haiti: country strategy with the idb (2005-2006)

DOCUMENT OF THE INTER-AMERICAN DEVELOPMENT BANK

HAITI

BANK’S TRANSITION STRATEGY 2005-2006

Approved March 2005

This document was prepared by the team consisting of: Barbara Szaszkiewicz, RE2/OD3; Team Leader; Ana Silvia Aguilera, RE2/OD3; Sara Bojorge-Saenz, RE2/OD3; Ronan Le Berre, RE2/OD3; Silvia Pella, RE2/OD3; Mariana Wettstein, RE2/OD3; and Cecilia Zavaleta, RE2/OD3. Contributions were made by: Agustín Aguerre, RE2/FI2; Diego Arias, RE2/EN2; Corine Cathala, RE2/EN2; Caroline Clarke, RE2/EN2; Marie Gaarder, RE2/SO2; John Horton, RE2/EN2; Emma Naslund-Hadley, RE2/SO2; José Justiniano, RE2/FI2; Michelle Lemay, RE2/EN2; Martha Preece, RE2/SO2; Susana Sitja, RE2/SC2; and.

CONTENT EXECUTIVE SUMMARY STRATEGY MATRIX INTRODUCTION CURRENT CONTEXT ....................................................................................................... 1 A. Political Developments...................................................................................... 1 B. Economic Developments ................................................................................... 2 C. Social and Environmental Situation .................................................................. 4 D. A Major Donor Reengagement Supports the Transition Process...................... 6 II. CHALLENGES AHEAD .................................................................................................... 6 1.

Consolidate the political transition and restore security........................... 7 2.

Lay the groundwork for sustained growth................................................ 7 3.

Improve access to basic services and develop human capacities ........... 10 4.

Address the environmental challenge..................................................... 11 5.

Strengthen governance and institutional capacity .................................. 12 6.

Strengthen aid coordination.................................................................... 13 III. GOVERNMENT’S AGENDA AND INTERIM COOPERATION FRAMEWORK (ICF).............. 14 A. Government’s Four Pillar Agenda Operationalized Within ICF..................... 14 B. Reconstruction Funding and Mechanisms for ICF Implementation................ 16 IV. BANK’S ONGOING TRANSITION STRATEGY FOR REENGAGEMENT ............................... 17 A. Overview of Implementation and Main Achievements................................... 17 B. The Bank’s Portfolio ....................................................................................... 18 C. Emerging Lessons from Experience................................................................ 20 D. Portfolio Links Bank’s Assistance with ICF Priorities.................................... 20 V. BANK’S TRANSITION STRATEGY 2005-2006............................................................... 21 A. Criteria for Preparation of the New Strategy................................................... 21 B. Key Objectives and Strategies ......................................................................... 21 1.

Pillar 1: Strengthen Political Governance and Promote National Dialogue................................................................................... 22 2.

Pillar 2: Strengthen Economic Governance and Contribute to Institutional Development ...................................................................... 22 3.

Pillar 3: Promote Economic Recovery ................................................... 23 4.

Pillar 4: Improve Access to Basic Services ............................................ 24 C. Implementation of the Bank’s Strategy and Operational Program.................. 25 D. Financial Flows................................................................................................ 27 VI. PROSPECTS AND RISKS ................................................................................................ 28 A. Medium Term Prospects for Economic and Social Recovery......................... 28 B. Risks ................................................................................................................ 30 I.

Annexes Annex I

Lending Program 2005-2006 Electronic Links to Technical Annexes

Annex II

Haiti. Governance and Capacity Weaknesses

Annex III

Guiding Principles of the Government’s Program

Annex IV

Sector Tables

Annex V

Ongoing Portfolio and Links to ICF Pillars

Annex VI

Key Sectors/Areas of Ongoing Bank-Donor Coordination

Annex VII

Indicative Bank’s Disbursements into Government’s Budget 2004-2006

Annex VIII

Haiti and the Millennium Development Goals

http://idbdocs.iadb.org/WSDocs/getDocument.aspx?DOCNUM=506175 http://idbdocs.iadb.org/WSDocs/getDocument.aspx?DOCNUM=506185 http://idbdocs.iadb.org/WSDocs/getDocument.aspx?DOCNUM=506191 http://idbdocs.iadb.org/WSDocs/getDocument.aspx?DOCNUM=506194 http://idbdocs.iadb.org/WSDocs/getDocument.aspx?DOCNUM=506199 http://idbdocs.iadb.org/WSDocs/getDocument.aspx?DOCNUM=506242 http://idbdocs.iadb.org/WSDocs/getDocument.aspx?DOCNUM=506256

ABBREVIATIONS CARICOM CIDA/ACDI DDR EC EDH EU FAES FAO FCB FTC GEF GDP HFY HIMO HIV/AIDS HIPC ICF IFAD IICA ILO/BIT: IMF ISL LAC MCFDF MDGs MEF MINUSTAH MPH NGOs OAS OIF PBL PRSP PIR SME SMI SMP TC TS UN UNAIDS/ONUSIDA UNDP UNESCO UNFPA UNICEF UNIDO/ONUDI UNHABITAT WB WFP WHO/OPS/OMS

Caribbean Community Canadian International Development Agency Demobilization, Disarmament and Reintegration European Community Electricité D’ Haití European Union Social Investment Help Fund Food and Agriculture Organization of the United Nations French Caribbean Contribution French Fund for Consulting Services Global Environment Fund Gross Domestic Product Haitian Fiscal Year Labor Intensive Work Programs (Haute Intensité De Main D’Oeuvre) Human Immunodeficiency Virus/Acquired Immune Deficiency Syndrome Highly Indebted Poor Countries Interim Cooperation Framework International Fund for Agricultural Development Inter-American Institute for Cooperation on Agriculture International Labor Organization International Monetary Fund Investment Sector Loan Latin America and the Caribbean Ministry of Women’s Affairs Millennium Development Goals Ministry of Economy and Finance (Haiti) United Nations Stabilization Force Ministry of Public Health and Population (Haiti) Non-Governmental Organizations Organization of American States Organisation Internationale de la Francophonie Policy Based Loan Poverty Reduction Strategy Paper Integrated Program of Response of Vulnerable Populations Small and Medium Enterprises Small and Medium Industries IMF Staff-Monitored Program Technical Cooperation Transition Strategy United Nations United Nations Program on HIV/AIDS United Nations Development Program United Nations Educational, Scientific and Cultural Organization United Nations Population Fund United Nations International Child Effort Fund United Nations Industrial Development Organization United Nations Human Settlements Program World Bank World Food Program World Health Organization

EXECUTIVE SUMMARY Haiti has been facing a difficult transition process since early 2004. In addition to a precarious socio economic situation, the country context has been aggravated by the impact of recent natural disasters, a looming humanitarian crisis and growing instability and security concerns. The interim Government, installed in March 2004 in the aftermath of an armed conflict which culminated in the current transition, faces daunting demands in implementing its strategy for national reconciliation and reconstruction. To help meet these demands, the new authorities prepared a national reconciliation and reconstruction agenda (Interim Cooperation Framework), and sought and received the support of Haiti’s international partners.

The Government’s agenda has been underpinned by a Needs Assessment entitled the Interim Cooperation Framework (ICF). The ICF sets out the Government’s strategy for national reconciliation and reconstruction, with clear targets and financial requirements in over 20 sectors, grouped around four strategic pillars: (1) strengthening political governance and national dialogue; (2) strengthening economic governance and institutional development; (3) promoting economic recovery; and, (4) improving access to basic services. The program balances short and medium term interventions, including confidence-building measures to strengthen Haiti’s implementation and governance capacities, among which anti-corruption measures, and actions to stimulate economic recovery over the medium term. It also includes quick impact programs to target basic infrastructure and short term job creation through labor intensive practices. Lessons from past aid experience are addressed, including the need for a strong aid coordination mechanism and developing absorptive and institutional capacities.

General oversight is provided by a Joint Coordination Committee for ICF Implementation, chaired by the Prime Minister, and composed of the Finance and Planning Ministers, civil society representatives and key donors, including the IDB. The IDB was a key player as a member of the multi-donor Steering Committee which oversaw the formulation of the ICF, together with the Government, the EU, UNDP and the World Bank. The IDB leads in critical sectors for recovery (infrastructure, agriculture, water supply, economic governance), as a major stakeholder in the ICF both through its ongoing Transition Strategy for Re-Engagement 20032004 with substantive presence in most ICF pillars, and planned interventions under the proposed Transition Strategy.

Haiti secures donor funding for transition program. The ICF is seen by both donors and the Government as an essential element to help stabilize the economy and to meet the country’s most pressing social needs, and should be sustained with strong donor involvement. The IMFsupported Staff Monitored Program provides the macroeconomic framework for recovery while the World Bank is poised for re-engagement, following clearance of Haiti’s arrears to this institution. At an international donors conference (July 19-20), co-hosted by the European Union, the IDB, the UN and the World Bank, donors pledged about US$1.1 bn towards Haiti’s transition program over the next two years, to meet the ICF financing target of US$924 m. The biggest allocations came from multilateral bodies. At the conference, donors committed to stay for the long haul recognizing that the earlier cycles of massive injection of external financing, followed by sudden withdrawals during crises, were counterproductive. The World Bank convened a Haiti Contact Group Meeting in Washington on December 16, 2004 to assess the progress in ICF implementation.

However, there are serious development and implementation challenges. On the political front, the authorities stated their intention to use the transition period to develop an all inclusive political process leading to elections, reverse the socio economic decline and lay the groundwork for sustained change. On the economic front, the new authorities have focused on a more disciplined fiscal stance and on strengthening tax administration to halt the deterioration in government finances. However, the prospects for restoring the so far elusive economic growth have been eroded by the combination of political violence and natural disasters that have hit the country during 2004. Implementation of the ICF is set in this fragile context. Main challenges include: (a) consolidating the political transition stalled by delays in the electoral process; (b) laying the groundwork for sustained growth in spite of weak institutional and resource mobilization capacities, limited economic diversification and competitiveness, depleted human and infrastructure capacities and a severely devastated environment; (c) improving access to basic services to reverse Haiti’s alarming social indicators and developing human capacities; and (d) addressing the environmental challenge.

IDB assistance – one year on. The IDB’s support to areas critical to Haiti’s recovery, through its current transition strategy approved in 2003, helped the country to maintain key institutional capacities and to finance essential activities. The IDB’s resumed lending mobilized US$400 m for Haiti with a portfolio of 10 projects at a time of limited donor engagement. Of this amount, US$78 m has been disbursed since July 2003, despite the young age of the portfolio. These resources are already financing activities in three of the four ICF pillars (economic governance, economic recovery and access to basic services). The balance available for disbursements, US$322 m, has also contributed to reducing Haiti’s external financing gap identified in the ICF. The portfolio has also provided a readily available vehicle for dialogue with the new Government on the IDB’s support to the ICF. Transition Strategy 2005-2006. The ICF provides the framework to align the IDB’s strategy with the national agenda, with the overall objective of consolidating implementation of the IDB’s ongoing portfolio. It also includes additional special measures required to deal with the current difficult implementation context. It proposes an assistance program for 2005-2006 which will roughly cover the transition period, based on criteria of: (a) flexibility, to be refined and adjusted as country developments warrant; and (b) strategic focus and selectivity in IDB assistance, focusing on those activities which promise to have the largest payoff, in areas where the IDB has a comparative advantage vis-à-vis other donors, including consolidation in areas where the IDB is already active; and in areas complementary to other donor activities. To articulate the new strategy, the IDB anticipates a mix of up to 11 operations for 2005-2006, combining investment and policy based loans and technical assistance, to fully realize the IDB’s pledge totaling US$263 m in support of the ICF priority initiatives.

Prospects and risks. There remain significant risks to political and macroeconomic stability and IDB involvement. On the political front, despite recent improvements, security concerns may delay the electoral process and their potential escalation could pose a serious obstacle to delivery and implementation of the IDB’s and ICF activities.

IDB COUNTRY STRATEGY WITH HAITI MATRIX Selected IDB Support to ICF Results Matrix IDB Objectives and Strategies

Country Objectives and Other IDB Action Strategies (ICF) Donors Portfolio* Pipeline IDB Pillar 1: Strengthen Political Governance and Promote National Dialogue Justice, Penitentiary Institutions and Human Rights Objective. Support the establishment of rule based mechanisms for rapid resolution of conflicts related to civil law.

Strategy. Promote a participatory front line justice to entail the establishment of the circle of justice within local associations, training judicial mediators and arbiters for rapid resolution of conflicts and establishment of a climate conducive to private investment.

Objective. Improve the efficiency and effectiveness of the Judicial System.

Strategy. Fight impunity; ensure the independence of the judiciary power; improve access to justice

UNDP, UNICEF, OAS, OIF, EU, US, Minustah, France, Canada, Brazil, Chile

TC Response to GenderBased Violence

Indicators

Number of conflicts resolved by the mechanisms for rapid resolution.

MIF Program to Develop Alternative Dispute Resolution Mechanisms

Country (ICF)** Publication of the decree on the operation of the Ministry of Justice and amending the decree of 3/30/84, status of employees and the CSM (Conseil SupĂŠrieur de la Magistrature).

OPC organic law adopted.

Pillar 2: Strengthen Economic Governance and Contribute to Institutional Development Economic Governance Objective. Strengthen governance and fiscal and financial management.

Strategy. Focus on measures and policies to increase tax revenues. Support improvements in the normative framework for budget formulation and execution.

Deepen reforms to strengthen (a) the institutional and operational capacity of the Central Bank; and (b) banking and non banking sector efficiency and effectiveness in financial resource mobilization and allocation of support to commercial banking sector.

Support institutional capacity building beginning with the Ministry of Finance.

Objective. Strengthen budgetary process; financial control mechanisms, use of public finances; and public procurement.

Strategy. Making budgetary process efficient, transparent and capable of translating the G’s priorities. Restructure Customs and the DGI (General Tax Directorate).

