Union of the Comoros: Selected Issues and Statistical Appendix
Author: International Monetary Fund
Publication Date:
13 Aug 2004
eISBN:
9781451809077
Language:
English
Keywords:
ISCR; CR; government; island government; trade regimes of the Comoros; constitution; Comorian authorities; government interference; government financing; BCC law; financial situation; Nonperforming loans; Credit; Central bank mandate; Financial sector; Loans; Sub-Saharan Africa
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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.

IV. Financial Sector Developments11

A. Background

68. The financial sector of the Comoros is small and has made only a limited contribution to the economic development of the country. At the time of independence in 1975 it consisted of the central bank, one commercial bank and one credit agency, operating on the basis of a single law related to exchange relations with foreign countries.12 Between 1975 and 1980, a number of laws and regulations were introduced to provide a legal foundation for financial sector activities in the country. A law defining the statutes of the central Bank of Comoros was established in 1979. It included the participation of the Comorian Franc in the “Franc Zone” at a fixed exchange rate on the basis of a cooperation contract between France and the Comoros. In 1980, the authorities passed a law giving the central bank the power to supervise banks and regulating the activities of banks and financial institutions.

69. Economic and financial sector developments in the Comoros have been substantially influenced by the fixed exchange rate regime for the Comorian franc related to its membership in the Franc zone. Since the move to full monetary union in Europe in 2002, the Comorian franc has been linked to the euro. The European Union has accepted the earlier agreement between the French and Comorian governments and will have to be consulted regarding any change to the existing agreement, including in particular of any change in exchange rate parity. Membership in the Franc zone has provided a firm monetary anchor to the country, enhanced the credibility of monetary policy, removed exchange rate uncertainty, and imposed a certain degree of fiscal discipline.

70. Another important factor for the economic and financial development of the country is the large private transfers from Comorians living abroad. Comoros is one of the countries with the highest per capita levels of remittances from a large Diaspora concentrated in France. People of Comorian origin living abroad number between 150,000 to 200,000 and have over the last couple of years, remitted more than US$30 million annually, or some 15 percent of GDP in 2001. Remittances take many forms, including in particular cash carried by visiting Comorians and wire transfers through Western Union.13

B. Structure of the Financial Sector

71. The Comorian financial sector consists of only a few institutions. The Sector presently comprises the central bank, the Banque Centrale des Comores (BCC); a single commercial bank, the Banque pour l’Industrie et le Commerce—Comores (BIC-C); a development bank, the Banque de Développement des Comores (BDC), and two networks of micro-finance institutions, the Mecks and the Sanduks. In addition, there is the National Savings Fund, the Caisse Nationale d’Epargne, affiliated with the government-owned Postal and Telecommunication Company (SNPT).

C. General Indicators

72. Measured by the total assets, the size of the financial sector in Comoros is very small. Including the central bank, assets amounted to CF 74,000 million or US$142 million in 2002. By comparison, in its Indian Ocean partner Mauritius, assets reached a level of US$6.4 billions, and in the Seychelles US$1.4 billions. In percent of GDP, the same picture emerges, with the Comoros lagging far behind its neighboring countries (Figure IV.1).

Figure IV.1.
Figure IV.1.

Comoros: Total Assets of the Banking Sector, 1991-2002

(In percent of GDP)

Citation: IMF Staff Country Reports 2004, 233; 10.5089/9781451809077.002.A004

Sources: Comorian authorities; and staff estimates.

73. The degree of monetization in the Comorian economy is comparatively low. Measured by the ratio of broad money to GDP it has consistently been substantially lower than in Mauritius and the Seychelles (Figure IV.2). In 2001, the monetization ratio registered a strong increase to 27 percent from an average of 20 percent during 1991–2000, and thereby reached broadly the same level as in the average of sub-Saharan Africa (SSA). However, this development was due to exceptional circumstances and is likely to be reversed over the next couple of years.14

Figure IV.2.
Figure IV.2.

Comoros: Degree of Monetization, 1991-2002

(Broad money in percent of GDP)

Citation: IMF Staff Country Reports 2004, 233; 10.5089/9781451809077.002.A004

Sources: Comorian authorities; and staff estimates.

