IMF: HAITI URGENTLY NEEDS 06-07 BUDGET SUPPORT

UNCLAS SECTION 01 OF 02 PORT AU PRINCE 001267 SIPDIS SIPDIS STATE FOR WHA/CAR EB/IFD STATE PASS TO USAID FOR LAC/CAR TREASURY FOR JEFFERY LEVINE COMMERCE FOR SCOTT SMITH E.O. 12958: N/A TAGS: EAID ECON PREL HA SUBJECT: IMF: HAITI URGENTLY NEEDS 06-07 BUDGET SUPPORT ¶1. Summary: Resident Representative of the International Monetary Fund (IMF) Ugo Fasano raised a red flag concerning Haiti's fiscal year 2006-2007 financing gap. If the GOH cannot find budget support for the estimated USD 45 to 60 million deficit that will not be covered by multilateral pledges, Haiti's Poverty Reduction and Growth Facility (PRGF) cannot go forward to the IMF Board in October. If the PRGF is not approved, Haiti will not qualify for the Heavily Indebted Poor Countries (HIPC) initiative which would immediately cut debt service payments by some USD 15 million, nor would Haiti qualify for potential debt stock cancellation of over USD one billion from the Inter-American Development Bank (IDB) and World Bank (WB). Fasano also noted that HIPC debt relief is contingent on a debt-to-export ratio of over 150 percent and Haiti's is currently 165 percent, dangerously close to the cut-off in view of Haiti's increasing exports. Fasano expects the 2005-2006 budget gap will be much lower than GOH estimates of USD 18.5 million. He emphasized the importance of reducing annual inflation rates to single digits and warned of the dangers of Central Bank financing schemes. Post urges the Department to work with other USG agencies and donor partners to address the critical financing gap issues raised by the IMF rep. End summary. Grim Prospects for the 2006-2007 Financing Gap - - - - - - - - - - ¶2. In a meeting with A/DCM and Econoff July 12, Resident Representative of the International Monetary Fund (IMF) Ugo Fasano raised a red flag concerning Haiti's fiscal year 2006-2007 financing gap. The IMF mission which was in Haiti at the end of June estimates the financing gap to be USD 111.5 million. So far, only international financial institutions have made firm commitments to close next year's gap -- USD 25 million from the Inter-American Development Bank (IDB) and USD 10 million from the World Bank (WB). Fasano said that the EU would possibly commit 10 to 12 million Euros (about USD 15 million) to close the gap, but given past experience with EU commitments, he did not count on it. Without the EU pledge, but including possible Heavily Indebted Poor Countries (HIPC) debt service payment reductions of USD 15 million, the Government of Haiti (GOH) would still face approximately USD 60 million financing gap for fiscal year 2006-2007. Even including the possible EU contribution, the financing gap would rest at around USD 45 million. If the Financing Gap is not Closed, PRGF is Dead - - - - - - - - - - ¶3. If the GOH cannot find budget support to close next year's financing gap by the time the Poverty Reduction and Growth Facility (PRGF) is scheduled to go to the IMF Board in October, the PRGF cannot move forward, according to Fasano. Without the PRGF, the GOH will not qualify for the HIPC initiative, which would reduce debt service payments by approximately USD 15 million per year. Moving forward to fiscal year 2007-2008, Haiti would lose an expected USD 500 million in debt relief from the World Bank, which would be granted only if they have a good track record with the PRGF. The GOH could also miss out on potential debt relief of USD 500 million from a similar IDB program which Fasano expected to be implemented in parallel to the World Bank debt cancellation. The Time for HIPC Debt Relief is Now - - - - - - - - - ¶4. Fasano also warned that Haiti could not afford to delay HIPC debt relief. The HIPC initiative is contingent on a debt-to-export ratio of 150 percent, and Haiti's current ratio is 165 percent. As the political and economic situation stabilizes, growth is increasing and so are exports, which have increased throughout 2005 and 2006. If this trend continues and the debt-to-export ratio falls below 150 percent, Haiti would no longer qualify for HIPC, or for debt relief from the IDB and WB. In one sense, this is positive: Haiti's debt burden is much lower than that of other poor countries. However, Haiti's government revenue is so small -- their tax collection is estimated at seven to nine percent of GDP and their exports are relatively low -- PORT AU PR 00001267 002 OF 002 that they have no hope of servicing the debt without assistance. Better News for This Year's Deficit - - - - - - - - - ¶5. Fasano expects the 2005-2006 financing gap to be much lower than GOH estimates of USD 18.5 million. He complimented the fiscal policies of President Rene Preval's government. He said they had done a good job of controlling revenue so far, and did not see how government expenditures could rise drastically enough to reach a deficit of USD 18.5 million before the end of the current fiscal year, despite GOH predictions of such a gap. ¶6. Fasano urged the Embassy to remind the government of the dangers of Central Bank financing to cover the gaps, which would lead to an increase in inflation. Inflation is currently at about one percent a month, which is higher than the yearly single digit inflation rate the IMF would like to see. He also said that in Haiti a low inflation rate does not negatively affect the growth rate, because the growth potential increases greatly with a sense of security and stability in the country, and with a sound macro-economic framework. ¶7. Comment: We believe Fasano's plea for urgent donor assistance to cover the 2006-2007 financing gap is on target and we will be making the point with other donors as well. If the GOH cannot close next year's financing gap, estimated at USD 45 to 60 million, they will lose leverage for over USD one billion in potential debt relief in the near future. SANDERSON