Make the regulatory framework suitable to the provision of the new organic law; strengthen the public finance control structures.

Strengthen mechanisms for public procurement so that they are transparent, credible, effective and can meet an increased volume of activities.

WB, IMF, FAO, Canada, EU, US France, UNDP, Brazil,

Loan Public Finance Reform (PBL) (60%) TC Strengthening of Revenue Collection Institutions Support to Establishment of Anti Corruption Unit Support to Institutional Reform.

MIF Deepening of Financial Services to Micro enterprises in Haiti

Increase tax collection burden through Large Tax Unit as a % of GDP. Increase tax returns audited by the DGI. Evolution of Central Government deficit and Central Bank financing according to IMF Program.

Increase the number of banks supervised by the Central Bank

Microfinance Strengthening to the Caisse Populaires

Implementation of adaptation plan for the prudential normative for BNC.

Loan Fiscal Reform Program (PBL) Financial Sector Reform Program (PBL)

Steady issue and implementation of rules for savings and loans cooperatives.

Approval of plans to completely automate the management and tracking of public expenditures and revenues in March 2005 and continued expansion in March 2006.

Elimination of the use of current accounts except in exceptional cases.

Audit report for 2002/03 and 2003/04 budgets made public.

Annual audits by the CSCCA and DIF as defined in the ICF in progress.

Web site in place, regular publications of calls for bids and procurement contract awards.

IDB Objectives and Strategies

Country Objectives and Other IDB Action Strategies (ICF) Donors Portfolio* Pipeline IDB Pillar 2: Strengthen Economic Governance and Contribute to Institutional Development

Indicators Country (ICF)**

Institutional Capacities Objective. Support institutional capacity building for public administration reform.

Strategy. Build institutional capacity in the Ministry of Finance.

Assess technical assistance requirements to meet conditions PBL Revenue Collection.

Objective. Strengthen institutional capacities.

Strategy. Strengthen short term and medium-term human resources through recruiting, training, and appeal for skills from the Diaspora and the retention of existing qualified personnel to ensure better policy formulation and efficient implementation of programs; preparation of civil service reform.

TC Institutional Strengthening Initiative

Loan Support to Executive Branch Institutional Facility TC Institutional Strengthening of the Ministry of Women’s Affairs and Rights Support to Executing Agencies

Budgets approved before start of the fiscal year.

Agreement of budget Execution with macroeconomic stabilization program and Organic Budget Law. Use of discretionary current accounts as a share of non-salary expenditures (decrease, towards <10%).

Local governments and autonomous agencies of Central Governments have budgets and keep their accounts in accordance with MEF regulations.

Incorporation of gender perspective and issues in programs of line ministries.

Strengthening of production capacity and dissemination of economic and statistical information, including the IHSI and the DEE of the MEF by 2006.

National discussion concerning the proposal for a civil service reform.

• Decrease on transport cost and time reduction.

• Traffic increment.

• Creation of temporary jobs.

On secondary and tertiary routes rehabilitated during the program.

Wider access to health and education centers.

Completion of the rehabilitation work on Route de Rails and Boulevard des Industries (for access to the port of P-a-P) by March 2006.

Pillar 3: Promote Economic Recovery Infrastructure (roads, ports and airports) and Private Sector Objective. Support to rebuilding infrastructure and private sector development.

Strategy. Identify urgent investments to ensure that essential roads for development are usable all year round. Building an institutional framework that can grant the durability of such investments. Application of the Road Fund. Design of executing units while building capacity and administrative infrastructure within the MTPTC. .

Make some investments to keep the port operational. Star preparatory studies for sector reform, including change of port model and private involvement in port operations.

Identify and undergo necessary investments to ensure safe and efficient airport usage and prepare institutional framework aiming at the concession of the Airport.

Objective. Improve access in the territory. Promote the development of the private sector Strategy. Rehabilitate the transportation infrastructure (roads, tracks, ports and airports); strengthen the institutions connected to transportation in order to make the targeted interventions sustainable.

Revive enterprises experiencing difficulty; strengthen the institutional capacities of the sector; ensure the country’s integration into the regional and international markets (including the development and facilitation of investment and exports and the promotion of tourism).

IMF, UNIDO, ILO, EU, US, Chile, Brazil

Loans Rural and Secondary Roads (97%) Program for Rehabilitation of Basic Economic Infrastructure (99%) TC Facilitation of Basic Economic Infrastructure Program

Loan Roads & Transportation TC Updating Road Inventory Classification Support for the Execution of the Roads Program in Haiti Support for the Execution of IDB Transport Programs in Haiti Support for Port Reform Program NFP New sources of economic growth: private sector participation.

Steady increase in the number of ministries with plans and resources for maintenance.

1/3 financed works have users participatory mechanism for management and maintenance.

80% of beneficiaries satisfied with rehabilitation work.

Completion of the redevelopment of the Cape-Haitien airport.

Completion of the rehabilitation works on National Highway 2 (18 km) and 5 bridges.

Completion of the rehabilitation work for National Highway 1 (St. Marc/ Gonaives) Activities to strengthen the capacities of the public and private sectors as defined in the ICF in progress.

IDB Objectives and Strategies

Country Objectives and Strategies (ICF)

IDB Action Portfolio* Pillar 3: Promote Economic Recovery

Other Donors

Pipeline

IDB

Indicators Country (ICF)**

Agriculture Objective. Support to revitalizing agriculture.

Strategy. Support the Ministry of Agriculture, Natural Resources and Rural Development (MARNDR) to extend the intensification process to other geographic areas and to a broader variety of agrisupply chains with demonstrated good sustainable potential.

Objective. Promote the development of the agricultural sector.

Strategy. Revive and contribute to a sustainable intensification of agricultural production; strengthen the institutional and legal framework of the sector

WB, FAO, IICA, PAM, EU, US, Brazil, Canada Spain, Germany, France

Loan Agricultural Intensification Program (95%) TC Technical Assistance to Support the Execution of the Agriculture Intensification Project

Loan Rural Economy Development Program TC Agriculture Sector and the Rural Economy in Haiti Technology Innovation in Rural Economy Preparation for MIF Haitian Coffees MIF Supporting the Competitive Position of Haitian Coffees SMP Integration of Small Producers to the Tomato Productive Chain

Increase in average yield of rice (tons/ha) in project area.

Increase the area cultivated of high value crops (other than rice) with respect to the baseline conditions.

Increase in gross revenue with regard to the baseline conditions of the project.

One year after the completion of the infrastructure works the agricultural yields in the 6,000 hectares increase.

Rehabilitation of 500 Km of rural trails and 120 km of ravines by September 2005. MI: 250 Km and 80 Km by March 2005

At the national level: increase in the incorporation of Environmental Information into the decision-making process at line ministries.

At the local level: increase in the number of communes involved in natural resource management activities.

2,000 hectares reforested. by Sept.

2005.

National Weather Center capable of transmitting weather alerts in time by Sept.

2005.

21,000 additional households use LPG, and 9,000 use kerosene; 1,000 SMEs converted to LPG or diesel by Sept. 2006. MI: 18,200; 7,800 and 650 by March 2006.

Building codes applied

by Sept. 2006.

NFP Sector Note: Agricultural sector and rural economy

Environment Objective. Reduce the impact of natural disasters and environmental degradation.

Strategy. Reduce the impacts of natural disasters, improve watershed management and institutional strengthening for environmental management, placing a particular importance on the support of local institutions, evaluation, support, and articulation of current local initiatives.

Objective. Support environmental protection and rehabilitation.

Strategy. Encourage the substitution of wood and charcoal in urban households and SMEs; fight against the degradation of land and vital natural resources as part of the CCD and CDB; sustainable and integrated management of risks and disasters through the implementation of the Nat. Risk and Disaster Management Plan.

WB, UNDP, UNIDO, WHO, FAO, IICA, EU, US, Canada, Brazil, Spain

TC Emergency Response to Floods in Haiti Emergency Assistance in Response Tropical Storm Jeanne

Loans Environmental and Institutional Strengthening Reducing the Impact of Natural Disasters Watershed Management TC Local Capacity Building in Watershed Management

IDB Objectives and Strategies

Country Objectives and Strategies (ICF)

IDB Action Portfolio* Pipeline Pillar 4: Improve Access to Basic Services

Other Donors

IDB

Indicators Country (ICF)**

Education Objective: Improve access, quality and management.

Strategy: Strengthening three aspects of the Haitian education system: (i) improved governance of the sector; (ii) better access to all levels of education, from pre-school to vocational and tertiary education; and (iii) enhanced quality of public and non-public education.

Objective: Improve educational level of the population.

Strategy: Improve access to and quality of education and professional training; developing tools for regulation and quality control; promote physical and sporting activities, community life, and participation of the youth in the country’s development.

WB, UNESCO, UNICEF, WHO, CIDA, OIF, EU, US, Brazil, France

Loan Basic Education Program (94%)

Loan Vocational Education Program

TC Vocational Education and Training and its Linkages to the Labor Market

TC Quality Control Mechanisms in Vocational Training

Objective: Improve health status of the population.

Strategy: Make PMS available and accessible around 15 UCS; strengthen the MSPP abilities to regulate, administer and manage; reduce the portion of households’ share in health financing; strengthen certain priority programs.

Increase prevention and management of malnutrition particularly among women and children.

UNICEF, UNFPA, WHO, CIDA, FAO, IICA, ONUSIDA, PAM, EU, US, Spain, France, Brazil

Loan Organization & Rationalization Health Sector (94%)

TC Drivers of Change Analysis for the Health and Local Development Sectors

Increment in net primary enrollment ratio. Baseline 1997: 67%.

Reduction in: repetition rate (1-6 years) and drop out rate (1-6 years) 2004-2007.

Improvement on test scores in mathematics and reading 3rd. and 5th grade.

Increase Rate of employment of beneficiaries in comparison to baseline.

Increase income of beneficiaries in comparison to baseline.

Ensure start of school year and in the budget the payment for subsidizing school fees, supplies and uniforms for disadvantaged students

by Sept. 2006.

1,500 schools and 25 centers for vulnerable groups rehabilitated by Sept. 2006.

Reduction in: maternal mortality and child mortality rate in pilot departments. Baselines: National rates: Maternal mortality 2001: 680 per 100.000 live births; Infant mortality under 1y.o. 2002: 79 per 1000 live births; Child mortality under 5y.o.

2002: 123 per 1000 live births.

At least 85% beneficiaries of the health program satisfied with services improvement.

At least 70 providers of basic health services certified by the end of the 3er. year of the Program.

80% of children under one-year in 15 UCS have received DTP3 by Sept 2006.

MI: 60% Sept. 2005.

Baseline: 49% 2003.

20 departmental hospitals can fill their reference function by Sept. 2006.

Households’ contribution for MEG and priority services falls by 10% by Sept 2006.

Health and Nutrition Objective: Improve access, quality, and efficiency of the Health System.

Strategy. (i) restructuring country’s health facilities into networks of locally integrated public and private health systems, and extending the coverage of the minimum service package; (ii) strengthening the management and coordination capacity of the MSPP, in order to develop a private/public partnership and ensure the coordination of international cooperation and health organizations; and (iii) restart priority programs.

TC Program to Support HIV/Aids Strategy

IDB Objectives and Strategies

Country Objectives and Strategies (ICF)

Other Donors

IDB Action Portfolio*

Pipeline

IDB

Indicators Country (ICF)**

Pillar 4: Improve Access to Basic Services Urban & Social Rehabilitation Objective, Improve living Objective: Improve urban standards in urban areas and living conditions in the slums. promote local development.

Strategy: Promote the participatory preparation of a Strategy. national program; institutional Urban areas: (i) improve the strengthening of relevant living conditions in the agencies.

Metropolitan Area of Port-auPrince; (ii) create opportunities Increase access to identity for income generation; and (iii) cards for people without documentation and nutritional strengthen the responsible conditions for target groups government institutions.

Local development: improve and access to health care with the quality of life and income- micro-insurance; strengthen generating capacities of the social assistance programs poorest and most vulnerable targeting vulnerable groups, segments of Haitian population strengthen MASTâ&#x20AC;&#x2122;s institutional capabilities.

WB, UNDP, UNICEF, UNHABITAT, WHO, ILO, EU, France

Loans Local Development (95%)

Loan Urban Rehabilitation Program

TC Support for Urban Rehabilitation Targeting the Urban Poor

TC Support for Urban Rehabilitation II Support for a Feasibility Assessment of Social Investment NFP Seminar on Community Participation Experiences in Urban Rehabilitation Projects

Decrease in Poverty rate.

Baseline National rates 2003: 76% population live on less than 2$/day; 56% less than 1$/day.

Improvements in PAP urban space in terms of additional spaces for economic exchange and reduce the time required for trips by car.

System of land ownership regularization improved in 50% of Port-au-Prince and 5 secondary cities; property tax collection improved by 50% by Sept.

2006. MI: 10% and 25%

by Sept. 2005.

50,000 people have received their identity documents by Sept. 2006.

MI: 5,000 Sept. 2005.

Reduction in the incidence rate of illnesses originated by water, such as diarrhea and typhoid fever.

100,000 people in disadvantaged neighborhoods covered by potable water services

by Sept. 2006. Baseline: 50% urban population covered 2003.

Water and Sanitation Objective. Improve access to water and sanitation.

Strategy. Extend the water and sanitation supply coverage.

Focus on small scale water and sanitation systems with strong community participation.

Objective. Improve access to water and sanitation.

Strategy. Increase water and sanitation supply coverage, especially to vulnerable groups.

Strengthen sector capacity and perform project feasibility studies to continue improvement in service and coverage rate beyond 2006.

* In parenthesis amount to be disbursed. ** Established on the ICF. To be updated with the Government.

