde throughout the 1980s, with a peak in 1986. Bilateral real exchange rate indices2 (BRERFY and BRERCY based on fiscal and calendar year consumer prices indices, respectively) show an appreciating trend, but at a lower rate than in the simple RER calculations. On the opposite side, a real exchange rate index constructed using nominal wages instead of the consumer price index indicated a real depreciation of the gourde during the 1980s. Thus, the assembly export sector (accounting for over 60 percent of total exports in the adjustment period [Table 2]) was not losing competitiveness at the prevailing exchange rate and wages were very low as compared to its trade competitors, including the Central American countries. In light of this evidence, there appeared to be no further advantage from exchange rate depreciation. It should be noted, however, that coffee exports (accounting for approximately 17 percent of total exports in the adjustment period [Table 2]) were hurt not only by the fall in world prices, but also by the real appreciation of the gourde. On the opposite, during 1987 and 1988 the world's three largest coffee producers: Brazil, Colombia, and Indonesia devalued their currencies in real terms thus maintaining or increasing their 30 coffee production even as world prices in real terms were declining LU Memo, March 18, 1987. Lt Constructed as the nominal exchange rate deflated by the Haitian consumer price index (CPI). L Constructed as the inverse of the nominal exchange rate times the ratio of the Haitian CPI and the US CPI. An increase in the index indicates a real appreciation. Lt World Bank, Price Prospects for Major Primary Commodities (Report No. 814/88): November 1988, 3). - 20 - Table 3: REAL EXCHANGE RATE INDICATORS, 1980-1989 (1980 - 100) HAITI - ERC (Credit 1766-HA) YEAR RERFY RERCY BRERFY BRERCY WRERFY 1980 100 100 100 100 100 1981 115 111 114 110 104 1982 117 119 118 120 102 1983 128 131 131 135 94 1984 138 140 145 147 87 1985 149 155 156 161 91 1986 162 160 143 141 84 1987 144 141 116 114 95 1988 144 147 108 110 95 1989 154 n.a. 116 n.a. 88 Sources: Data from draft CEM Statistical Appendix, 1991 and IFS-IMF. Sustainability 5.11 A structural dependence on external financing to bridge fiscal and external gaps and the narrow export base are two critical weaknesses of the Haitian economy. The sustainability of the fiscal and balance of payments position were intertwined with the timely availability of foreign financing and the attainment of projected levels of Haiti's two main export products. On the fiscal side, the Government stressed that more attention should have been paid by the Bank as part of the technical assistance program to the mobilization of public sector resources in order to lower dependence on external financing'. However, two factors should be considered: (a) this was a longer-term structural issue beyond the scope of the ERC, and (b) in any case, the first steps had been taken by (1) bilateral agencies, such as CIDA (Canada) and USAID, which were already providing assistance in this area and there was no need to duplicate efforts; and (2) the issue of revenue enhancement was related to record keeping and tax administration, which was being dealt with by the IMF. 5.12 On the balance of payments side, the ERC relied on export growth and foreign aid to be the sources of firancing of the increased imports resulting from trade liberalization and higher investment levels. Even though assembly sector exports met the projected levels, coffee export values were on average 39 percent lower than projected in both FY87 and FY88 (Table 2). The structural weakness associated with a narrow export base with high LIt PCR, Part II, para. 97. l1 President's Report, para. 82. - 21 - vulnerability to external shocks raises doubts on the sustainability of a viable external sector position absent of efforts to expand the export base. These issues, however, go beyond the scope of the short-term ERC, but should nonetheless be addressed by future longer-term structural adjustment lending operations. B. Implementation The Collapse of the Macroeconomic Framework and Credit Cancellation 5.14 The World Bank had two main reasons for canceling the ERC: (a) the uncertainty on the fulfillment of unmet tranche conditionality and the feasi- bility of a sustainable macroeconomic environment following the November 1987 events; and (b) the impact of the suspension of external bilateral assistance pledged to support Haiti's adjustment program. 5.15 When bilateral aid was withdrawn following the November 1987 events, the FY88 budget was no longer viable since the unfinanced gap was too large to fill. The disbursement of the ERC's second tranche would not have had an impact, thus creating an issue of futility in the Bank's disbursements. The shortfalls in budget support grants (84 million gourde realized against 165 programmed) and in gross aid disbursements (US$120 million realized against US$220 million programmed) proved too big to be compensated. The situation worsened since not only did the absolute level of external assistance fall, but there was also a change in the distribution of the remaining aid. Beginning in FY87 the Government had to face the consequences of a major shift from official grants going to the public sector to grants being administered by private organizations. Whereas in FY86 only 12 percent of total official grants went to the private sector, by FY88, 36 percent and, by FY89, 45 percent of grants were going to the private sector directly (Table 2). The principal cause of the worsening fiscal deficit in FY87 and FY88 was a drop in revenues. As discussed above (para. 3.12) while expenditures remained under control tax revenue performance fared worse that expected owing to the negative impact of the acceleration of smuggling following the opening-up of previously closed provincial ports and the weakening of tax administration. 5.16 In an attempt to compensate for the loss of external assistance to the public sector, the Government took steps to improve its savings performance by cutting treasury spending and adopting a package of emergency tax measures. These effGrts, together with a sharp reduction in capital outlays financed with external aid, helped to reduce the public sector deficit; total expenditures were lowered to 15 percent of GDP, against a projected 17 percent of GDP in the ERC Nevertheless, the external aid withdrawal gave rise to a large increase in the domestic aorrowing requirement of the public sector. At the time of the second formal supervision (September 8-9, 1988), it was concluded that even though the three different Governments of FY88 had attempted to limit the size of the budget deficit and external imbalances, due to the aid cuts following the November 1987 events the shortfalls in budget support grants proved too large for the Government to deal with. By September 1988, the proportion of the fiscal gap projected to be financed by - 22 - the Central Bank was nearly 2 percent of GDp3, compared to 0.6 percent in FY86 and 1.2 percent in FY87. 5.17 The fiscal and external sectors' prospects for FY88 and FY89 were very uncertain and pessimistic. The second supervision mission's (September 1988) assessment was that the conditions for releasing the second tranche had not been fully met and it appeared extremely doubtful whether the conditions could be met satisfactorily in the near future and be sustained. According to the mission's assessment, the Government was understandably more pre- occupied with the daily financial crisis. Moreover, key officials were changing and the policy-making machinery remained in flux . Thus, at the time of the second supervision mission it was clear that the macroeconomic framework for FY88 could not be considered viable. In FY88 the Government was looking towards continued restraints on investment and maintenance expenditures, and on private sector credit, both necessary to contain the domestic and external financial deficits but also detrimental to economic growth, thus foregoing a basic objective of the ERC". Moreover, the prospects for FY89 were dim at that stage, given the complete uncertainty of resumption of bilateral aid which had been largely assured when the ERC was designed. Imports in FY87 grew by only 4.6 percent and were projected to grow by 19.5 percent, and in FY88 decreased by 8 percent and were projected to grow by 11 percent in the ERC. Real GDP fell by 2.5 percent in FY88 against a projected 5 percent growth at the time of the ERC, and also declined in FY89 by 0.5 percent. 5.18 The World Bank made an effort to continue the program, even after the bilateral donor's withdrawal from November 1987 to September 1988. The Government attempted to implement a viable fiscal program for FY88 by reduc- ing the investment program, increasing cement and flour prices, and pursuing the Swiss and French interest in helping the Manigat administration with the financing gap. However, after the June 1988 coup which overthrew Manigat, the Swiss and French Governments pulled out. The uncertainty on the fulfill- ment of pending tranche conditions, the political situation, and the fiscal position for FY88 was too great for the World Bank to continue with the program. It is important to note, however, that to persuade the Government to keep intact the trade liberalization measures already implemented, the Bank did hint to the preparation of another adjustment credit should the situation improve 1 Memo, September 14, 1988. Lt Memo, September 24, 1988. L Memo, September 14, 1988. LU Memo, September 19, 1988, para. 12. - 23 - Maintenance of Import Licensing for Seven Agricultural Products 5.19 The trade liberalization effort called for the removal of all import licensing. Therefore, the existence of the import licensing in force for the seven agricultural products cited in para. 4.07 raises the issue of a possi- ble limited coverage by the ERC of the trade liberalization effort within the agricultural sector. At the time of negotiations, the Haitian Government had asked to Bank for a study of this specific issue; to that end a proposal to undertake such study with external technical assistance had been agreed upon, but was not delivered by the Bank. 5.20 It is unfortunate that this important issue, also raised by the recent Agricultural Sector Review37, was not studied by the Region at the requisite depth and expeditiousness, thus satisfying the request of the Haitian Government at the time of the ERC. The analysis should have been done at the time of adjustment and not ex-post. C. Technical Assistance Issues: Delayed Preparation and Processing of the IDA Industrial Restructuring and Development Project (IRDP) 5.21 As discussed above, there was a Technical Assistance Credit comple- menting the ERC which included assisting the Government in the implementation of an industrial restructuring plan to assist the domestic industries' adjustment to the trade reforms envisaged by the ERC. The first phase of the plan consisted in the preparation of diagnostic studies on the restructuring needs of industrial firms affected by the trade regime reform. The second phase consisted of in-depth studies aimed at developing individual restruc- turing plans for approximately 25 local private industrial enterprises. The final phase included the actual implementation of an Industrial Restructuring and Development Project (IRDP). The diagnostic studies assessing the indus- trial enterprises' strengths and weaknesses were completed between March and July 1987. However, the in-depth studies were concluded only in May 1989 and the IRDP - which was intended to follow immediately aftar the ERC (in IDA FY88) - was approved only on November 2, 1989. 5.22 According to the Government, industrial restructuring was intended to be an integral part of the trade reforms. The implementation of industrial restructuring as originally scheduled would have, according to the Govern- ment, restrained the deterioration of the external balance caused by the withdrawal of bilateral aid. Given that domestic industry had to endure the increased competition stemming from both the trade liberalization reforms and the upsurge in smuggling when provincial ports were open in 1987 to interna- tional traffic, the Haitian Government, and even the US, and Canada, L/ ASR, para. 1.11. - President's Report, para. 93 and PCR, Part II, para. 81. - 24- considered the IRDP an integral part of the trade liberalization effort3. The IRDP was thought to be (a) vital for cushioning the adverse effect of the exposure of domestic producers to foreign competition; (b) a framework for removing the remaining quantitative restrictions following reforms under the ERC; and, (c) a vehicle for continuing IDA's assistance for the Government's promotion policies initiated in the Technical Assistance project. 