PORT AU PRINCE, SEPTEMBER 2, 2022 (MIC) -
The COVID-19 pandemic coincided with a series of natural, social and political shocks in Haiti. These include a protracted political crisis, political lockdowns (peyi lòk), the assassination of President Jovenel Moise, political transitions, and gang activities.
These were exacerbated by natural disasters such as recurring earthquakes and hurricanes, and then, the pandemic itself.
Gangs’ control of large swaths of the country has wreaked havoc, impeding local and regional economic activities, halting production, tourism and transportation, disrupting the supply chain, and thereby impeding economic growth, driving up inflationary pressures, stressing household budgets, pushing up poverty rates and worsening social and political challenges.
Background.
Low skills, illiteracy, poverty, corruption, weak governance and vulnerability to natural disasters have long stood in the way of Haiti's economic growth. The country’s economy has been contracting and facing significant challenges, including fiscal imbalances, high unemployment, low value-added activities, prolonged recessions and structural challenges – all of this prior to the COVID-19 pandemic.
Nevertheless, the pandemic led to a 3.3% and 1.8% contraction in GDP in 2020 and 2021, respectively.
Relative to other external shocks, the COVID-19 pandemic might have limited impacts on the economy, impacted by long-lasting and persistent, potentially irreversible effects of protracted political crises, maladministration, and violence, making it more challenging to rebound or overcome recurring natural disaster-induced shocks.
In 2015, Hurricane Mathew destroyed about 22% of Haiti's GDP, with about 50% of damage and losses to the productive sectors concentrated in the agriculture sector.
While Haiti's troubles have economic and natural ramifications, lack of entrepreneurship and productive investments, and the devastation caused by hurricanes and earthquakes, among other things, as well as social and political problems, rampant corruption, and weak governance affect Haiti's poor economic performance, which, in turn, worsens political and social challenges.
Poverty has in fact increased the volatility of Haitian politics - the root cause of Haiti's social and economic underdevelopment. The resulting fiscal effect ultimately weakens the institutional apparatus. Economic weakness also contributes to corruption, enlarges the pool of potential recruits for gang violence, and enhances the attractiveness of the drug trade.
The economy through the pandemic
Disentangling the effect of the pandemic from other shocks, including natural disasters and the protracted state of conflicts prevailing in Haiti, is not a straightforward issue.
Confirmed COVID-19 cases were relatively low, though this figure might be due to lack of testing, explained by fear or low capacity.
Disease outbreaks have historically affected the world, and many scholars predicted the current COVID-19 outbreak to have far more significant economic consequences, particularly in developing countries.
While the expected proximal effects include disruption of input supply, fall in tax receipts, increase in sovereign debts, shortage in the labour force, and productivity losses, the pandemic appears to have limited impacts on Haiti's economic activities relative to shocks imparted by climate-related events and political breakdowns.
At the height of the pandemic, for example - from 2019 to 2021 - the country's GDP decreased by 2.28% per annum, with a more significant decline in per capita GDP (3.47%), while inflation surged to 19.45% per annum over the same period. Inflation is projected to top 27.5% by the end of 2022.
In a recent episode of “Investir Profin” hosted by economist Kesner Farel, economist/political scientist Joseph Harold Pierre emphasised that imported inflation accounts for about 50% of the inflationary pressure observed in food products and commodities; while petroleum products account for 20%.
While subsidising petroleum affects the state budget negatively, food imports widen the trade deficit with a more significant impact on inflation.
Professor Isaac Marcelin, Associate Professor of Finance at the University of Maryland suggests that the pandemic has had limited impacts on economic activities considering the pre-pandemic state of economic lethargy that prevailed.
Photo: Prof. Isaac Marcelin
He points to the fact that during the pandemic there was the presidential assassination as well as an earthquake that ravaged the southern peninsula simultaneously with tropical storm Grace. Moreover, risks to the possibility of growth remain significant, owing to political uncertainty with looming elections and security challenges.
