Analysis of Haiti’s Macroeconomic Dynamics: A Guide for Foreign Investor.
Introduction
Haiti is home to breathtaking beaches and crystal blue water, one of the most popular tourist spots in the Caribbean Sea. Currently, tourism is the main income that helps Haiti to stabilize its country’s economy after several natural disasters that happen over the years. Haiti is a country located on the island of Hispaniola where Christopher Columbus found on 5th December 1492, was colonialized by Spain then ruled by France. Furthermore, they reached their independence in 1804 and became a unified republic in 1859. Haiti became the world’s first black-led republic and the first independent Caribbean state, adopting an open economy system. On the other hand, there are still several environmental issues that Haiti face such as, natural disasters, political instability, human rights problem, etc.
In this essay, I will conduct several studies and discussions regarding Haiti’s economic condition, from their currency historical development, Trend of the Balance of Payments, current and financial account which will include graphics to compare to its partners, followed by their currency movements and foreign reserves that’ll portray their competitive advantage, their risk on a financial crisis which will affect Haiti and its trading partner. Then, there will be some advice for investors on whether or not should they invest in Haiti.
A brief historical development of the selected currency
The national currency for the Republic of Haiti is the Haitian gourde (HTG). It is based on an old Spanish currency called gordos. Before the Haitian gourde was first introduced in 1813, the country used livre which was pegged to the French Livre at the same value. The gourde replaced the livre at a rate of eight livres and five sous for every one gourde. In 1870, there was a second issue where the Haitian gourde was revalued, and the government introduced banknotes with denominations of 10 and 25. The third issue happened in 1872 which is used until now. Then, in 1881 it pegged with French Franc that last until the year 1912. In 1912, the gourde was pegged to the USD at a rate of five gourdes to one dollar. Then in 1989, it unpegged from the USD and floats until now (Mitchell, 2019). Since it was pegged to USD, it has brought unquestionable economic benefits (1915–34). United States administrators controlled Haiti’s fiscal and monetary policy. In 1940–1950, Haiti’s export rises which make its economic growth constantly. But after Francois Duvalier elected as president in 1957, there was no positive impact to its economy because there were corruption and high tax. Luckily under the presidentship of Jean-Claude Duvalier, Haiti’s economic growth increase due to numerous foreign investors. (Anon., n.d.)
Trend of the balance of payments (current and financial accounts)
Haiti Current Account:
The graph (Figure 2.0) illustrates Haiti’s current account in the last 5 years. By this, it can be seen that Haiti’s current account shows a great trend during the first year. It can be seen that Haiti reached a trade surplus of 41.61 USD million in the last quarter of 2015. Nonetheless, in the last quarter of 2015 the exchange rates of Haiti Gourde have depreciated towards USD (Figure 2.1). In 2016, Haiti recorded another trade surplus of 87.38 USD million in the first quarter. But in the third quarter of 2016, Haiti recorded a deficit of -103.15 due to a Hurricane storm disaster (Hurricane Matthew) that destroyed 90% of south Haiti. However, Haiti was able to recover and reach a surplus in the last quarter of 2016 with 86.15 USD million. On the other hand, the Haiti Gourde exchange rates towards the USD stay constant until November 2016 when it depreciates adequately. In 2017 and 2018, Haiti’s current account shows a poor trend and the exchange rates to USD remains weak due to numerous natural disasters, political instability, mismanagement of humanitarian relief, an imbalance of their export and import, and their dependency on USA goods. (Economics, n.d.)