5.23 In the Government's view this project suffered from World Bank's administrative delays40. However, there were four main causes for delayed preparation. First, the negative investment environment and the dichotomy between what the Haitian authorities perceived as an immediate need for restructuring following the trade reform, and the entrepreneurs perception that the priority need was to find ways to face the smuggling challenge. Second, political instability within Haiti. Third, delays in the completion of the in-depth studies. Fourth, administrative delays witi,in the Bank, i.e., two different task managers were in charge of the project during the 1987-1989 period. It must be kept in mind also that the instability of Haitian politics during the 1986-1989 period would have made disbursement very difficult even if the project had been prepared in time. 5.23 A World Bank preparation mission visited Haiti in February 1987 and, following discussions with enterprises accounting for more than one-half of industrial output, concluded that demand for restructuring or for industrial investment was limited. The lack of investment demand was explained by lower domestic prices due to increased smuggling following trade liberalization and to the existing unstable and rapidly deteriorating business climate. The mission indicated t.o the Government that further project preparation would be delayed until June 1987 when a mission would reassess the situation. The Haitian authorities felt that smuggling did not provide sufficient basis for delaying project preparation because no precise data on smuggling were avail- able. By May 1987, however, smuggling continued to be widespread and the investment climate remained unfavorable, leading to the postponement of the scheduled preparation/preappraisal mission. A mission to Haiti in September 1987 concluded that the business climate and labor unrest were improving, and even though smuggling had not diminished, industrialists appeared to be interested in finding ways to adjust to trade liberalization and smuggling, and to reduce production costs. A preparation mission scheduled for November 1987 was postponed due to political events until May 1988. However, the in- depth studies and restructuring plans - which constituted preparatory project work - were not completed in time by the consultants hired by the Government and eventually, the appraisal mission took place in April 1989. L9 1987 Annual Meetings brief, September 8, 1987. Lt PCR, Part II, para. 91. - 25 - VI. SUMMARY ASSESSMENT AND LESSONS OF EXPERIENCE 6.01 The transitional Government which came to power in Haiti in February 1986 was committed to the implementation of an adjustment program to restruc- ture the economy and foster sustained growth. The overall objectives of the Government's adjustment program supported by the ERG were to establish condi- tions for a viable, growing economy and relieve the average Haitian of the excessive burden of high consumer prices arising from past anti-competition policies. The Bank's ERG focused on the improvement of the economic incen- tives, investments and important institutions in agriculture, industry, and the education sector. Because the credit was negotiated with a provisional Government, the ERG represented only the first step of continuing efforts to pursue adjustment in the areas identified above. 6.02 The ERG did contribute to the successful implementation of fiscal and trade reforms by the transitional Government. As stressed by the PCR, even though the reforms initiated in 1986 needed to be refined and many deep- seated problems of longer-term development (such as the critical situation in health and nutrition, poor agricultural performance and deteriorating natural environment) remained to be tackled, Haiti had made a promising start" Four different Governments from February 1986 to September 1988 maintained the structural reforms implemented in FY86-87. In addition, notwithstanding the political, economic, and financial difficulties of FY88 and FY89, Haiti has kept in place the basic fiscal and trade reforms implemented during 1986- 1987. The Government was strongly committed to the program and, it should be stressed that, it was the combination of aid curtailment with the uncertainty following the November 1987 events about the fulfillment of tranche condi- tionality and the macroeconomic environment that led to the cancellation of the ERC. 6.03 With the benefit of hindsight, several issues related to program design and implementation should be kept in mir.d for future operations in Haiti. In the first place, given Haiti's social indicators and the fact that by 1986 the World Bank had already implemented social emergency programs the program should have included a social component to address Haiti's status as the poorest country in the Western Hemisphere and to offset the negative impact of economic stabilization and adjustment on the most vulnerable groups of society. Even if one accepts the argument that the Social Fund could not be included in the ERG because of its limited scope as negotiated with a provi- sional Government is accepted, the Social Fund should have followed immedi- ately after the ERG. However, an Emergency Social Fund was eventually presented to the Board only in November 1990. 6.04 The issue of the limited impact of the liberalization effort in the agricultural sector, particularly the maintenance of import licensing for seven agricultural products, was a very sens.tive one. The Government had requested from the Bank a technical study to address the issue. The study unfortunately was never delivered by the Region. This occurrence emphasizes EU PCR, para. 34. - 26 - the necessity in future operations co ensure a timely follow up by the Bank on specific issues which may arise during program negotiation and implementation. 6.05 The negative impact on tax revenue performance of the opening up of provincial ports and of the weakening of tax administration contributed to compromising the viability of the macroeconomic framework for FY87 and FY88. Revenue collection was negatively affected by widespread smuggling, worse than expected performance of the reformed tax system, and by :ne general lowering of import tariffs and reduction of export taxes. The negative implications on tax revenues of the lepacy of decades of protectionist policies and modest revenue performance should have been explicitly addressed at the time of the ERC. 6.06 It is risky to enter into a program extremely dependent on external aid without the possibility of guaranteeing bilateral donors' disbursements in the face of events within a politically unstable country. As happened in the case of Haiti, if the donors' package does not come through the program is likely to collapse, notwithstanding the country's compliance with most program conditions. It is essential to have the program fully funded at the time of Board presentation even though in a country structurally dependent on external assistance and in transition to democracy the withdrawal of the financing package is a downside risk which cannot be avoided. In the case of Haiti the donors were aware of the fragility of the Haitian political environment before the ERC was approved and the financing package was lined up with a firm commitment by the donors at the time of the ERC. The ERC however, should have explicitly included the risk of political upheavals and aid withdrawal among the possible program risks. 6.07 The Government's inability to maintain a sustainable macroeconomic framework and to implement a satisfactory investment program in FY88 under- scores the fact that the priority area in the implementation of an adjustment program by new Government must be the sustainability of the macroeconomic framework and the public sector investment program. 6.08 A necessary condition for the -uccessful implementation of structural reform is the commitment of the whole government to the reform program, and not only the commitment of the technical authorities; the Government must own the program for it to succeed. 6.09 Finally, the successful implementation of fiscal reforms and trade liberalization after the fall of the Duvalier regime underscore the fact that a regime change provides the best opportunity to implement structural adjust- ment measures. Thus, following the resolution of the current political crisis emanating from the coup of September 30, 1991, the opportunity is likely to present itself for addressing outstanding structural issues in order to achieve a viable macroeconomic situation, encourage domestic and interna-tional competition, and generate growth. Priority areas to be addressed include: fiscal issues requiring improvements in cost competitiveness of the cement and flour companies, i.e. comply with the ERC conditions which were not met, the ceasing of Central Bank financing of the - 27 - deficit, the inclusion of cost recovery as part of the fiscal picture, and renewed privatization efforts; lowering of tariffs or. external trade, liberalizing the agricultural sector, and maintaining the absence of price controls; eliminating exchange rate distortions by merging the official and parallel foreign exchange markets; defining investment priorities and strengthening of institutions to undertake investment in infrastructure; and focusing on the social sectors. - 28 - ANNEX 1 Page 1 of 2 CHRONOLOGY February 7 DuvalJer leaves the country, a provisional military government ("National Council of Government") headed by General Henry Namphy takes office September 15 ERC - initiating memorandum ERC - appraisal mission October 31 Policy Framework Paper (PFP), 1986/87-1988/89 December 17 IMF - Structural Adjustment Facility (SAF) 1I January 28 ERC negotiations 30 ERC - Letter of Development Policy March Ratification of new constitution 24 ERC approved by Executive Directors April 16 ERC effectiveness and first tranche disbursement May 11-22 Informal interim ERC Supervision June Civil unrest: Government attempts to seize electoral machinery and bans largest trade union; street demonstrations ensue July Civil unrest: Hundreds of peasants die; two presidential candidates are murdered; radio stations are attacked by armed forces September 8-22 ERC - Formal Supervision I October 31 Original forecast date for ERC second tranche release (postponed until after December 15) November 29 Violence against voters; elections canceled December Suspension of external bilateral assistance pledged to support Haiti's adjustment program - 29 - ANNEX 1 Page 2 of 2 19 aS January 17 Military-controlled elections take place with less than 15 percent voting February 7 Leslie F. Manigat takes office for five years and retires General Namphy and two other generals March 14-17 Informal ERC Supervision and preparatory economic mission June 20 General Namphv fires President Manigat, abolishes the constitution, and dissolves parliament September 8-9 ERC - Formal Supervision II 17 A group of sergeants overthrows General Namphy and replaces him with General Avril 30 Second tranche of ERC canceled December 30 ERC closed 1989 April 2 X coup against General Avril fails December 16 IMF - SAP closed 1990 March 10 General Avril abdicates. General Abraham succeeds Avril and vows to turn power over to a civilian within seventy-two hours 13 Ertha Pascal Trouillot is inaugurated as provisional president with the mandate to lead the country into general elections December 16 First open Presidential elections are held. Rev. Jean- Bertrand Aristide wins the elections 1291 January 7 Failed coup attempt led by Dr. Lafontant February 7 Rev. Jean-Bertrand Aristide is inaugurated THE GOVERNMENT'S PROGRAM AND THE ERC ANNEX 2 Page o Sector and II. Tranche Related IDA, IMF and Implementation Policy Area Issues and Objectives Measures Taken Conditions Donor Support Record MACROECONOMIC STABILIZATION Overall Need to maintain s. 