74. Financial intermediation in the Comoros has generally lagged behind other countries in the region. Currency in circulation is still the most important form of payment and constituted a significant part of financial assets in Comoros. Its correct level in terms of GDP is probably better measured by the data since 2001, following the conversion of French franc savings into Comorian francs, than during earlier years (Figure IV.3). Another indicator of financial intermediation, bank claims on the private sector, has also been lower in the Comoros than in Sub-Saharan Africa and neighboring countries. In 2002, these claims stood at about 8 percent of GDP in the Comoros, compared with 20 percent in Sub-Saharan Africa and the Seychelles, and more than 45 percent in Mauritius (Figure IV.4).

Figure IV.3.
Figure IV.3.

Comoros: Currency in Circulation, 1991-2002

(In percent of GDP)

Citation: IMF Staff Country Reports 2004, 233; 10.5089/9781451809077.002.A004

Sources: Comorian authorities and staff estimates.
Figure IV.4.
Figure IV.4.

Comoros: Banks Claims on Private Sector, 1991-2002

(In percent of GDP)

Citation: IMF Staff Country Reports 2004, 233; 10.5089/9781451809077.002.A004

Sources: Comorian authorities; and staff estimates.

75. The domestic savings ratio has traditionally been low in Comoros compared with Sub-Saharan Africa (SSA) and neighboring countries. For a large part of the period 1991–2002 the domestic savings ratio was negative in the Comoros and displayed a considerably higher degree of volatility than in partner countries (Figure IV.5). The low savings ratio is explained by the high level of remittances the country receives from the Comorian diaspora, while its swings may be due to uncertainties about economic growth and political stability. The increase during 1998–2002, is also likely to have been influenced by the creation of the microfinance institutions which channeled savings of rural areas into the official financial sector.

Figure IV.5.
Figure IV.5.

Comoros: Domestic Savings, 1991-2002

(In percent of GDP)

Citation: IMF Staff Country Reports 2004, 233; 10.5089/9781451809077.002.A004

Sources: Comorian authorities; and staff estimates.

76. There are no primary or secondary markets for government or private commercial debt in the Comoros. Government financing has mostly taken the form of direct credit from the BCC and BIC-C, or consisted of an accumulation of foreign and domestic arrears rather than the issuance of treasury bills or bonds. In addition, the central bank does not issue any certificates of deposits or bills; instead it has imposed required reserves to reduce active liquidity.

Key Financial Institutions

77. Financial transactions in the Comoros are highly concentrated in the BIC-C despite the recent emergence of microfinance institutions. The BIC-C’s market share in deposits has declined during the past five years from 80 percent to 73 percent, and its share for the credits to the economy has remained broadly unchanged, following the decline in lending by the BDC (Table IV.1). The microfinance institutions grew dynamically since their establishment and now have market shares of close to 20 percent of deposits and loans.

Table IV.1.

Comoros: Market Shares of Financial Institutions, 1998-2002

(In percent)

article image
Sources: Comorian authorities; and staff estimates.
Banque pour l’Industrie et le Commerce—Comores (BIC-C)

78. The BIC-C is the only full-fledged commercial bank in the Comoros. It was created in 1982 and has only five branches in the country, three in Ngazidjia, one in Moheli, and one in Anjouan. Since 1990, the BIC-C is part of the BNP-Paribas group.

79. The BIC-C generally conducted sound banking operations and has not experienced financial difficulties. Despite its large excess reserves, its lending has decreased by 5 percent during the last five years (Table IV.2). One possible cause for this decrease in lending is the rise in political tensions and uncertainties in the country which has weakened economic performance. Another reason, probably linked to it, is the adoption of more stringent lending criteria in light of an increase in the level of non-performing loans (NPLs) in its balance sheet from 13.3 percent of total credits in 1998 to 25 percent in 2002 (Table IV.2 and Figure IV.6). However, over the same period, the bank improved its provisioning, so that the coverage of NPLs by loan loss provisions increased from 61.6 percent in 1998 to 72.3 percent in 2002. Although there are no indications of any serious problems with the BIC-C, a Fund/MFD expert has recently recommended that the central bank conduct a full audit of its accounts.

