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Union of the Comoros: Staff Report for the 2014 Article IV Consultation—Debt Sustainability Analysis

Author(s):
International Monetary Fund. African Dept.
Published Date:
February 2015
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Background

1. Comoros reached the completion point under the HIPC Initiative in December 2012. Following agreements with all, but one,1 bilateral creditors, Comoros received extensive irrevocable debt relief in 2013 which resulted in a decline in nominal external debt from 40.3 percent of GDP at end-2012 to 18.5 percent at end-2013 (Text Table 1, Table A1). In 2014, France unilaterally cancelled a debt of about $6.6 million Comoros owed to the French Post Office. All the debt and debt service indicators were brought to well below their respective thresholds of the debt sustainability framework. Since the completion point, Comoros has contracted only one external loan, with India of about $42 million for the construction of a heavy-fuel electricity generation plant that is projected to be disbursed over 2015–18. Comoros has incurred some arrears (about $1 million) on rescheduled payments under the bilateral agreements; these are expected to be paid before end-2014.

Text Table 1.Nominal Stock of External Debt, 20141(Millions of U.S. Dollars; end-of-period)
Total External Debt125.0
Multilateral Creditors80.8
IMF19.9
IDA14.2
BADEA28.3
Other multilateral creditors18.4
Official Bilaterals44.2
Paris Club Creditors6.9
Non-Paris Club Creditors37.3
Mauritius0.8
Kuwait27.3
India20.0

Following Paris Club cancellation of all its HIPC-eligible debt, rescheduling of short-term debt in arrears, and restructuring non-Paris club debt.

Disbursements of $41.6 million are expected over a 4-year period, starting in 2015

Source: Comorian authorities

Following Paris Club cancellation of all its HIPC-eligible debt, rescheduling of short-term debt in arrears, and restructuring non-Paris club debt.

Disbursements of $41.6 million are expected over a 4-year period, starting in 2015

Source: Comorian authorities

Underlying Assumptions

2. The medium-term macroeconomic framework has been updated for the 2014 Article IV consultation and the long-term assumptions revised since the last DSA update was prepared in December 2013.1 The long-term assumptions on growth and inflation have been retained broadly unchanged from the previous. However, the projected current account deficits have been revised upwards to reflect an upward revision in project grants and external financing.

  • Real GDP growth is assumed to be 3.3 percent and 3.5 percent in 2014 and 2015, respectively, and stabilize at 4 percent per year thereafter. This represents a growth acceleration relative to the historical record reflecting improved prospects for political stability and governance, as well as the planned reforms in the electricity and telecom sectors, the coming on stream of a large fishing project, and continues strong investment financed by donors in the construction of roads, schools, and hospitals. However, with population growth at about 3 percent per year, this growth assumption is modest in per capita terms.

  • Inflation is assumed to average around 3 percent per year, anchored by Comoros’ exchange rate peg under the monetary cooperation agreement with France.

  • The current account deficit is projected to average around 10.5 percent of GDP per year over the medium term and thereafter decline gradually to 6 percent of GDP by the end of the projection period, representing a continuation of net resource transfers to Comoros in support of growth and development, albeit at a slowly declining rate. The drop in international commodity prices will also help contain the imports bill. In addition to the full inclusion of remittances, this is the most significant difference with respect to the previous DSA which had the current account deficit narrowing more significantly over the long term. The projected current account deficit is also larger than before because of a technical upward revision of non-factor service imports.

  • Exports are assumed to grow somewhat faster than imports over the projection period but from a very low base.

  • Private remittances from the diaspora in France, which have been resilient in the face of the recession and slowdown in Europe, are projected to continue to growth in nominal terms but decline gradually relative to GDP, from 26.4 percent in 2014 to 24 percent by 2019 and 16 percent by 2034. These remittances are assumed to continue to finance a substantial part of imports to Comoros.

  • Gross investment in support of growth and development is assumed to stabilize at close to 24 percent of GDP. Reforms in key sectors such as energy and telecommunications are expected to lead to higher FDI inflows during the projection period.

  • Public investment is projected to account for more than half of investment, initially mainly financed by project grants. Over time, foreign borrowing (on somewhat concessional terms; a grant element of 32 percent, corresponding to non-Paris Club bilateral terms in the LIC DSA template) is assumed to gradually replace some of the grant financing so that by 2034 grants account for two-thirds of foreign-financed capital spending and semi-concessional loans for one-third. This assumed pattern of external financing would seem justified in view of the limited growth in per capita GDP that is projected over the next two decades. Domestically-financed capital spending is projected to rise modestly over the projection period. No domestic borrowing by the government is assumed.

  • The overall fiscal deficit is projected to average around 2-3 percent of GDP and be mainly financed through external loans for investment purposes.

