Inflation in Haiti: A Second Look

#87, January 2025

This is by far the longest post I have written for Dominicanomics. It goes into a lot of detail on the data, including both conventional economic data and the available data on the security and humanitarian crisis. My aim is to bring greater clarity to a very murky situation. Although it has been eight years since I left Haiti, I like to think I can still make a contribution. I would be especially grateful for comments or corrections from readers on what I have prepared.

Inflation in Haiti: A Second Look ^[1]

The continuing inflation in Haiti, running over 30% annually^[2] despite a stable exchange rate, is commonly attributed to "supply shocks", reflecting the disruptions to supply chains caused by the gang takeover of most of Port-au-Prince and other (mainly urban) areas. I have challenged this view, as it didn't seem to fit the available evidence.

Continuing to analyze the situation, I have come to see that the "supply shock" explanation is not wrong; however, it covers several different phenomena that are occurring in parallel. In this note, I want to unpack the different processes now underway.

The exchange rate

The first, and the most visible phenomenon is the exchange rate. Haiti's Central Bank, the BRH, has overseen an exchange rate that, over the past two years, has strengthened significantly, appreciating from 154 gourdes per dollar in April 2023 to around 131 gourdes per dollar in late 2023 and remaining at that level until now.

The likely cause of the strong exchange rate is a relative surplus of foreign currency flowing into the country. Haiti has very little in the way of exports: most are garments, with a high import component (notably cloth). Disruptions to international trade, particularly the gang-led blockade of March-May 2024, forcibly reduce imports, and so also reduced the demand for dollars to pay for them. With transfers from the diaspora continuing to rise, and no way to spend the extra, foreign currency has built up in the system. The central bank has purchased some of this, strengthening--and then maintaining--the exchange rate.

This strong exchange rate, and the dollars that support it, are effecting a major shift in the distribution of income within the country.

· First, away from productive sectors. Haiti's GDP fell for the sixth year in a row last year, by about 4%. All sectors saw a decline. I mentioned the garment sector, responsible for most of Haiti's manufactured exports: it is down by half since 2019. Manufacturing for the local market gets less attention, but it also suffering from increasingly cheap Dominican imports: recorded exports from the Dominican Republic topped $550 million in 2024, the second-highest level in the last 6 years, unaffected by the "shock" of March-May.

· Second, away from those who rely on small monthly remittances from relatives abroad to survive: the same dollar transfer buys fewer and fewer goods in the local marketplace. And it is estimated that 72% of households receive transfers from the Haitian diaspora that totaled as much as $4 billion in the year ending in September. I will discuss this further below.

· Third, towards the government. While Customs revenue has suffered, the lower cost of imported fuel, measured in gourdes, has allowed the government to end fuel subsidies, in turn allowing the BRH to stop extending new credit to the government.

This much is clear. This policy of maintaining a strong exchange rate, attractive though it may be in a country where few things are stable, makes imports cheaper if you can get them, but local production of everything less competitive in the face of inflation.

Inflation

While the exchange rate--often cited as a major cause of inflation in Haiti--has remained steady, prices have continued to rise. Between March 2023, when the exchange rate began to appreciate, and November 2024, prices have risen by 44%.

Not only has the exchange rate been stable, but the other usual driver inflation, money creation to fund the government, appears to have not been employed either.^[3]

What else can we say about this inflation? Three things. First, that it appears to be fairly uniform across the country. For the 12 months to November, we see the following inflation rates reported by region:

· Port-au-Prince 26.9%

· West 30.1%

· South 27.4%

· Center 25.0%

· North 23.2%

If we take the longer view, we also do not see much dispersion in inflation: between 2017-18 and November 2024, no region has seen prices rise by more than 10% relative to the prices of any other region, including Greater Port-au-Prince ("Aire Metropolitaine", in blue below):

It is still worth noting, however, that prices are somewhat higher, both over the year and over the medium term in the South ("Sud") and West ("Ouest") areas. The South has disproportionately been the receiving region for what are now 1 million internally-displaced persons, with 40% of them as of December 2024, which has no doubt put upward pressure on market prices.^[4] And the West has been a major locus of disruptive gang violence in the second half of 220224.

Second, inflation is also reported to be fairly similar between imported ("produits importés") and domestically-produced goods ("produits locaux")--surprising, given that the exchange rate has remained steady:

Haiti: Inflation (12-month change)

Third, that food prices have been outstripping other prices by significant margins over the past few years, especially 2022-24:

The Supply Shock Explanation Unpacked

The conventional explanation is that all prices have gone up because of the "supply shock" caused by the activities of the gangs. But the role of the gangs is not specified in these explanations. Gang activity is not uniformly distributed across the country, so we should expect to see disruptions to supply chains caused by them to vary across regions, as well as between domestic and imported goods (independent of the exchange rate effects). But we don't.

