Union of the Comoros
Selected Issues and Statistical Appendix
Author: International Monetary Fund
Publication Date:
10 Feb 2009
eISBN:
9781451809206
Language:
English
Keywords:
ISCR; CR; CA deficit; GDP; HP trend; CA deficit norm; CA level; CA norm estimate; trade balance
Download PDF (1.9 MB)

The Selected Issues paper for the Union of the Comoros describes an assessment of the external competitiveness. Comoros has been hard hit by negative terms-of-trade shocks that have weakened the external position. A trend decline in the world price of vanilla, its main export, has occurred parallel to unprecedented increases in international food and petroleum prices. Although export growth has slackened, imports have steadily grown driven by a surge in remittances and a steady real appreciation of the euro-pegged national currency.

Abstract

The Selected Issues paper for the Union of the Comoros describes an assessment of the external competitiveness. Comoros has been hard hit by negative terms-of-trade shocks that have weakened the external position. A trend decline in the world price of vanilla, its main export, has occurred parallel to unprecedented increases in international food and petroleum prices. Although export growth has slackened, imports have steadily grown driven by a surge in remittances and a steady real appreciation of the euro-pegged national currency.

Assessing the External Competitiveness of the Comoros1

I. Introduction

1. Since joining the Franc Zone in 1979, Comoros has operated a conventional peg to the French franc and the euro. The country has its own currency and central bank. However, its monetary arrangement with France is essentially the same as the one that binds the CFA Zone to the former colonial power—including safeguards on monetary financing of government financial operations.2

2. In recent years, Comoros has been hard-hit by negative terms of trade shocks that have weakened the external position. A trend decline in the world price of vanilla, its main export, has occurred parallel to unprecedented increases in international food and petroleum prices. While export growth has slackened, imports have steadily grown—driven by a surge in remittances and steady real appreciation of the euro-pegged national currency. As a result, the external current account deficit has widened over time.

3. Against a backdrop of constant political instability and lackluster export performance, economic activity has been subdued. Until 2006, there was limited progress in building up institutional capacity, which has prevented effective reform. Moreover, dilapidated economic and social infrastructures and a poor business environment have discouraged private sector initiative and kept foreign direct investment at bay. Consequently, real GDP growth averaged a modest 2.1 percent for 2000–07, and per capita income has steadily declined.

4. This paper assesses the external competitiveness of the Comoros during the period 1980–2007, with a focus on the most recent years.3 Its main findings reveal that:

  • At end-2007 the real effective exchange rate (REER) was broadly in line with its equilibrium value as determined by economic fundamentals. As external and internal imbalances widened in recent years, the actual REER has weakened while the equilibrium REER has appreciated, helping to close the gap between the two.

  • A substantial narrowing of the underlying current account deficit—in the range of 8–12 percent of GDP—may have been needed at end-2007 to ensure consistency with the norm current account deficit, requiring a real depreciation of the exchange rate of about 4–7 percent.

  • Comoros fares poorly on structural competitiveness grounds compared to other low-income small states in the region and within the Franc Zone, underscoring the need for wide-ranging structural reforms.

5. The structure of the paper is as follows: Section II reviews developments in Comoros’ balance of payments and real exchange rate (RER) during 1980–2007. In Section III, econometric methods are applied to estimate the equilibrium value of the RER and the external current account balance. Section IV discusses the country’s competitiveness using various structural indicators, and Section V concludes. As is recommended for currency union member countries, in highlighting trends in Comoros’s external competitiveness, this study compares its performance with that of its peers in the Franc Zone without assessing the external stability of the zone itself.

II. External Sector Developments and Key Vulnerabilities

A. Balance of Payments

6. The balance of payments of Comoros since 1991 has had several notable features:

  • Large and persistent trade deficits (goods and nonfactor services) averaging 21 percent of GDP annually were mostly financed by worker remittances, which amounted to more than 15 percent of GDP at the end of 2007. Public transfers had gradually declined.4 The current account deficit averaged 7 percent of GDP during the period.

  • The capital and financial account recorded a small surplus averaging 3.2 percent of GDP a year. Official transfers offset large external debt repayment obligations and negative private capital inflows—both of which kept the financial account negative throughout the period.