Table IV.2.

Comoros: Financial Situation of the BIC-C, 1998-2002

(In millions of Comorian francs unless otherwise indicated)

article image
Sources: Comorian authorities; and staff estimates.
Figure IV.6.
Figure IV.6.

Comoros: Nonperforming Loans, 1998-2002

(In percent of total credits)

Citation: IMF Staff Country Reports 2004, 233; 10.5089/9781451809077.002.A004

Sources: Comorian authorities; and staff estimates.
The Development Bank of the Comoros (BDC)

80. The BDC was created in 1981 to replace the Société de Crédit pour le Développement des Comores. The latter was liquidated because of itsbad financial situation. The resources of the BDC derive from credit lines made available by international institutions and donors. The capital of the BDC is now held by the BCC and the Agence Française de Développement (AFD). Although the share of the BDC in overall lending has declined significantly over recent years, its share in long term credit has generally exceeded 90 percent. The BDC’s loans cover a wide range of sectors of the economy, including notably industry, tourism, agriculture and handicraft.

81. The financial situation of the BDC deteriorated sharply during the 1990s. Since 1997, the BDC stopped lending and concentrated its activity on the recovery of outstanding loans. The financial situation of the BDC deteriorated further in 1998 with the attempted secession of Anjouan from the rest of the country. Several portfolios related to tourism and hotel projects became unrecoverable. In addition, many loans to civil servants of Anjouan origin defaulted when the central government stopped paying their salaries in 1998. The difficult political and economic situation in the Comoros has made it very difficult for the BDC to recover its loans. Other causes for the poor financial situation of the BDC include in particular the financial mismanagement of the bank owing to poor skills levels and governance problems. Reflecting the recent efforts at loan recovery by the BDC and increases in provisions, NPLs decreased between 2000 and 2002 and the ratio of provisions to NPLs increased (Table IV.3).

Table IV.3.

Comoros: Financial Situation of the BDC, 1998-2002

(In millions of Comorian francs)

article image
Sources: Comorian authorities; and staff estimates.

82. Recent attempts to privatize the BDC failed because foreign investors showed no interest in buying a bank in bad financial shape and with no audited accounts. In response, the BDC asked its shareholders to allow for a restart of lending operations on the basis of its capital. In the event, a trial license for one year was granted. However, an in depth analysis and auditing of the BDC accounts were considered necessary before launching new activities.

The National Savings Fund

83. The Caisse Nationale d’Epargne (CNE) is the financial arm of the governmentowned postal and telecommunication company, the Société Nationale du Poste et des Télécommunications (SNPT).15 It was created in 1992 in connection with the establishment of the legal status for the SNPT. The principal objective of the CNE is to mobilize domestic savings. The CNE is also allowed to lend to its clients. However, due to the high rate of nonperforming loans, it has essentially suspended lending activities.

84. In order to eliminate the quasi-monopoly of the BIC-C, the authorities advanced plans to transform the CNE into a commercial bank. The authorities believe that this will attract more savings and introduce more competition in the market. They argue that costs for clients could be reduced, banking services be broadened and modernized, and new services introduced. The authorities plan to rely on the existing network of the SNPT and have proposed several measures to protect depositors, and to guarantee good financial management. Nevertheless, there are a number of serious concerns about the feasibility and soundness of this proposal, including notably the poor level of skills at the CNE, especially regarding new financial activities.

85. For a thorough assessment of the government’s proposal, the BCC requested technical assistance from the Fund. An expert (of the IMF’s Monetary and Financial Systems Department (MFD)) recommended the imposition of obligatory reserves of 30 percent, a liquidity ratio of 65 percent, and a solvability ratio of 10 percent.16 In addition to these recommendations on prudential issues, the expert urges to ensure the strict separation of accounts and activities of the proposed new institution from those of the SNPT because there is a concern that the SNPT could use the resources of the CNE to finance its investments in the telecommunication sector at non-market conditions and irrespective of the soundness of these investments The BCC has so far not approved the government’s plans.