'actory FY88 resulted in reduced Continued IDA TA to provide macro Met by September 1987 but Performance macro framework In anich to inflation and overall satisfactory consulting services foil out of compliance due imploment policy reforms: balance of payments performance to cvil unrest and aid past policies led to economic surplus IMF Structural Adjustment withdrawal stagnation, inflation and Facility approved Dec. 1988 balance of payments problems Agreement with IMF and IDA on policy framework Proposed U.S. Economic for IMF Structural Support Fund grant for FY87 Adjustment Facility has to be contingent on targets of 4.5% real appropriate macro framework growth, inflation at as agreed with IMF and IDA level of trading partners, and overall balance of payments surplus of about 2% of __________________ GDP in FY87 ____ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ Fiscal Policy Inadequately controlled and Public sector deficit extra-budgetary spending Bed reduced in FY88 _____________ to fiscal deficits ___________ _____ ________________________ Monetary Policy Past fiscal deficit financed Public Sector's stock of largely with 'Ientral Bank non-concessional debt credit: excess liquidity reduced in FY88 spilled over Into balance of REFORM System lacked buoyancy and Reduction of excise equity with high excise taxes taxes on basic concuption ots and extensimv ncome taxfr evasion. Objective Is to placed on petroleum improve collections, buoyancy products and equity Elimination of taxes earmarked for special projects Reform of Income tax THE GOVERNMENT'S PROGRAM AND THE ERC ANNEX 2 Page 2o5 Sector and II. Tranche Related IDA, IMF and Implementation Policy Area Issues and Objectives Measures Taken Conditions Donor Support Record PUBLIC EXPENDITURE a. Recurrent Past spending dominated by Elimination of wasteful Improvements IDA TA for programing Met and sustained wages, poorly controlled, and special political to recurrent control and monitoring of not oriented enough to devel- projects budgeting in public expenditure, opment and non-wage needs. education including wage bill Much past expenditure waste- Ending of reserved ful, inefficient and for budgetary sums for Completion of IDA Education IV project Met: Minister of Finance special political purposes. unidentified purposes further includez TA to improve Objective Is to control audits, education budgeting ard spending and reorient it to Reduction of fradulent including of control priority purposes wage payments, the Ministry especially in education of Finance USAID financed audits of Central Bank not met: and of the several ministries and only drafts submitted Increased recurrent central Bank agencies spending on agriculture, education and health b. Public Past program Included FY8 program Improved, Preparation IDA TA for programing, Met by October 1987 but Investment inappropriate and uneconomic with elimination of of a control and monitoring of fell out of compliance due enterprie, and diffused unproductive projects satisfactory program and for project to revenue shortfalls and over too many uncompleted and with little or no program for selection aid cuts unproductive projects; investment content FY88 project selection poor and UNDP assisted preparation returns low. Quality of FY87 program is rula- of list of 28 projects program is to be improved by tively sound, including limiting number of projects list of 26 small new World Bank chaired Nov. 6 and completing priority on- projects for donor Caribbean Group for going ones financing and agreement Cooperation in Economic not to use resources Development meeting of other than from sirport Haiti Subgroup tax for Cap Haitian and compleingprior - airport THE GOVERNMENT'S PROGRAM AND THE ERC ANNEX 2 Page 3 of 5 Sector and II. Tranche Related IDA, IMF and Implementation Policy Area Issues and Objectives Measures Taken Conditions Donor Support Record PUBLIC ENTERPRISES A. Agro- Inappropriate, inefficient Ending of subsidies to Industrial and and uneconomic enterprises public enterprises Industrial operating with privileged and Enterprses monopoly status led to real Closure and dissolution of resource losses, fiscal ENAOL vegetabl, oil plant losses and high consumer and replacement of its prices for basic items. Import monopoly and quote Objective is to ete those on imports with 2OX tariff losses and lower prices Closure of USs sugar mill DIDA TA to finance study of Decision not to extend anyln subsidies, privileges or ares surrounding the second loan guarantees to any public sugar mill, USN private ompanies or cooperatives that may run the former ENAOL and USND plants Audits, management changes Implementation of and commencement of auditors' recom- programs to improve cost mend2tlons and IDA TA for Cinent dlliiti Not Met competitiveness at La further Improve- power and other advice Minoterie and Ciment ment* in cost d'Haiti competitiveness at CCCE considerig financing new La Mlinoterle and power generator for Ciment Replacement of L& Ciment d*Haiti d'Halti Minoterie's monopoly on flour ImIportm with tariff Removal of Ciment d'Tadlf's import monopolies and of quota and license requirements to import Cement and their replacement with t tariff THE GOVERNMENT'S PROGRAM AND THE ERC ANNEX 2 Page 4 of 6 Sector ond II. Tranche Related IDA, IMF and Implementation Policy Area Issues and Objectives Measures Taken Conditlons Donor Support Record COMPETITION AND INDUSTRIAL INCENTIVES A. Trade Regime Nigh protection of domestic Ellenatlon of all IDA TA to support technical market led to uncompetitive import monopoly rights, assistance for firs local production, high all import quotas, and restructuring consumer prices and anti- most import license& and export bias. Objective Is to regulations (except for Propsed IDA Industrial reduce nominal and effective sanitary reasons on Restructuring credit to protection on local market to wood, clothes and finance firms restructuring reduce consumer prices and newspapers and licensing Increase relatIve of rice, sorghum, maize, profitability of exports beans, chicken parts and pork mat parts) New tariff structure, ending all specific tariffs, and introducing a structure with an average tariff of about 2% and a maximum of 4o, with a few exceptions, and including transitional measure. for products made in Haiti through December 1987 Extension of IX Elimination administrative charge to of petty Met and Sustained ail imports except taxes on pharmaceuticals and exports and tpetroleum products Imports b. Fiscal Past system of discretionary IDA TA to assist Incentive. tax exemptions led to introduction of drawback privileged status for moms scheme firms. Objective r to harmonize treatment across sectors and firms THE GOVERNMENT'S PROGRAM AND THE ERC ANNEX 2 Sector and IssuesandOuII. Tranche Related IDA, IMF and Implementation Policy Area leaues and Objectives Measures Taken Conditions Donor Support Record AQRICULTURE A. Pricing Prices and taxes at food Export tax on coffee Elimination of USAID and French aid Met and Sustained processing plants, export reduced from 229 to 20X coffee export support coffee development taxes, Import quotas and tax if overall projects tariffs, and administered Elimination of export revenue and prices have set incentives taxes sisal and cocoa expenditure which diverge from performance comparative advantage, Replacement of import permit IDA TA to review deterring output and export monopoly on flour with environmental degradation expansion, and inducing soil tariffs and develop policy and erosion. Objective is to investment proposal reverse this by shifting relative producer prices b. Policy- Production discouraged by low Preparation IDA TA to assist design Altered and Mot Induced rents rents on State landsE and and implementation of permitting intermediaries to Implementation system to raise rents extract high economic rents of program to from subtenant.. Objective raxe rents on is to raise rents to market State land* levels c. Credit Access to credit has been Audit BWDAI Dissolution of IDA considering supporting Altered and Not Met very limited and credit BNDAI and new credit bank agencies portfolios are legal hoovsy in arrears, largely establishment uncollectable loansp of a new Objective is to improve agricultural access to and efficiency of credit bank credit s tem edariestoimplemntation system toIraiser PROGRAM COMPLETION REPORT HAITI ECONOMIC RECOVERY PROGRAM (CREDIT 1766-HA) August 21, 1989 Country Department III Latin America and the Caribbean Region - 37 - PROGRAM COMPLETION REPORT HAITI ECONOMIC RECOVERY PROGRAM (CREDIT 1766-HA) PART I. PROJECT REVIEW FROM BANK'S PERSPECTIVE A. Overview 1. The Economic Recovery Program Credit (ERC) was the first adjustment operation undertaken by the Bank in Haiti. The main objective of the operation was to support Haiti's comprehensive fiscal and trade reforms initiated after the change of the country's political regime in February 1986. Bank staff undertook intensive dialogue with Haiti's new Government and major donors throughout 1986 to prepare and appraise the ERC for consideration by the Board. 2. The Board approved the ERC of SDR 32.8 million (US$40 million equivalent) on March 24, 1987 for disbursement in two equal tranches, the first upon effectiveness, which occurred on April 16, 1987. The original forecast date for the second tranche re3ease was October 31, 1987; this was based on the expectation that, by the end of September 1987, Haiti would have implemented all requisite measures. 3. The implementation of the ERC, and those of other reforms in Haiti, proceeded smoothly in the initial stages. Indeed, there was evidence suggesting that, albeit gradually, the economy was beginning to stabilize and turn around from the state of decline of the preceding five-year period (see paras. 29-33). 4. Haiti, however, had not completed the conditions for release of the second tranche of the ERC when a formal progress review was undertaken during September 1987. That slippage was due to official procedural delays only, and not to any basic discord with the ERC conditionality. Therefore, Bank management decided to delay tranche release until after December 15, 1987, at which time another progress review was planned to take place. 5. Meanwhile, on November 29, 1987, the scheduled elections on that day were canceled amidst voter-aimed violence that broke out soon after polling started. From thereon, Haiti was in a state of chronic constitutional crisis, which persisted through three changes of government in less than a year and which remains unresolved. 6. In the above climate of political uncertainty, economic performance suffered and was further impeded by suspension of the substantial amounts of enternal bilateral assistance that had been pledged to support Haiti's adjustment program. In those circumstances, despite affirmative assurances - 38 - to the Bank by the successive authorities, Haiti could not press on with its economic reform measures, including those programmed under the second tranche of the ERC (see paras. 35-36). 7. The second tranche of the ERC was finally canceled at the end of September 1988, after the Bank had extended the original Credit cancellation and closing dates, and after two formal and two informal progress reviews. The ERC was closed on December 30, 1988. B. Credit Background' The Emergence of Structural Problems 8. Haiti has long been among the poorest countries in the world; but, prior to the adjustment program mounted in 1986, there had been little systematic effort to lift the country out of its situation of extreme poverty. After many years of such policy neglect, the structural deficiencies of Haiti's economy and the deterioration of its balance of payments became particularly acute during 1980-85. 9. In part, the worsening situation in 1980-85 was due to external factors: export receipts from coffee, a major trade item, were poor and affected by low world prices and by hurricanes; the export assembly industry, which included electronic components and which was another major source of foreign exchange and employment, suffered badly from the shakeout in the U.S. computer industry. The only bauxite mine was closed in 1982 when its deposits were exhausted. Tourism, which had declined owing to the publicity associating Haiti with the AIDS disease, was discouraged further by the social unrest in 1984-85. In addition to the external adversities, Haiti's domestic policy environment in 1980-85 had the makings of a severe economic deterioration. 10. Haiti's domestic policies in 1980-85 fostered an inefficient and inequitable economic system. The system was based on fiscal and trade regimes employing a variety of instruments (export taxes, excise duties, import quotas and prohibitions, customs tariffs) set at excessively high levels as well as on restrictive institutions and practices, such as trade monopolies, outright closure of provincial ports 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 and to undertake capital expenditures that were The contents of this section are described and analyzed at length in documents already distributed to the Executive Directors: Haiti: Policy Proosals for Growth (5601-HA) was distributed on June 18, 1985; Hai;h Public Ex1enditure Review (6113-HA) on October 5, 1986; the President's Report for the Economic Recovery Program (P-4411-HA) on February 9, 1987; and Economic Recovery in Haiti: Performance. Issues and Prospects (7469- HA) on January 19, 1989. - 39 - uneconomic or unaccounted for, rather than to expand efficiently the country's productive capacity or provide essential public services. 