  • Despite a generally weak overall balance of payments situation, Comoros continues to enjoy a rather comfortable reserves position. This reflects the impact of external arrears accumulation, given lack of budgetary resources to honor public debt service obligations falling due, and debt relief from key development partners. On average, the country’s international reserves have grown an average ¾ percent of GDP a year since 1991, reaching the equivalent of 7 months of imports by end-2007. (Figure 1).5

Figure 1.
Figure 1.

Comoros: Developments in the Balance of Payments, 1991-2007

(percent of GDP)

Citation: IMF Staff Country Reports 2009, 046; 10.5089/9781451809206.002.A001

Source: Comorian authorities, and Fund staff estimates.

7. Overall, Comoros’s balance of payments appears exceptionally vulnerable on a flow basis. The deficit on the trade balance is financed primarily by remittances, grants, and loans, while sizable external debt obligations cannot be honored, causing the accumulation of large external payments arrears. As a result, the country is facing an unsustainable stock of net foreign liabilities that seems impossible to address without debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI).

B. Evolution of the REER Indices

Comoros’ lackluster competitiveness is evidenced by poor export performance and sustained real exchange rate appreciation. During 2002-07, the country’s exports as a share of world exports declined by 50 percent; the export volume shrank by 27 percent; and the CPI-based REER appreciated by 14 percent (29 percent since 2000). During the same period, the internal terms of trade, another key measure of competitiveness, declined substantially as the increase in prices of imported goods outpaced that of prices of domestic goods (Figure 2).

Figure 2.
Figure 2.

Comoros, and Other Selected Countries: Evolution of REER and Other Price Indices

(1997-2007)

Citation: IMF Staff Country Reports 2009, 046; 10.5089/9781451809206.002.A001

Source: Comorian authorities, and staff estimates

III. Empirical Analysis of the Equilibrium Exchange Rate

A. Overview

8. This section spells out the results of three quantitative approaches to estimating the REER equilibrium value (ERER) and assessing the external competitiveness of Comoros: (i) the behavioral single-equation equilibrium exchange rate approach (BEER-SE), which assesses the equilibrium exchange rate based on the past behavior of the country’s macroeconomic fundamentals; (ii) the macroeconomic balance approach (FEER-MB), which estimates the projected deviation of the current account (CA) from an estimated norm implied by the fundamental determinants of saving and investment; and (iii) the external sustainability approach (ESA), which projects forward the long-run relationship between the CA and the net foreign assets (NFA) position and assesses any necessary adjustment of the real exchange rate. These approaches provide various estimates of the ERER and current account balances, on the basis of which a judgment is made about the appropriateness of the exchange rate policy pursued by the authorities.

B. The Behavioral Equilibrium Exchange Rate Approach

9. Equilibrium REER estimates are obtained using autoregressive distributed lag modeling (ARDL), which is more appropriate for small samples and provides consistent estimates regardless of the order of integration of the variables, given the relatively short sample period (the data consist of 28 yearly observations for 1980–2007).6,7 If the actual REER is above its equilibrium value, it would be considered overvalued; if below, it would be considered undervalued. Assessing how much the actual REER departs from its equilibrium value is key to identifying internal and external imbalances, as well as policy actions that may be needed to restore equilibrium. The equilibrium REER was estimated using the following fundamentals: (i) terms of trade (TOT); (ii) trade openness (OPEN), measured as the ratio of total trade to GDP; (iii) total factor productivity (FTP), proxied by real per capita GDP relative to main trading partners; and (iv) government consumption (GOV).

Explaining Developments in the Real Effective Exchange Rate (REER)

In behavioral equilibrium exchange rate (BEER) models, a number of factors are assumed to influence the equilibrium real exchange rate:

  • Terms-of-trade (TOT). The terms of trade are defined as the ratio of the price of a country’s exports to the price of its imports. Comoros’s main exports are agricultural products (e.g., vanilla, cloves, and ylang-ylang), whose prices are determined in world commodity markets and subject to significant volatility that affects the terms of trade. An improvement in the terms of trade will positively affect the trade balance and thus lead the ERER to appreciate.