Microfinance Institutions

86. Microfinance institutions were introduced in 1997 with the assistance from the French government and international organizations. The Caisse Française de Développement (CFD) financed the Sanduk, while the Mecks were financed by the Comorian government and the International Fund for Agricultural Development. The Mecks and the Sanduks accept deposits and specialize in credits to small–and medium–sized enterprises. By the end of the first year of operations, the two networks had created 39 funds on the different islands, collected more than FC 360 millions in savings, and distributed FC 320 millions in credits.

87. The microfinance networks are not yet covered by formal prudential regulations and supervision of the central bank. A law draft for their inclusion is ready but has not yet been issued by the government. Once that is the case, the central bank will need technical assistance, and increase its human resources to effectively supervise the institutions. Given their strong growth, the Mecks and Sanduks will also need to modernize their operations and accounting practices. In particular, they need to have access to up-to-date information through better and broader computerization of operations. There is also a need to reinforce internal audits and to strengthen loan evaluation.

D. Central Bank Role and Activities

88. The role and activities of the Central Bank are defined by the central bank law which was established in 1978 and amended in 198717. The law describes the central bank as a public institution with a capital of CF500 million detained in equal shares by the French and the Comorian governments. The law briefly describes the objectives of the BCC, establishes the nature of its operations and instruments, and specifies fundamental arrangements for its administration (Table IV.4).

Table IV.4.

Comoros: Financial Situation of the BCC, 1998-2002

(In millions of Comorian francs)

article image
Sources: Comorian authorities; and staff estimates.

Objectives

89. The objectives of the central bank are defined in a rather broad way in Article 4 of the BCC law which leaves the primary objective of the BCC unclear. Article 4 states that the central bank has the mission to formulate monetary and credit policies, supervise and control banking activities, and monitor the implementation of exchange regulations. The vagueness of the BCC’s objectives entails the risk of a pursuit of multiple objectives, without apparent prioritization. This could severely undermine the credibility of the central bank and hamper its effectiveness. It could also dilute its accountability and complicate the coordination of monetary policy with fiscal policies of the government.

90. In view of these risks, best practices call for the establishment of a single objective for central banks. Typically, this objective is the control of inflation or, more broadly, the safeguarding of the value of the national currency, which would also include the stability of the external value of the currency. Regarding domestic economic policies, a single objective would help avoid the time-consistency problem to which government fiscal policies are often subject. It would also provide a more precise basis for holding the central bank accountable for its policies and its financial condition. If the central bank were nevertheless, to pursue more than one objective, they should be clearly prioritized. In that case, the bank would pursue one objective as its main operational target and the others as subsidiary targets.

Independence

91. The independence of the Central Bank of the Comoros is curtailed under the BCC law in a number of respects. This applies both to the bank’s statutory autonomy and its scope for pursuing its statutory objectives without government interference. In both cases, international best practices would call for a strengthening of legislation for the BCC.

92. Statutory autonomy is typically defined by the practices regarding the election of Board members and the central bank governors. In Comoros, the Board of Directors of the central bank is composed of eight members, four of which are designated by the Comorian government and the other four by the French government (Article 34). Board members are appointed for a renewable period of four years (Article 35). They can be dismissed by the authority which has nominated them. There is no provision in the law requiring a justification for the dismissal. Nor is there any clarification of the procedure for such a case. This is clearly in contradiction with best international practice.

93. The Governor of the BCC is appointed by the President of the Comoros for a renewable period of five years. The appointment follows the recommendation of the Finance Minister on the proposal by the Board of Directors (Article 40). The Vice-Governor is nominated by the Board for a period of four years, his term can be renewed. The position of Vice-Governor has typically been held by a French national. There are no clarifications in the BCC law regarding the possible dismissal of the Governor and Vice-Governor. Also, while their duties are broadly defined, nothing is said about their accountability. Nor are there provisions regarding their protection from political influence. On both accounts, the law is not in line with best international practice.

