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?
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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
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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
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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

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