There are obviously substantial costs being imposed by gang activity.^[5] Not only direct costs from disruptions, but also the cost of paying for "protection", especially from the G9 gangs controlling the ports and the commercial area of Delmas: there are reports of individual checkpoints collecting between $6,000 and $8,000 per day for allowing passage. Yet, even in March-April-May, when there was very little being imported by sea, import prices didn't rise faster than domestic goods prices (though there is no breakdown between Dominican and sea-borne imports). So there is certainly an element of cost-push inflation.

But this cost-push should vary by location. We have seen that whatever is causing prices to rise is doing so in a fairly uniform way, and a way that is not a one-time effect, but ongoing. A common explanation would be monetary, that the demand for money (gourdes) is collapsing, and that people are getting rid of gourdes by buying goods. We know this explanation doesn't work here, because if it did, we would see people exchanging gourdes for dollars as well, which is very much not the case.

So we are left with the common explanation, supply shocks. But how could that work?

Through the curtailment of supply, especially of imports. What we have seen is that there is more money coming in through remittances, and not as many goods to buy. So in addition to the cost-push elements, there may be a classic situation of inflation caused by too much money chasing too few goods, as in a closed economy. This will have resulted in demand-side price pressures which could be affecting different parts of the country in similar ways. We also see declines in agricultural production, with violence especially high in the provinces of Artibonite and Ouest, usually the most productive agricultural areas. In addition to the output declines, the distribution system has been disrupted in ways that reduce food movements to urban areas. So the inelasticity of demand for food, plus the disruption not only to imports but also to local production, have led to food prices rising more quickly that prices of other goods across the country.^[6]

This demand pressure can explain why market prices for food equalize between imported and domestic food, despite key food items being largely imported: cooking oil 100%, rice 80%, corn 50%, and beans). There is not cost-plus markup pricing, but pricing according to whatever the market will bear. And this demand for food has likely contributed to the higher inflation in the South, with its 400,000 displaced persons.

In short, I see two drivers behand the current inflation: excess demand, and cost-push. Both have supply disruption at their base, but have different policy implications.

Policy Implications

Economic policy in developing countries is generally more about the ability to carry out measures given the environment than it is about figuring out what to do. Nevertheless, it may be useful to distinguish different options. Here are two scenarios that policymakers could be planning for: better, or not better (the status quo is a scenario of continued deterioration, even without new elements to make it even worse.

NOT BETTER. In circumstances of continued gang disruption, the key policy action is to facilitate the importation of food. This mainly means using the MSS to secure the ports and facilitating the work of Customs. The central bank should continue amassing foreign exchange reserves, preventing further appreciation if not stimulating a modest depreciation of the gourde.

BETTER. Should the national security situation improve, it is likely that a renewed demand for imports would appear. The BRH should be ready to see the reserves it has accumulated as it allows a gradual slide in the exchange rate. With the dismantling of protection rackets under this scenario, supply costs should decline, allowing prices to decline. Should this occur, it would help the real exchange rate to converge to a more appropriate level with less depreciation than would otherwise be the case.

In either case, the priority for renewed macroeconomic stability--the humanitarian case need not be made, I think--is to prioritize food supply. "Eliminating excess demand" will, in this context, equal putting food into people's bowls. Success should be visible not only through declines in the World Food Program's estimates of hunger, but also in the slowing of inflation.

---

^[1] This note solely reflects the author's personal opinions. In preparing it, I have drawn on the collective wisdom of analysis in the public domain, and a few private comments from others who are familiar with the situation, but any remaining errors are mine. I have received no compensation from any source for this work.

^[2] The average over the past 3 years; The most recent data is from November, when the 1-month change came to 26.6%.

^[3] The BRH has published very little data since it suffered a computer breach in 2023. In the past two months, the IMF has published two different versions of the BRH summary balance sheet at end-September, but neither one adds up correctly, making them difficult to rely on to evaluate monetary policy.

^[4] See the most recent IOM report: https://dtm.iom.int/fr/reports/haiti-rapport-sur-la-situation-de-deplacement-interne-en-haiti-round-9-decembre-2024. This is in French, but the English report on survey round 9 should become available shortly.

^[5] Principal sources for this discussion are ACLED, Armed Conflict Location and Event Data (for example, https://acleddata.com/2024/10/16/viv-ansanm-living-together-fighting-united-the-alliance-reshaping-haitis-gangland); and GI-TOC, the Global Initiative against Transnational Organized Crime (for example, https://globalinitiative.net/analysis/haiti-political-and-criminal-impasse/).

^[6] Food already makes up almost half of the official CPI basket, but that is probably an underestimate now. With people increasingly shifting their expenditures to food, the CPI probably is underestimating the true rate of inflation.