Against the backdrop of a stable political environment and the strengthening of the country’s institutions, my Comorian authorities have embarked on an ambitious economic reform agenda underpinned by the 2009 Poverty Reduction and Growth Strategy Paper (PRGSP). This paper also serves as the foundation for the three-year reform program supported by the IMF under the Extended Credit Facility (ECF). Under this program, my authorities are implementing sound policies aimed at achieving macroeconomic stability, raising the level of economic growth while tackling poverty more effectively. These efforts are also receiving the support of the international community through a substantial increase in external assistance.
As confirmed by staff in the report, my authorities have continued to make progress under the Fund-supported program. In particular, all June 2010 performance criteria and quantitative and structural benchmarks were met. Macroeconomic performance has also been broadly satisfactory, thanks in part to an increase in FDI and the authorities’ sound policies under the ECF which have contributed to a strengthening of domestic demand.
During the second half of 2010, the fiscal position weakened in the third quarter due, among others, to a shortfall in revenues reflecting delays in the payment of taxes owed to the Treasury by Comores Télécom. As a result, the fiscal objectives as of end-September 2010 were not met. In addition, the delayed disbursement of financial support from some development partners adversely affected government deposits at the central bank and therefore led to a breaching of the ceiling on net credit to the government. The authorities took corrective measures, and in November they obtained the settlement of the profit taxes owed by Comores Télécom, along with other revenues. Nevertheless, there was still an overrun in spending associated with the elections equivalent to 0.1 percent of GDP.
My authorities would like to reassure Directors that they remain fully committed to the objectives of the program. They have completed all prior actions, and going forward, the program will continue to focus on the implementation of a prudent fiscal policy and on the adoption of structural policies that will enhance the economy’s competitiveness. In this regard, my authorities would like to point out that many of the taxes enacted in 2010 started to generate revenue only in late 2010 but will be fully effective in 2011. Moreover, the government has recruited external consultants who have begun work on auditing the 2009 accounts of Comoros Telecom, which will be followed by an appraisal of the enterprise’s net worth, with a view to issuing calls for expressions of interest from potential partners. At the same time, a committee has been established to monitor the reform of the petroleum product-importing company in order to assist the government with finalizing the choice of an appropriate reform strategy. The government is also working with the African Development Bank to develop a plan to reform the electricity company.
The fight against poverty will remain at the core of my authorities’ development agenda as they strive to make their PRGSP more operational. In this regard, they are currently finalizing the preparation of an action plan with the assistance of development partners to better prioritize development projects and policies. They look forward to raising spending in priority sectors in the period ahead with the much-needed resources that will be freed upon reaching the HIPC completion point. In this vein, my authorities would like to reiterate their firm commitment to pursuing a timely implementation of all the triggers in order to reach the completion point in 2012 as expected.
II. Policies Under the Extended Credit Facility
In 2011, my authorities will pursue the implementation of prudent macroeconomic policies under the program. In particular, they are aware of the need to accelerate progress towards a more sustainable fiscal position. The strict implementation of these policies within a more stable political and social environment should help contribute to a strengthening of economic activity led by investment in infrastructure and private construction. Accordingly, real GDP is projected to reach 2.5 percent in 2011 (from 1.8 in 2010), increasing more rapidly than population growth, thereby raising the population’s living standards following many years of stagnation. Inflation will remain in the low single-digit, thanks to Comoros’ membership in the zone Franc’s monetary framework which continues to serve the economy well.
In the fiscal area, my authorities are determined to continue in 2011 their fiscal consolidation efforts, and reduce the fiscal deficit from 3 percent of GDP in 2010 to 2.2 percent in 2011. To this effect, they intend to strengthen government revenues while keeping a strict control over expenditures—particularly the wage bill—while improving the quality of spending, preserving pro-poor expenditures, and avoiding the accumulation of arrears. The projected increase in domestic revenues to 14.2 percent of GDP in 2011 from 13.1 in 2008 is expected to result from the improvement in the efficiency of the tax and customs administration currently being undertaken, based on the recommendations of a recent Fiscal Affairs Department T/A mission. New domestic tax measures will also contribute to raising domestic revenues.
Fiscal expenditures in 2011 will be capped at 23.2 percent of GDP, and a particular attention will be given to keeping the wage bill under strict control. In support of these efforts, Comoros’ National Assembly has adopted recently new personnel frameworks for the civil service that will help reduce civil service staffing starting in 2011, and lead to a decline in the wage bill.
In the context of increased financial intermediation resulting from the introduction of two new foreign banks in Comoros, the banking system’s financial position remains satisfactory. NPLs declined in 2010 and the overall profitability of banks stayed stable despite the relative impact of the global crisis. These developments will positively contribute to further entrench the economic recovery through increased credit to the private sector. Measures have also been taken to strengthen the national postal and financial services company (SNPSF)—which shows relatively weaker prudential ratios than other financial institutions—with a view to improving its financial standing and helping protect depositors’ savings.
The current account deficit is projected to widen to 13.6 percent of GDP in 2011 from 10.2 percent in 2010 driven by an increase in imports. My authorities are confident that the projected increase in FDIs in the coming years notably following the 2010 Qatar Conference will greatly contribute to an economic diversification towards key sectors identified in the PRSCP such as agriculture, fishing, and tourism. This will contribute to raising exports and curbing the current account deficit over time. Foreign exchange reserves, however, will remain comfortable at above 6 months of imports cover at end-2011.
On the structural front, my Comorian authorities intend to further accelerate the reform of public enterprises in 2011 with the assistance of development partners, notably the World Bank and the African Development Bank. Progress has already been achieved in identifying the appropriate reform strategy for the Société Comorienne des Hydrocarbures while the preparatory work for the reform strategy of the water and electricity company is ongoing and should be completed by end-March 2011. The authorities intend to issue calls for expressions of interest from potential strategic partners for Société Comorienne des Hydrocarbures and for Comores Télécom in the first quarter of 2011, as noted above. As for the electricity company, a call for expressions of interest should be issued before end-June 2011.
My authorities are thankful to the partners that are providing interim debt relief under the HIPC initiative and to those who have agreed to defer debt service payments pending debt relief under the initiative. Moving forward, they would like to reaffirm their commitment to a prudent debt strategy and, accordingly, will neither contract nor guarantee any short-term or nonconcessional borrowing. Furthermore, as regards concessional borrowing, they will consult with Fund staff before contracting or guaranteeing any such external debt in excess of USD$20 million.
My Comorian authorities would like to reiterate their deep commitment to the program of adjustment and to the achievement of its objectives. It is their intention to further strengthen their efforts to boost growth and reduce poverty more rapidly. In this spirit, they would like to express their deep gratitude to the Board for its support and guidance throughout the years. They request once again Executive Directors’ support for the completion of the second review under the ECF, and for the modification of a performance criterion for end-December 2010.