  • Trade openness (OPEN). Trade openness is a proxy for trade controls. A reduction in controls would be expected to increase trade. Whether increased trade results in an appreciation or depreciation of the real exchange rate depends on individual country circumstances. The measure used in this study is the ratio of exports plus imports of goods and services to GDP.

  • Productivity (TFP). Productivity relative to foreign trading partners is proxied in this study by relative per capita real GDP because a measure for TFP is not available. Developments in relative productivity capture well-known Balassa-Samuelson effects. Countries with higher productivity growth in the tradable sector (where such growth tends to concentrate) can sustain an ERER appreciation without losing competitiveness.

  • Government consumption (GOV). An increase in government consumption biased toward nontradables creates higher demand for nontradables relative to tradables. This greater demand boosts the relative prices of nontradable goods, causing the equilibrium real exchange rate to appreciate. However, if the increase in overall government consumption is biased toward the tradable sector, an increase in spending will cause the ERER to depreciate.

10. The following long-run equilibrium equation was estimated:

(1)ln(REER*)=0.24ln(TOT)[3.18]+0.08ln(OPEN)[0.11]+1.77ln(TFP)[0.85]−0.28ln(GOV)[0.82]8

11. Equation 1 shows that all estimated coefficients exhibit the expected sign, but only the terms of trade variable is statistically significant.9 It suggests that the REER has appreciated in response to improved terms of trade, productivity, and higher openness to international trade, and depreciated in response to increases in government consumption.10

12. At the end of 2007, the REER was slightly undervalued but close to its equilibrium value as determined by economic fundamentals (Figure 3). It should be noted that the equilibrium REER has steadily depreciated since 2003 as external imbalances widened, notably in response to worsening terms of trade and low growth. These developments have been accompanied by a steady appreciation of the actual REER since the 1994 devaluation.11 As a result, the gap between actual and equilibrium REER has substantially narrowed during 2003-07.

Figure 3.
Figure 3.

Comoros: Actual and Equilibrium Real Effective Exchange Rate, 1980-2007

Citation: IMF Staff Country Reports 2009, 046; 10.5089/9781451809206.002.A001

Source: Comorian authorities, and Fund staff estimates.

C. The Macroeconomic Balance Approach

13. In the FEER-MB approach, developments in the ERER are linked to those in several relevant medium-term macroeconomic fundamentals (Edwards, 1989; Isard and Faruqee, 1998; Faruqee, Isard, and Masson, 1998).12 The core of this approach is based on defining the current account in two different ways: (i) as domestic savings minus investment; and (ii) as the net exports balance, thus reflecting the choices between home and foreign goods and services, which are influenced by the their relative price, or the exchange rate. If an equilibrium saving-investment balance can be defined, and other fundamentals factors affecting net exports can be controlled for, then an equilibrium exchange rate can be estimated as the rate which makes these two ways of definining the current account consistent with each other at a position of internal balance (full employment). The analysis is done in three steps.

14. First, an equilibrium or norm current account (CA) is estimated. In this case, coefficient estimates based on a number of panel estimators are taken from Imam and Minoiu (2008), who model the determinants of the CA balance using panel data for 140 countries, including Comoros, between 1980 and 2005.13 To increase robustness, the analysis estimates six different CA norms using three different panel estimators (fixed effects, pooled OLS, and random effects) applied to two different country samples: (i) the full sample of 140 countries ranging from low-income to upper-income, and (ii) the low-income country (LIC) sample of 35 countries, including Comoros. Table 1 summarizes the panel coefficient estimates for each CA norm and shows their elasticities with respect to each independent variable.

Table 1.

Current Account Norms: Panel Estimated Elasticities, 1985-20061

(in percent of GDP)

article image
Panel estimated coefficients are based on Imam, Minoiou, (2008), and expressed in natural logarithms.Robust standard errors in parenthesis; * significant at 10% level; ** significant at 5% percent; *** significant at 1% level.

The dependent variable is current account to GDP ratio

Country-specific for Comoros under the fixed effect panel estimator.