External DSA

A. Remittances Scenario

3. Comoros qualifies for the inclusion of private remittances in the denominator of the debt and debt service indicators for the purposes of the baseline of the DSA. For Comoros, private remittances represent a large and reliable source of foreign exchange—currently well in excess of 25 percent of GDP—and sizable inflows are expected to continue over the medium and long term. That said, the debt sustainability outlook is sensitive to the level of remittance flows, which more than doubled relative to GDP between 2003 and 2013, and are potentially subject to downside risk.

4. The inclusion of remittances in the debt sustainability analysis leads to a marked improvement in the debt and debt service indicators relative to the previous traditional non-remittances baseline scenario. Under the remittances baseline, there are no breaches of debt or debt service thresholds in the baseline. (Figure A1, Tables A1 and A2). Debt burdens rise gradually toward the end of the projection period reflecting the assumption of only a modest level of external borrowing during the projection period, based on Comoros’ continuing status as a fragile low income country. The ratio PV of debt to exports plus remittances shows a modest breach of its threshold under the shocks to non-debt creating inflows1 and the same indicator breaches the threshold late in the projection period in the historical scenario. The initial improvement in the debt and debt service indicators under the historical scenario mainly reflects the fact that the projected current account deficits in the baseline are larger than the historical deficits over the medium term. The historical scenario is, therefore, over-financed during this period. The opposite is the case for the latter part of the projection period, when the projected current account deficit falls below the historical average, leading to under-financing and the need for additional borrowing.

B. Customized Scenarios—Lower Remittances and Higher Borrowing

5. A customized scenario with lower remittances than in the baseline underscores larger debt vulnerabilities. Rather than assuming a gradual rise in the nominal value of remittances, this scenario assumes that levels stabilize at current nominal levels (thereby declining faster in relation to GDP than in the baseline). The DSA is much less favorable on this basis, with a sustained breach of the PV of debt-to-GDP plus remittances threshold in both the baseline and in the stress tests (Text Figure 1). Given the recent marked changes in the level of measured remittances and corresponding uncertainties about the future path, this alternative scenario further underpins for a “moderate” risk rating for external debt distress.

Text Figure 1.Comoros: Indicators of Public and Publicly Guaranteed External Debt under Lower Remittances Scenario Including Remittances, 2014–2033 1/

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio on or before 2024. In figure b. it corresponds to a Non-debt flows shock; in c. to a Non-debt flows shock

6. The debt sustainability outlook for Comoros would also deteriorate somewhat were the country to engage in significant external borrowing over the medium term, particularly if that borrowing were on commercial or near-commercial terms. Additional external borrowing on commercial terms amounting to about 5 percent of GDP per year would not on its own lead to breaches of thresholds under the baseline but to several breaches under alternative scenarios and stress tests (Text Figure 2). While it is unlikely that Comoros could find creditors that would be willing to extend this amount of credit to the country on an ongoing basis, this scenario underlines that Comoros’s scope for external borrowing, especially on commercial terms is limited

Text Figure 2.Comoros: Indicators of Public and Publicly Guaranteed External Debt under High Borrowing Scenario Including Remittances, 2014–2033 1/

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio on or before 2024. In figure b. it corresponds to a Non-debt flows shock; in c. to a Non-debt flows shock

Debt Distress Classification and Conclusion

1. In light of the revised DSA, it is the view of the staffs of the IMF and the World Bank that Comoros’ risk of debt distress rating should be upgraded from high to moderate, a view that the country authorities share. The analysis shows that, taking remittances into account, the debt and debt service indicators remain below the applicable thresholds in the baseline, and that there are only modest breaches under alternative scenarios and stress tests. However, customized scenarios show that debt sustainability is sensitive to both the level of remittance flows and to external borrowing levels over the medium-term. These findings underline the importance of fostering a climate conducive to maintaining high levels of remittances that can be used productively, and limiting recourse to external financing, particularly on non-concessional terms. It also highlights the importance of striving to maintain higher growth levels compared to historical average by implementing planned structural reforms in infrastructure and the businesses environment, the electricity and the telecom sectors in a timely fashion.

