VZCZCXRO8231
PP RUEHQU
DE RUEHPU #1267/01 1941736
ZNR UUUUU ZZH
P 131736Z JUL 06
FM AMEMBASSY PORT AU PRINCE
TO RUEHC/SECSTATE WASHDC PRIORITY 3497
INFO RUEHZH/HAITI COLLECTIVE PRIORITY
RUEHBR/AMEMBASSY BRASILIA PRIORITY 1113
RUEHSA/AMEMBASSY PRETORIA PRIORITY 0958
RUEHQU/AMCONSUL QUEBEC PRIORITY 0510
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 PORT AU PRINCE 001267 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR WHA/CAR 
EB/IFD 
STATE PASS TO USAID FOR LAC/CAR 
TREASURY FOR JEFFERY LEVINE 
COMMERCE FOR SCOTT SMITH 
 
E.O. 12958: N/A 
TAGS: EAID ECON PREL HA
SUBJECT: IMF: HAITI URGENTLY NEEDS 06-07 BUDGET SUPPORT 
 
 
¶1.  Summary: Resident Representative of the International 
Monetary Fund (IMF) Ugo Fasano raised a red flag concerning 
Haiti's fiscal year 2006-2007 financing gap.  If the GOH 
cannot find budget support for the estimated USD 45 to 60 
million deficit that will not be covered by multilateral 
pledges, Haiti's Poverty Reduction and Growth Facility (PRGF) 
cannot go forward to the IMF Board in October.  If the PRGF 
is not approved, Haiti will not qualify for the Heavily 
Indebted Poor Countries (HIPC) initiative which would 
immediately cut debt service payments by some USD 15 million, 
nor would Haiti qualify for potential debt stock cancellation 
of over USD one billion from the Inter-American Development 
Bank (IDB) and World Bank (WB).  Fasano also noted that HIPC 
debt relief is contingent on a debt-to-export ratio of over 
150 percent and Haiti's is currently 165 percent, dangerously 
close to the cut-off in view of Haiti's increasing exports. 
Fasano expects the 2005-2006 budget gap will be much lower 
than GOH estimates of USD 18.5 million.  He emphasized the 
importance of reducing annual inflation rates to single 
digits and warned of the dangers of Central Bank financing 
schemes.  Post urges the Department to work with other USG 
agencies and donor partners to address the critical financing 
gap issues raised by the IMF rep.  End summary. 
 
Grim Prospects for the 2006-2007 Financing Gap 
- - - - - - - - - - 
 
¶2.  In a meeting with A/DCM and Econoff July 12, Resident 
Representative of the International Monetary Fund (IMF) Ugo 
Fasano raised a red flag concerning Haiti's fiscal year 
2006-2007 financing gap.  The IMF mission which was in Haiti 
at the end of June estimates the financing gap to be USD 
111.5 million.  So far, only international financial 
institutions have made firm commitments to close next year's 
gap -- USD 25 million from the Inter-American Development 
Bank (IDB) and USD 10 million from the World Bank (WB). 
Fasano said that the EU would possibly commit 10 to 12 
million Euros (about USD 15 million) to close the gap, but 
given past experience with EU commitments, he did not count 
on it.  Without the EU pledge, but including possible Heavily 
Indebted Poor Countries (HIPC) debt service payment 
reductions of USD 15 million, the Government of Haiti (GOH) 
would still face approximately USD 60 million financing gap 
for fiscal year 2006-2007.  Even including the possible EU 
contribution, the financing gap would rest at around USD 45 
million. 
 
If the Financing Gap is not Closed, PRGF is Dead 
- - - - - - - - - - 
 
¶3.  If the GOH cannot find budget support to close next 
year's financing gap by the time the Poverty Reduction and 
Growth Facility (PRGF) is scheduled to go to the IMF Board in 
October, the PRGF cannot move forward, according to Fasano. 
Without the PRGF, the GOH will not qualify for the HIPC 
initiative, which would reduce debt service payments by 
approximately USD 15 million per year.  Moving forward to 
fiscal year 2007-2008, Haiti would lose an expected USD 500 
million in debt relief from the World Bank, which would be 
granted only if they have a good track record with the PRGF. 
The GOH could also miss out on potential debt relief of USD 
500 million from a similar IDB program which Fasano expected 
to be implemented in parallel to the World Bank debt 
cancellation. 
 
The Time for HIPC Debt Relief is Now 
- - - - - - - - - 
 
¶4.  Fasano also warned that Haiti could not afford to delay 
HIPC debt relief.  The HIPC initiative is contingent on a 
debt-to-export ratio of 150 percent, and Haiti's current 
ratio is 165 percent.  As the political and economic 
situation stabilizes, growth is increasing and so are 
exports, which have increased throughout 2005 and 2006.  If 
this trend continues and the debt-to-export ratio falls below 
150 percent, Haiti would no longer qualify for HIPC, or for 
debt relief from the IDB and WB.  In one sense, this is 
positive: Haiti's debt burden is much lower than that of 
other poor countries.  However, Haiti's government revenue is 
so small -- their tax collection is estimated at seven to 
nine percent of GDP and their exports are relatively low -- 
 
PORT AU PR 00001267  002 OF 002 
 
 
that they have no hope of servicing the debt without 
assistance. 
 
Better News for This Year's Deficit 
- - - - - - - - - 
 
¶5.  Fasano expects the 2005-2006 financing gap to be much 
lower than GOH estimates of USD 18.5 million.  He 
complimented the fiscal policies of President Rene Preval's 
government.  He said they had done a good job of controlling 
revenue so far, and did not see how government expenditures 
could rise drastically enough to reach a deficit of USD 18.5 
million before the end of the current fiscal year, despite 
GOH predictions of such a gap. 
 
¶6.  Fasano urged the Embassy to remind the government of the 
dangers of Central Bank financing to cover the gaps, which 
would lead to an increase in inflation.  Inflation is 
currently at about one percent a month, which is higher than 
the yearly single digit inflation rate the IMF would like to 
see.  He also said that in Haiti a low inflation rate does 
not negatively affect the growth rate, because the growth 
potential increases greatly with a sense of security and 
stability in the country, and with a sound macro-economic 
framework. 
 
¶7.  Comment:  We believe Fasano's plea for urgent donor 
assistance to cover the 2006-2007 financing gap is on target 
and we will be making the point with other donors as well. 
If the GOH cannot close next year's financing gap, estimated 
at USD 45 to 60 million, they will lose leverage for over USD 
one billion in potential debt relief in the near future. 
SANDERSON