15. Imam and Minoiu (2008) also used panel estimation techniques to derive estimates of CA norms for countries for which only limited data are available. The extension involves assuming the same long-run elasticities as estimated in the panel, which is particularly useful for Comoros, for which data are available starting since 1980. Also relevant in this case are the panel estimates for the LICs, which have several economic characteristics in common with Comoros.

16. Equation 2 reports the CA norm elasticities estimated by the fixed effects estimator for the LIC sample (norm 4 in table 1):

(2)(CA^GDP)COM,t=−4.895+0.557×(FISCGDP)COM,t+0.056×(NFAGDP)COM,t−0.674×RELGDPCOM,t−0.207×GROWTHCOM,t−0.454×POPCOM,t

Where t = 1980,…,2005 in the model and t = 2007,…,2013 for the projection, and the reported country-specific fixed effect is captured by the scalar to account for unobserved heterogeneity (−4.9 for Comoros).

is specific to Comoros. The time-varying fundamentals—factors affecting external and internal balance (see Box 1)—include the following regressors:

  • 1. FISC, the overall fiscal balance (on a cash basis, and expressed as a ratio to GDP)

  • 2. NFA, the Comoros net foreign assets position (end-period percent of GDP)

  • 3. RELGDP, relative per capita GDP (expressed as a deviation from US income) to control for the stage of development of the economy

  • 4. GROWTH, Comoros’s per capita GDP growth, to control for relative economic growth

  • 5. POP, the growth rate of population, a demographic control capturing the size of the economically dependent population.

Fundamentals Affecting Saving and Investment

The fundamental equilibrium exchange rate (FEER-MB) approach or saving-investment (S-I) model relates a country’s current account (equal to national saving less domestic investment) to a number of explanatory determinants over the medium-term:

  • Fiscal position. Government budget deficits can lower desired national saving, and lead to a deficit in the current account, if changes in public saving are not fully offset by changes in private savings (i.e., there is no full Ricardian equivalence), which would lead to a deficit in the current account. Conversely, an improvement in the fiscal position is associated with a higher current account balance (the coefficient of variable FISC/GDP in equation 2 should be positive).

  • Net foreign asset (NFA) position. A current account position is consistent with a stable ratio of NFA to GDP. Therefore, a higher NFA position is associated with a higher current account balance (the coefficient of variable NFA/GDP in equation 2 should be positive).

  • Stage of development. This is proxied by a country’s relative per capita GDP (RELGDP in equation 2), expressed as a deviation from a reference country (US income), and per capita income growth (GROWTH). In low-income countries (early stage of development and high per capita income growth), the rate of return to capital, and therefore the rate of investment, should be high. Thus, lower relative per capita GDP or higher per capita GDP growth will increase investment relative to savings and reduce current account balances (the coefficient for both variables should be negative for low-income countries).

  • Dependency ratio. The domestic saving rate should depend on the age profile of the population. A population that grows faster has a higher proportion of young people and is associated with a higher rate of consumption, resulting in a lower rate of savings. Therefore, an increase in population growth is associated with a lower current account balance (the coefficient of the POP variable should be negative).

1 For a theoretical background for this model, see Masson (1989) and Lee, et al. (2006). For an empirical investigation, see Chinn and Prasad (2003) and Imam and Minoiu (2008)).

17. The estimated elasticities from equation 1 are in line with economic theory and intuition in terms of signs and magnitude: (i) a 1 percent increase in the overall fiscal balance-to-GDP ratio predicts an improvement in the current account of half a percentage point of GDP; (ii) a higher NFA/GDP position is associated with a higher CA surplus; however, the coefficient is much smaller (0.05 percent of GDP); (iii) raising income by 1 percentage point relative to US income worsens the CA by 0.7 percent, but higher per capita growth causes it to deteriorate by a fifth of a percentage point (LIC sample). The demographic control variable shows that an increase in the population growth rate by 1 percentage point is associated with a deterioration of the CA balance by half a percentage point of GDP.