Table A1.Comoros: External Debt Sustainability Framework, Baseline Scenario, 2011-20341/(In percent of GDP, unless otherwise indicated)
ActualHistorical 6/Standard 6/Projections
201120122013AverageDeviation2014201520162017201820192014-2019 Average202420342020-2034 Average
External debt (nominal) 1/44.740.518.517.517.518.419.320.320.022.730.7
of which: public and publicly guaranteed (PPG)44.740.518.517.517.518.419.320.320.022.730.7
Change in external debt-4.5-4.2-22.0-0.90.00.90.91.0-0.20.70.9
Identified net debt-creating flows2.17.66.14.88.48.27.77.97.35.22.9
Non-interest current account deficit10.97.911.27.72.77.310.910.710.310.710.28.36.27.8
Deficit in balance of goods and services33.939.042.236.538.737.336.135.734.530.123.9
Exports16.214.914.914.514.514.414.314.214.113.612.7
Imports50.253.957.250.953.251.750.449.948.643.736.6
Net current transfers (negative = inflow)-22.8-31.4-30.8-22.86.4-29.2-27.8-26.6-25.7-24.9-24.1-21.6-17.3-20.3
of which: official2.24.1-0.50.21.01.31.31.31.31.21.0
Other current account flows (negative = net inflow)-0.20.3-0.20.00.00.0-0.1-0.1-0.1-0.2-0.5
Net FDI (negative = inflow)-3.8-1.7-1.4-1.41.2-2.0-2.0-2.0-2.1-2.3-2.5-2.7-2.7-2.7
Endogenous debt dynamics 2/-5.01.4-3.7-0.5-0.5-0.5-0.5-0.5-0.5-0.4-0.5
Contribution from nominal interest rate0.30.30.10.10.10.10.20.20.30.40.6
Contribution from real GDP growth-1.0-1.4-1.3-0.6-0.6-0.6-0.7-0.7-0.7-0.8-1.1
Contribution from price and exchange rate changes-4.42.5-2.5
Residual (3-4) 3/-6.6-11.8-28.1-5.7-8.5-7.2-6.9-7.0-7.5-4.4-2.0
of which: exceptional financing-4.0-0.10.0-0.90.00.00.00.00.00.00.0
PV of external debt 4/13.112.312.713.614.415.215.218.024.0
In percent of exports87.685.387.794.4100.7107.2108.0132.4188.4
PV of PPG external debt13.112.312.713.614.415.215.218.024.0
In percent of exports87.685.387.794.4100.7107.2108.0132.4188.4
In percent of government revenues84.584.683.686.487.989.588.895.2105.1
Debt service-to-exports ratio (in percent)10.110.42.12.52.44.24.75.66.15.012.2
PPG debt service-to-exports ratio (in percent)10.110.42.12.52.44.24.75.66.15.012.2
PPG debt service-to-revenue ratio (in percent)10.28.02.02.42.33.84.14.75.03.66.8
Total gross financing need (Millions of U.S. dollars)53.546.266.440.570.275.778.487.488.191.0142.9
Non-interest current account deficit that stabilizes debt ratio15.412.133.38.210.99.79.59.710.57.65.2
Key macroeconomic assumptions
Real GDP growth (in percent)2.23.03.51.91.43.33.54.04.04.04.03.84.04.04.0
GDP deflator in US dollar terms (change in percent)9.8-5.26.55.56.85.42.23.53.93.73.73.73.02.73.0
Effective interest rate (percent) 5/0.80.70.20.60.20.40.60.81.01.21.40.91.92.11.9
Growth of exports of G&S (US dollar terms, in percent)15.7-10.310.56.09.05.65.87.07.27.07.06.66.36.36.3
Growth of imports of G&S (US dollar terms, in percent)12.75.016.914.410.3-2.910.54.55.36.74.94.84.75.05.1
Grant element of new public sector borrowing (in percent)38.332.032.032.032.032.033.132.032.032.0
Government revenues (excluding grants, in percent of GDP)16.119.315.514.615.215.716.417.017.118.922.820.1
Aid flows (in Millions of US dollars) 7/45.654.9171.163.868.570.876.582.487.5113.8187.7
of which: Grants45.654.9171.163.868.570.876.582.487.5113.8187.7
of which: Concessional loans0.00.00.00.00.00.00.00.00.00.00.0
Grant-equivalent financing (in percent of GDP) 8/8.99.59.59.69.69.18.77.88.4
Grant-equivalent financing (in percent of external financing) 8/100.091.384.083.882.887.983.675.081.0
Memorandum items:
Nominal GDP (Millions of US dollars)611.0596.3657.7716.6758.2816.1881.2949.81023.91442.52854.5
Nominal dollar GDP growth12.2-2.410.39.05.87.68.07.87.87.77.16.97.1
PV of PPG external debt (in Millions of US dollars)86.288.096.6111.3127.2145.0156.3260.5686.3
(PVt-PVt-1)/GDPt-1 (in percent)0.31.21.92.02.01.21.42.02.32.0
Gross workers’ remittances (Millions of US dollars)112.6152.6159.2167.3170.8176.8183.7192.3201.4260.3469.1
PV of PPG external debt (in percent of GDP + remittances)10.510.010.411.211.912.712.715.320.6
PV of PPG external debt (in percent of exports + remittances)33.432.634.337.741.044.245.156.982.2
Debt service of PPG external debt (in percent of exports + remittances)0.80.90.91.71.92.32.52.15.3
Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Figure A1.Comoros: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2014-2034 1/