Haiti’s Financial Account:
After receiving a huge number of investors that reached 374,86 USD million in 2017, Haiti’s FDI inflow decreased significantly to 105 USD million in 2018 (Figure 2.2). Then in 2019, Haiti’s FDI inflow reached 75 USD million. By this, it can be concluded that the decreased inflow in FDI are caused by high political risk, numbers of corruption, and high risk of natural disasters. (Santanertrade, 2020)
Currency movements on the country’s competitive advantage and foreign currency reserves
Haiti is a free market economy and has a relatively weak exchange rate. By this, the foreign investors will be much likely to invest because there is a low labor cost and making it affordable to produce goods. For instance, the exchange rate towards the USD may seem to depreciate but it is a competitive advantage for Haiti because it exports numerous apparel and textiles to the United States. The exporters will gain advantages because they will get more Haitian Gourde in exchange for USD. On the other hand, importers will need to buy more Haitian Gourde to buy USD. If exporters sell their foreign currency to the bank, the bank collects USD from the exporters and it can add the foreign currency reserves. If the Haitian Gourde spread is too much it can cause inflation and makes Haitian Gourde weak towards USD.
The average value for Haiti is 0.42 billion USD with a minimum of 0 billion USD in 1960 and a maximum of 2.52 billion USD in 2013. The latest foreign exchange reserves including gold reserves value were in 2018 where it reached 2.37 USD billion. It can be seen that Haiti attracted more investors due to an increase in foreign exchange reserves since 2004 (Figure 3.0).
The impact of the following factors on the currency movements: Factors: Inflation, interest rates, growth rates
Haiti’s Inflation Rates:
The inflation rate in Haiti is relatively high, the average of Haiti from 2003 until 2019 is 12.19%. The highest record was in the year 2003 which reached 38.40% and the lowest record was in 2009 with -4.70% (Figure 4.0). By a relatively high inflation rate, it led to an increase in price for domestic goods which decreases the demand for export and increases the demand for import goods. If Haiti increases its imports, it will affect their currency which will lead to depreciation. (Economics, Haiti Inflation Rate, n.d.)
Haiti’s Growth Rate:
Haiti’s average growth rate from 1997 until 2018 is 1.40%. The highest record was in 2011 which reached 5.50% and the lowest record was -5.50% in 2010 (Figure 4.2). When the domestic growth rate is higher than the foreign growth rates. It will be more attractive to foreign investors. Thus, they will be much likely to invest in domestic assets. The supply of the foreign exchange will increase at a larger rate than the demand. The graph illustrates that the USA as Haiti’s trading partner has a better growth rate (Figure 4.3). When the domestic growth rate is lower than the foreign growth rate, foreign investors (in this case of the USA) may be less attracted to invest in domestic assets. (Economics, n.d.)
Advice for foreign trading partners and investors
Before investing in Haiti, an investor should do more research. They should calculate the advantages that they will get or the disadvantages that they will face. Even though Haiti’s high interest rates and a weak currency are attractive to investors, creating a business in Haiti is complicated. Investors need to reconsider these factors, for instance, Haiti’s political instability, natural disasters that occur often, government corruption, and the increase in fuel costs that are recently happening there which will lead to a higher production cost. Moreover, Haiti faced a political crisis that declines its economic growth. It will be great if foreign trading partners and investors to have another choice of country to invest in and prevent any loss in the future.
Conclusion and Recommendations
In conclusion, Haiti’s low economy is mainly because of its political instability and corruption that brings ambiguity to its investors and their high volume of imports. Even though there are several factors that are attractive to investors, for instance, their weak currency and low labor costs lead to a low production cost. Investors must rethink their plans on investing in Haiti to prevent any of the disadvantages that may occur. Seeing the current account and financial account’s graph, it shows a poor trend which causes by their dependency on import goods and a low percentage of export goods. Thus, their Balance of Payment (BoP) remains a deficit. Moreover, Haiti’s low GDP growth rate and interest rate affect the Haitian Gourde which leads to low demand for domestic investment and depreciation of its currency. Meanwhile, if the demand for domestic investment is high it will help Haiti to lower its financial account. Additionally, Haiti’s foreign direct investment shows a decrease due to its natural disasters and political instability. Thus, investing in Haiti is high.
As a developing country, Haiti needs to fix its economic issues. Haiti should lower its dependency on import goods and develop its domestic production. This can be done by developing their infrastructure and giving incentives to the local industry. Finally, to stabilize and reduce its issues Haiti needs to change its government policy and reduce its corruption. Thus, it will make Haiti’s economy improve again.
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