18. The second step gauges the sensitivity of the CA balance to changes in the REER (Box 3).

Estimating Current Account Elasticities for Comoros

Trade elasticities for Comoros are estimated by applying a standard empirical trade model that relates import volumes to relative import prices and domestic income and export volumes to relative export prices and foreign income. Two specifications are estimated: ordinary least squares (OLS) and the error-correction model (ECM).1 The main results (see text table) are that (i) the price elasticities are statistically significant and higher than 1 in absolute value, which suggests that the Marshall-Lerner conditions are met and therefore RER depreciation would improve the trade balance; (ii) with price elasticities relatively high, smaller changes in RER would be needed to adjust the trade balance; and (iii) in the OLS specification, the income elasticity of imports is strong and statistically significant (a 1 percent increase in income increases imports by more than 2 percent) while the income elasticity to exports is negative but statistically insignificant.

Text Table 1.

Standard empirical model Long-Run Comoros Trade elasticities, 1985-2007

article image
Source: Author’s calculations.Note: Imports and exports of goods and services.Variables in logarithms. Standard errors in parenthesis

(*) denotes significance at 1% (5%) level.

Using period average ratios of imports of 39 and exports of 17 as a share of GDP, and the OLS price elasticities of ηM = −1.14 and ηX = −1.36, we obtain an estimated elasticity of the current account to the REER of ηCA = 0.61.2 This implies that a depreciation of 1.6 percent of the REER would be needed to improve the Comoros current account by 1 percent. Using the ECM specification, current account elasticity would be slightly lower, 0.45, implying that a depreciation of 2.2 percent in the REER would be needed to improve the current account by 1 percent.

1 See Appendix 1 for details of the econometric methodology.2 In line with the IMF-CGER methodology (Lee et al., 2006), changes in the REER affect the current account solely through the balance of goods and services.

19. In the last step, the analysis assesses the adjustment in the real exchange rate that would be needed to close any gap between the estimated CA norm and the underlying CA based on estimated trade elasticities.14 Before this is done, two alternative underlying CAs are estimated by applying a Hodrick-Prescott trend (HP) and a 3-year moving average (MA), with a view to filtering out the influence of temporary effects. Given the sensitivity of the results to the choice of sample and panel estimator, the reference CA norm is averaged out across all the alternative estimates (Figure 4), resulting in a CA deficit norm of 5.4 percent of GDP. On this basis, the estimated improvement of the underlying CA deficit needed over the medium term would be equivalent to either 2.3 or 3.4 percentage points of GDP, depending on whether the HP trend or the 3-year MA is used.

Figure 4.
Figure 4.

FEER-MB Approach: CA Norms vs Underlying CA, 2007-2013 Averages, in percent of GDP

Citation: IMF Staff Country Reports 2009, 046; 10.5089/9781451809206.002.A001

Source: Staff estimates.Note: the underlying current account is expressed as either a three-year moving average (WEO proj.) or an HP trend to filter out temporary factors, and is based on a real effective exchange appreciation of 10 percent over 2007-13. The average CA norm estimate is computed across all 6 CA norms.

20. The current account elasticities (Box 3) are then used to compute the real exchange rate changes that are needed to eliminate the gap between the underlying CA deficit and the CA norm.15 To do so, we use the adjusted underlying CA (as a percent of GDP), which assumes a cumulative real exchange appreciation of about 10-12 percent against the main Comoros trading partners over the period 2008–13.16 Table 2 summarizes the changes needed in the CA and RER to reach equilibrium between savings and investment over the medium term. On average, the needed reduction in the CA deficit over the medium-term is estimated at 8–8.5 percentage points of GDP, which implies a RER depreciation of about 11–12 percent. These results indicate that a CA adjustment is needed over the medium term, which may require a 12 percent depreciation of the REER over the medium term, given the economic fundamentals.

Table 2.

Current Account: Actual, Underlying and Estimated Norms: 1985-2013

(in percent of GDP)

article image
Source: Staff estimates.

The econometric specification for the current account norms uses coefficients from Iman and Minoiu, (2008).

Assuming a current account elasticity of 0.61 (OLS specification), and adjusted for the projected real appreciation in the underlying CA over the period 2007-13 (10 percent RER appreciation).