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio on or before 2024. In figure b. it corresponds to a Non-debt flows shock; in c. to a Non-debt flows shock; in d. to a Non-debt flows shock; in e. to a Non-debt flows shock and in figure f. to a Combination shock

Table A2.Comoros: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2014-2034(In percent)
Projections
20142015201620172018201920242034
PV of debt-to-GDP+remittances ratio
Baseline1010111213131521
A. Alternative Scenarios
A1. Key variables at their historical averages in 2014-2034 1/1098887928
A2. New public sector loans on less favorable terms in 2014-2034 21011121314151929
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2015-20161011121313131622
B2. Export value growth at historical average minus one standard deviation in 2015-2016 3/1011131415151721
B3. US dollar GDP deflator at historical average minus one standard deviation in 2015-20161011121314141622
B4. Net non-debt creating flows at historical average minus one standard deviation in 2015-2016 4/1019272526252723
B5. Combination of B1-B4 using one-half standard deviation shocks1018252425252624
B6. One-time 30 percent nominal depreciation relative to the baseline in 2015 5/1014151617172028
PV of debt-to-exports+remittances ratio
Baseline3334384144455782
A. Alternative Scenarios
A1. Key variables at their historical averages in 2014-2034 1/33292828272535116
A2. New public sector loans on less favorable terms in 2014-2034 233354045505271115
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2015-20163334384144455783
B2. Export value growth at historical average minus one standard deviation in 2015-2016 3/3338485155566891
B3. US dollar GDP deflator at historical average minus one standard deviation in 2015-20163334384144455783
B4. Net non-debt creating flows at historical average minus one standard deviation in 2015-2016 4/33781108890909991
B5. Combination of B1-B4 using one-half standard deviation shocks3367968083839390
B6. One-time 30 percent nominal depreciation relative to the baseline in 2015 5/3334384144455783
PV of debt-to-revenue ratio
Baseline85848688898995105
A. Alternative Scenarios
A1. Key variables at their historical averages in 2014-2034 1/85706359544958143
A2. New public sector loans on less favorable terms in 2014-2034 285869297102103119147
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2015-2016858692949695102112
B2. Export value growth at historical average minus one standard deviation in 2015-2016 3/8589103103103102106107
B3. US dollar GDP deflator at historical average minus one standard deviation in 2015-2016858794969897104115
B4. Net non-debt creating flows at historical average minus one standard deviation in 2015-2016 4/85143194188182178166116
B5. Combination of B1-B4 using one-half standard deviation shocks85134189184179175165122
B6. One-time 30 percent nominal depreciation relative to the baseline in 2015 5/85119123125127126135149
Debt service-to-exports+remittances ratio
Baseline11222325
A. Alternative Scenarios
A1. Key variables at their historical averages in 2014-2034 1/11222225
A2. New public sector loans on less favorable terms in 2014-2034 211223338
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2015-201611222325
B2. Export value growth at historical average minus one standard deviation in 2015-2016 3/11223326
B3. US dollar GDP deflator at historical average minus one standard deviation in 2015-201611222325
B4. Net non-debt creating flows at historical average minus one standard deviation in 2015-2016 4/11334438
B5. Combination of B1-B4 using one-half standard deviation shocks11333438
B6. One-time 30 percent nominal depreciation relative to the baseline in 2015 5/11222325
Debt service-to-revenue ratio
Baseline22445547
A. Alternative Scenarios
A1. Key variables at their historical averages in 2014-2034 1/22344436
A2. New public sector loans on less favorable terms in 2014-2034 2224456511
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2015-201622445547
B2. Export value growth at historical average minus one standard deviation in 2015-2016 3/22455547
B3. US dollar GDP deflator at historical average minus one standard deviation in 2015-201622445547
B4. Net non-debt creating flows at historical average minus one standard deviation in 2015-2016 4/225777510
B5. Combination of B1-B4 using one-half standard deviation shocks225777510
B6. One-time 30 percent nominal depreciation relative to the baseline in 2015 5/235677510
Memorandum item:
Grant element assumed on residual financing (i.e., financing required above baseline) 6/3131313131313131
Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Figure A3.Comoros: Indicators of Public Debt Under Alternative Scenarios, 2014-2034 1/

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio on or before 2024.

2/ Revenues are defined inclusive of grants.

Figure A2 shows the public sector debt dynamics.

Mauritius is the remaining holdout; negotiations are ongoing.

Appendix 2, Staff Report for Sixth Review under the ECF.

These non-debt creating inflows represent mainly remittances in the case of Comoros. As the remittances have been growing rapidly over the last decade their historical standard deviation is large, which accounts for the severity of this shock.

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