Growth
Prof. Marcelin also contends that, in 2021, Haiti had a GDP per capita of US$1,815, the lowest in the LAC region and less than a fifth of the LAC average of US$15,092.
On the UN’s Human Development Index, Haiti ranked 170 out of 189 countries in 2020. As the poorest country in the hemisphere and the only one that has experienced a decline in per capita gross domestic product (GDP) in recent decades, Haiti has been a concern for humanitarian and development assistance donors.
After each disaster, international partners, including multilateral agencies and NGOs, step in to help the recovery efforts. Donor-provided resources often remain inadequate and diluted by corruption. Thus, Haiti’s economic, social, and political situation has not improved.
The IMF provided financial assistance without ex-post conditionality to Haiti, equivalent to about US$360 million since 2020. Nevertheless, the increased participation of domestic and international NGOs seems to have crowded out the public sector making it more challenging to coordinate international support toward channels that alleviate poverty and diminish the effect of the other vulnerabilities, pushing the country into a vicious cycle.
Haiti faces acute, layered, and chronic challenges to economic growth. The need for the infusion of funding from external sources remains substantial. Without improvements in governance and better policies, Haiti cannot recover from the effects of the sustained shocks to achieve social well-being and economic growth.
The February 2020 Humanitarian Response Plan, revised in May 2020, is based on the additional humanitarian needs generated by COVID-19 and a budget that increased from about US$250 million to US$472 million (Diaz-Bonilla et al., 2021).
Public finances and economic policies
Haiti's primary economic challenge is generating economic growth in an environment hostile to domestic and foreign investments, private contracts, property rights, and the rule of law. When the pandemic struck, macroeconomic fundamentals were fragile. Per capita income is less than one-quarter of the Latin American and the Caribbean average.
Haitians face tremendous challenges in engaging in growth-generating activities. Fragile and lacking financial resources, the country faces urgent needs for shelter, sanitation, food, and medicine, among other things, after each disaster.
Following the emergency phase, the resource-constrained nation failed to provide necessary assistance to affected populations. Prevailing conditions suppress domestic and foreign investments, and financial resources to fund productive investments remain scarce, exacerbating the country's dependence on foreign aid and budget assistance to cope with external shocks. Meanwhile, official external financing remained low due to enduring political uncertainty, according to the IMF.
The institutional breakdown was acute. Over the last five years, the Haitian government failed to organise parliamentary elections leading the executive branch to govern by decree. Protests intensified against the government in early 2020, which coincided with the COVID-19 breakout, resulting in lockdown measures, crippling an already sluggish economy.
Over the past year, a caretaker government has not contained gang activities, but has established political stability through politicking and power sharing, which, some contend, could promote growth.
The pandemic however slowed the needed steps for the Haitian government to normalise political conditions and contain criminal activities by gangs. The slow pace of reforms, low supply of credit, and lack of improvement in the security situation have effectively shut down the road to recovery.
Currently, the government is considering the adoption of a tax code and a single window to enhance revenues. There is a view that government needs to implement steps and procedures to strengthen basic governance which will safeguard public procurement in order for these measures to be impactful.
To support the financial sector and reduce the effect of the pandemic, the Central Bank (BRH) intervened, at the beginning of the pandemic, by providing liquidity, allowing banks to tap into a critical funding source. It reduced the refinance and reference rates, lowered reserve requirements on domestic currency deposits, eased loan repayment obligations for three months, and suspended fees in the interbank payment system (IMF COVID-19 policy tracker, in Díaz-Bonilla, 2021) while increasing the fiscal deficit financing.
Despite steady inflows in remittances, imbalances in production, exports, and imports weigh heavily on the domestic currency. The IMF estimated that the pandemic caused a drop in remittances estimated at US$557 million in 2020; a decline in textile exports to the U.S. of about US$178 million, or 2% of GDP and 17% of total goods exports; and a drop in foreign direct investment (FDI) of about 0.4% of GDP.
Tourism had declined sharply by roughly 30% in 2020 from 2019 levels owing to the political instability, and social unrest was further affected by the pandemic.