11. The economic distortions and the financial drain inherent in Haiti's policies in 1980-85 had resulted in very significant erosions of the coun- try's incomes, living standards and finances. In that period, agricultural output declined by 1.3% per year on average and industrial outrut by 2.5% per year on average, while unemployment rose from 22% to 30% and inflation increased from 6% to 8%. In the same period, real incomes and private con- sumption per head each declined by 3% per year on average. Public consump- tion, on the other hand, grew faster than revenues, eroding public sector savings at the same time as public capital expenditures were increased. The overall public sector deficit averaged 9% of GDP in 1980-85 and the external current account deficit, 8% of GDP. The public sector deficit was financed principally by money creation--which, spilling into the balance of payments, led to loss of international reserves by US$22 million per year on average-- and by stepped up credits from overseas suppliers and private banks--which contributed to the increase in the country's external debt, from around US$320 million (22% of GDP) in 1930 to US$690 million (34% of GDP) in 1985. 12. The economic decline during 1980-85 led to increasing political dis- content, culminating in a dramatic change of regime in February 1986. The transitional Government which then came to power set out to promote economic recovery via an adjustment program. The Government's Adjustment and Recovery Program 13. The fundamental objectives of Haiti's adjustment program %ore to establish conditions for a viable, growing economy and relieve the average Haitian of the excessive burden of high consumer prices arising from past policies of suppressing competition. Those objectives were to be fostered directly by removing impediments to efficient resource allocation, and indirectly by attracting higher capital inflows with a sound policy environment. 14. The major policy instruments of the program were fiscal reforms aimed at improving the efficiency and the equity of the public revenue and expendi- ture systems, and trade reforms aimed at phased elimination of the numerous price distortions in the economy. In the process, Haiti expected to reduce financial imbalances, lower inflation, augment its international reserves, and promote economic expansion through export-led growth (initially, coffee and assembly products) and improved agricultural performance. Among the means to induce the expansion of output and trade, Haiti chose to emphasize fiscal and monetary restraint while maintaining the (nearly 70-year old) fixed parity of the gourde vis-a-vis the U.S. dollar and the country's exchange system free of any controls. 15. The specific measures implemented under the program and the impact of those measures are reviewed in Section D below. The adjustment and recovery - 40 - program was to span Haiti's fiscal years2 FY86-89 and was underpinned direct- ly by policy-based external assistance from IDA (Economic Recovery Program), the IMF ("tructural Adjustment Facility) and the USAID (Economic Support Fund). 16. Essentially, the policy-based operations of all three agencies were aimed at backing the attainment of Haiti's adjustment objectives. Each agency did also focus on particular aspects of the adjustment program. Thus, the Economic Recovery Program was focused on improving the incentives, investments and important institutions in agriculture, industry and the education sector. The Structural Adjustment Facility emphasized macroeco- nomic stabilization, including reduction of public sector deficits, improved balance of payments performance, reduction of public debt to the domestic banking system and relaxation of controls over interest rates. The Economic Support Fund emphasized management and financial audits of government enti- ties, and the strengthening of the programming and revenue administration capabilities of the Ministry of Finance. 17. In addition to direct balance of payments support. Haiti's donors pledged substantial financial assistance in the form of commodity and project aid in favor of the country's adjustment and recovery program. For the period FY87-89, the height of the initial program period, all donors together had indicated that net disbursements of concessional aid to Haiti would aver- age about US$180 million per year, nearly 25% above the annual net disburse- ments during FY83-85. Significantly, this enhanced level of external assis- tance was mobilized--with Haiti itself participating--under the aegis of the Caribbean Group for Cooperation in Economic Development, the aid coordination forum chaired by the Bank. C. Role of the Bank 18. At the time Haiti initiated the adjustment program in 1986, the Bank Group had had a long association with the country since beginning operations there in 1956. But, through mid-1980s, Haiti ran a closed and capricious economic decision-making and implementing system. That state of affairs precluded any sustainable policy dialogue and reforms of an economy-wide nature. Accordingly, Bank involvement in most of those years was confined largely to limited policy improvements and financial assistance in the context of investment operations in physical (roads, power, urban, port) and social (education, water supply) infrastructure, and a few operations in the directly productive sectors (one each in agriculture, rural development and industrial credit). 19. One exception to the Bank's historical role noted above was in the area of public finances. Starting in the late 1970s, the Bank had reinforced IMF dialogue and programs with Haiti designed to modernize the structure, size and administration of public revenues. The partial progress attained in that area (especially the centralization of revenues in the Ministry of V Haiti's fiscal year runs from October 1 to the following September 30. - 41 - Finance, the elimination of special accounts held at the Central Bank by pub- lic institutions and members of the Presidential circle, the rationalization of the Central Bank itself, and the introduction of value added taxes) are described in the Bank's 1985 economic report.3 That report also contained wide-ranging recommendations for economic reforms that became central to Faiti's adjustment program. Formulation of Adjustment Program 20. The Bank had undertaken intensive policy-oriented economic and sector work in Haiti during 1985. In addition to the economic report, a detailed agricultural sector assessment was produced, and a strong mission was fielded in October-November to review public expenditure programs and issues.s All that work was carried out in 1985, because, with the economy at rock bottom (see para. 11 above), the then Government had indicated its intention to reorient economic policies. Social unrest unseated that Government early in 1986, but the successor Government proved solidly com- mitted to the Bank's policy proposals for stabilization, efficient resource allocation and revival of economic growth. 21. The new Government began to implement fiscal and trade reforms very soon after taking office in February 1986 and requested Bank operational support for its program. Preparations for such an operation were begun in May 1986 based on the Bank's economic, public expenditure and agricultural reports already cited. In July 1986, the Government itself engaged consul- tants to study and propose changes in industrial incentives, including tariff reform. In this area, the Bank, through specialist staff missions, especial- ly in November 1986, assisted the Government to formulate additional tariff reform measures aimed at extensive liberalization of the trade regime. Attesting to the timeliness and effectiveness of the Bank's adjustment- related work and policy dialogue is the fact that the new Government proceeded to implement many of the Bank proposals even as the IDA-financed ERC was being prepared and appraised. The Economic Recovery Program Credit 22. The Economic Recovery Program Credit was approved by the Board on March 24, 1987 and became effective on April 16, 1987. In addition to requiring satisfactory macroeconomic stabilization, the Credit supported specific actions grouped under four headings; namely, public expenditure, public enterprises, competition and industrial incentives, and agricultural Op. cit, pp. 19-20. Haiti: Acricultural Sector Study (in three volumes). Report No. 5375-HA, June 14, 1985. Haiti's Government which took office in February 1986 was apprised of that mission's findings and recommendations before the completion of the expenditure report (op. cit) in grey cover in September 1986. - 42 - pricing. At the time of Board approval, Haiti had already implemented a number of actions,6 against which the first tranche was disbursed when the Credit became effective. The measures negotiated for second tranche release7 were expected to be completed by the end of September 1987. 23. The completion of some second tranche conditions (e.g., raising state land rentals) as well as the overall implementation of the adjustment program were deemed to require technical assistance. To that end, IDA also provided an associated technical assistance credite to Haiti. The Technical Assistance Credit (TAC) 24. This Credit, comprising institutional support, and analytical and investment studies, was designed to assist Haiti in three key areas pertain- ing to the country's adjustment program. Eirst, the Ministry of Finance and the public investment planning body (CPNAP) were to be supported with euip- ment as well as advisers and trainers in macroeconomic and public expenditure management. Second, several studies were agreed upon to strengthen and advance Haiti's adjustment agenda. Notable in this regard were the studies to: (a) diagnose the restructuring needs of domestic industries affected by trade liberalization; (b) devise a 4rade drawback system; (c) analyze and recommend rationalization of the civil service establishment and pay scheme; (d) examine alternatives to sugarcane production in the area around the Usine Sucriere du Nord (USN), and uneconomic sugar mill; and (e) propose policies and investments to ameliorate Haiti's serious soil erosion problem. Third, agreement was reached to undertake studies to guide implementation of spe- cific actions (raising state land rentals, reducing operating costs at the government-owned cement factory) for release of the second tranche of the ERC. (The status of the studies under the TAC is assessed below in paras. 57-59.) 25. The ERC was the first adjustment operation undertaken by the Bank in Haiti. It had been expected that the implementation of the Credit and that of the TAC would pinpoint additional policy reforms and investments for possible IDA financing. Accordingly, to further support Haiti's economic recovery, some modifications were introduced also in the program of planned IDA operations. Program of IDA Onerations 26. Prior to Haiti's economic reforms of 1986, the IDA program for the country had comprised investment operations, mainly in infrastructure and W See the President's Rep>rt for the ERC, op. cit., pp. 26-27, para. 91. U !Jhid.. pp. 27-28, para. 92. L' The Technical ABsiatance Credit, dencribcd in the granidntip jjeRA, No. P-4433-HA, was approved on May 20, 1987 and became effective on July 7, 1987. The Credit is now expected to close at the end of December 1989. - 43 - human resources development (see para. 18). With the advent of adjustment efforts, the program of IDA assistance was modified to include also future, policy-based sector and structural adjustment operations. 27. Among the planned policy-based operations were an industrial restruc- turing and development project, follow-up structural adjustment and technical assistance credits, and sector adjustment credits for agriculture and the environment. Those operations had been envisaged fo- the Bank's FY89-90 and were expected to incorporate the proposals of relevant studies initiated under the TAC and also to complement the achievements of the Government's adjustment program and the Bank support to that program. D. Accomplishments of Adjustment Program and Bank Support 28. In view of the inequities and the inefficiencies of Haiti's systems of public finances and incentives framework before 1986 (see paras. 10-11), the country's adjustment program was quite appropriately targeted at overhauling those systems. As shown below, during 1986 and most of 1987, policy reforms and economic performance, and the corresponding inflows of external aid, broadly conformed to the program ob ectives. From thereon, however, amidst a series of constitutional crises, the implementation of the program was impeded as Haiti's policy-making machinery was distracted by political crises and as the program's external financing package fell apart. Progrm _Performance 29. In the course of program implementation, Haiti's economic policies from March 1986 to November 1987 focused first on macroeconomic stabiliza- tion, and, second, on improvement of resource allocation and growth pros- pects. This was accomplished through reform of taxes, public expenditure, public enterprises, competition and industrial inventives, and agricultural pricing. Total expenditures, competition and industrial incentives, and agricultural pricing. Total expenditures and taxes were cut by about 2% of GDP, and the expenditure budget was reallocated such that education and health spending were increased by over 20% in real terms. Taxes on basic food items were reduced, helping to lower prices and raise private consump- tion among the low-income people. Income taxes were simplified, top marginal rates lowered and measures to strengthen tax collection initiated. The pub- lic investment program was pruned and concentrated on completing priority on- going projects while the public sector's debt to the domestic banking system was reduced. Trade monopolies, both public and private, were dismantled. Of the five public industrial firms, two (the Darbonne sugar factory and the From July 1987, there had been intermittent civil disturbances associated with the electoral process, culminating in a cancellation of elections at the end of Ntivember 1987 amidst violence on election day. Fresh elections were held in January 1988 and a new civilian Government assumed office in February. Four months later, a military Government took over, lasting three months till it too was replaced. - 44 - ENAOL vegetable oil mill), which were uneconomic, were closed, and another two (the flour mill and the cement factory) began to be restructured. 