C O N F I D E N T I A L PORT AU PRINCE 000204

SIPDIS

SIPDIS

STATE FOR WHA/CAR
EB/IFD/OMA
EB/IFD/ODF
WHA/EPSC
S/CRS
TREASURY FOR JEFFREY LEVINE
STATE PASS AID FOR LAC/CAR
USDOC FOR 4322/ITA/MAN/WH/OLAC (SMITH, S.)

E.O. 12958: DECL: 01/27/2015
TAGS: EFIN ECON PGOV HA
SUBJECT: HAITI: FISCAL PRESSURES AS INTERIM GOVERNMENT
PREPARES FOR TRANSITION

REF: PORT AU PRINCE 0114

Classified By: Deputy Chief of Mission Douglas Griffiths.
Reason 1.5 (d) and (e)


1. (C) SUMMARY: The IMF ResRep told Econ Counselor that
IGOH performance under EPCA II was satisfactory, despite some
problems at the end of the year with Central Bank financing.
Tax receipts and spending are up, and the IGOH is exploring
the possibility of subsidies to avoid a fuel price hike. The
IMF,s projection of the financing gap remains USD 31
million, in contrast to the lower IGOH estimate. Given the
high price of petroleum and pressures for new spending by the
newly elected government, we fear the gap could grow. The
IMF is moving ahead with its plans for a Poverty Reduction
and Growth Facility (PRGF) in 2006. END SUMMARY.


2. (SBU) Economic Counselor met January 25 with IMF ResRep
Ugo Fasano to go over IGOH economic performance in its last
days in office. Fasano said that overall IGOH performance
under EPCA II was satisfactory. The IGOH ran into trouble at
the end of December when expected disbursements from the
World Bank and the IDB were delayed due to problems meeting
conditionality, specifically audits of some public
enterprises. The IGOH resorted to Central Bank financing to
cover the shortfall, which had the negative effect of causing
some inflation and depreciation of the Gourde. However, the
loan conditions have now been met. The IGOH expects the
disbursement soon and will repay the Central Bank.

Tax Receipts and Spending Up
- - - - -

3. (SBU) Fasano confirmed the Finance Minister,s
description of the fiscal situation (see reftel) and said
that spending and tax receipts were above planned levels.
Revenue was up because of better Customs administration at
the port but, simultaneously, spending was up due to costs

associated with implementing elections and fighting
insecurity in the capital. Fasano agreed that some of the
additional spending was caused by Ministers who wanted to get
public works projects under way before IGOH leaves office,
but that the spending itself was not bad. He saw no evidence
of corruption, but noted that Finance Minister Bazin is under
a lot of political pressure from his colleagues to spend,
spend, spend.

Price of Petroleum a Problem; Canadians to the Rescue?
- - - - -

4. (C) A larger problem looming ahead is the price of
petroleum. The IGOH based its FY 2006 budgeting on an
estimate of USD 40 per barrel for the year, but now the price
is over USD 60. According to a set formula based on global
prices, the IGOH needs to raise gasoline prices 20 percent in
the coming weeks. However, the IGOH is loath to do so, and
has approached the Canadian government for a grant of USD 8
million to subsidize the price of fuel. The 8 million would
allow the IGOH to avoid a gasoline price rise until the end
of March. The GOC has said it will consider providing USD 5
million, but has not yet made a final decision, according to
Fasano.

Financing Gap Could Grow
- - - - -

5. (SBU) The IMF,s most recent projection of the financing
gap for the second half of the fiscal year remains USD 31
million. This contrasts with Minister Bazin,s lower
estimate (reftel), but Fasano believes that Bazin is
including a USD 12 million grant to close the financing gap
promised by the EU following good, clean elections. The IMF,
the ResRep said, is not as certain that the EU money will
ever arrive.

Moving Ahead Quickly with a PRGF
- - - - -

6. (SBU) Looking ahead, Fasano said that the IMF is
prepared to send a team to Haiti as early as February,
between the first and second rounds of the election, in order
to meet with the two Presidential candidates in the run-off
to discuss a future Poverty Reduction and Growth Facility for
Haiti (PRGF). The program could be negotiated in the spring,
go to the IMF Board for a vote in the summer, with the
program taking effect October 1, 2006.


7. (C) COMMENT: We fear the financing gap could grow. If
the price of oil remains high, government spending would
likely rise above planned levels. We note that a new
Parliament will soon be in session and that could lead to
higher spending, even on simply repairing the neglected
Parliament building. Local elections and unanticipated
spending by newly elected officials, eager to deliver the
goods to constituents, will likely put upward pressure on
spending as well. Subsidizing the price of gasoline in
general is a bad idea; in this case even worse as the IGOH
would leave a nasty legacy for the newly elected government
when money for subsidies runs out just as it takes office.
END COMMENT.


CARNEY