94. The operational autonomy of the BCC is curtailed with respect to both the pursuit of its general objectives and the implementation of individual policy decision. In Article 4 on the objectives of the central bank, the BCC law stipulates that their pursuit must take place within the framework of the government’s economic policies. While this stipulation leaves room for interpretation, it could still imply in the case of a conflict a complete subordination of central bank policies to the objectives and policies of government. In contrast, best international practices call for a fairly formal separation of the central bank from the government and its fiscal policy objectives. Best practices also advocate the establishment of clearly defined provisions for the resolution of conflicts with the government. Neither of these practices exist in the Comoros.

95. The independence of the BCC is further weakened by the scope of the Finance Minister to demand a review of any Board decision. While the review permitted by Article 34 will not necessarily lead to a new, or even opposite, decision, its invocation can exercise substantial pressure on the Board. However, because Article 16 of the BCC law limits the central bank’s ability to finance government deficit such pressure can not affect credit to the government. In particular, Article 17 states that the sum of all loans to the Treasury (direct loans or government bonds) must not exceed 20 percent of the average annual revenues of the government during the last three budget years. This stipulation sharply curtails the scope of government to seek continued and large of deficit financing from the BCC.

96. Membership of the Comoros in the Franc zone provides additional assurances of prudent monetary policies and limits government interference. As part of the agreement on monetary cooperation between the Comorian and the French governments, exchange rate policy is firmly determined and thereby puts narrow constraints on the BCC’s monetary policy.18 The presence of members of the French administration on the Board, and the nomination of a French Vice-Governor have also curtailed government interference at the BCC.

97. The monetary policy instruments of the BCC are limited and have hereby been used. Under the BCC, the Bank may discount or repo to banks against eligible commercial paper (Article 11), bank certificates (Article 12), or other guaranteed debt certificates (Article 13) as well as publicly guaranteed debentures and obligations subscribed by the Comorian treasury running for a period of a maximum of four years. In addition, the bank has established required reserves ratios and may set minimum interest rates on deposits and lending of financial institutions. Official interest rates have been modified only rarely. Interest rates set by the central bank are typically indexed to the interbank rates of the Euro zone, as are debit rates applied by the BCC. The discount rate of the BCC is serving as a penalty rate whenever the required reserves ratio is not respected.

Prudential Regulation and Supervision

98. Giving the high level of liquidity in the economy, the BCC’s monetary policy instruments have been blunt for most of the time. Usually, the commercial bank did not need to refinance itself at the central bank. Excess liquidity appears to be a structural phenomenon in the Comoros (as in many other developing countries) that is not likely to change soon.

99. Prudential regulation and supervision were introduced in 1880 with the issuance of banking law n°80-07. The law was amended in 2000 by three circulars dealing with: (i) the instruction to provide regular information on the accounting situations to the BCC (Circular n°12/2000/COB); (ii) the definition of equity in the balance sheets of banks and financial institutions (Circular n°13/2000/COB); and (iii) the definition of the solvability ratio of the banks and financial institutions (Circular n°14/2000/COB).19

100. Prudential regulation and supervision needs to be upgraded in light of recent developments in the domestic financial sector and in response to the needs of a globalized environment. On the domestic side, especially the development of microfinance institutions requires attention. However, more regulation and supervision resources will also have to be devoted to the Development Bank and the examination of proposals by the Government to create a Postal Bank on the basis of the network of the SNPT. On the international level, significant developments have taken place in prudential regulation, some of which are important for the Comoros and its cooperation with other countries.

101. There is an urgent need to bring the microfinance institutions under the supervisory authority of the central bank. These institutions have grown significantly since their introduction in 1997, and it is unclear whether this dynamic growth has been accompanied by appropriate management policies and the necessary broadening of skills. In addition, there are indications that some institutions have begun offering financial services outside of their normal range of activities. Some are even said to experience financial problems. To obtain clarity on these questions and prepare needed action, the draft law on supervision of microfinance institutions that is before the government should be promulgated on as soon as possible. Giving supervisory authority to the Central Bank it would provide a sound and enforceable legal framework for the operations of these institutions and thereby diminish the risks to depositors and the likelihood of a general failure. Given the limited human and financial resources in the supervision department of the central bank, it will be particularly important to strengthen internal control and governance of these institutions. In addition, assurances are needed on strong and skilled management, and on transparent accounting systems that meet international standards.

