Union of the Comoros
Selected Issues and Statistical Appendix

This Selected Issues paper analyzes the decentralization of government in the Union of the Comoros and its economic management functions foreseen under the constitution. The paper examines the special challenge of combining a civil service reform needed to increase the efficiency of the civil service with the decentralization of the civil service foreseen under the new constitution. It discusses developments in a number of civil service indicators that are often used to analyze the government wage bill and employment in relation to economic and fiscal objectives.

Abstract

This Selected Issues paper analyzes the decentralization of government in the Union of the Comoros and its economic management functions foreseen under the constitution. The paper examines the special challenge of combining a civil service reform needed to increase the efficiency of the civil service with the decentralization of the civil service foreseen under the new constitution. It discusses developments in a number of civil service indicators that are often used to analyze the government wage bill and employment in relation to economic and fiscal objectives.

I. Introduction

1. This selected issues paper provides additional information on four topics of importance in the context of the 2004 Article IV consultation with the Comoros: (i) the decentralization of government and its economic management functions foreseen under the constitution; (ii) civil service reform in the context of decentralization; (ii) financial sector developments, including prudential issues; and (iv) external sector developments and policies.

2. Section II on “Decentralization in the Comoros: Striking a Balance” provides background information and analysis for the issue that has emerged as the most important, and at times highly contentious, issue in the Comoros since the approval of the new constitution in December 2001. The constitution gives wide-ranging but ill-defined powers to the islands, including financial autonomy. Specific arrangements on decentralization were expected to be defined in by-laws to the constitution; however, despite numerous attempts to define them the Union and island governments have so far failed to reach agreements. The difficult relationship between governments has significantly weakened economic management and the pursuit of coherent macroeconomic policies and structural reforms. A solution to these issues is critical for the restoration of confidence and the needed improvement of the economic outlook, including on poverty reduction, for the country. Considering the limited human and financial resources of the country and its low level of development, decisions on decentralization issues need to strike an appropriate balance between the political decision to grant more autonomy to the island governments, and the need for coherent and financially sound macroeconomic policies. Decisions should also aim at establishing management structures that are operationally effective and economically efficient. The discussion in Section II addresses a number of these issues in the light of the literature.

3. Section III examines the special challenge of combining a civil service reform needed to increase the efficiency of the civil service with the decentralization of the civil service foreseen under the new constitution. The paper discusses developments in a number of civil service indicators that are often used to analyze the government wage bill and employment in relation to economic and fiscal objectives. It then contrasts developments in some of these indicators between the different islands. In addition, the paper includes a presentation of the evaluation of the Comorian situation by a World Bank consultant and a mission of the IMF’s Fiscal Affairs Department. Finally, the paper reports the results of two Paris meetings on these issues, in which the representatives of the Union and island governments reached preliminary agreements on the delineation of competencies of the two levels of government.

4. Section IV gives additional background information on developments in the Comorian financial sector, including its changing structure. It begins with an examination of general indicators of financial sector development such as size, degree of monetization, degree of financial intermediation, and the savings ratio. It then describes the operations of the various types of financial institutions, including developments in their market shares. In discussing the central bank, special attention is given to its legal framework, including in particular the articles that define its statutory objectives and independence. In this discussion, the arrangements in the Comoros are compared with best international practice. In the concluding sections, the paper examines the monetary policy instruments and the bank’s responsibilities in the area of prudential regulation and supervision.

5. In section V, a comprehensive overview is provided on external sector developments and policies. These are of particular importance because for a small and open island economy like the Comoros, the external sector performance has a critical effect on the country’s growth and development. The paper begins with an examination of developments in the balance of payments and its components, and seeks to identify the key determinants that have affected their behavior during the past. The analysis includes an assessment of principal export prices and of international competitiveness under the peg of the Comorian franc to the euro. The paper then examines in some depth the importance of remittances. It also discusses the degree of aid dependency of the country, as well as the Comoros’ external vulnerability and the scope for diversification. Finally, the paper examines the importance of external debt and its sustainability and discusses developments in the exchange and trade regimes of the Comoros.

Union of the Comoros: Selected Issues and Statistical Appendix
Author: International Monetary Fund