30. In a major reform of the trade regime, all but seven of the 111 quan- titative restrictions on imports were eliminated. The remaining seven prod- ucts (rice, maize, millet, beans, sugar, chicken parts and porkmeat parts), representing less than 20% of imports, became subject to import licensing without formal ceilings. Further, specific tariffs were all replaced by ad valorem ones, and the general level of protection was reduced drastically, with a view to both lowering prices and stimulating competitive efficiency, including at public enterprises. The export tax on coffee was phased out and other agricultural export taxes (on cocoa and sisal) were abrogated. 31. The reforms listed above were remarkably extensive and swift, the more so as they were initiated even before all commitments of supporting external aid were made to Haiti. The various measures began to stabilize and restructure the economy during (Haitian) FY86-87: the public sector deficit averaged an equivalent of 6% of GDP, compared to 9% in FY80-85; the external current account deficit averaged 5% of GDP, compared to 8% in FY80-85; the rate of inflation was brought down to 2% per year, compared to 8% per year on average in FY80-85; and the effective exchange rate depreciated by 14% in real terms, compared to a 40% appreciation, in real terms, between FY80-85. At about 7% of GDP, Haiti's national savings remained low in FY86-87 owing to the policy-induced growth of private consumption and a decline in FY87 public sector receipts. The latter reflected, in the main, the difficulties of revenue collection by Customs and public utilities in an atmosphere of elections-related unrest which broke out in the last quarter of the fiscal year. Nonetheless, the overall investment-savings gap in FY86-87 was narrowed to a more sustainable 5% of GDP, compared to 8% of GDP in FY80-85. 32. Economic growth in FY86-87 averaged slightly under 1% per year, not enough, but better than the decline of about 1% per year in FY80-85. In large part, economic growth in FY86-87 was marred by the collapse of coffee export volume and prices, and, in the latter half of 1987, but disturbances related to the electoral process. Also, domestic agriculture and industry, already under expected stress from trade liberalization, had to endure added competition from the upsurge of contraband imports, which intensified when provincial ports, formerly closed, were opened up to international traffic. While such developments entailed hardships for local producers--for example, in the Aice and other marketed food growing areae--there were, on the other hand, offeetting factors, such as greater availability of basic wage goods, lower consumer prices, and the opening up of economic and employment opportunities in the trade and transport sectors. ,;. Haiti's economic policies during 1986 and most of 1987 drew signifi- cant international support. Capital grant and net loan disbursements from official sources, including use of IMF Credits, increased by 27% in PY86-87 over the average amount of FY80-85. The higher inflows, coupled with lower current account deficits, enabled the country to retire some arrears and accumulate some gross reserves. Consequently, import coverage improved to - 45 - about two and a half weeks at the end of September 1987, compared to less than one and a half weeks at the end of September 1985. 34. While the reforms initiated in 1986 still needed refinements, and many deep-seated problems of longer-term development (such as, the critical situa- tion in health and nutrition, poor agricultural performance and deteriorating natural environment) remained to be tackled, Haiti had made a promising start. The momentum of the original economic reforms was lost, however, by a series of essentially constitutional crises, beginning in the last quarter of FY87 and persisting for over a year, that then compounded the country's economic and financial situation during FY88. Interruption of Program 35. Against the background of political instability, economic developments in FY88 were characterized by work stoppages, investor uncertainties, dis- traction of government attention from economic policy reforms, shortfalls in public revenue, especially during the first half of the fiscal year, and slower disbursements as well as suspension of vital external assistance. Based on donor intentions, the program had envisaged FY88 gross aid disbursements of US$220 million, made up of Us$70 million from policy-based operations and US$150 million in the form of commodity and project aid. Because of the circumstances which arose in FY88, none of the policy based disbursements (from IDA, the IMF and USAID) materialized. At the same time, about US$30 million of the expected commodity and project aid (from the U.S.) were withheld. There was thus a 45-50% shortfall in gross aid disbursements in FY88, and the program was more or less at a standstill. 36. The second tranche of the IDA-assisted ERC was among the policy-based disbursements that had been expected in (Haitian) FY88; but it could not be disbursed because all conditions had not been completed for nearly a year beyond the originally targeted date. In retrospect, the specific conditions for second tranche release and their original completion timetable (September 30, 1987; i.e. 5 to 6 months from effectiveness) do not appear to have been unrealistic. In any case, in the course of Credit implementation, IDA did agree to two reasonable waivers and also extended the original cancellation date for the undisbursed amount (see paras. 46-48 below). However, when all conditions were still not met despite the prospective waivers and extension, the undisbursed half of the Credit was finally canceled at the end of September 1988. 37. As it turned out, the main factors (the constitutional crises and the euspension of bilateral external financing) which led to program interruption were different from the rtehs perceived at the appraisal of the ERC. At appraisal, three principal risks had been perceived.10 38. The first risk perceived was that, in the face of rising popular expectations and the run-up to the November 1987 elections, the Government See Presdent's Report for ERC, on. cit., p. 29, paras. 95-96. - 46 - could lose its momentum in containing expenditures and reforming public enterprises. In actual fact, the Government kept up its efforts, especially on expenditure control. The reform of public enterprises was also sustained, albeit with delays brought on by management changes at the flour mill and by prolonged negotiations on investments and external credit needed t) reduce operating costs at the cement factory. 39. The second risk perceived was that influential protected manufacturers might have succeeded in blocking the full introduction of trade regime reforms. This risk also did not materialize. The successive governments persevered in the introduction of the reforms and manufacturers protested more against contraband imports than against the removal of protection. 40. To ensure full implementation of the trade reforms, an understanding had been reached that IDA would provide technical and financial assistance for industrial restructuring. In this regard, the initial diagnostic studies of firms wishing to restructure their operations were initiated on time under the aegis of the IDA-financed TAC. However, the next steps--in-depth studies and the processing of IDA financial assistance--were delayed, owing to the uncertainties regarding the maintenance of the macroeconomic framework (see para. 53 below) and to the civil disturbances during the November 1987 elections. 41. The third risk perceived at appraisal was that policy reforms could be reversed by the new Government that was scheduled to take office in February 1988. In fact, that Government, and those that followed, did not reverse the basic fiscal and trade reforms in any significant way. The pace of further economic reforms did slacken from 1988 in the atmosphere of recurring politi- cal crises and in the wake of substantial shortfalls in revenues and aid, with those shortfalls leading to large financial imbalances, including the accumulation of external payments arrears. Nonetheless, the authorities continued to stAte their intention to safeguard and advance the economic reform agenda. 42. In view of that intention of the Haitian authorities, Bank management agreed, while canceling the undisbursed half of the ERC, that a new adjust- ment program might be prepared when the situation in Haiti improved and stabilized and when the necessary bilateral donor-financing was secured. As regards the focus of subsequent adjustment programs, more efforts will be needed to strengthen Haiti's tradeable goods sector; improve revenue Wrbili- zation and expenditure programming; rationalize public sector employment and enterprises, especially the various public utilities; and institute incen- tives to arrest the alarming rate of environmental degradation. At the same time, it will be important to maintain and complete the specific adjustment measures put in place during implementation of the ERC. - 47 - E. Implementation and Monitoring of the tconomic Recovery Program Credit SMpervis ion 43. Between effectiveness (April 16, 1987) and cancellation (September 30, 1988) of the second tranche of the ERC, the Bank carried out two formal and two informal supervisions in the field to review progress on second tranche conditions . In addition, two progress review meetings were held in Washington with Haitian officials. On each occasion, Government representa- tives cooperated fully with Bank staff, who, in turn, informed the former of staff assessment of the status of compliance and of Bank Senior Management decisions when the decision were made. 44. Considering the size of the ERC (Us$40 million equivalent) and the nature and number of Credit conditions, the Bank's supervision effort was quite adequate. Indeed, since extension of cancellation and closing dates had to be made, the supervision effort exceeded that anticipated when the Credit was appraised and negotiated. In part, the three changes of govern- ment prior to Credit closure necessitated the extra supervision effort to monitor regularly the status of compliance with Credit conditions. Credit Compliance 45. At the first formal review (September 8-22, 1987) of Credit compliance, Haiti had not completed the conditions for second tranche release. Actions were still pending on final audits of the Central Bank (Banque de la Republique d'Haiti - BRH); cost reductions at the government- owned flour and cement factories (respectively, La Minoterie and Ciment d'Haiti); the establishment of a new agricultural credit bank; the dissolu- tion of the erstwhile agricultural and industrial development bank (Banque Nationale de Developpement Agricole et Industriel - BNDAI); and raising of state land rentals. The rest of the total ten specific conditions were either completed or nearly so, and the macroeconomic framework was judged to be sound. 46. Discussing the above status with Government, the Bank management indicated that it would be prepared to waive two of the tranche release conditions--the creation of a new agricultural credit bank and the raiaing of state land rentals--provided adequate progress on these occurred before tranche release. These concessions were agreed to because, despite strenuous efforts, specialist consultants to carry out the necessary studies could not The first tranche had been released upon effectiveness, based on measures that had been taken already (see para. 22). j2 The original Development Credit Agreement (dated March 27, 1988) for the ERC had specified (in Article III, Section 3.01). that progress review would occur no later than September 30, 1987. It had been expected that, by then, the second tranche conditions (listed in Schedule 3 of the Credit Agreement) would have been met. - 48 - be recruited on time. Subject to submission of satisfactory evidence, the Bank also concurred with Government proposal to close only the agricultural window of BNDAI; the industrial window would be retained since an IDB line of credit to BNDAI was then disbursing and also since the performance of BNDAI's industrial portfolio had been improving. 