102. The resumption of activities by the Development Bank requires ongoing supervisory attention. Substantial concerns about the soundness of the financial situation of the BDC and the quality and integrity of its management were voiced before the resumption of its activities. These concerns remain valid despite the fact that the bank obtained only a limited license for a trial period of one year. Developments should be monitored closely, and any non-traditional financial activity remain prohibited.

103. The plan of the government to create a Postal Bank, or to combine and broaden the financial activities of the CNE and SNPT networks, requires substantial further study. The main objective of the government appears to be the strengthening of competition in the financial sector. This would, indeed, be desirable. However, concerns exist about the broadening of financial services of the new Postal Bank or the CNE to those of a commercial bank, and the possible involvement of the SNPT in the provision of such services. Such a move could entail significant risks because of the low level of skills in both institutions. In addition, there is a need to ensure the strict separation of financial transactions between the CNE (or the envisaged Postal Bank) and the SNPT. As long as these issues have not been resolved and an appropriate regulatory system, that gives an unreserved responsibility for supervision to the BCC not been installed, it would be imprudent to advance with the government’s plans.

11

Prepared by Marwan Mikhael

12

Law n°69-1161 of 1966

13

For a more extensive discussion of remittances, see the companion paper on external sector developments.

14

The sharp increase in broad money in 2001 was mainly the result of a large amount of conversion of formerly uncounted cash holdings of French francs ahead of the introduction of the Euro at the beginning of 2002.

15

Law number 92-004/PR

16

Report by Raymond Bernard of July 10, 2003.

17

Statuts de la Banque Centrale des Comores et l’accord de coopération monétaire. In the discussion below, these sets of laws for the BCC will be referred to as the “BCC law”.

18

The agreement stipulates the establishment of a foreign exchange account called “compte d’opérations” at the French Treasury similar to the accounts opened by the countries in the CFA zone. Under the agreement, the BCC is also obliged to hold at least 65 percent of its foreign reserves at the French Treasury. The account is supervised and managed by the French Treasury and France guarantees the convertibility of the Comorian franc at the agreed fixed exchange rate.

19

In addition, a draft circular on non performing loans has recently been issued in line with international standards defines nonperforming loan as: (i) loans for which more than three months have passed since the last debt service payment; (ii) loans for which the financial situation of the borrower leads to the conclusion of a high risk of default; and (iii) loans for which a judicial conflict exists between the financial institution and the borrower.

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Cover IMF Staff Country Reports
Union of the Comoros: Selected Issues and Statistical Appendix
Author: International Monetary Fund
Volume/Issue:
Volume 2004: Issue 233
Publisher:
International Monetary Fund
ISBN:
9781451809077
ISSN:
1934-7685
Pages:
110
DOI:
https://doi.org/10.5089/9781451809077.002
  • View in gallery

    Comoros: Total Assets of the Banking Sector, 1991-2002

    (In percent of GDP)

  • View in gallery

    Comoros: Degree of Monetization, 1991-2002

    (Broad money in percent of GDP)

  • View in gallery

    Comoros: Currency in Circulation, 1991-2002

    (In percent of GDP)

  • View in gallery

    Comoros: Banks Claims on Private Sector, 1991-2002

    (In percent of GDP)

  • View in gallery

    Comoros: Domestic Savings, 1991-2002

    (In percent of GDP)

  • View in gallery

    Comoros: Nonperforming Loans, 1998-2002

    (In percent of total credits)

Comoros: Total Assets of the Banking Sector, 1991-2002

(In percent of GDP)

Comoros: Degree of Monetization, 1991-2002

(Broad money in percent of GDP)

Comoros: Currency in Circulation, 1991-2002

(In percent of GDP)

Comoros: Banks Claims on Private Sector, 1991-2002

(In percent of GDP)

Comoros: Domestic Savings, 1991-2002

(In percent of GDP)

Comoros: Nonperforming Loans, 1998-2002

(In percent of total credits)