GOH BUDGET UPDATE: MOVING FORWARD WITH

C O N F I D E N T I A L SECTION 01 OF 03 PORT AU PRINCE 001483 SIPDIS SIPDIS STATE FOR WHA/CAR EB/IFD S/CRS SOUTHCOM ALSO FOR POLAD STATE PASS TO USAID FOR LAC/CAR INR/IAA (BEN-YEHUDA) COMMERCE FOR SCOTT SMITH TREASURY FOR JEFFERY LEVINE WHA/EX PLEASE PASS USOAS E.O. 12958: DECL: 08/08/2016 TAGS: ECON EAID ENRG PGOV PINS HA SUBJECT: GOH BUDGET UPDATE: MOVING FORWARD WITH PETROCARIBE, REVENUES HIGHER THAN EXPECTED REF: A. PAP 856 ¶B. PAP 1417 PORT AU PR 00001483 001.2 OF 003 Classified By: Ambassador Janet A. Sanderson for reasons 1.4 (b) and (d ). ¶1. (C) Summary: President Rene Preval's economic advisor Gabriel Verret told econoff August 8 that the new budget is almost complete and will move forward to parliament, maybe by tomorrow (August 11). Concerning the financing gap for FY06 (USD 18.5 million) and FY07 (USD 15 - 25 million),government revenues are stronger than expected, which will help reduce the gaps somewhat. The GOH also plans to cut expenditures, Verret explained. For this fiscal year, some elements of the Social Appeasement Program (French acronym: PAS) and an "illegal" supplemental monthly salary offered to workers at the start of the academic year may be partially cut. To close the financing gap for FY07, the GOH will cut back on investments for which there is not sufficient donor funding. Meanwhile, the GOH is seeking parliament's approval for eventual ratification of the PetroCaribe agreement, which Venezuela and Haiti have yet to formally sign. The GOH continues to perceive the terms of the loan to be favorable to Haiti and sees the loan itself as a source of additional financing. Apparently, the first shipment of petroleum was a grant and not part of the regular loan agreement. Verret also said that Preval plans to replace ineffectual bureaucrats with those committed to raising government revenues. End summary. PetroCaribe: A Source of Additional Financing? - - - - - - - - - - ¶2. (U) Economic advisor Gabriel Verret, previously skeptical of the PetroCaribe initiative, told econoff that the GOH sent a letter to parliament August 3 outlining the PetroCaribe program to facilitate eventual ratification. He confirmed that the first shipment, which arrived in Port-au-Prince on the day of Preval's inauguration, was a grant and that the agreement has not yet been formally signed by the Haitian and Venezuelan governments. (Note: Apparently, the signing between the Vice-President of Venezuela and President Rene Preval at the inauguration on May 14 was ceremonial (ref A) and the first shipment was a grant, not a part of the loan agreement. End note.) Verret said PetroCaribe could offer a loan of anywhere up to USD 100 million, based on the following calculation: the GOH purchases USD 250 million in Venezuelan petroleum products each year; 60 percent of this must be paid after a 90 day grace period and 40 percent of it is payable over a period of 25 years, at a one to two percent interest rate. In order to ensure the money will be there for repayment in 25 years, the GOH would have to put about USD 60 million into a trust fund, leaving USD 40 million for investment projects. Verret said it is more likely that the government would set aside around USD 12 million for repayment for the first five years of the agreement, leaving USD 88 million for immediate investment. ¶3. (SBU) Note: The GOH continues to misconstrue the actual benefits of the PetroCaribe deal. Ambassador has personally addressed the issue of PetroCaribe with GOH officials at the highest level explaining the pitfalls of the agreement. The GOH agrees that Haiti is not well-positioned to accept PetroCaribe petroleum: they do not have a state-owned oil company; they lack adequate port and storage facilities, necessitating use of private storage; and poorly-maintained roads and theft make transportation from the port to the final destination point difficult. Post has also reminded GOH officials that the transportation of PetroCaribe petroleum is not insured by Venezuela, and is often transported in ships which do not meet international standards. Finally, the GOH has stated that the international oil companies operating in Haiti are vital to the economy and does not want to risk pushing them out of the local market. End note. PORT AU PR 00001483 002.2 OF 003 GOH Revenues on the Rise, Cuts