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HTI | Jul 3, 2022

IMF says fuel subsidies in Haiti absorb 33% of revenues

/ Our Today

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Fund recently approved a Staff-Monitored Program (SMP) for Haiti

Durrant Pate/Contributor

Fuel subsidies have been absorbing at least 33 per cent of domestic revenues and crowding out productive spending on investment, health and education.

That’s one of the findings of the International Monetary Fund IMF, which has recently approved a Staff-Monitored Program (SMP) for Haiti, which runs through May 31, 2023. SMPs are arrangements between country authorities and the IMF to monitor the implementation of the authorities’ economic program but are not accompanied by financial assistance.

The IMF in its assessment of Haiti found that, “fuel subsidies have been absorbing at least one third of domestic revenues and crowding out productive spending on investment, health and education. They are also highly inequitable, with over 90 per cent of the benefits going to the top 10-20 per cent of the income ladder in Haiti”.

In this light, the Haitian government plan to prepare the groundwork to eventually tackle this issue. As a first step, they launched in April several social programmes under the Programme d’urgence targeted to the groups affected by earlier fuel price adjustments.

The Haitian authorities will also strengthen the monetary policy framework and limit foreign exchange interventions to smooth excessive volatility to gradually eliminate the spread with the parallel market. In addition, key steps are also planned to improve the financial regulatory framework. 

Details of the SMP reached with Haiti

It is not feasible for Haiti to implement an upper credit tranche (UCT) Fund-supported programme at this time due to the weakened policy frameworks and erosion in administrative capacity during the protracted crisis. The proposed SMP would help build capacity, support efforts to reduce inflation and raise growth, strengthen fiscal and monetary policy frameworks, address governance weaknesses and combat corruption, and take concrete steps to strengthen social assistance.

A successful SMP is needed to build a track record of policy implementation that would improve Haiti’s prospects for a UCT programme. Under the SMP, real Gross Domestic Product (GDP) is projected to turn positive in FY2022 to 0.3 per cent after contracting by 1.7 per cent in FY2019, 3.3 per cent in FY2020, and 1.8 per cent in FY2021.

Growth for FY2022 is to be driven by a mild rebound in the service sector. After peaking at 25.2 per cent year-over-year in FY2020, inflation declined gradually to 13.1 per cent year-over-year by September 2021, in part a lagged reaction to the large gourde appreciation. It is projected at 27.5 per cent at end-FY2022 with 12-month period-average rate of 26.1 per cent.

The deficit of the Non-Financial Public Sector (NFPS) is projected to decline to 1.5 per cent of GDP in FY2022 from 2.4 per cent of GDP in FY2021. A current account surplus of 0.8 per cent of GDP is projected in FY2022 following a surplus of 0.5 per cent in FY2021 arising from a 21 per cent surge in remittances.

Since 2018, Haiti has experienced a protracted political crisis, repeated country lock-downs and civil unrest, an earthquake, the assassination of its president and a deep recession. Policymakers face economic imbalances, a surge in gang violence, worsening poverty conditions, and dire social challenges aggravated by years of political instability.

SMP policy recommendations:

• Adopt a FY2022 budget with measures consistent with agreed targets.

• Reduce central bank financing of the deficit and limit foreign exchange (FX) intervention to smoothing excess volatility.

• Mobilise revenues and strengthen public finance management (PFM), notably with higher tobacco, alcohol, and car excises, expansion and simplification of the tax base, and measures to strengthen expenditure management and controls.

• Require a minimum budget allocation to the ministry of social affairs (MAST) and prepare an action plan to implement the national plan for social protection (PNPPS).

• Strengthen the framework for monetary and exchange rate policies by clarifying the objectives and modalities for liquidity and foreign exchange rate operations.

• Advance governance reforms with technical assistance (TA), including governance of the central bank, revenue administration, and public finance management.

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