WB, UNESCO, WHO, CIDA, UNHABITAT, EU, France, Spain

Loan Potable Water & Sanitation Sector Reform Program (99%) TC Support for the Execution of Water Supply Loan Support of the Sector Reform Unit

Loan Rural Water Supply TC Intersectoral Water Policy NFP Sector Note: Integrated water resources management

5 neighborhoods equipped with toilets and/or latrines managed by communal committees or families and hygiene training received by Sept 2006.

INTRODUCTION The Transition Strategy (TS) 2005-2006, outlined in this document, represents the InterAmerican Development Bank (IDB) 1 short term response to the Government’s request for external assistance under the Interim Cooperation Framework (ICF). It is expected to cover roughly the transition period and maintain the momentum until after a new government is put in power. At that time, the Bank anticipates initiating work on a full Country Strategy Paper.

In the period since the Bank’s Transition Strategy for Re-engagement 2003-2004 (approved in October 2003) was prepared, a new interim administration is installed in Haiti. The new team is committed to use its term in office to address urgent requirements, improve governance and administrative capacities and lay the groundwork for long-term growth. It has restored economic stability and restarted provision of essential services in its first months in office. Moreover, it has put forward its strategy for national reconciliation and reconstruction and moved toward a government-led, donor-supported, Interim Cooperation Framework (July 2004) for aid coordination and implementation. The framework focuses on strengthening political and economic governance, promoting economic recovery and improving basic services.

The Bank, along with other donors, played a key role supporting the Government in the preparation and formulation of the ICF. Furthermore, the Bank is a major stakeholder in this process through its ongoing Transition Strategy, due to the important volume of resources mobilized, already disbursing, and the remaining balance available for disbursements in the coming years. The ICF process realized a high level of pledges of external assistance in July 2004. These pledges, totaling about US$1.1 bn, including the Bank’s pledge of US$260 m, exceeded the ICF target for external financing estimated at US$924 m. The authorities have also prepared the recurrent budget for the current HFY (October 2004-September 2005), which has been adequately funded with indicative donor disbursements from the pledged levels of assistance.

However, since the Donors Conference in July, the transition process has been adversely affected by severe human and economic damages from natural disasters and growing political instability and violence. The disastrous floods that hit the southeastern and northwestern regions of Haiti in recent months resulted in serious losses of life, and the adverse economic impact has not yet been fully assessed. These events also exposed the scale of the environmental degradation and lack of disaster preparedness in Haiti. Since late September, there has been an upsurge in armed anti-government violence by supporters of former President Aristide.

This difficult situation highlights the major challenges facing the Government and could have potential adverse implications on the sustainability of the recovery process. The UN has classified the security situation under Phase III in October 20042. International development assistance entering the country within the framework of the ICF, and implementation of the Bank’s program of operations will depend on the evolution of the country situation.

1 2

Also refers to as the Bank.

UN Phase 3: Mandatory relocation of non essential staff and dependents (could be within country unless entire country is in Ph 3 as is the case for Haiti). Also involves significant restrictions to mission travel. Other restrictions and measures, such as curfews, etc., are specific to the situation.

The TS is fully aligned with the national strategy articulated in the ICF and also aims to help identify ways of addressing reconstruction bottlenecks over the longer-term. It builds on, and consolidates, the Bank’s predecessor Transition Strategy for Re-engagement. Emerging lessons from Bank experience with program implementation have yielded valuable insights for current and planned Bank activities. Based on this experience, the TS will be kept flexible and refined, as country developments require.

In order to accelerate implementation, the Bank is exploring, with the United Nations Stabilization Force (MINUSTAH) and in close consultation with the Government, the possibility of involving army engineers from the participating international force in some of the Bank infrastructure projects in the country. These arrangements could also involve the participation of other UN agencies.

The document is organized as follows: Introduction; Part I provides the current context; Part II looks at the challenges ahead; Part III presents the Government’s Transition Agenda and the Interim Cooperation Framework (ICF); Part IV reviews the ongoing Transition Strategy for Reengagement and lessons learned; Part V outlines the Bank’s Strategy and assistance within the ICF pillars and its implementation, including special measures, financial flows and aid coordination arrangements; and, Part VI highlights prospects and risks. The proposed Program of Bank’s Operations is reflected in Annex I.

I. CURRENT CONTEXT A.

Political Developments

1.1

The political crisis from the unresolved dispute over the 2000 elections escalated earlier this year when the Organization of American States (OAS) efforts to broker an accord between the ruling party and the main opposition coalition failed, preventing the organization of legislative elections. On January 12, 2004, the term of Haiti’s parliament expired, and since President Aristide ruled by decree. The upheaval culminated in a change of government in March 2004, following the departure of President Aristide in February 2004. In accordance with the provisions of Haiti’s Constitution, the Chief of the Supreme Court, Boniface Alexandre, was sworn in as acting President. UN Security Council Resolution 1529 recognized the interim authorities and called for the preparation of an assessment of Haiti’s political, economic and social reconstruction needs.

Subsequently, an UN-led multinational force (MINUSTAH) was deployed in Haiti in June 2004 (UN Security Council Resolution 1542), with a wide ranging mandate to support the political transition.

1.2

A Transition Prime Minister, Gerard Latortue, was sworn in on March 12, 2004, and appointed a technocrat-led Cabinet. The interim Government team have stated their decision not to run in the elections. The authorities, political parties and civil society (except the former ruling party) signed a Political Pact on April 4 agreeing that the Government would organize democratic elections in 2005, to hand over power to an elected government by February 2006. An Electoral Council has been established for this purpose, although without participation of the former ruling party, Fanmi Lavalas. As a result, the Government has yet to achieve an all inclusive political process leading to elections in 2005.3

1.3

This situation has been aggravated in late September, in the aftermath of the recent floods by an upsurge of violence. As a result of the mobilization of the anti-Aristide rebel army against supporters of former President Aristide, violent conflict and the proliferation of arms are contributing to political instability. The UN peacekeeping effort was further stretched by the need to provide support for the flood-hit areas of the country. Despite the provision of food aid coordinated by the UN World Food Program, food shortages will continue to occur. The interim Government is struggling to re-establish political and social stability; however, the political situation and security outlook remain uncertain: the Government’s authority throughout the county is not fully restored, the former ruling

3

Update: In early February, the Government launched a political dialogue to seek political inclusion in the electoral process. The electoral calendar was announced on February 12, 2005. Municipal elections are scheduled for October 9, while legislative and presidential elections will be held in two rounds on November 13 and December 18, 2005.

-2political party, Lavalas, refuses to participate in the election process and the framework for national elections in 2005 has yet to be established.4 B.

Economic Developments

1.4

After some improvement in economic performance throughout much of 2003 resulting from encouraging measures undertaken by the preceding Administration under an IMFsupported Staff Monitored Program (SMP, April 2003-March 2004), the SMP went off track last December, following large spending overruns, and expired as widespread protests and an armed rebellion led to the change in Government. The budget deficit widened to 2.3% of GDP (excluding grants) during the period October 2003 – March 2004; Central Bank financing of the budget breached the SMP indicative target and net international reserves fell to a historic low of US$17 million.

1.5

Haiti suffered significant economic losses from the political turmoil in early 2004.

Property losses and the closure of business derailed economic activity for weeks, resulting in severe disruptions in the supply system, and private sector confidence weakened amid persistent security concerns. As a result, monthly inflation picked up to 6.5% in April from 1.5% in February, reflecting widespread supply constraints (closure of ports and looting of warehouses) and increases in international commodity prices.

Property damage in both the public and private sectors is estimated at 5.5% of GDP and output is expected to decline by 5% in fiscal year 2003-04 (October 2003 to September 2004). The interim Government’s financial position further deteriorated as revenues declined substantially due to the fall in economic activity, weakened administrative capacity and security concerns. Although activity appears to be picking up in some sectors, commercial banks remain reluctant to extend new credit to the private sector mainly because of concerns that non-performing loans could rise owing to the conflict’s impact on creditworthiness.

1.6

Figure 1. : Haiti: Revenues, Expenditures Faced with revenue shortfalls and to restore and Overall Balance financial stability in the months that followed the February-March events, the Transition Government curbed nonessential expenditures while developing an emergency plan to prioritize expenditures to rehabilitate key government facilities and infrastructure and to safeguard the provision of basic public services. The authorities cut recurrent and capital expenditure during April–May 2004 by about 0.9% of GDP. Since these cuts exceeded revenue shortfalls, they led to a positive fiscal Source: BRH and IMF Staff estimates position and a decline in Central Bank credit to the Government. (See Figure 1) Initial steps have been taken to strengthen governance in

4

Update: However the security situation is expected to improve; the UN stabilization force reached its full contingent of 8,300 in December 2004 and has begun to play a more active role in addressing security concerns since the early months of 2005 together with Haiti’s National Police.

-3the public sector including, in particular, reducing recourse to ministerial “discretionary” current accounts and subjecting these to close scrutiny. The national currency, the Gourde, has strengthened since the end of the armed conflict in March 2004 reflecting the effects of a recovery in remittances and a collapse in imports, as well as expectations of foreign aid inflows.

1.7

The Government, in consultation with the IMF staff, formulated a macroeconomic program for the period April-September 2004 under a new SMP. It is expected that the SMP will be followed by a disbursing program under the IMF Post-Conflict Facility, under discussion in the context of Article IV Consultation. 5 The objectives of the SMP are to stabilize the economy and provide a track record of sound macroeconomic policy implementation to underpin donor assistance and a follow-up IMF program. However, following the serious economic losses from the disastrous floods in May and September 2004, the authorities may also seek emergency assistance from the IMF, in addition to the above mentioned assistance from the Post Conflict Fund. While Haiti has remained current in its debt service obligations to the IDB and IMF, it continued to accumulate arrears to some multilateral and bilateral creditors. Under the SMP, the Government developed a plan to clear its arrears to all official external creditors beginning with the WB..6

1.8

The SMP was broadly on track. By the end September quantitative targets are likely to be met since fiscal over performance is expected to continue. The authorities eased the monetary conditions substantially in response to the decline in inflation and the budget surplus. The interest rate on 90-day bonds declined to 7.6% in September from 28% in March. However, bank credit to private sector remained stagnant and banks widened intermediation spreads in response to an increase in non-performing loans. Nonetheless, available indicators suggest the banking system remains relatively sound. The external position has strengthened. The surge of remittances caused some pressure on the currency, allowing the Central Bank to build its net international reserves (NIR) to US$53 million in August, about US$31 million above the SMP floor.

1.9

The macroeconomic framework for 2004/2005 –discussed with IMF staff in Septemberaims at macroeconomic stabilization. Real GDP would rebound by 3%, and consumer price inflation would slow to about 12%. The Central Bank’s NIR would rise to about US$88 million, in line with import growth. This rebound in growth is considered conservative, and higher growth could be achievable, depending on the actual response of donors’ assistance and improvement in security. However, the macroeconomic stability remains fragile and near term growth prospects uncertain. The challenge will be to

5

6

Update: Based on the satisfactory performance of Haiti under the SMP, which ended in September 2004, in January the IMF approved US$15.6 m in Emergency Post-Conflict Assistance (EPCA). The ECA supports the stabilization program for Haitian FY 2004/05 established by the authorities. The government's program for 2004/05 builds on recent macroeconomic gains and seeks to revive economic growth.

Update: Arrears on January 4, 2005, Haiti settled in full its arrears to the WB. WB Reengagement: on January 6, 2005 the WB approved its own Transitional Support Strategy, together with an Economic Governance Reform Operation and an Emergency Recovery and Disaster Management Project from International Development Association.

-4sustain recent economic stabilization gains. The economic recovery may be affected by disruptions in the pace and allocation of donor disbursements foreseen under the ICF. In addition, although immediate humanitarian assistance is being provided, substantial additional resources are likely to be needed to address the impact of the floods.

C.

Social and Environmental Situation

1.10

The poverty situation in Haiti has worsened significantly in recent years. Based on 2003 data, the UN reports that poverty incidence is 76% (i.e percentage of population living below US$2/day) and that the incidence of extreme poverty (US$1/day) is 56%. The report found that poverty is far more entrenched in the rural areas than in urban areas, and that rural-urban migration contributes to poverty. With the shrinking of rural economic activity, persistent rural poverty and recurring instability, large numbers of rural migrants have established residence in precarious housing (bidonvilles, or slums) on the outskirts and inside the capital city. This state of advanced impoverishment and decapitalization was qualified as a “silent emergency” in the UN Integrated Program of Response to Vulnerable Populations (PIR, March 2003).

1.11

Currently, the social, economic and environmental indicators are alarming: a GDP per capita of US$360 (2003), ranking 150th on the Human Development Index; nearly half of its 8 m population is younger than 18 years of age; the worst health indicators in the region, with a life expectancy of 53 years, an under 5 mortality rate of 123 out of 1,000; and a maternal mortality of 523 per 100,000 live births. Half of the population does not have access to clean drinking water, while only 28% of the population has access to sanitary facilities; and the country has a 97% deforestation and erosion level. The illiteracy rate is nearly 50% and the net primary school enrolment rate is 68%, with very poor service quality. The incidence of HIV/AIDS, at 5%, is the highest outside Sub Saharan Africa.

1.12

Especially dramatic is the situation among women. UNDP’s Gender Development Index for Haiti is the lowest in the Western Hemisphere. The total fertility rate is high at 4.7 children per woman, compared with a regional average of 2.8. In addition to having the highest maternal mortality rate in the western hemisphere, Haitian women account for a higher number of people living with HIV/AIDS than do men – 5% of girls between 14 and 24 are infected as compared with 4.1% of boys. The female literacy rate is 46.1%.

Haitian girls also enter the formal and informal economy much earlier than do boys.

Some 10% of girls aged five to nine and 33% of girls aged ten to fourteen are economically active.

1.13

The last few years have witnessed the growing marginalization of the population, a very critical level of vulnerability and the inadequacy of traditional survival mechanisms. The population’s vulnerability is very high: 56% live with less than $1 a day. Exposure to precarious living conditions is particularly acute for vulnerable groups, such as women, children, the elderly poor and the handicapped. Poverty remains widespread and inequality may have increased.