47. With the alterations described above, the Government and Bank manage- ment estimated that the second tranche conditions could be satisfied within another two months. Accordingly, it was agreed to delay the tranche release until after December 15, 1987, when another review was not planned to take place. 48. At mid-December 1987, Haiti was still not in full compliance. The conditions mentioned in para. 45 above remained outstanding. In addition, the viability of Haiti's FY88 (October 1, 1987-September 30, 1988) budget and balance of payments became an issue, following suspension of substantial budget support and other forms of grant aid by the U.S. and other bilaterals in the wake of the aborted end-November elections. Haiti then requested IDA to amend the Credit Agreement so as to: (a) postpone the tranche cancella- tion date (from December 31, 1987 to September 30, 1988) and the credit closing date (from June 30, 1988 to December 30, 1988), and (b) reset the terminal date for reviewing progress to June 30, 1988. IDA agreed to the amendments, which came into effect on February 10, 1988 upon countersignature by Haiti. 49. A new Government was installed in Haiti on February 15, 1988 after fresh elections had been held the month before. The Government assured IDA of its intention to comply with the Credit conditions and, on June 17, 1988, requested a progress review mission as, in Government view, all requisite measures for tranche release had been put in place. The review mission had to be aborted when a military coup d'etat occurred in Haiti on June 19, 1988. 50. When contacts were established, the Government which had just taken office requested IDA to wait until the end of August before undertaking a formal progress review. The Government requested a mission to start on September 6, 1988, and IDA sent one from September 8-9, 1988 to review fully the status of compliance. 51. The progress review mission of September 8-9, 1988 assessed the then status of conditions against which the first tranche of ERC had been released in April 1987 and the status of compliance with the second tranche condi- tions. It was concluded that the first tranche conditions (listed in para. 91 of the President's Report No. P-4411-HA of February 9, 1987) remained intact. 52. In reviewing progress on second tranche conditions, IDA examined their status and the likely macroeconomic outturn in Haiti's FY88. While five out of ten specific conditions had been satisfied, there were still important unmet conditions, especially those relating to cost reductions at the cement and flour factories, the final FY86-87 audits of the Central Bank, and the - 49 - fate of BNDAI. (See Attachment II for a summary of the status of each second tranche condition). 53. As regards the macroeconomic outturn in FY88, IDA was satisfied that each of the three different Governments during FY88 had made very strong efforts at limiting the size of the budget and the external deficits. How- ever, due to the aid cuts following the November 1987 events, the shortfalls in budget support grants (G84 million realized against G165 million pro- grammed) and in gross aid disbursements (US$120 million realized against US$220 million programmed) had proved too big for Haiti to deal with. The bottom line was pointing towards a fiscal gap of over G150 million (nearly 2% of GDP) to be financed by monetary expansion, and external payments arrears, including those to the Fund, of US$20-25 million. 54. The above financial situation could not be considered a viable FY88 outturn. Moreover, the prospects for FY89 were as dim at that stage, given the complete uncertainty of resumption of bilateral aid which had been large- ly assured when the ERC was designed. In that situation, the Government, as in FY88, was looking towards continued restraints on non-salary operations and maintenance expenditures, and on private sector credit. While both these restraints appeared necessary to contain the domestic and external financial deficits, they would impede economic growth, thus foregoing a basic objective of the ERC. 55. The upshot at the end of the September 1988 performance review was that the second tranche conditions had not been completed, nearly a year then since the originally forecast date. Meanwhile, the economic situation in Haiti had changed significantly since the ERC was appraised, and the coun- try's policy-making and implementation machinery remained in a state of flux. In that atmosphere, it was not known when full compliance with the Credit would be attained. 56. Consequently, after consulting with the then Government, IDA decided to cancel the second half of the ERC as of September 30, 1988, the legal cancellation date as amended ear'ier that year (see para. 48). The decision was conveyed formally to Haiti on October 1, 1988, by which time a new Government had taken office following a coup d'etat on September 17, 1988. 57. The associated Technical Assistance Credit (see para. 24), howover, was kept alive, with Haiti continuing to implement the various components- the services of short-term advisers, and the policy and investment studies-- aimed at propounding future adjustment issues. The Bank has received and commented on a number of the studies already completed. These include the works relating to industrial restructuring needs; duty drawback scheme, public service employment and pay; and alternatives to sugarcane production around the USN. 58. The recommendations of some of the completed studies are being uced to prepare planned IDA operations in Haiti. For example, the otudion of restructuring needs of manufacturing enterpriueG are being ufed to prepare the planned Industrial Restructuring and Development Project; while the study - 50 - on alternatives to sugarcane production around the USN is serving as input to the preparation of the planned Second Rural Development Project in the North. 59. Consultants conducting the study on state land rentals have submitted an interim report, which will be finalized after Government and Bank staff have reviewed it. And, finally, the important study on Haiti's environmental policy and investment options is progressing, albeit a little behind schedule but with fruitful consultations occurring between Government and Bank staff and the consultants who are preparing the study. Disbursement and Procurement under ERC 60. The ERC was to finance goods imported by the private and public sectors into Haiti from eligible countries and territories. Excluded were goods financed by other sources and a specific list including military and para-military items, alcoholic beverages, tobacco, precious stones and jewelry, gold and nuclear reactors and parts. Proceeds of the credit was to e disbursed bases on satisfactory evidence of (a) physical entry of the imports into the country; (b) actual payment in foreign exchange for such imports; and (c) evidence that the quantities imported matched the invoiced amounts. This evidence was to be compiled by the Societe Generale de Surveillance (SGS), and independent inspection company. 61. Retroactive financing to November 1, 1986 of SDR 16.4 million (Us$20.0 million) corresponding to the first tranche had been approved and took place in accordance with the disbursement provisions noted above. For subsequent disbursements, it had been agreed that only contracts with a minimum value of US$10,000 equivalent would be eligible for financing. Disbursements would be made on the basis of Statements of Expenditure (SOEs), duly certified by a specialized inspection company satisfactory to IDA, and authorized by the borrower, responsible for the submission of withdrawal applications to IDA. Detailed documentation evidencing expenditures were retained by the borrower and made readily available for inspection by IDA staff. 62. The Credit Agreement had specified that procurement of general imports by both the private and the public sectors would use international competi- tive bidding in accordance with IDA guidelines. Exceptions would be for con- tracts valued below US$3.0 million and for petroleum products. Procurement of imports by the private sector in the case of contracts valued below US$3.0 million would be made following regular commercial practices. Procurement of imports by the public sector in the case of contracts valued below US$3.0 million would be on the basis on comparisons of written quotations solicited from a list of three suppliers eligible under IDA guidelines. Procurement of petroleum products would be carried out eight under bilateral arrangerients based on prevailing market prices, or on the spot market through direct negotiations in accordance with local practices. The agreed disbursement and procurement procedures were monitored closely and were adhered to by all partion. 63. It had aloo buon agreed that the Minintry of the Economy and Finance would maintain records of all transactions under the credit in accordance - 51 - with sound accounting practices. Not later than four months after the end of each Haitian fiscal year, all accounts would be audited by independent audi- tors acceptable to IDA. Audit reports would include a separate opinion with regard to the claims submitted to IDA on the basis of the SOEs and state whether such claims had been effected in accordance with the Credit Agree- ment. By this understanding, the audit report of expenditures against the first tranche should have been submitted by the end of January 1988. There was, however, an inordinate delay on this count and it was not until February of 1989 that a draft audit report was submitted to the Bank. F. Conclusion 64. Following years of policy neglect, the structural deficiencies of Haiti's economy and the deterioration of its balance of payments became particularly acute during 1980-85. To some extent, the worsening situation in 1980-85 was brought on by adverse external factors, such as, hurricanes, falling prices of coffee, loss of demand for important export assembly items, depletion of bauxite deposits and decline of tourism. 65. Haiti's economy in 1980-85 was weakened even more, however, by the country's own economic policies. In particular, its wasteful public expend- iture policies and its incentives framework based on highly distortionary fiscal and trade regimes led to growing financial imbalances and declining production and exports. In turn, the economic hardships gave rise to increasing discontent with the political regime in the country. 66. The political regime in Haiti changed dramatically in February 1986. The two-year transitional government which then came to power embarked on an economic adjustment and recovery program along the lines that had been suggested by the Bank in a series of economic and sector studies undertaken in 1985. 67. Haiti's adjustment program was focused first on macroeconomic stabili- zation and, second, on improvement of resource allocation and growth pros- pects. The program involved reforms of taxes, public expenditures, public enterprises, industrial and trade incentives, and agricultural pricing. 68. Those reforms, implemented with remarkable commitment and speed in the initial stage,s received substantial international financial support, includ- ing the IDA-aasisted ERC and the associated TAC. The various measures imple- mented during February 1986 to November 1987 (see paras. 29-32) began to stabilize the economy and to establish the incentives for efficient growth of production and trade while, at the same time, starting to alleviate the burdens of unemployment, high cost of living and lack of social services that had been afflicting the majority of the population. 69. The momentum of the original economic reforms was lost, however, owing to a series of conatitutional crises, beginning with the abortive end- November 1987 elections and lasting through three changes of government in less than a year. The ensuing economic uncertainties were compounded by suspension of the substantial amounts of external bilateral assistance that - 52 - had been pledged to support Haiti's adjustment program. In those circum- stances, Haiti was not able to press on with its economic reform measures, including those programmed under the second tranche of the ERC. 70. The conditions for release of the second tranche of the ERC remained uncompleted nearly a year beyond the originally agreed date. Finally, the undisbursed half of the Credit was canceled at the end of September 1988. The associated TAC, however, was kept alive, with Haiti continuing to implement the assistance and studies that had been intended to identify future adjustment issues. 