Fiscal Policy

Despite irregularities in the allocation of funds under the François Duvalier regime, government revenues traditionally equaled, or surpassed, budget outlays, technically yielding balanced budgets. Jean-Claude Duvalier's unprecedented intervention in the economy in the 1980s, however, broke this tradition. The public sector under Duvalier established, or expanded, its ownership of an international fishing fleet, a flour mill, a cement company, a vegetable-oil processing plant, and two sugar factories. Duvalierist officials based these investment decisions primarily on the amount of personal profit that would accrue to themselves, to Duvalier, and to the rest of his coterie. They ignored the potential negative impact on the economy. Poorly managed, the state's newly acquired enterprises drained fiscal accounts, causing the overall public-sector deficit to reach 10.6 percent of GDP in fiscal year (FY) 1985, despite sharp reductions in spending on already meager social programs in accordance with an IMF stabilization program. In July 1986, the Ministry of Finance, under the CNG, revamped fiscal policies through tax reform, privatization, and revisions of the tariff code. Although the CNG greatly increased spending on health and education, the reform measures served to lower the government's deficit to 7 percent of GDP by FY 1987. General Avril's FY 1989 budget attempted further to curtail deficit spending, but that prospect remained unlikely without stable flows of economic assistance.

Expenditures

The misallocation of public revenues for private use and the low government allocations for economic and social development have contributed directly to Haiti's extreme poverty. After 1986, national budgets included a significantly larger portion for development efforts, but they continued to allocate the largest share--17 percent in FY 1987-88--to the armed forces and internal security forces. About 57 percent of FY 1988 expenditures were for wages and salaries; 26 percent, for goods and services; 10 percent, for interest payments; 4 percent, for extrabudgetary spending; and 3 percent, for transfers and subsidies. Compared with previous budgets in the 1980s, this budget included increased spending on wages and interest payments and decreased spending on goods and services, as well as an allocation for unspecified expenses. The FY 1989 budget continued these fiscal trends. The leading expenditure items in the FY 1989 budget were defense (16.4 percent), debt payments (15.8 percent), education (14.5 percent), health and social services (13.7 percent), and finance, public service, and commerce (12.4 percent). According to some reports, however, discrepancies existed between budget allocations and actual disbursements.

Revenues

The structure of government revenues changed distinctly as a consequence of the tax and tariff revisions of 1986. Haiti's taxes and tariffs historically exacted revenues from directly productive activities--mainly agriculture--and from international trade. This revenue structure eventually created disincentives for the production of cash crops and other export products, while it stimulated the development of uncompetitive industries. Over time, Haiti's authorities created a public-finance pattern that, when combined with a highly regressive income tax, raised approximately 85 percent of its revenue from the rural population, but spent only about 20 percent on those same taxpayers.

A 10 percent value-added tax was introduced in 1983, but it was not until 1986 that tax and tariff reforms began to shift the source of revenues. New tax laws simplified the income-tax process, altered tax brackets, and strengthened tax-collection efforts. In the area of trade regulations, the new government phased out export taxes and replaced quantitative restrictions on all but five goods with ad valorem tariffs of a maximum of 40 percent, thus essentially lowering import protection and liberalizing trade. As a result of these policies, revenues derived from international trade dropped from 35 percent in FY 1984 to an estimated 22 percent in FY 1989; the revenue balance in both years was derived from internal taxes.

Monetary and Exchange-Rate Policies

The Bank of the Republic of Haiti (Banque de la République d'Haiti--BRH) represented one of the few well-established, public-sector institutions dedicated to economic management. Founded in 1880 as the National Bank of Haiti, the BRH--a commercial bank--did not begin to act as a central bank until 1934, when it became known as the National Republic Bank of Haiti. Since the 1930s, the bank has performed the functions of a central bank, a commercial bank, and a development-finance institution; it also has been involved in other matters, such as the management of the Port-au-Prince wharf. As a central bank, the BRH also issued Haiti's national currency, the gourde.

On August 17, 1979, new banking laws gave the BRH its present name and empowered it with the monetary-management responsibilities associated with most central banks. The BRH subsequently became actively involved in controlling credit, setting interest rates, assessing reserve ratios, and restraining inflation. In the late 1980s, the BRH pursued generally conservative monetary policies, and it employed high cash-reserve ratios in commercial banks as the key policy tool to regulate the money supply. In an effort to increase the dynamism of the economy, the BRH sought to inject more credit into the private sector, particularly for long-term uses.

Since 1919 the Haitian currency has been pegged to the United States currency at the rate of five gourdes to the dollar. Since that same date, the United States dollar has served as legal tender on the island and has circulated freely. Remarkably, the value of Haiti's fixed exchange rate remained strong for decades; it fluctuated only with the movements of the currency of the United States, its main trading partner. Until the 1980s, no black market existed for gourdes, but unusually high inflation and large budget deficits eroded their value and brought premiums of up to 25 percent for black-market transactions in the early 1980s. The black market subsided considerably in the late 1980s, but the gourde's real rate of exchange remained above the 1980 level.

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Source: U.S. Library of Congress