Necessary Nonetheless - - - - - - - - - - ¶4. (U) Verret said that GOH revenue collection for both June and July surpassed expectations, and the GOH predicts the trend to continue. For this reason, Verret estimated a reduction in the estimated USD 18.5 million financing gap for FY06, but did not say by how much. In addition to revenue buoyancy, Verret expects cuts to the Social Appeasement Program (PAS),a three-tiered GOH proposal to create a more favorable environment for development. This represents a change from the GOH position at the donors' conference. ¶5. (C) Verret also said that the "illegal" funding for "back-to-school" pay for public employees should be cut. He said there is no legal basis for this expenditure and that the precedent, which was set by former President Jean-Bertrand Aristide, should be ignored. The GOH originally budgeted to pay public employees a bonus of 70 percent of their monthly salaries, regardless of how high the salary bracket and the number of children. Preval is re-examining the proposal and may give one sum to all employees -- Verret gave 5000 Haitian gourdes (USD 129) as an example -- or offer the bonus only to those who make less than a minimum threshold. ¶6. (U) Next year's budget gap is predicted to be about USD 15 to 25 million. (Note: The International Monetary Fund (IMF) estimated the FY07 budget gap to be USD 111.5 million. At the July donors' conference, however, the international community made pledges which reduced the gap to USD 28 million. If HIPC debt relief of USD 14 million is approved, the IMF estimates the FY07 budget gap would be further reduced to USD 14 million. Hence, the range of USD 15 to 25 for the FY07 gap. End note.) Verret said the GOH is looking at certain investment cuts, while also seeking additional support from "non-traditional" sources such as Taiwan. Separately, IMF resrep Ugo Fasano said Canada is another possible source of budget support although the funding would not be available in time for the Poverty Reduction and Growth Facility (PRGF) to move forward to the IMF Board in October. Shift in Finance Personnel - - - - - - - - - - ¶7. (C) Verret said Preval is intent on increasing government revenues and is discussing possible personnel changes to the GOH's finance bureaucracy. Specifically, he reported that the President has targeted the Director General of Customs Edouard Vales Jean-Laurent and the entire board of the Central Bank for re-examination. Concerning Laurent, Verret said that he is doing his job well, despite the transport workers, strike at the border (ref B); however, Verret agreed that the Central Bank board, including Governor Raymond Magloire, should be dismissed, with the exception of two valuable members, possibly before their tenure is up in March 2007. Neither the GOH nor the IMF is satisfied with the work of the current Central Bank. What little work they have done on monetary policy has been ineffectual and the inflation rate is still hovering around 13 percent, well above the IMF's target for a single digit inflation rate. Concerning commercial banking supervision, they have also done a lousy job, according to Verret. He cited Socabank, which is facing serious liquidity difficulties, and said that the bank has given a large loan to at least one of the members of the Central Bank board. ¶8. (SBU) Comment: It is troubling to hear that Preval is thinking of letting his customs' director go, when Laurent has put himself on the line to collect revenues at the border and enforce the law. Talk of replacing Laurent stems from Preval's desire to appease the transport works on the Haitian-DR border. We know he is under pressure from some in the formal business community (those who pay taxes and would like to see others do the same) to retain Laurent. Whether PORT AU PR 00001483 003.2 OF 003 Preval decides to retain Laurent will be an indicator of his ability and willingness to stay the course on enforcing tax collection. As for PetroCaribe, it is also clear that the GOH is not focused on the long-term implications of the PetroCaribe deal, but instead on immediate access to extra cash. That said, overall, the GOH's desire to maintain fiscal discipline bodes well for continued macro-economic stability, at least over the short term. SANDERSON =======================CABLE ENDS============================