71. Thus far, Haiti has maintained a large part of the basic fiscal and trade reforms against which the first tranche of the ERC had been disbursed. That disbursement was effected in accordance with the criteria and procedures set forth in the Credit Agreement. There was, however, an inordinate delay in submission of the audit report of Credit records maintained at the Ministry of the Economy and Finance. - 53 - PROGRAM COMPLETION REPORT HAITI ECONOMIC RECOVERY PROGRAM (CREDIT 1766-HA) PART II. PROJECT REVIEW FROM BORROWER'S PERSPECTIVE A. The ERC Statistics PCR, Part III 1. The statistics presented are correct and complete. B. The Analysis: PCR, Part I 2. Right from the start the Bank recognized the auxiliary role of the ERC operation, the first objective of which was to support the efforts of the Government of February 1986 which had already moved to introduce reforms in taxation and the trade regime. The series of measures preceding the Bank's entry onto the scene related to: (a) public expenditure (b) public enterprises (c) competition and incentives for industry (d) the export taxes on certain agricultural products and BNDAI. 3. These initiatives were in line with the Bank's thinking on what needed to be done, since in the interval there had been intensive dialogues between the Government and the Bank on the question of policy orientations. As a result, the ERC operation which was then already under preparation was initi- ated one month after approval by the Bank Board (March 24, 1987) by disburse- ment on April 16, 1987, of the first tranche of a US$40 million credit. 4. While the progress already accomplished had paved the way for the ERC operation, its implementation also depended on the intentions of the main donors and the IMF. As an adjustment and economic recovery program had received the support of all concerned, the ERC operation was set up alongside the USAID Economic Support Fund (us$57 million for 1986-88 only) and the IMF Structural Adjustment Facility (SDR 28.004 million) plus, in addition, generous foreign aid in the form of products and projects totalling US$180 million at the commencement of the program. 5. Resumption of bilateral assistance and IMF support, togethet with a propitious macroeconomic situation and several reforms were in fact condi- tions that had to be met. It is instructive to observe the Bank focusing first on one aspect (reforms -- PCR, Part I. para. 1, 31) and then on the other (bilateral assistance -- PCR, Part I. para. 54). - 54 - 6. It is true that agencies such as the Bank and the Fund are subject to pressures from all quarters and their assistance is governed both by the effort demonstrated by the recipient countries and by the readiness evinced by the donors. Thus the Bank and the Fund can each justify their withdrawal from the program by referring to the halting of bilateral aid following the events of November 29, 1987, which created a shortfall of several hundreds of millions of gourdes, and, subsequently, the destabilization of the Haitian economy. However, the suspension of bilateral aid as a sign of disapproval of the events of November 1987 is a political condemnation. 7. The fact is that bilateral aid accounted for 85.5% of the US$220 million of gross disbursements scheduled for 1987-88, of which US$70 million was frow the ESF, ERC and SAP operations, plus assistance expected from the Swiss government -- here, too, bilateral aid amounted to 47.1% of the US$70 million. 8. This is clearly a lot of tied aid, and moreover aid likely to be impacted by political events taking place in Haiti and elsewhere. This risk appears to have been overlooked: the Bank showed itself more concerned about other risks, such as lose of control over public expenditure during the pre- election period in 1987, and that powerful groups might bring pressure to bear to block the reform of the trade regime, and thirdly, that the govern- ment following that of February 1986 might abrogate the measures on which agreement had already been reached in the interest of the reforms. It was against risks of this type that disbursement in two tranches of US$20 million each was viewed as a sort of insurance policy. However, none of the risks feared in fact materialized. In other words, the reforms were preserved, and this notwithstanding the political crises and the social costs that they entailed, at the very least up till the end of 1988. 9. Events followed a different course, for which the program was not designed (PCR, Part I, para. 37). While the primary impact of the reforms was felt through the easing of the tax burden and the liberalization of trade, a succession of political crises occurred which brought the machinery of government to a standstill, in particular the DC1 (the Tax Department) and AGD (the Customs Administration), and made it impossible to maintain the pace of the 1986 reforms. The spirit of the reforms nevertheless remained un- diminished, even though the prevailing circumstances rendered meeting of the release conditions for the second tranche increasingly difficult and uncez- tain. These conditions were appropriate, it is true, but hardly necessary for release of the funds after so many changes effected in such a short time (PCR, Part I, para. 31). 10. In particular, it was in the assistance promised for industrial restructuring that the Bank's action caused the greatest disappointment. Industrial restructuring was intended to be an integral part of the trade reforms. All the deregulation and deprotection measures had been implemented and all that remained to be done was for IDA to order some enterprise studies -- only a few had been made -- and to provide financing for the restructuring of the firms in question. None of this was done, in spite of the promises made. The face is that these were private firms selected by the Bank experts - 55 - themselves and which, in exchange for promises of financing and technical assistance, had voluntarily agreed to become active partners in the reform of the trade regime, rather than opponents quite capable of turning themselves into pressure groups to block the reforms. 11. With the withdrawal of balance of payments and budgetary support (G 165 million), the macroeconomic situation inevitably deteriorated during 1987-88, as the domestic financing of the public sector by the Central Bank increased with the ineluctable outcome of mounting external arrears. After all, it was oilateral aid in f,reign exchange, coupled with budgetary discipline, which had made it possible to build up the exchange reserves in 1986-87. And if a start could have been made on industrial restructuring, that would have made the external position less bad. The discipline that could well have turned into indiscipline was nevertheless maintained notwith- standing the loss of hundreds of millions in bilateral and multilateral aid. 12. With the deterioration of the macroeconomic environment the only alternative was restrictions in order to prevent anything worse. However, judging by the increasing discounting of the gourde on the parallel market between the start and the end of 1987, the fact that no foreign exchange was disbursed under the ESF, SAF and ERC programs eroded the stability of the gourde at a time when credit to the private sector was regaining its dynamism, undoubtedly not for reasons that would have been preferred. 13. The dilemma is that by tightening the financial policy attainment one of the ERC's main objectives -- promotion of economic growth -- was rendered all the harder. This engendered a conflict between the pursuit for domestic stability and the quest for external stability. It is correct that from the Bank's viewpoint the SAF was intended to concentrate primarily on macroeco- nomic stabilization, including reduction of public debt to the banking sys- tem, and easing of controls on interest rates (PCR, Part I, para. 16). By withdrawing from the program the IMF deprived it os significant means for achieving certain objectives considered to be of strategic importance: the sole tool left to the Government was the monetary and budgetary tool, which is moreover one and the same since the budget is the real exogenous variable in Haiti's financial policy. However, this instrument had to focus on two targets: external stability and domestic stability. Domestic stability was the first to be sacrificed, to judge by the deteriorated state of the econo- my, followed ny external stability, in light of the accumulated external arrears. 14. Adjustment programs generally offer a range of policies designed to curb consumption, expand supply and encourage structural adjustment. Fiscal and monetary policies target demand and seek to prevent the public sector from crowding out the private sector where credit is concerned. In most cases, fiscal and monetary policy is backed by the policy on wages an prices and by the exchange rate policy. The price and exchange rate policies in particular aim at favoring the production of certain goods, for the most part tradeables, and at damping down domestic demand, while the wage policy seeks to hold wages at reasonable levelu and increase employment. It is over the long term that structural measures have their impact on the functioning of - 56 - the markets for goods, inputs and foreign exchange. In the case of Haiti, the time frame envisaged was good, but in actual fact the program will barely extend over a full fiscal year. 15. It is vital that the next adjustment program focus in particular on: (a) industrial re9tructuring; (b) production of tradeable goods; (c) government resources and expenditures; (d) employment in government and the public enterprises; (e) the alarming pace of deterioration of the environment (cf. para. 42 of Part I of the PCR); (f) technical assistance at the operating level for the DGI, AGD and public enterprises. 16. It is appropriate to note that Haiti's experience is not different from that of other developing countries at the bottom of the poverty scale. The universal causes of the failure of adjustment programs are: (a) events that could not have been foreseen or which were not foreseen; (b) the difficulty of enlisting general political support for the program; (c) bottlenecks in the administrative apparatus; (d) expectations that are not always in a prop-rtion with the means of the program; (e) delays in the releasing of development aid. It can be stated that Haiti's experiencj between February 1986 and December 1988 demonstrated all the above. It is certain that the successive political crises, slow responseo and decision-making by the Government, defi- cient management capacities in the public enterprises, but also for instance the slowness in furnishing all the aid promised for industrial restructuring, in brief, all the above reasons plus others as well explain the failure of the program. 17. At the time of the first contacts between the Bank and the Haitian Government after February 1986, the Bolivian experience was known: Bolivia was in the vice of an adjustment program that was exacting heavy costs from, in particular, the households hardest hit by the cloning of the state-run mines. To ease the suffer4ng of these people, an Emergency Social Fund was established in December 1986. The intention was to cet up a similar fund for Haiti; however, nothing wan done. It was not until quite recently, in 1989, that the idea resurfaced. C. The Bank's Performance 18. It was only retroactively that the reforms embarked upon immediately after February 1986 became accepted as satisfactory, and sufficient, for an initial disbursement. The rocurd uf the utagn leading to oignaturo of the credit agreement shows that approval wan given by the Bank's Board in Mqrch - 57 - 1987, whereas the initiating memorandum was dated September 1986. The tax and trade regime reforms were then already under way. Nevertheless, the Bank speeded effectiveness of the credit agreement, which was first set for June 30, 1987 but was then moved fcrward to April 16, 1987. 19. The Bank showed itself to be quite flexible in extendiirg the deadline for disbursement of the second tranche of the ERC and as regards the appraisal missions. 20. The technical assistance promised by the Bank was provided and main- tained despite the political upheavals. However, the industrial restructur- ing project suffered from the Bank's inability to recruit the necessary experts in time, but also from administrative delays with the known consequences, namely the fact that the financial assistance promised for industrial restructuring did not materialize. 