International tourism, number of arrivals - Haiti.
The decline in tourism led to lower revenues in related industries, including hotels and restaurants. For instance, Electricity and Water by (-29.5%), Restaurants and Hotels (-15.9%), Manufacturing (-10.3%), and Commerce (-7.3%) (Diaz-Bonilla et al., 2021).
The exchange rate has worsened steadily, dependence on imports and demand for foreign currency has grown, and disruptions in fuel procurements and energy costs have driven up inflationary pressures. Containment measures due to the COVID-19 pandemic might have suppressed demand import compression that artificially strengthened the current account balance while fundamentals deteriorated.
Haiti has implemented several measures to support vulnerable populations and maintain employment during the pandemic, including increasing public expenditures by nearly 1.6% of GDP (see Díaz-Bonilla, 2021).
However, the resource-trapped country’s pandemic expenditures placed it below fiscal measures implemented in the Latin America and Caribbean (LAC) region. The Inter-American Development Bank (IDB) also approved a reprogramming of other operations from the banks and bilateral aid to focus resources on the pandemic.
This reassignment totalled US$27million from the non-disbursed balance of Haiti’s current investment portfolio and US$50 million in addition to US$112million from the IMF to address budget shortfalls. In 2020, the World Bank approved a US$20 million grant and US$35 million in 2022 for the Haiti COVID-19 response.
Governance and Public Administration
Haiti scores low on nearly all other fundamental development indicators. The state is the most significant political and economic industry, driving wealth accumulation. As a result, opposing groups always target the state seeking control to extract rents.
Together with limited financial resources, the lack of skilled, trained, and adequately organised government personnel and the lack of management systems within ministries and other government bodies are the principal constraints on the state's effectiveness.
The implications of the institutional deficiencies in planning, budgeting, executing policy decisions, and managing people and resources cut across all government activities, including the government's ability to interact with donors, set priorities, and craft and implement policies.
Conclusion
According to Prof. Marcellin, in order to assess COVID-19’s impact on Haiti's economy, one needs to consider the broader context of natural disasters, civil unrest, political violence, gang activities, weak governance and the government's inability to craft and implement public policies.
COVID-19 only exacerbates a state of perennial weaknesses, he says. Hope for a more prosperous and peaceful future for the Haitian people lies in building a more effective, resilient state through gains in the rule of law, property rights, and political and human rights conditions.
The experts agree that while many multilateral institutions provided support to recover from the pandemic, the country's inability to tap into international financial markets to finance its development priorities hamstrings its progress.
Donors’ plans and objectives may be incoherent with the government’s priorities. According to Prof. Marcellin, for the country to progress, the burden rests on the shoulders of Haiti’s political leaders, who will need to rise to the challenge of overcoming a history of fractiousness, patronage, and indecision.
Donors and international organisations can help ease that burden by providing financial resources, promoting political consensus, and encouraging adherence to strategic plans.
Haiti’s vulnerabilities through the pandemic period meanwhile remain significantly elevated. Although the direct effect of the pandemic may be limited relative to other exogenous factors, the effect of COVID19-related disruptions may potentially amplify those of other disturbances, including protracted gang violence, the spectre of natural disasters, corruption, weak governance, and ineffective public policy. Thus, the pandemic's total effect (direct and indirect) on the economy will linger. Therefore, the challenges to growth remain daunting.
It is noteworthy to highlight that the Governor of the Central Bank, Jean Baden Dubois raised the possibility that, by August 2023, Haiti may be cut off from the international system of payments owing to its poor performance in fighting corruption, money laundering, arms trafficking, and its inability to track terrorism financing.
Haiti receives a poor mark and figures on a grey list of the Caribbean Financial Action Task Force (CFATF). Ostracising Haiti from the international payment system will raise transaction costs and worsen the quality of life.
Even as this report is being published, deadly political demonstrations have resumed. There are growing calls for Haitian authorities to keep the situation at bay and organise fair and free elections so that productive investments can resume which will diminish poverty levels and, eventually, gang violence.