-51.14

The crisis that culminated in early 2004 may have worsened the overall poverty situation in Haiti. Low income households and individuals suffered from disruptions in the supply of basic commodities (i.e. rice) and higher inflation, and the delivery of basic services (education, health, food assistance, security) was severely disrupted in the whole country.

In addition there was an increase in gender-based violence, including rapes7. The humanitarian crisis caused by the additional demands of the post-flood recovery has compounded an already difficult situation. An assessment team from the UN Office for the Coordination of Humanitarian Affairs (OCHA), that recently visited the northwestern department, concluded that food aid would be needed to help people to survive between October 2004 and the next harvest in March 2005.

1.15

For the current context, Haiti’s chances of achieving the MDGs by 2015 are compromised. In particular, progress towards MDGs in the social sectors is lagging overall. Although precise data is lacking, the UN has estimated that Haiti is behind in the accomplishment of the Millennium Development Goal to reduce the proportion of people living on less than US$1/day to half the 1990 level by 2015. Similarly, Haiti is classified as being far behind in the MDG goal to reduce infant and under five mortality rates by two thirds and halve the proportion of people living without access to improved water sources. Not enough reliable data are available at this time to track changes in the accomplishment of MDGs related to completion rates in education. According to the 2003 Human Development Report, cutting Haiti’s head count poverty in half between 2003-2015 to attain MDGs needs annual growth of GDP per capita of 2.9%.

1.16

A particularly serious problem in Haiti, closely connected to poverty, is the severe degradation of the environment and the high exposure of the population to natural hazards. Due to insufficient resources, the Government is ill equipped to face natural disasters, resulting in large segments of the population being affected by such events every year. The floods in September in northwestern Haiti came just months after a similar catastrophe had claimed the lives of more than 2,500 people in the country’s southeastern border region. In September, the floods killed over 3,000 people, affected 300,000 and devastated agricultural production on the Artibonite plain, where nearly all of Haiti’s domestic food crops are grown. IMF estimates property losses (including agriculture) caused by tropical storm Jeanne at 3.5% GDP.

1.17

The transition Government intends to prepare a participatory medium-term Poverty Reduction Strategy Paper (PRSP) in 2005, in consultation with all Haiti’s stakeholders.

To this purpose a Coordination Committee was created with representatives from the Government and a selected group of donors (including the IDB). The PRSP, the preparation of which was initiated by the previous Government, would be presented for finalization and approval by the elected government expected to take office in 2006, and will include a medium term development strategy covering the period 2006-2009.

7

Haiti has the highest level of gender-based violence in the hemisphere; 70% of women report that they have been victims.

-6D.

A Major Donor Reengagement Supports the Transition Process

1.18

The cumulative setbacks in recent months Total pledges 1,085 Grants 663 have ravaged Haitiâ&#x20AC;&#x2122;s economy. Faced with EC 288 a precarious economic and financial France 33 Germany 14 situation, in the short term, the interim World Bank 5 Government prepared a transition strategy IDB 3 Sweden 2 and requested external assistance to cope Canada 88 United States 207 with the demands it faces. Based on the Other 23 priorities identified in the Governmentâ&#x20AC;&#x2122;s countries/agencies Concesional loans 422 strategy, an Interim Cooperation World Bank 150 Framework (ICF), a short and medium term IDB 260 IFAD 12 strategy setting out a list of responsibilities Source: World Bank. and costs, was developed by the transition Government, the European Commission, the Inter American Development Bank, the UN and the World Bank, in consultation with national stakeholders, between May and June 2004. The ICF provides an indication of policy priorities with the needs assessment determining that between July 2004 and September 2006, Haiti would require total financing in excess of US$1.3 bn. With some US$400 m of financing already available in the form of external assistance, mostly from the Bank, and domestic resources, the assessment called for fresh financing of US$924 m to be raised to fill the financing gap.

1.19

Donors pledged US$1.1 bn, US$160 m more than requested. The biggest allocation came from multilateral bodies. The Bank and World Bank pledged US$260 m and US$155 m in new lending, respectively, and the European Union allocated up to US$325 m in grants. Canada pledged US$135 m and the US pledged US$120 m. Several European countries, led by France, also made new commitments on a bilateral basis.

Table 1. Pledges at Haiti Donors Conference July 19-20, 2004 (By type of support, in millions of US$)

Figure 2 - 3. Real GDP Growth

II. CHALLENGES AHEAD 2.1

GDP growth in Haiti has been on a declining trend in the last 20 years, although fluctuating widely in response to political developments and external aid flows (figure 2). Real GDP growth remained close to zero in the first three years of this decade (figure 3), inflation averaged 17% and the fiscal deficit (excluding grants) averaged Source: IMF Staff estimates.

3.1% of GDP. The volume of publicly funded social programs and the contraction of donor assistance (from US$611 m in 1995 to less than US$136 m in 2002) that followed the

-72000 political crisis, led to significant declines in the delivery of basic services. Private transfers, mainly remittances from Haitians living abroad, more than doubled, from US$256 m in 1997 to US$650 m in 2002, and surpassed US$900 m in 2003, totaling 15% of GDP, which partially offset the negative impact of the economic crisis by providing a safety net to the poorest segments of the population.

2.2

After years of falling per capita incomes, virtually flat growth, rising poverty and deteriorating social indicators, Haiti’s most important short term challenges are to manage the political process, restart economic growth and lay the basis for social, economic and governance policies that will reduce poverty. In that line, the most immediate issue is the country’s inability to finance the required basic public investments, while strengthening institutional capacities, creating governance mechanisms and the human skills required to implement a focused public investment program. The Government will need to: 1.

Consolidate the political transition and restore security

2.3

The most important immediate challenge is to consolidate the political transition and restore security, as a pre-requisite for Haiti’s transition and recovery to be successful. The Government needs to address the simultaneous and pressing demands of national reconciliation and reconstruction, as well as to follow through with its stated intention to promote political inclusion conducive to democratic elections; restore the rule of law and security throughout the country; and make efforts to prevent violence. Vulnerabilities have a particular impact on Haitian women; chronic unrest and violence have had a serious impact on women’s possibilities to improve their political and economic security.

2.4

The Government will need to pursue the efforts at implementing a smooth disarmament, demobilization and reintegration program with sustainable alternative opportunities, and substantial efforts will be needed to prepare and manage the electoral process underway.

Improving security and stability will continue to demand high priority attention and resources from the Government and its international partners.

2.

Lay the groundwork for sustained growth

2.5

Haiti has potential for medium and long term growth, in particular in terms of extensive land endowments and a large supply of low cost labor. Lack of macroeconomic stability has undermined private and banking sectors’ confidence. Limited competitiveness hampers private sector development while private investment and financial intermediation remain at low levels. Limited diversification of the economy has created highly vulnerable living standards.

2.6

Broad based growth requires improvements in the efficiency of transport and port facilities and the high cost of operating in Haiti (power, telecommunications, etc). Basic infrastructure is in serious disrepair. Only 5% of roads are in good shape, while 15% are in what is considered average shape, a net decline from the state of affairs reported in 1991. Furthermore, about half of the tertiary network, essential in a country where twothirds of the population lives in rural areas, was taken off the official road registry as a result of the extreme deterioration that rendered it unusable. A high priority will be

-8placed on launching urgent works to rehabilitate the roads and implement an institutional and financial framework to guarantee the durability of these investments. In terms of other basic infrastructure, major state-owned utilities were planned for privatization in 1997, including the telephone company, power company, and port and airport authorities.

However, the privatization process has stalled since then.

2.7

Improving the production and distribution of electricity in the country constitutes one of the main priorities of the Government. It is estimated that only about 10% of the Haitian population has access to electricity. Already weakened by the embargo, which caused a large part of its infrastructure to be out of service due to the lack of spare parts and equipment, Electricité D’ Haití (EDH) has been paralyzed for 10 years by the crisis, while at the same time suffering from disastrous management.

2.8

The private sector’s role in the economy is constrained by the important participation of the informal sector, its weak structure and the lack of representation of intermediary organizations, which are too fragmented. The private sector consists of a large number of informal-sector micro enterprises, often under-capitalized and marked by extreme heterogeneity. At the top, a few large groups attract most of the investments. There are relatively few SMEs/SMIs. The priority will be to establish the re-capitalization fund that the Government has announced which will support the recovery of the private sector and improvements in governance.

2.9

Haiti is one of the most open economies in the Western Hemisphere in terms of tariff protection. However, the country’s development presents a number of weaknesses in policy management resulting from its poor human and financial resources, which restrict the ability to design, adopt and apply adequate trade policies. Financial constraints are also limiting Haiti’s ability to participate and contribute to trade negotiations through the CARICOM’s Regional Negotiating Machinery. In order to achieve competitiveness in a more liberalized trading environment, Haiti has identified infrastructure and human resources, as well as port modernization, business and export promotion as important issues.

2.10

One of Haiti’s major challenges is its concentration on a small number of markets and products. The apparel sector faces an uncertain future when quotas expire in 2005, and its exports of agricultural products have declined over time, especially due to the recent decline in commodity prices (i.e. coffee). However, the production of export commodities has remained steady, even showing some export growth like the case of mangoes.

2.11

The efforts to promote economic recovery and to improve competitiveness could benefit from a recent study financed by the Bank-managed Swedish Fund, which has identified actions and timeframe to exploit comparative advantage in some economic sectors that have demonstrated potential and to transform them into sources of sustained growth (coffee, mango, assembly industries, etc). Those advantages could be strengthened with a better integration of Haiti into regional and international markets.

-92.12

Growth of the dominant sector, agriculture, is constrained by small farm sizes, weak policies, an archaic and ponderous land titling system that blocks the development of an efficient land market, inadequate research and extension, limited access to financial resources, soil erosion, and low levels of investment in human resources, irrigation, and storage. Severely deteriorated infrastructure further affects agricultural productivity. The small amount of available technology and the low level of capitalization of Haitian producers in a context of strong population pressure, combined with the vulnerable topography and fragile soil that characterize the country, contribute to soil erosion by forcing farmers to employ unsustainable agricultural practices.

2.13

This decline also spilled over to the agro industry. The challenge to rural development is the acceleration of agricultural productivity growth through technology generation and diffusion, and the promotion of productive off-farm activities in rural areas. The environmental degradation challenge and Haiti’s vulnerability to natural disasters compound the current limitations.

2.14

Addressing these shortcomings Box I. Key Actions needed requires pursuing public-private macroeconomic stability, fiscal mobilization and partnership efforts, deepening reforms • Consolidate public expenditure management, within the context of the to create an incentive-friendly and economic program supported by the IMF and the Bank. This will require external support (budget support, institutional stable regulatory framework with low strengthening and targeted analytical support through non transaction costs, reforming the financial services). financial sector and overhauling the • Reconstruct key large infrastructure, which underpin economic activity, particularly in the transport and power sectors and judiciary system. In parallel, attention improve their operation and maintenance systems. This will will also need to be given to require sizeable external financial support as well as some institutional strengthening. The Bank is the main financier in this developing the market-based service area. providers –both financial and non the business environment. External support will be financial (business development • Improve needed through a mix of budget support, institutional strengthening and direct support to the private sector (i.e. by services)- that are required for support from the IDB Group IIC, MIF, PRI).

SMEs/SMI to survive and grow. agriculture to remedy decades of neglect and Structural reforms and institutional • Revitalize deterioration, by tackling the constraints to growth (regulatory issues, financial resources, agricultural productivity), areas that modernization are key elements to the the Bank is already supporting. economic program to ensure the sustainability of the ICF interventions and the expected results. To achieve these ends, a stable macroeconomic environment is needed, which will contribute to political stability and to restoration of confidence in the country. This will trigger the restoration of the private sector’s leading role in the recovery process, a major thrust of the Government through its public/private partnership approach. The backbone of the macroeconomic program will be the Government’s management of the fiscal budget, with a clear sense of policy and public investment priorities.

2.15

To realize Haiti’s potential, however, resources need to be used efficiently to increase agricultural and manufacturing/assembly output for domestic and international markets and to promote tourism. Recent developments suggest that economic management has improved and that the Government is developing a plan to address pending issues such as ensuring regular debt service, but these gains remain fragile. Key sources of growth in the recovery and transition period will be the resumption of economic activity, enhanced

-10private sector confidence, increased agricultural production, private investments and externally financed infrastructure reconstruction projects. An area which merits particular attention is the resuscitation and decentralization of the assembly sector, given the positive Haitian precedent for rapid and sustained assembly job creation and the feasibility of improving the provision of basic services to free zone areas within a relatively short time span. In the short term, large external assistance inflows are expected to boost growth mainly through construction. In the medium term, growth will be supported by public investment, financed by foreign aid, private sector investment and productivity gains from structural reforms.

3.

Improve access to basic services and develop human capacities

2.16

Reconstruction efforts in Haiti are taking place within the context of an acute social crisis. Available social indicators point to a serious deterioration in living conditions and widespread poverty. Political and social instability has been a key factor in the significant deterioration in economic and social conditions in Haiti in the last years. Lack of growth, and the interaction of poor governance, instability, under investment in human capital and high vulnerability to natural disasters and environmental degradation, are at the root of Haitiâ&#x20AC;&#x2122;s poverty, which affects more than two thirds of the population of 8 m.