21. The requirement that only documentary evidence in respect of imports certified by the Soci6t6 G6n6rale de Surveillance (SGS) would be acceptable caused problems, especially when its sphere of application was extended to include other imports in addition to those originally specified. SGS' serv- ices are extensive and they are not always effective. Moreover, it has not always been easy to compile the data needed for preparation of the documents required by the Bank. For the future, a more efficient arrangement less likely to give rise to difficulties of all sorta should be envisaged, giving preference to an approach based on overall cost reduction. The present arrangement encourages evasion by obtaining SGS inspection waivers. D. Borroer'n Performance 22. The Government was required to make considerable efforts in a very short space of time in -rder to compile the documentation required for disbursement of the first tranche of the ERC. The public enterprises had to provide additional data regarding goods procured by them abroad, in order to make up for shortcomings in the SGS inspection system. 23. Certain delays still occurred between the receipt of the funds disbursed and the entries in the Central Bank's books crediting the special account opened for the purpose. E. Bank-Borrower Rolationn 24. Relations between the Bank and the Borrower have been good. Th Bank and the Government quickly reached agreement on what had to be done in the circumstances. The Governments determination to move ahead owiftly with the fiscal and trade reforms placei the Bank in a comfortable position to speed the implementation of the adjustment and economic recovery program. 25. Reforms are otill needud: oe no continuations of what has been already started, and other completely now ones. Certain reforms may require - 58 - stage-wise implementation, while others, on the contrary, succeed thanks to the speed with which they are put into effect: the 1986 reforms belong in the latter category. 26. The mobilization of resources on behalf o the financial equilibrium of the public sector was not given enough attention. It would be advisable for the next adjustment program to include technical assistance to help augment the resources available. 27. Disbursements would have greater impact if the interval between them was shorter, even if they were on average smaller in amount. However, a much larger volume of resources is needed, on a par with the scale of the reforms. This program was cheap for the Bank. 28. The US$20 million finally canceled at the end of September 1988 should be added to the funding proposed in a subsequent program. Not only because of the reforms implemented, but also because, between February 1986 and September 1988, notwithstanding four successive governments, there was not question of reversing these reforms. It is quite clear that the macroeco- nomic environment has been transformed since then, but if the external support promised had in fact been forthcoming, this macroeconomic environment would have been better today. 29. A large bilateral aid component in an adjustment program is a risk. Recognition of this risk prompts the suggestion that solutions should be considered that would given the beneficiary country rather more operating autonomy in the event of suspension of a significant part of the bilateral aid. One way of furnishing the additional resources needed could be provision of more extensive technical assistance, but at the resource mobilization level, since technical assistance is less vulnerable than aid in cash or kind. Moreover, supplementary financial assistance may be obtained from the IMF's compensatory financing facility for contingencies. 30. An emergency social fund to assist the disadvantaged and the most severely impacted groups is an all the more urgent need now that it appears that the next adjustment program could be under way barely three years after the first, and moreover in an increasingly fragile macroeconomic context with the risk that the reforms of 1986-87 may be jeopardized. This social fund will have to be in a position to propose ways of easing the costs of adjustment, for example: (a) by assisting tradesmen and small business operators by means of a system of loans giving them access to means of production; (b) by raising the return these groups are able to obtain from their activities by means of better prices for their products and aervices, or by making inputs available at special low prices; (c) by creating employment for the hardest-hit groups, especially government and public enterprise employees laid off as a renult of rationalization measures in the public sector; (d) by making direct payments to individuals; - 59 - (e) by providing health care and services to those who are too poor to afford them. 31. Since the supply of and demand for tradeable goods will have to be one of the chief focuses of future adjustment programs (PCR, Part I, para. 42), every effort will have to be made to exploit everything that a reformed exchange rate system can offer. After all, the exchange rate is one of the factors that determines the prices of tradeable goods in terms of nontrade- ables and, therefore, forms an integral part of adjustment. 32. For a country such as Haiti it is not enough for nominal wages to be low or for the real effective exchange rate obtained by using relative wage levels to move downward, to preserve international competitiveness. This overlooks the fact that the attractiveness of a country for investors is also determined by the efficiency of its administrative apparatus, the quality of its infrastructure, the cost of local products and services, etc. 33. It is obvious that the stop-and-go policy is costly, in that by holding development back this policy lessens the chances of sustained and lasting growth. It is recommended that clearer distinction be drawn between policy-based sector operations and structural adjustment operations. Sector commitments with a set time frame, and infrastructure investments, are primarily components of a development policy and therefore aimed at expansion of medium and long-term supply. 34. Clearly, transfers from abroad are a means to augment the supply of tradeable goods in the short term and to hold their relative prices down lower than they would otherwise be. However, the demand for nontradeables will also rise, with the risk of an increase in their relative prices. This can cause a transfer of resources to that sector, but at the expense of production tradeables. The next adjustment program will have to take this possibility into account. - 60 - Attachment I HAITI - ECONOMIC RECOVERY PROGRAM (CREDIT 1766-A) Key Macroeconomic Indicators as Projected in President's Report and Actuals Base Projectad in Year 1/ President's Report Actual FY86 FY87 FY88 FY86 FY87 FY88 ------(Percentages, unless otherwise indicated------ GDP Growth Rate (m.p.) -1.4 4.5 5.0 0.6 0.6 -1.5 GDP/Capita Growth Rate -3.1 2.7 3.1 -1.2 -1.2 -3.2 Consumption/Capita Growth Rate -0.2 3.1 2.8 1.4 0.5 -2.7 Gross Investment/GDP 12.1 13.5 14.3 10.9 12.9 11.3 Domestic Savinge/GDP 5.6 5.2 5.5 5.0 5.1 4.5 National Savings/GDP 7.2 6.9 7.3 6.6 7.0 6.6 Public Investment/GDP 6.2 7.4 8.0 5.7 7.2 5.6 Public Savings/GDP 1.0 1.2 1.9 0.5 -0.5 0.5 Private Investment/GDP 5.9 6.1 6.3 5.2 5.7 5.7 Private Savings/GDP 6.2 5.7 5.4 6.1 7.5 6.1 Resource Gap/GDP 6.5 8.3 8.8 5.9 7.8 6.8 Government Revenues/GDP 10.5 10.2 10.9 11.0 10.2 10.1 Government Expenditures/GDP 16.5 16.4 17.1 16.0 17.0 15.3 Public Sector Deficit (-) or Surplus (+) /GDP -5.2 -6.8 -7.2 -5.3 -7.7 -5.2 Export Growth Rate (Traditional) 14.8 5.5 5.5 14.8 -12.5 11.9 Export Growth Rate (Non-traditional) -13.2 6.2 6.2 -13.2 -7.0 -0.6 Total Exports GNFS/GDP 13.8 13.0 12.6 13.0 13.0 12.5 Import GNFS Growth Rate -5.7 19.5 11.1 -6.4 4.6 -7.9 Imports GNFS/GDP 20.3 21.3 21.4 18.9 20.8 19.3 Current Account (in US$ Mn.) -105.3 -153.1 -179.3 -96.4 -126.8 -103.4 Current Account/GDP -4.9 -6.6 -7.0 -4.3 -5.9 -4.7 Terms of Trade Adjustment/GDP 0.0 0.4 0.6 0.0 -0.2 -0.4 Debt Service (in US$ Mn.) 72.5 62.9 52.7 44.5 56.2 52.7 Interest Payments/XGS 4.8 4.1 3.6 5.1 4.5 4.9 Interest Payments/GDP 0.9 0.7 0.6 0.7 0.6 0.6 Agriculture GDP (f.c.) Growth Rate -1.6 5.5 5.5 2.4 0.2 -1.3 Industry GDO (f.c.) Growth Rate 0.2 5.1 5.1 -3.1 1.1 -0.6 Services GDP )f.c.) Growth Rate 0.1 3.6 3.6 2.7 2.7 -0.8 Public Sector Employment Growth Rate ... ... ... } } ) Private Sector Employment Growth Rate ... ... ... }1.6 }-6.5 }1.2 Unemployment Rate ... ... ... 30.6 39.3 40.4 IL As used in President's Report. When the President's Report was produced, data for FY86 were estimates only. Actual data, which became available subsequently, are also given in this table. ... Not provided. NOTE: All ratios, except the Terms of Trade Adjustment/GDP, are calculated from current price values. - 61 - Attachment II HAITI - ECONOMIC RECOVERY PROGRAM (CREDIT 1766-HA) Status of Second Tranche Release Conditions on September 30, 1988 Condition Number jE Item Status (a) (i) Satisfactory development budget Condition met when FY88 budget and investment and investment program for programs were agreed on in October 1987. But, Haiti's FY88 (October 1, 1987 the January 1988 revision of budget, following to September 30, 1988) revenue shortfalls, slashed Treasury contribution to development budget by 36%. Also, following aid cuts after November 1987 events, counterpart Gourdes available for investment program fell short by 69%. Consequently, condition now out of compliance. (a) (ii) Satisfactory FY88 recurrent Condition met. When recurrent budget was budget allocation to the revised in January 1988, the Education budget Ministry of Education was least affected, and Bank staff are satisfied with revised allocation to the Ministry of Education. (b) (i) FY86 audit of the Ministry of Condition met. Finance (b) (ii) February-September 1986 and Condition not met. Only draft audits FY87 audits of the Banque de la submitted to-date. Final audits still Republique d'Haiti (Central awaited. Bank). (c) Reduce operating coats at Ciment d'Haiti: Condition not met. Cost of publicly-owned Ciment d'Haiti production ion July 1988 (US$96.87/MT) not (cement factory) and La lower than a year ago, even though temporary Minoterie (flour mill). workforce has been cut substantially, from 352 in July 1987 to 180 by August 1988. Major factor responsible for high cost is the dilapidated and inordinately expensive electric power plant at the factory. Cost of power remains at about US$0.3/kWh, nearly five times the cost in US cement plants, and more than twice the price of power in neighbt:ing countries. Decision to modernize power plant at the factory has been pending for two years. La Minoterie: Condition not met. Cost of producing flour was US$17.1/100-lb. bag in June 1988, compared to US$14.4/100-lb. bag in September 1987. Total workforce at mill has remained same (698 in August 1988, against 697 in September 1987). Composition of workforce has changed, with more on regular and less on temporary basis now than a year ago. In August 1988, there were 482 regulars and 216 temporaries, compared to 321 regulars and 376 temporaries in September 1987. (d) Elimination of petty taxes on Condition met and sustained since September exports and imports. 1987. (e) Elimination of coffee export Condition met and sustained since September tax. 1987. - 62 - (f) (i) Satisfactory establishment of a Condition not met, although Region had new agricultural credit bank. recommended (memo of 10/19/87), and SVPOP had agreed to (memo of 11/2/87), waiving this condition if all other conditions for tranche release were met. An IDB-financed report on legal framework and operating procedures of new bank was initiated but not followed-up. Government intention now is to transform the Ministry of Agriculture's smallholder-oriented Bureau de Credit Agricole (BCA) into a full- fledged agricultural credit institution lending to all borrowers in the sector. The BCA was set up in 1959 and, lately, was financed largely by USAID funds, now withdrawn. The source of future financing is unknown. (f) (ii) Dissolution of the Banque Prospects of compliance by cancellation date National de Developpement (9/30/88) uncertain. We had agreed to Agricole et Industriel (BNDAI). Government proposal that only agriculture window be dissolved since the industry window, operated with an IDB line of credit had been improving. Prior to coup of 9/17/88, Minister of Finance had signed a decree dissolving agriculture window and decree was awaiting signature by the rest of Cabinet to become law. Fate of decree unknown now, but, even before coup of 9/17/88, several officials doubted whether ,abinet would approve dissolution. (g) Increase state land rentals. Condition, as altered according to Regional recommendation (memo of 10/19/87) and agreed by SVPOP (memo of 11/2/87). has been met. Original condition had required preparation and satisfactory progress in implementation of program to raise rentals. Since consultant services for preparing program had been impossible to obtain on time, SVPOP had accepted Region's proposal to waive original condition, provided a consultant was appointed and work progressed satisfactorily prior to tranche release. A consultant has been appointed and has submitted a satisfactory work schedule to IDA through the Government. /a Numbers refer to those employed in Schedule 3 of the Development Credit Agreement.