Front Matter Page
© 2004 International Monetary Fund
March 2004
IMF Country Report No. 04/74
Djibouti: Selected Issues
This Selected Issues paper for Djibouti was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed on December 19, 2003. The views expressed in this document are those of the staff team and do not necessarily reflect the views of the government of Djibouti or the Executive Board of the IMF.
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Front Matter Page
INTERNATIONAL MONETARY FUND
DJIBOUTI
Selected Issues
Prepared by a staff team comprising Joel Toujas-Bernaté, Abdelrahmi Bessaba, and Jemma Dridi (all MCD)
Approved by the Middle East and Central Asia Department
December 19, 2003
Contents
Overview
Chapter I. The Financial System in Djibouti
I. Introduction
II. The Currency Board
III. The Financial System
A. The Banking System
B. The Money Changers
C. Informed Financial Arrangements
D. Microcredit Programs
IV. Financial Sector Reforms and Growth Issues
A. Legislative Framework
B. Supervision and Prudential Regulations
C. Financial Intermediation
D. Other Measures and Developments
V. Main Conclusion
References
Tables
I.1. Selected Financial Indicators, 1990–2002
I.2. Selectoral Distribution of Credits, 1997–2002
I.3. Deposits Structure, 1990-2002
Figures
I.la. Djibouti and Trading Partner Countries: CPI Indices, 1990–2002
I.lb. Djibouti and Trading Partner Countries: CPI Indices, 1990–2002
I.2. Exchange Rate Developments, 1980–2002
I.3. Total Bank Deposits and Credits, 1990–2002
I.4. Credit Distribution, October 2002
I.5. Nominal GDP and Broad Money, 1984–2002
I.6. Inflation and Broad Money
I.7. Inflation and M2 Velocity
I.8. Demand and Time Deposits, 1991–2002
I.9. Currency Composition of Deposits, 1994—2002
I.10. Foreign Currency Deposits Ratios, 1990–2002
I.11. Foreign Currency Deposits, 1994–2002
I.12. Non Performing Loans, 1994–2002
I.13. Deposits and Credits, 1990–2002
I.14. Interest Rates Spread, 1990–2002
I.15. Domestic and Foreign Interest Rates, 1990–2002
I.16. Broad Money and Net Foreign Assets, 1994–2002
Boxes
I.1. Financial Development and Economic Growth
I.2. Conditions and Policy Implications for Currency Board Arrangements
I.3. Informal Financial Arrangements
Appendix
I. Recent Monetary Developments
Overview
1. The most important challenge facing the Djibouti authorities in the years to come is achieving high rates of economic growth in order to create employment opportunities for a rapidly increasing labor force and to alleviate rising poverty.1 To these ends, the authorities have formulated an ambitious national poverty reduction strategy aimed at accelerating the implementation of structural reforms that would promote private sector activity and investment, while maintaining a stable macroeconomic environment and improving social services. Achieving sustainable high rates of growth in an economy with a narrow production base, high cost of production factors, a weak institutional framework, and an uncertain regional environment will not be an easy challenge to meet. However, the authorities managed to start the needed reform process. While progress was achieved in correcting large financial imbalances, significant structural rigidities remain that constrain economic growth. This selected issues paper aims to provide a review of recent developments, the results of policy reforms achieved so far, and the remaining reform agenda over the medium term in two particular areas, namely the financial system and the fiscal sector.
2. Chapter I analyzes the evolution of the financial system with a focus on ways to enhance its effectiveness. It shows that, notwithstanding past efforts to improve and develop financial services in Djibouti, financial intermediation remains limited and the depth of the financial sector needs to be increased. To that effect, the authorities need to (i) strengthen the legal framework, promote transparency, and pursue efforts to step up banking supervision; (ii) remove obstacles to the expansion of credit to the private sector, by improving the functioning of the judicial system and creating an environment conducive to private sector development; and (iii) enhance the development of small businesses, which are often excluded form bank credit, through the establishment of microcredit programs and an appropriate regulatory framework to ensure the efficiency of these programs.
3. Chapter II reviews the fiscal adjustment experience undertaken by the authorities, the cornerstone in reestablishing the macroeconomic fundamentals in Djibouti. It shows that the fiscal deficit (on a payment-order basis) was reduced from a peak of 13 percent of GDP at the start of the civil war in 1992 to 3.3 percent of GDP by 2002, a significant effort that has few parallels in recent history. Stylized facts about this fiscal adjustment indicate that it was achieved mostly through a reduction of expenditures. Looking ahead, although Djibouti has made significant strides in reforming its tax system and spending management practices, the reform agenda must be pursued in order to (i) build a modern tax system; (ii) further strengthen expenditure management; and (iii) reallocate additional resources to productive use and to social sectors. Finally, an assessment of the sustainability of the medium-term fiscal position in light of the government’s spending plans to address poverty issues shows that, in order to reduce the government debt-to-GDP ratio, the authorities will need to maintain a stronger fiscal balance than in the past, implement policies to sustain higher economic growth, and continue to adopt a very prudent external borrowing stance.
Contents
Chapter II. Fiscal Adjustment—Assessment and Outlook
I. Introduction
II. Fiscal Adjustment in Djibouti: Stylized Facts
A. Revenue Contribution to Fiscal Adjustment
B. Expenditure Contribution to Fiscal Adjustment
C. Budgetary Reforms
III. Marcroeconomic Impact of the Fiscal Adjustment
A. Background
B. The Djibouti Experience
IV. The Path for Future Fiscal Consolidation
V. The Medium-Term Fiscal Sustainability
A. Medium-Term Outlook
B. Assessing Fiscal Sustainatality
C. Sensitivity Analysis on Government Debt
VI. Conclusion
References
Tables
II.1. Fiscal Adjustment Measures and Outcome, 1994–2002
II.2. Value of Tax Exempt Goods and Services, 1998–2002
II.3. Actual and Trend GDP, 1980–2002
II.4. Selected Economic Indicators, 1993–2002
II.5. Djibouti and Comparator Countries: Fiscal Indicators, 1990–2002
II.6. Ratios of External Indebtedness of Developing Countries, 1995–2004
II.7. Central Government Financial Operations, 2002–08
II.8. Minimum Primary Balance Required to Maintain the Government Debt to GDP Ratio Constant
II.9. Indicators of Government Debt Sustainability, 2002–08
II.10. Government Debt Sustainability, 2002–08
Figures
II.1. Djibouti and Comparator Countries, 1990–2002
II.2. Domestic and External Government Financing, 1990–2002
II.3. Indicators of Government Debt Sustainability, 2002–08
II.4. Government Debt Sustainability Stress Tests, 2002–08
Boxes
II. 1. Military Demobilization
II.2. Pension System Reform
II.3. The Domestic Payment Arrears Problem
II.4. The Tax System
II.5. The Tax Incentive System for Private Investment
II.6. The Government Wage Bill
Annexes
I. Historical Overview of Fiscal Adjustment
II. Planned Fiscal Measures, 1996–2002