2.17

As the socio economic situation Box II. Key Actions deteriorated, public institutions and to implement public health programs throughout the country and improve access, which will economic governance grew weaker Rehabilitate the require putting in place an adequate financing system substantially supported by donors, as the affecting delivery of social services health sector Bank is already doing, and tackling a number of and investments in human capital. rehabilitation issues where the Bank is already present, which needs to The low level of the populationâ&#x20AC;&#x2122;s tackle both access and quality issues. In a context of deterioration in literacy rates, parallel actions purchasing power, the deterioration Revitalize the are required in basic education and to develop of transport infrastructure, and the skills that are required for economic recovery, education sector with particular focus on expanding vocational absence of financial intermediation education which the Bank will support and reforming higher education have led to a virtual collapse of the by rehabilitating, upgrade and expand drinking formal sector. In urban areas, Improve water water supplies, in the context of population and urban growth, an area already supported by the supply informal activities account for about Bank 80% of all activities, mostly smallwhich the Bank will support, at a time when Improve living unchecked urbanization has been growing while conditions in scale trade, services and daily labor. infrastructure has not kept up urban areas Nearly all of the employment in Haiti (95%) is in the informal sector, thus exacerbating the vulnerability of livelihoods. Underemployment affects more than half of the economically active population. Almost one out of every two Haitians between the ages of 20 and 45 does not have a lucrative occupation. Unemployment and underemployment are particularly elevated among women.

2.18

Economic activity is based on subsistence activities. Recent experience in Haiti indicates that labor intensive work programs (HIMO) offer attractive solutions when a large number of temporary jobs and revenue opportunities need to be created for the poor. The priorities are to reinforce capacities in the implementation of HIMO programs, create about 680,000 jobs in the next two years with about half coming from ongoing projects or programs, and increase access to micro-credit.

-112.19

The country’s poor indicators of human development are not only evidence of widespread social deterioration but they point also to the most significant barriers to economic growth. Rural poverty has prompted a steady migration towards the urban areas.

2.20

Social progress will be impossible without rapid growth, but rapid growth cannot be sustained without advances in health and education. High population growth rates further impede attempts to improve social services. The global health outlook is alarming. Only about half of the population has access to health services and the quality is generally poor. Only about 30% of health facilities in Haiti are public and most of them are located in urban areas. NGOs provide 70% of health services in rural areas, and the coordinating and supervisory role of the Ministry of Public Health and Population (MPHP) is weak.

Shortages of essential drugs and equipment further hamper the provision of services. A series of institutional weaknesses have hampered the capacity of the Government to respond to the Country’s epidemiological profile, including: (i) a marked degree of centralization of essential and non-essential functions in the headquarters of the MPHP; (ii) limited capacities at the level of the Departmental Directorates; (iii) very low levels of coverage of basic health services in most of the municipalities outside Port-au-Prince; and (iv) limited sources of information for the formulation and monitoring of health policies. A key challenge is to overcome governance and implementation issues to meet urgent needs and reduce major access and capacity problems.

4.

Address the environmental challenge

2.21

This challenge is probably the most intractable. The accelerated frequency and gravity of droughts and disastrous floodings, mudslides and collapsing infrastructure in the aftermath of tropical storms or hurricanes, demonstrates the increased cumulative degradation and vulnerability of Haiti’s already fragile watersheds. The sequence of events that have led to the current situation began with a process of land occupation and utilization that exhausted the land frontier a century ago. Demographic pressure in rural Haiti has surpassed the sustainable carrying capacity of the land given existing agricultural production techniques.

2.22

High rates of deforestation and soil erosion contribute to the accelerating deterioration of Haiti’s environment. With fuel wood accounting for over 72% of the country’s energy requirements, forest resources have been severely depleted, causing erosion in the upper reaches of watersheds and sedimentation in rivers and along coastal areas. Twenty-five of the country’s 30 watersheds are highly degraded, contributing to runoff and flooding as well as diminished replenishment of aquifers. Furthermore, only approximately 56% of the population has access to potable water services, resulting in an unmanaged exploitation of hydrological resources, which in turn puts at risk the quantity and quality of water available for consumption.

2.23

Given the demographic pressures, the topography and arable land distribution and utilization, and consequently the accelerated depletion of both land and water resources, poverty alleviation and reduction of risk of natural disasters have few alternatives. The primary release of these pressures has been out-migration, both seasonal and permanent,

-12and the reflow of remittances to family members. This escape valve has not however reversed the course of environmental destruction. Several other developments need to occur in order to provide sustainable advances. Foremost, creation of significant new employment opportunities in secondary towns, urban centers and off-farm rural areas is fundamental. Related to this push, where agricultural production has sustainable potential it must be intensified and linked to value-added enterprise. Only in this context is there much realistic prospect for progress in pro-active environmental protection measures.

2.24

Priority pro-active measures include promotion of commercially viable substitutes for wood and charcoal, improved land and natural resource management schemes including intensified use of successful agro-forestry practices and strategic interventions to improve risk and disaster management. The Government recently signaled its recognition of the importance of environmental management, elevating the Environmental Secretariat to Ministry status, but it suffers from weak institutional capacity. Although a National Environmental Action Plan was approved after an intensive participatory process in 1999, weak policies combined with a lack of institutional capacity at all levels have curtailed its implementation. A strategic early area of emphasis for the Bank, the support to the Governmentâ&#x20AC;&#x2122;s efforts to reactivate and implement an intersectoral water policy, begun under previous governments, has stalled.

5.

Strengthen governance and institutional capacity

2.25

Poorly performing public institutions and lack of governance are major constraints to development and poverty reduction. Economic governance weaknesses, compounded by institutional capacity deficits, concern the entire public sector and, particularly, public resource allocation, execution and management. During 2000-2003, public sector investment represented only 2.1% of GDP on average. The capital expenditures to current expenditures ratio in Haiti reached an average of 13% during the period 1991-2001, well below those of low-income countries (35%), Sub Saharan Africa (31%) and LAC (21%).

During 2001-2003, the spending institutions (political sector) in the government budget spent on average 46% of their budget through â&#x20AC;&#x153;discretionaryâ&#x20AC;? current accounts, compared with 22% for the economic sector and 18% for the social sectors.

2.26

Important bottlenecks remain in the processing, implementation and monitoring of programs and projects, while administrative capacity to cope with the procurement and financial management burdens of the plethora of donor-funded activities remains very limited. In addition, coordination mechanisms within the Government are weak and there is insufficient quality and availability of public services as well as a poorly performing judicial system. There is need for a comprehensive strategy for civil service reform.

2.27

Governance weaknesses are evident in the following key areas (a) public procurement; (b) budget preparation and execution and financial management; (c) human resource and institutional capacities; (d) public enterprise and infrastructure management; (e) governance of the social sectors. (See Annex II)

-136.

Strengthen aid coordination

2.28

Haiti will remain heavily dependent on external aid for the foreseeable future. Given the severe financial constraints and low resource mobilization capacity, continued delivery of donor assistance is critical for Haitiâ&#x20AC;&#x2122;s social and economic recovery. The ICF represents the concerted effort of Haiti and the international community to do what is needed to revitalize the economy, manage a sustainable and cohesive development program, start growth and buttress the institutional and governance reform process. However, the coordination and implementation of external assistance remains a challenge based on past experience in Haiti.

2.29

During the last decade, following the embargo (1991-1994) and restoration of constitutional rule in 1994, more than US$2.6 bn. have been provided by the international community, in addition to about US$4 bn in remittances. During this period, multiple aid coordination processes emerged which, together with the multiplicity of donors and reporting requirements, constituted a heavy burden on already stretched public sector capacities. Moreover, after peaking up in the initial years of donor re-engagement, donor disbursements started trickling down towards the second half of that decade, as a result of successive political crises and instability.

2.30

Donors have recognized that the cycle of massive injection of external financing support followed by sudden withdrawals is counterproductive and that is important to maintain steady support for sustainable development of public sector institutions. Moreover, lack of continuity of donor programs due to the parliamentary vacuum in the late 1990s severely limited the sustainability of strategic and sector policies of the government. The Bankâ&#x20AC;&#x2122;s re-engagement in 2003, at a time of contraction of most external assistance to the public sector, sought therefore to restore and sustain such eroded institutional capacities as well as the delivery of basic services and infrastructure.

2.31

During ICF formulation, the donor community recognized their share of responsibility in this process, including lack of closer coordination, consistency and strategic vision in their interventions. The setting up of parallel project implementation structures weakened the state while systematic bypassing of the public sector in recent years, due to serious economic governance concerns, further eroded weak public sector capacities. Significant implementation capacity exists in the NGO community and UN agencies, due to their extensive experience in Haiti. However, this capacity is not linked to national leadership and priorities, and it is also becoming constrained by the heavy demands of Haitiâ&#x20AC;&#x2122;s reconstruction process. This highlights the need to put in place mechanisms for the Government to mobilize alternative institutions for service provision, including the private sector and local communities themselves.

2.32

Departing from this earlier experience will be a major challenge for donors and the implementation of the reconstruction program. In a conscious break with the past, the ICF aims to frame external assistance on the basis of a joint and realistic identification of the needs and programs for the transition period. The ICF provides a focal point for guiding and coordinating international assistance. A key thrust of the ICF stakeholders (Government, donors and civil society) was to outline a single set of priorities and

-14directions for Haiti’s recovery and development. The ICF is grounded on the need for the development agenda to be led and owned domestically and recognizes the need for a private/public partnership to implement it. It also stresses that, for sustainability, donor activities must conform to national programs and priorities within the ICF, to avoid fragmentation and lack of coordination of donor interventions ahead.

III. GOVERNMENT’S AGENDA AND INTERIM COOPERATION FRAMEWORK (ICF) A.

The Government’s Four Pillar Agenda Operationalized Within ICF

3.1

The ICF Reconstruction Program was developed by the Government, within a short time frame (May-June 2004), jointly with the donor community and national stakeholders.

Based on key interventions and specific priorities in each area of concentration of the strategy, the Government has articulated its reform program around four strategic pillars.

(See Annex III) The main thrust of each of these strategic pillars is summarized below:

3.2

Pillar 1. Strengthening political governance and promoting national dialogue. The government aims to (a) strengthen needed national capacities, involve all sectors of society in the process of disarmament, promote respect for the rule of law, and strengthen the judiciary; and (b) initiate a process of national reconciliation and dialogue that will provide lasting, consensual solutions to reduce the risk of conflict and crisis in the country. Elections are scheduled for 2005 and the transition will thus be completed by the swearing in of the newly elected President. With external support, including the MINUSTAH, the new Provisional Electoral Council (CEP) will organize elections and ensure that they are transparent.

3.3

Pillar 2. Strengthen economic governance and contribute to institutional development. The Transition Government plans to strengthen public procurement mechanisms, by establishing a central control mechanism for public procurement through an interim public procurement commission (with private sector and civil society participation in the competitive selection of members), building procurement capacity in 4-5 key spending agencies, reinforcing transparency by publishing bid and contract information, strengthening private sector capacity to participate in public procurement bids, and improving and consolidating the legislative and regulatory framework in preparation for deeper reforms beyond 2006. The Government also announced its decision to establish an anti-corruption unit, subsequently created in late September 2004.

3.4

The Government’s strategy aims to make the budget process more efficient and credible, and to tighten financial controls so as to reduce opportunities for misuse of public resources. The Government plans to drastically curtail the use of discretionary current accounts (comptes courants) and strictly control their use as of September 2004; the Treasury’s institutional role will be reestablished and reinforced.

3.5

The Transition Government also plans to prepare and implement the regulatory framework of the new Organic Law on the Preparation and Execution of Budget Laws; strengthen the system of public accountants as proposed in the new Organic Law; reinforce the operational capacities of public finance control structures; and strengthen

-15the MEF’s Directorate of Fiscal Inspection charged with overseeing revenue collection entities as well as private and public enterprises. The Government also plans to maximize the State’s resource mobilization capacity (with the objective of raising the tax revenues as a share of GDP from 7% to 14% over the medium-term) by reducing tax evasion, limiting tax exemptions and exonerations, and completing and implementing the strategic plans for the reorganization and modernization of the structures of the Directorate General of Taxes and that of the Customs Administration.

3.6

The Government plans to significantly strengthen the quality of human resources in the public sector in support of the implementation of the ICF and to create capacity to monitor economic governance policies and programs, including through a partnership with civil society; and reinforce the capacity to generate and disseminate economic and statistical information. Support is also planned to establish decentralized participatory structures for preparation of action programs at the local level.

3.7

Pillar 3. Promote economic recovery. The Government has formulated a macroeconomic program for the second half of the Haitian fiscal year (April – September 2004) and agreed on the macroeconomic framework for the remainder of the HFY, in consultation with IMF staff, to ensure the macroeconomic stability required for sound investment decisions by the private sector.

3.8

The transition strategy also aims to reestablish electricity supply by September 2004, to improve service quality and improve the functioning of EDH. Similarly, the Government plans to transfer the management of the telephone utility (Teleco) to the private sector.

3.9

The strategy also aims to implement the necessary investments to ensure that the roads essential to the country’s development are usable. The Government intends to put in place both an institutional and financial framework to guarantee the sustainability of these investments. For the management of ports and airports, the strategy is to identify and immediately put in place essential investments and prepare the reforms necessary for modernization.

3.10

In order to support the creation of jobs, the strategy aims to support the recovery of the private sector and the small- and medium- size enterprises and industries through the creation of a recapitalization fund for businesses that were affected by the events of February-March 2004, and of a mutual guarantee fund for small companies, and by the injection of financial resources into the micro-finance system. The Government also plans to strengthen the institutional set-up for investment promotion and private sector development, promotional activities for tourism and arts and crafts, institutionalizing public-private consultations and revising the legal framework for business development.

The Government’s strategy includes a rapid employment creation with the objective of creating 600,000 jobs over the next two years as a boost to the formal sector job market.

3.11

The Government also envisages to contribute to a rapid recovery of agricultural operations and the rural economy by, inter alia, rehabilitating irrigation infrastructures and providing technical advice to small farmers. The Government plans to actively

-16promote the replacement of wood and charcoal, fight the deterioration of land and natural resources, promote reforestation, and improve risk and disaster management.

