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
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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
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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
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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 --

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that they have no hope of servicing the debt without
assistance.

Better News for This Year's Deficit
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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