3.12

Pillar 4. Improve access to basic services. In the health sector, the Governmentâ&#x20AC;&#x2122;s strategy targets restarting operations in the main hospitals, the extension of the Minimum Package of Health Services to 2,500,000 Haitians by developing 15 health districts, and the strengthening of the Ministry of Public Health and Populationâ&#x20AC;&#x2122;s capacities for management and coordination. As for potable water and sanitation, the plan is to extend the water and sanitation supply coverage to urban and rural population, to strengthen the institutional capacities of the sector, and improve the services provided, particularly to vulnerable groups in urban and rural areas. With respect to food security, the strategy seeks to ensure the harmonization of inter-sector and inter-institutional interventions by strengthening the institutional and legal framework of the National Coordination for Food Security.

3.13

In the education sector, the strategy aims to establish support measures for governance and improve access, quality and conditions for apprenticeship. For professional training, the plan is to facilitate access and increase the relevance and quality of professional training, and to strengthen the capacities of the National Institute for Professional Training.

3.14

In addition, the strategy covers other areas related to access to basic services, such as slum upgrading to physically improve certain shantytowns in the Port-au-Prince Metropolitan area and in secondary cities in the country. Activities would prepare the participatory formulation of a National Program for Improvement of the Urban Environment, and would institutionally strengthen the ministries and town councils involved in this sector.

B.

Reconstruction Funding and Mechanisms for ICF Implementation

3.15

The Government has secured adequate funding to implement ICF Program. The draft Government Budget for the current Haitian fiscal year (October 2004-September 2005), factors in aid disbursements expected to occur in 2005, based on the donor pledges made in July 2004 (totaling US$1.0 bn.). Actual disbursements of grants and loans to this budget are estimated at US$235 m. The estimated costs for implementation of the activities under the four ICF pillars are estimated as follows: (a) Strengthening political governance and promoting national dialogue (US$173 m); (b) Strengthening economic governance and institutional development (US$165 m); (c) Promoting economic recovery (US$526 m); and (d) Improving access to basic services (US$447m).

3.16

To ensure Government ownership and leadership in the ICF process, overall strategic coordination will be assured by the Office of the Prime Minister, in coordination with, and participation of key national (civil society) and international stakeholders. This tripartite partnership is articulated in the Joint Coordination Committee for ICF Implementation and Monitoring, which includes three representatives from the Government (Prime Minister and the Ministers of Finance and Planning), three from civil society and six members from the donor community (EC, IDB, UNDP, World Bank, US

-17and Canada). Interministerial coordination will be led by the Planning and External Cooperation Minister. The Finance Minister will monitor budget and financial execution.

Operational implementation of the ICF interventions will be the responsibility of the line ministries, in close consultation with lead donors in each sector (focal points) and civil society representatives, organized around Sector Tables. Coordination mechanisms, such as the Joint Committee and the Sector Tables, were agreed with the Government at a “follow-up” donor meeting focused on ICF implementation held in Haiti in September 2004.

3.17

Sector Tables will be composed of Government, donor and civil society representatives.

They will be led by a Government coordinator from the line ministry involved and a focal point from the donor community. The Bank has confirmed interest in leading the infrastructure/roads, economic governance, local development, water and agriculture sectors. (See Annex IV)

3.18

Despite the progress in developing this coordinated framework for ICF implementation and aid coordination, the transition process will require steady and well sequenced implementation to achieve the reconstruction objectives. This will require adequate and timely flow of pledged donor assistance.

IV. IDB’S ONGOING TRANSITION STRATEGY FOR RE-ENGAGEMENT A.

Overview of Implementation and Main Achievements

4.1

The Bank’s ongoing Transition Strategy for Re-engagement, mobilized in October 2003, is in its early stages of implementation. The main challenges that were present when this strategy was prepared in late 2003 were: strengthening poverty reduction efforts and investing in the development of human capital; maintaining and reinforcing macroeconomic stability; undertaking reforms to improve the provisions of basic services and transport infrastructure and carrying out a sound process of institutional modernization, with emphasis on strengthening economic governance and absorptive and technical capacities.

4.2

To meet these challenges, the transition strategy concentrated on two fundamental areas, complemented with a strong capacity building effort: (a) initiation of a process of governance reforms to create an effective public administration, starting with transparency and accountability in public finance management; and rebuilding effective public institutions and policies; (b) high-impact, short term investments, with emphasis on existing state institutions and mechanisms to reactivate the economy and improve living conditions at the community level. It thus provides readily available technical and financial resources to sustain critical ICF activities until other donor disbursements materialize.

4.3

All Bank instruments were marshaled to implement it: (i) policy-based operations focusing on critical reforms in the policy and legal environment: an investment sector loan and a public finance reform loan; (ii) investment operations for infrastructure and to upgrade service delivery capacity; (iii) technical cooperation operations to underpin

-18economic governance reforms, project preparation and institutional strengthening; and (iv) small projects and MIF funding to support private sector development. These efforts were complemented with (a) strong hand holding and execution strengthening portfolio management approach; and (b) close donor coordination to ensure proper coherence and complementarity in interventions based on the Bank’s comparative advantage.

4.4

When the Bank resumed its lending to Haiti in July 2003, it updated and reactivated 6 pending loans totaling US$197.6 m and approved 4 new lending operations for US$201.9 m, thus bringing the total amount of commitments to US$397.8 m. Total disbursements reached US$78 m (US$48 m in 2003 and US$30 m in 2004 ). The selection of specific operations was based on criteria largely supported by lessons learned from Bank experience in Haiti: (1) poverty alleviation, to address the problem of persistent and extreme poverty in Haiti; (2) additionality, to provide the critical inputs required for project success; (3) sustainability, to contribute to long term development objectives, with strong focus on human resource development and institution building at all levels; and (4) feasibility, with specific and realistic targets and emphasis on simplicity and flexibility in project design, streamlined procurement and contracting procedures, and development of alternative approaches to deal with specific implementation bottlenecks.

4.5

Despite the short time elapsed since the reactivation of the Bank’s portfolio, some key milestones of the Transition Strategy for Reengagement have been achieved: (i) completion of conditions for disbursement of the second tranche ISL, and also of first tranche conditions for the program to improve governance (first stage); (ii) elaboration and initial implementation of solid execution plans for the activities to be financed under the new Local Development Program, disbursement of the four recently re-activated investment loans (road, health, water, education) and approval of two of the three new loans programmed; and (iii) improvements in governance were introduced. In particular, Prudential norms for regulating the banking sector are under implementation, including supervision of the cooperative sub sector; an annual budget preparation and approval system has been established by special law, and two budget cycles have been approved under this system, for 2002/3 and 2003/4; and information on budget execution is being disseminated to the public. Strict limits on the recourse to ministerial discretionary accounts are being imposed, restricting such accounts to one per ministry; an anticorruption unit has been established in the Ministry of Finance for a more transparent fiscal management.

B.

The Bank’s Portfolio

4.6

The Bank’s current portfolio of 10 active projects covers sectors identified as priorities in the ICF: education, health, potable water and sanitation, rural roads, agriculture, basic infrastructure, local development and rural development, totaling US$317 m. In addition, two operations, totaling US$75 m (an investment sector loan, fully disbursed, and a public finance reform loan, of which a first tranche of US$10 m already disbursed), represent fast disbursing policy-based IDB support to key governance reforms, through strengthening of public finance management and increasing transparency and accountability in the public sector.

-194.7

The conflict that lead to the departure of President Aristide temporarily delayed progress in project execution and in meeting the conditionalities of new projects. However, despite the young age of the Bank’s portfolio, many of the projects have already reached the stage at which substantial disbursements are flowing, provided the evolution of the security situation allows for a sustained implementation pace. This is being addressed by stepped up IDB support to implementation including special measures. The turmoil also eroded already fragile government capacities. The Bank has put emphasis on continuous strengthening of portfolio performance and monitoring of project impact. Implementation mechanisms and structures have not been significantly affected by the conflict, although some executing agencies have been damaged, and adjustments to implementation arrangements have been made, when necessary, to keep projects operational. During implementation of this strategy, the Government and the Bank will continue exploring additional mechanisms to facilitate project execution in areas critical to reconstruction.

4.8

One of the main outcomes is the achievement of the level of disbursement projections set out by the specific project results-based action plans, agreed with the new authorities by a special portfolio implementation mission in April 2004. This is the result of a very supportive Bank role to boost weak institutional capacities, through strong supervision by headquarters specialists and Country Office staff, complemented with specific execution strengthening actions (financing of additional expertise, facilitators, technical assistance, ROS/DAU/PMR training seminars on key aspects of project implementation). The Bank is pursuing innovative approaches to sustain implementation in the current context and in the expected increase in donor activities, which will strain public sector capacities further. In particular, it has streamlined and approved procurement procedures, specifically in the areas relating to publication, processing periods, etc, to accelerate disbursements.

4.9

Another important result of the Bank’s approach is the flexible and streamlined design of its operations, which now allows the Bank to use these resources in support of ICF priorities as well as to respond to specific emergency recovery needs from recent flooding. In the latter case, in addition to the Emergency TC for US$200,000 disbursed in late September when the Government declared a state of emergency after Tropical Storm Jeanne, the Bank has offered the Government the possibility of using resources of up to US$10 m from the Bank’s ongoing infrastructure loans (rural roads and basic infrastructure) and the Investment Social Fund (FAES) for emergency rural roads and related basic infrastructure reconstruction, and for the provision of basic social services, including nutrition, in the affected areas.

4.10

Implementation of this strategy has also: (a) enhanced the Bank’s knowledge of key sector and institutional issues important for Haiti’s long term development; and, (b) provided a readily available vehicle for an active dialogue with the transition authorities and other donors on macroeconomic, economic governance, fiscal and various sector policy and institutional issues. In addition, efforts made during the implementation of the ongoing strategy have paid off and are shared by a broader donor re-engagement.

-20C.

Emerging Lessons from Experience

4.11

Execution of the transition strategy for re-engagement in the current fragile implementation environment in Haiti has yielded some valuable lessons:

•

exceptional levels of financial assistance and timely availability of resources are needed for a long period to face the challenges associated with the country’s deep rooted constraints and recovery; focus on a set of realistic and specific objectives to ensure that the Bank’s efforts remain focused in following up implementation progress; the realism and specificity of the objectives set out in the transition strategy for re-engagement were critical in ensuring such an approach; timeliness and relevance in technical support, including mobilization of Trust Funds and policy advice are essential for implementation to move ahead quickly; focus on implementation: capacity constraints can be overcome or mitigated with an appropriate level of implementation arrangements, hands-on support to implementation and a dose of pragmatism and flexibility; there are now tested and effective implementation mechanisms in place (for infrastructure, community projects and institutional strengthening); importance of involving civil society (such as NGOs working in the provision of social services) in the projects; the considerable Bank staff involvement to work directly with government agencies and to assist in implementation needs to be emphasized. This has implications for the Bank’s administrative budget particularly during the initial period when there must be greater reliance on international staff as opposed to national operational staff while the latter are being strengthened; effective assistance requires an overhaul of standard approaches to the design and implementation of assistance programs and projects; IDB Management has put together a proposed set of special measures to strengthen implementation capacities in response to the high priority assigned by the IDB Board of Executive Directors to support implementability of the IDB’s programs in Haiti; risks need to be managed, not avoided where development assistance is often a high-risk, high-gain endeavor; working closely with other partners: with the IMF on macroeconomic issues, the World Bank on economic governance, with the EU in infrastructure and vocational training, with the UN to ensure proper synchronization of political and economic stabilization and emergency reconstruction efforts, with selected bilateral partners (US, Canada, France) who helped mobilize others, and with national and international NGOs and the Haitian private sector.

•

• • • • •

•

• •

D.

Portfolio Links IDB’s Assistance with ICF Priorities

4.12

The IDB is Haiti’s leading source of financing for long term development programs, with a portfolio that remains relevant to support the new reconstruction agenda since Haiti is still facing the challenges that were present when the Transition Strategy for Reengagement was prepared in late 2003.

-214.13

In line with the ICF goals of boosting job creation and generating income for the poor, the programs financed by the Bank seek to employ labor intensive methods, for instance in public works to improve roads or build small infrastructure projects in local communities. They are also contributing to key targets of Haiti’s Interim Government of buttressing economic activity and raising living standards. During ICF formulation, the Bank’s resources available on the ground were included in the relevant ICF pillars as existing financing for the reconstruction process, thus contributing to reducing the external financing gap estimated by the ICF. Moreover, the continued relevance and priority of the operations included in the 2004 pipeline will provide the link with the Bank’s new Transition Strategy. As a result, the Bank is a major stakeholder in key ICF pillars, as detailed in Annex V.

V. BANK’S TRANSITION STRATEGY 2005-2006 A.

Criteria for Preparation of the New Strategy

5.1

The criteria considered for the preparation of this strategy included: • Flexibility. This Transition Strategy was designed as a flexible guide, to be refined and adjusted as country developments warrant. The TS proposes an assistance program for 2005-2006, which will roughly cover the period of political transition. At the end of the TS period, the Bank will assess the country situation with a view to moving to a full country strategy paper.

• Strategic focus and selectivity in Bank assistance and donor coordination. The synergy between the proposed Bank program and donor activities was identified with key donors during ICF preparation, and it is expected to be maintained throughout the period of TS and ICF implementation through close coordination in the field (sector tables). The Bank has considered, in particular, to focus on: (i) those activities which promise to have the largest pay off with regard to supporting the recovery and transition process; (ii) areas where the Bank has a comparative advantage vis-à-vis other donors, including consolidation in areas in which the Bank is already active; and (iii) areas complementary to other activities planned or underway by other donors or local stakeholders.

B.

Key Objectives and Strategies

5.2

The overall objective is to consolidate implementation of the ongoing portfolio and support the recovery and transition process under the ICF. A related key objective of the TS is to prepare the ground to eventually move from a transition mode to a long term development effort in the Bank’s approach to Haiti, through preparation of a full country strategy. Consolidating the gains from reconstruction and addressing these governance issues will lay the foundations for longer term growth and poverty reduction. Poverty reduction is the main longer term goal for Haiti.

5.3

The specific objectives of the TS are those identified within the Government’s recovery program, in the four ICF strategic pillars:

-221.

5.4

Pillar 1: Strengthen Political Governance and Promote National Dialogue

The Bank will support the establishment of rule-based mechanisms for rapid resolution of conflicts. This will be undertaken with the support of a MIF-TC Program to Develop Alternative Dispute Resolution Mechanism, to promote a participatory front line justice that entails the establishment of the circle of justice within local associations, training judicial mediators and arbitrators for rapid resolution of conflicts and establishment of a climate conducive to private investment. The Bank’s future support would eventually evolve from preparatory work in this area that will also be financed by the above MIFTC. In addition, the Bank will help address gender-based violence through a TC (Response to Gender-Based Violence), that will identify concrete actions for Government interventions.

2.

Pillar 2: Strengthen Economic Governance and Contribute to Institutional Development a)

Consolidate Bank’s support to strengthening governance and fiscal and financial management

5.5

The Bank will continue its support to improvements in financial management, particularly measures and policies to increase tax revenues and financial sector reform, which are crucial to help reverse the deterioration of the social and economic situation.

Bank’s assistance will deepen reforms to strengthen: (i) the institutional and operational capacity of the Central Bank; and (ii) banking and non-banking sector efficiency and effectiveness in financial resource mobilization and allocation of support to commercial banking sector. To that purpose a Financial Sector Reform Program is proposed.

5.6

The Bank will continue working on economic governance reforms8, in close coordination with the IMF and the World Bank, and supporting improvements in the normative framework for budget formulation and execution. To complement this work the Bank is preparing a sector loan, Fiscal Reform; the Preparatory work and technical assistance to implement reforms to be identified for PBL conditionality are being financed through an ongoing TC9. b)

5.7

8

9 10

Capacity building for public administration reform

The Bank will support institutional capacity building, beginning with the Ministry of Finance, through a TC in execution10, and the operation Support to Executive Branch Institutional Facility. This program will assess the technical assistance requirements to meet conditions under the above PBL and for second tranche release under the ongoing Public Finance Reform PBL. In addition, and to help the Government plan to strengthen the gender mainstreaming capacity of the line ministries, the Ministry of Women’s Affairs (MCFDF), which has the mandate to support the other ministries in this endeavor, will be strengthen through a new TC Institutional Strengthening of the MCFDF.

Through the ongoing Public Finance Reform Program, and two TC: Support to Establishment of Anti Corruption Unit within MEF, and Support to Institutional Reform.

Strengthening of Revenue Collection Institutions.

Institutional Strengthening Initiative.

-233.

Pillar 3: Promote Economic Recovery a)

Consolidate Bankâ&#x20AC;&#x2122;s support to rebuilding infrastructure and private sector development

5.8

Roads. The proposed strategy for the road sector, aims at identifying urgent investments, necessary to ensure that essential roads for development are usable in all climates, all year round. This effort needs adequate planning, funding, and the use of proper road building technology; building an institutional framework that can grant the durability of such investments; the application of the Road Fund key for generating funds and the culture of routine road maintenance, and effective sector management. In the short term, this translates into the design of an executing unit for the infrastructure programs, with external support, that can launch the investments and infrastructure programs while building capacity and administrative infrastructure within the MTPTC. In the medium and long terms, it is the MTPTC that must be able to consolidate the road network and its sustainability.

5.9

Ports. The strategy considers in the short term some investments need to be made, immediately, in order to keep the port operational, such as dredging, rehabilitation of operating land infrastructure, and equipment acquisition. It is necessary to start, as soon as possible, preparatory studies for sector reform, including the change of port model and private involvement in port operations, especially in Port au Prince.

5.10

Airports. The strategy is similar to that exposed for the ports sector. Even though the present legal framework allows for private sector involvement and participation, it will demand stronger institutions to have successful airport concessions. The strategy for the sector is to identify and undergo the necessary investments to ensure safe and efficient airport usage, specially in the two international airports; prepare the institutional framework and carry out the feasibility studies aiming at the concession of the Airport at Port au Prince, and probably Cap Haitien.

5.11

The Bank will support these processes through a new operation, Transport Infrastructure Rehabilitation, four new TCs, a non financial product11, and two programs in initial stages of implementation, Rural and Secondary Road and Program for Rehabilitation of Basic Economic Infrastructure. b)

5.12

11

Consolidate the Bankâ&#x20AC;&#x2122;s support to revitalizing agriculture

The Bank is supporting the Ministry of Agriculture, Natural Resources and Rural Development to implement a Rural Economy Development Program, that will extend the intensification process initiated through the Agricultural Intensification Program to other geographic areas and to a broader variety of agri-supply chains (filières) with demonstrated or highly promising sustainable potential. Areas of opportunity will be assessed both from a production and marketing perspective as well as based on the

Updating Road Inventory Classification, Support for the Execution of the Roads Programs in Haiti, Support for the Execution of IDB Transport Programs in Haiti, Support for the Transport Infrastructure Rehabilitation Program, and the non financial product New Sources of economic growth: private sector participation.

-24linkages to expanded value-added employment. The development of the operation will be supported by a French Trust Fund Technical Cooperation. In addition the Bank will support the sector through a series of new TCs and other products12. c)

Reducing the impact of natural disasters and environmental degradation

5.13

The Bank’s current dialogue with the Government includes perspectives for continued involvement in environment, including reducing the impacts of natural disasters, watershed management and institutional strengthening for environmental management, placing a particular importance on the support of local institutions, evaluation, support, and articulation of numerous current local initiatives.

5.14

The above mentioned challenges are reflected in the proposed pipeline with loan operations for Environmental and Institutional Strengthening and Reduction of the Impact of Natural Disasters and a later operation for Watershed Management, which will be complemented with the program Local Capacity Building in Watershed Management, financed by a grant from the Global Environment Facility (GEF).

4.

Pillar 4: Improve Access to Basic Services a)

Consolidate Bank’s support to education and health reform

5.15

In line with the priority actions identified within the ICF in the area of Education, Youth and Culture, the strategy is aimed at strengthening three aspects of the Haitian education system: (i) improved governance of the sector; (ii) better access to all levels of education, from pre-school to vocational and tertiary education; and (iii) enhanced quality of public and non-public education. To that purpose the Bank is financing the project Basic Education Program, and is in the process of designing, with the Government, a Vocational Education Program, aiming to increase employment opportunities of lowincome youth, and which will be supported by the TC Quality Control Mechanisms in Vocational Training.

5.16

The strategy in the health sector is aimed at confronting the institutional weaknesses by pursuing the following priorities: (i) restructuring of the country’s health facilities into networks of locally integrated public and private health systems (the health district model, or UCS), and thereby extending the coverage of the minimum service package; (ii) strengthening the management and coordination capacity of the MSPP in order to expand and implement a human resources management policy, as well as to develop a private/public partnership and to ensure the coordination of international cooperation and health organizations; and (iii) restart priority programs, including the prevention and care of malnourished children and women, the prevention and care of people infected with HIV/AIDS and tuberculosis, and systematic vaccinations of infants less than a year of age. The strategy is being implemented through the ongoing program Organization & Rationalization Health Sector and the TC Program to Support HIV/AIDS Strategy; these

12

Technology Innovation in Rural Economy, Support for preparation and implementation of Rural Development projects, Preparation for MIF Haitian Coffees, Supporting the Competitive Position of Haitian Coffees (MIF), Integration of Small Producers to the Tomato Productive Chain (SMP) and the non financial product Sector Note: Agricultural sector and rural economy.

-25operations will be complemented with a new TC Drivers of Change Analysis for the Health and Local Development Sectors. b)

Improving living standards in urban areas and promoting local development

5.17

The proposed strategy toward urban areas aims at: (i) improving the living conditions in the Metropolitan area of Port-au-Prince; (ii) creating opportunities for income generation; and (iii) strengthening the responsible government institutions. To these purposes the Government and the IDB are in the process of designing an Urban Rehabilitation Program. In addition, the program would aim at assisting the Haitian public sector in strengthening its capacity to deliver services to the poor in an efficient and targeted way.

5.18

Regarding local development, in line with Haiti’s transition strategy presented in the ICF, the Bank’s strategy in this sector is intended to ensure that the rapid impact of coordinated interventions is coupled with ownership by the communities. To that goal, the overall objective of the ongoing operation Local Development is to improve the quality of life and income-generating capacities of the poorest and most vulnerable segments of Haitian population. c)

Consolidate Bank’s role in the water sector

5.19

Rural Water Supply, focuses on small scale water and sanitation systems with strong community participation and consistent with the ongoing Potable Water Supply and Sanitation Sector Reform Program.

C.

Implementation of the Bank’s Strategy and Operational Program

5.20

To articulate the new strategy, the Bank anticipates presenting a mix of up to 11 operations for 2004-2006, combining investment and policy based lending and technical assistance. This Strategy would fully realize the Bank’s pledge within the ICF, totaling about US$263 m (US$260 m plus about US$3 m in grants).

5.21

The TS proposes the following five-fold agenda for implementation: (i) managing the existing portfolio; (ii) launching new lending operations and fine-tuning relevant activities from the 2004 pipeline under the ongoing strategy (iii) providing technical assistance and a well focused program of non lending services to underpin Bank program implementation, policy formulation and implementation, and develop a knowledge base on key challenges to development and growth; (iv) engaging the IDB Group; and (v) strengthening aid coordination. In addition, the country office will be strengthened to expand its capacity to help meet the growing implementation challenges, including support to executing agencies, line ministries and national coordinators. (i)

5.22

13

Managing the existing portfolio

Despite the portfolio being young, commitments and disbursements have already been substantial (US$48 m in CY 2003 and US$24 m in CY 2004 to date).13 Particular efforts

As indicated in footnote 6, total Bank disbursements to Haiti in 2004 reached US$ 30 million.

-26will continue and expand in the coming years to maintain this level of performance, since existing projects are the ones that are most likely to translate into actual results on the ground over the TS and the political transition period.

5.23

This focus will translate into continuing to implement and, as needed, further expand the current Bank thrust to strengthen execution capacities, including: (i) ensuring adequate administrative budget and additional allocations for implementation support; (ii) strengthening the Country Office; (iii) continuing the development of innovative approaches to portfolio management to increase absorptive capacities, including strong involvement in â&#x20AC;&#x153;hands-onâ&#x20AC;? implementation support and decentralization of selected responsibilities to the field; increasing the frequency of special portfolio implementation review missions and donor consultations; and (iv) reviewing on a regular basis implementation mechanisms for ongoing projects. (ii)

5.24

To implement the proposed Transition Strategy, and to address priority issues associated with the transition and recovery process, a substantial program of financial assistance is proposed to fully utilize the FSO resources available to Haiti for this period (over US$260 m). New projects are expected to be complemented by non-reimbursable FSO/TC resources (US$3 m over two years), Institutional Facility Funds and Trust Funds. The new operations are expected to be designed in a manner that responds to the specific circumstances in the country, ensuring their flexibility, simplicity and monitorability. Annex I details the proposed list and estimated financing amounts for each operation. (iii)

5.25

Providing technical assistance and a well focused program of non financial products to underpin Bank program implementation, policy formulation and implementation

Given the large amount of donor-funded technical assistance available to Haiti, the Bank will pursue the twin objectives of supporting preparation and implementation of ongoing or planned investment lending operations and policy-based loans and improving country knowledge to underpin preparation of an future country strategy paper. These efforts will ensure that the sequencing and selectivity of non-lending support can be easily and effectively translated into practical, specific policy measures that can be implemented in the short and medium term. The TS focuses on: (i) advisory services and support for implementation of the ongoing macroeconomic stabilization program and associated economic reforms; (ii) analytical work on key core diagnostic tasks, particularly related to Haitiâ&#x20AC;&#x2122;s potential and competitiveness, and preparation of new lending operations; (iii) specific sector support activities to underpin project preparation and execution. Most prominently, a multisector TC (US$600.000) will support key line ministries and executing agencies involved in Bank activities. (See Annex I) (iv)

5.26

Launching new lending operations

Engaging the IDB Group

Haitian private sector representatives have maintained a regular dialogue with RE2 Management as well as MIF, PRI and IIC staff. There is substantial IDB Group interest

-27in building capacity and expanding support for private sector development in Haiti, particularly by IIC, PRI and continuation of MIF assistance to microfinance and small and medium enterprise development. The private sector will benefit from the proposed PRI Haiti Telecommunications Project and additional MIF operations. Efforts will be increased to continue to ensure an adequate involvement of both IIC and PRI. (v)

Strengthening aid coordination

5.27

The Bank will continue to play a strong role in this area, through leadership and/or major participation in the Sector Tables, within the ICF Coordination Mechanism, in the areas where it has substantial presence and comparative advantage (infrastructure/transport, water and sanitation, local development, agriculture and economic governance), and as a strong participant in the coordination mechanism established under the ICF. This will be sought or pursued through: (a) assisting in defining multi-donor programs in key sectors of Bank involvement; (b) continuing to play an active leading role in coordination mechanisms in the field, through the country office; and (c) supporting the Government’s efforts to strengthen their coordination capacities and role. Annex VI details key areas of Bank/donor coordination under the ICF.

D.

Financial Flows

5.28

Haiti will need exceptional assistance from the international community to implement its reconstruction program. The Government faces the challenge of timely and steady delivery of donor assistance. The Government’s policy has focused on halting the deterioration in government finances by curbing non essential expenditures and by strengthening tax administration, targeting tax arrears in particular. Despite these efforts, it is estimated that the overall government deficit, excluding exceptional outlays, in HFY 2003/2004 still reached about 2.7% of GDP, while if the payment of arrears is included, it is estimated to be closer to 5% of GDP. As a result, Haiti faces substantial short term external financing needs.

5.29

Donor disbursements under the ICF are expected to ease the growing pressures on the Government’s finances stemming from both increases in public sector wages, which had declined 40% since 2000, until they were raised by 30% in July, as well as increased capital expenditures. The external resources mobilized through the ICF will provide US$426 m in fiscal year 2004/2005, equivalent to around 12% of projected GDP, and a further US$353 m. in 2005/2006, 5% of projected GDP. Given the current instability and violence, and Haiti’s deep rooted structural and social constraints, the Government faces some formidable challenges to implement the ICF interventions over the next two years.

5.30

Based on this level of commitments, indicative donor disbursement projections into the Government’s 2004-2005 budget are expected to reach US$260 m; this provides adequate external support to implement the Program. Capital expenditure and debt service are to be almost fully covered by external financing. Looking forward, the authorities expect to receive significant grant financing. About 61% of the pledges made by donors in July are in the form of grants and the remaining 39% in the form of highly concessional loans. These concessional loans will be used to leverage additional grant

-28financing and increasing internal revenue mobilization capacity by supporting economic reforms and by financing high impact investments.

5.31

The Bank’s share of the indicative disbursements into the current budget is estimated at US$102 m., and projected at US$145m. in 2005-2006, thus bringing the total Bank projected disbursement through the ICF period to US$247 m. (See Annex VII)

5.32

The objective of the previous Transition Strategy was to ensure positive net flows beginning in 2004 and beyond. With the help of the two tranches already disbursed of the Investment Sector Loan (ISL), this objective has been met, as of end-September 2004.

While Haiti’s monthly debt service to the IDB averaged about US$1.5 million in 2004, IDB’s monthly disbursements averaged US$2.6 million, slightly exceeding projections.

The objective of the proposed Transition Strategy is to increase the Bank’s positive net flows substantially. This will be essential to help implement the ICF, and maintain the momentum of governance reforms initiated under the ISL and being pursued under the ongoing PBL for Public Finance Reform.

5.33

Preliminary projections made by the Country Office based on past patterns, suggest that accumulated disbursements from October 2004 through December 2005 are likely to total about US$100 million, including the second tranche of the PBL Public Finance Reform, US$15 m projected for June 2005; while debt service would amount to about US$30 million, quadrupling the average monthly net flow to about US$4.7 million. However, the Bank’s ability to maintain steady disbursement flows will depend on the Government’s capacity to implement investment projects, to maintain an adequate macroeconomic framework needed for policy based loans, and to make new IFI loans legally effective.

VI. PROSPECTS AND RISKS A.

Medium Term Prospects for Economic and Social Recovery

6.1

Debt sustainability Indicators for Haiti are mixed. Based on end-September 2003 data, an IMF analysis has estimated that the debt-export ratio in net present value terms is 194%, suggesting that Haiti’s debt is unsustainable and that the country could qualify for HIPC debt relief. Under such circumstances, donor assistance pledged in July 2004 might not be sufficiently concessional, and thus Haiti’s debt burden could remain unsustainable over the medium term. To the extent that such new borrowing would increase the net present value of debt, the July assistance could worsen Haiti’s debt sustainability.

However, this figure may overestimate14 the net present value of the debt, and is overly sensitive to a presently low discount interest rate used for the estimation of net present value. A higher interest rate would significantly lower the figure and such a move towards adjusting the discount interest rate higher is likely.

14

In particular, it is likely that part of the debt may be eligible to relief according to the Nice rules.

-296.2

At the same time, Haitiâ&#x20AC;&#x2122;s debt/GDP ratio in present value terms is relatively low, at 26%, and is expected to decrease to about 21% in 2008. A projection based on somewhat more favorable assumptions of higher export growth or higher discount rates would further lower the ratio, suggesting that debt sustainability would not be an issue. In that case, the concessionality of pledged assistance would appear adequate. However, the critical situation in the country may justify eventual Bank consideration of increasing the share of the grant element in its program.

6.3

An IMF mission to update assumptions and assess debt sustainability is scheduled for March 2005, to assess Haitiâ&#x20AC;&#x2122;s eligibility for HIPC debt relief based on end-2004 debt stocks. If the net present value of the debt to exports ratio is measured above 150%, Haiti could apply for relief after a period of successfully implementing a program with the IMF. Assuming that a PRGF (Poverty Reduction and Growth Facility) is in place in 2006, the debt relief process would begin in 2007.

6.4

Assuming that political stability is achieved, that the ICF is successfully implemented and that macroeconomic stability is maintained, the medium-term economic outlook is moderately positive. Real GDP growth, which is expected to be about 3% during 20052006, could accelerate to about 4% beginning in 2007. This improvement would be supported by progress achieved in governance and transparency, as well as continued external economic assistance. This outcome would be given a greater chance if the new elected authorities would manage the economy under an eventual PRGF arrangement.

6.5

The external sector is expected to benefit from the eventual passage of the HERO act by the US Congress15. The current account deficit (excluding grants) is expected to stay at about 6% of GDP, as private remittances and the trade deficit stabilize at around 20% and 21% of GDP respectively. External grants are expected to remain at about 4% of GDP, financing most of the current account deficit.

6.6

As for social recovery and poverty reduction, expectations should be modest regarding the possibility to meet the MDGs, particularly the poverty goal. (See Annex VII) According to the 2003 Human Development Report, cutting head count poverty in half in 2015 from the 1990 level to attain MDGs requires an average annual growth of GDP per capita of 1.4% for 25 years16, or 2.9% for 12 years if there had been no growth of GDP per capita between 1990 and 2003. However, since income per capita in Haiti has actually decreased by 25% between 1990 and 2003, GDP per capita would have to grow by about 6.3% per year in the remaining years to 2015. Such a rate would require GDP to grow by about 8% per year, about doubling the expected GDP growth rate. With an expected per capita growth rate of about 2%, Haiti will still be able to recoup some of the poverty increase of recent years, but not completely reverse by 2015 the decline of the last 14 years, much less meet the poverty MDG. This calls for increased and steady international support.

15

16

The HERO (Haiti Economic Recovery Opportunity) Act was approved by the US Senate in June 2004, and is pending approval by the House of Representatives. The bill would grant limited duty-free entry into the US for the next 7 years to apparel articles assembled in Haiti without regard to the country of origin of the components.

Assuming an elasticity between poverty decrease and income per capita increase of about 2. Box 3.1. Human Development Report, 2003.

-306.7

As for the transition strategy itself, the main risks to the medium term economic and social prospects relate to the potential for political instability, if the elections are delayed, impeding national reconciliation and undermining economic recovery.

B.

Risks (i)

Risks associated with political transition and insecurity

6.8

While significant progress has been made within the ICF framework, the most critical risks remain those related to a possible disruption of the transition process whether due to internal instability or catalyzed by external events. These risks include the Government’s ability to achieve political inclusion conducive to democratic and timely elections; electoral delays may prolong current legislative vacuum and delay ratification of IFI loans, and political paralysis in the pre-election period.

6.9

To manage these risks, the evolution of the security situation will be closely monitored in coordination with key partners, so as to react early. It is worth noting, however, that these risks are associated with significant opportunities to date, the Government has reacted to such problems by improving security and trying to accelerate ICF implementation, so as to demonstrate its capacity to get results on the ground.

6.10

The Bank will continue to focus on high impact activities while also working with the Government to help strengthen its ability to manage the country’s reconstruction efforts.

Public works employment programs and community driven development under the reconstruction program are two notable examples of Bank-supported activities that, if successful, will strengthen the outreach of the State and mitigate risks to political normalization and stability. (ii)

Compromised administrative capacity for implementation and aid coordination

6.11

Low administrative capacity can limit the effectiveness of the activities and programs supported by the Transition Strategy. Weak accountability and transparency in the public sector represents an additional concern.

6.12

The Bank’s Transition Strategy aims to address this issue by working towards strengthened public financial management, anti-corruption initiatives and capacity building. Bank’s actions complement other international partners involved in these fields, mainly the IMF, EU, the US and the World Bank. As part of its planned re-engagement once arrears are cleared, the World Bank is preparing an Economic Governance Reform Credit to support economic governance reforms in audit and restructuring of key public enterprises to ensure accountability in public resource use in critical infrastructure areas, public sector procurement, public expenditure management and public sector financial control.

6.13

Although the ICF emphasizes human resource management and capacity building in the public sector, and takes into account existing absorption capacities, the interim period may not be sufficient for sustained public sector reforms.

-31(iii)

Erosion of fiscal discipline may threaten macroeconomic stability

6.14

The Government has maintained fiscal and monetary discipline during the past year, including a no overdraft policy for government expenditure and avoidance of inflationary money creation. However, as larger amounts of external assistance flow and demands on the Government grow, there is a risk that fiscal discipline will erode, possibly leading to macroeconomic problems as well as ineffective use of scarce public resources. To manage this risk, the Bank will work in close coordination with IMF, World Bank and key bilaterals to closely monitor implementation of economic reforms, so as to rapidly identify and respond to slippages in implementation. Practical steps will include revisions of specific activities’ implementation schedules and planned Bank interventions.

6.15

Haiti’s performance on debt service and arrear accumulation has been weak (arrears accumulated during the 1991-1994 international embargo period and again since 2000).

Although the Transition Government intends to pursue sound macroeconomic and public finance management, accumulation of arrears could resume in the future, especially after the transition period (2004-2006), if political instability were to continue. Haiti’s ability to remain current in its debt service obligations will depend on overall macroeconomic performance and sustained economic recovery as well as continued and timely donor disbursements. (iv)

6.16

A reduction of donor interest in continuing supporting Haiti’s longer term development efforts

The successful implementation of the ICF calls for a sustained pace of disbursements and a rapid startup of critical activities to reach the identified objectives in a timely manner.

During the ICF process, donors have provided assurances of their commitment to stay “for the long haul”, but concerns remain that this may eventually waiver in the context of growing instability. Without continuing external support, the country runs the risk of having inadequate resources to sustain the reconstruction efforts underway to further consolidate state capacities and improve governance together with funding urgent social and infrastructure needs, and the even greater risk of a major humanitarian crisis.

Annex I Page 1 of 4

LENDING PROGRAM 2005-2006 LOANS ( IN US$

MILLIONS)

Lending Pipeline 2005-2006 and ICF Pillars Project

Amount US$ Million

Project Approval Year

Division

Pillar 2: Strengthen Economic Governance and Contribute to Institutional Development PBL (Fiscal Reform) 25 2005 SC2 Institutional Facility - Support to Executive Branch 5 2005 SC2 PBL (Financial Sector Reform) 25 2006 FI2 55 Sub-total Pillar 2 Pillar 3: Promote Economic Recovery Rural Economy Development Program (HA-L1003) 40 Reducing the Impact of Natural Disasters (Sector 5 Facility for Disaster Prevention) Environmental Institutional Strengthening (Institutional 5 Development Facility) Transport Infrastructure Rehabilitation Program 50 100 Sub-total Pillar 3 Pillar 4: Improve Access to Basic Services Watershed Management (HA -0033 and HA-0013) 28.5 Rural Water Project 15.0 Vocational Education 22.0 Urban Rehabilitation Program 50.0 115.5 Sub-total Pillar 4 Total 270.5

2005

EN2

2005

EN2

2005

EN2

2005

FI2

2006 2006 2005 2005

EN2 EN2 SO2 SO2

Annex I Page 2 of 4

PRIVATE SECTOR LOANS 2005-2006 (US$ THOUSANDS) Project

Monto

PRI

Haiti Telecommunications Project Total PRI

48,00048,000-

Microfinance Strengthening to the Caisses Populaires Deepening of Financial Services to Microenterprises in Haiti Supporting the Competitive Position of Haitian Coffees Program to Develop alternative dispute resolution mechanisms Total FOMIN

400.0 220.0 700.0 600.0 1,920.0

MIF/FOMIN

SMP Integration of Small Producers to the Tomato Productive chain Total PES

500.0 500.0

TOTAL 50,420.0

Annex I Page 3 of 4

TECHNICAL COOPERATIONâ&#x20AC;&#x2122;S PROGRAM 2005-2006 (US$ THOUSANDS) Number

Program Name

Amount

2005-2006 Pillar 1. Strengthen Political Governance and Promote National Dialogue S/N

Response to Gender-Based Violence*

130.0

Pillar 2. Strengthen Economic Governance and Contribute to Institutional Development HA-T1018 S/N

Institutional Strengthening of the Ministry of Womenâ&#x20AC;&#x2122;s Affairs and Rights* (FTA)

100.0

Support to Executing Agencies

600.0

Pillar 3. Promote Economic Recovery HA-T1006

Updating Road Inventory Classification

HA-T1019

Support for the Execution of the Roads Program in Haiti* (FCB)

HA-T1017

Support for the Execution of IDB Transport Programs in Haiti* (FCB)

145.0

Support for the Transport Infrastructure Rehabilitation Program

130.0

Agriculture Sector and the Rural Economy in Haiti* (FTC)

140.0

S/N

Support for preparation and implementation of Rural Development projects

100.0

S/N

Technology Innovation in Rural Economy*

140.0

S/N

Preparation for MIF Haitian Coffees

100.0

S/N

Local Capacity in Watershed Management* (GEF)

S/N HA-T1008

150.0 75.0

4,000.0

Pillar 4. Improve Access to Basic Services HA-T1014

Quality Control Mechanisms in Vocational Training

250.0

S/N

Support for a Feasibility Assessment of Social Investment

140.0

S/N

Support for Urban Rehabilitation II

130.0

S/N

Intersectoral Water Policy

140.0

S/N

Drivers of Change Analysis for the Health and Local Development Sectors

150.0

TOTAL * Non FSO

6,620.0

Annex I Page 4 of 4

NON-FINANCIAL PRODUCTS

Studies and Documents

Year

Responsible Unit

New Sources of Economic Growth: Private Sector Participation

2005

OD3

Sector Note: Agricultural Sector and Rural Economy

2005

EN2

Sector Note: Integrated Water Resources Management

2006

EN2

2005

SO2

Pillar 3. Promote Economic Recovery

Pillar 4. Improve Access to Basic Services Seminar on Community Participation Experiences in Urban Rehabilitation Projects