D. The External Sustainability Approach

21. The external sustainability approach emphasizes the relationship between a country’s CA balance and its long-run net foreign asset (NFA) position.17 Following Lee et al. (2006), it consists of three steps: (i) calculate the level of the current account that would stabilize the NFA position at a given benchmark level; (ii) compare observed CA flows or the NFA position with the benchmark; and (iii) calculate the REER adjustment necessary to bring the CA balance to the level that stabilizes the NFA position as targeted.

22. An important reason for caution when assessing Comoros’s net external asset position is that Comoros is in debt distress. At the end of 2007 the external debt-to-GDP ratio was about 60 percent, above the HIPC and low-income debt sustainability threshold. Without an adjustment program, and in the absence of HIPC and MDRI debt relief, the net external asset position would not converge toward a sustainable equilibrium because most debt indicators would remain above their policy-dependent thresholds even if there were no unfavorable shocks.18 Therefore, in the following forward-looking analysis, it is assumed that HIPC and MDRI debt relief is attained in 2012 and that CA income and transfer components are unchanged.

23. The main problem in implementing the external sustainability approach is choosing the NFA target. Before selecting a target it is useful to assess (1) the long-run NFA position that would result from keeping the present CA balance; and (2) the CA balance required to stabilize the NFA position at its current level. The target NFA position is then calculated taking account of both country circumstances and the composition of current and financial account flows.

24. According to the external sustainability approach, the CA level that is consistent with an unchanged NFA-to-GDP ratio is calculated as follows:

(3)cas=g+π(1+g)(1+π)bs

where:

cas = stabilizing level of the CA balance to GDP

g = estimated growth rate of real GDP

π = estimated GDP inflation

bs = stable NFA to GDP ratio

For Comoros the following assumptions are made:

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Implications for the Current CA and NFA Levels

25. Equation (3) can be used in a number of ways to assess the sustainability of the Comoros current account: (i) it could be assumed that the 2008 CA deficit is projected into the future to identify the implications for the long-run NFA position. (ii) conversely, we can calculate the CA deficit that would keep the NFA position at its 2007 level. (iii) We can calculate the CA deficit that would result by assuming an NFA position that could be considered an appropriate target from the normative point of view.

  • 1) Projecting the 2008 CA. Using the current projection, the underlying CA deficit (including grants) is estimated at 8.7 percent of GDP for 2008. For Comoros the real growth rate is estimated at 4 percent and GDP inflation at 3 percent based on projections for these variables over the medium term (2008–2013). According to equation (3), a current account deficit of 8.7 percent of GDP would result in a long-run NFA position equal to −133 percent of GDP, which seems too high to be sustainable.

  • 2) Maintaining the 2007 NFA position. We now estimate the CA deficit required to keep the Comoros NFA position at its current level of–34 percent of GDP. Using equation (3), a CA deficit of 2.2 percent of GDP would be consistent with constant NFA as a share of GDP, which seems too low for a developing country in the situation of Comoros and would imply 6–7 percent real exchange depreciation (Table 3).

  • 3) Appropriate target for the Comoros NFA position. We now calculate the CA deficit that would result from assuming an NFA position that is an appropriate target from a normative standpoint. Since foreign direct investment (FDI) is the key variable for boosting long-run economic growth in a low-income country like Comoros, two long-run NFA targets are calculated: The first scenario (low FDI) is based on gradually increasing the current FDI-to-GDP ratio from 1.6 percent of GDP at the end of 2007 to 2.5 percent by 2013, on track for a ratio of 7.5 percent by the end of 2030. The second scenario (high FDI) assumes more accelerated growth for the FDI-to-GDP ratio, from 1.6 percent of GDP at the end of 2007 to 17.2 percent by 2013, on track for a ratio of 52 percent by the end of 2030. The Comoros NFL position by 2030 is thus calculated to be 48 percent of GDP for the high-FDI scenario and 3.1 percent for the low. Using the average CA norm of 5.7 estimated in the MB-FEER approach, the corresponding projected CA deficit would be 3.3 percent of GDP in the high-FDI scenario and 0.2 percent in the low. With the elasticity of the CA with respect to RER of 1.6, real depreciations of 3.9 percent and 9 percent would be required to align the underlying CA deficit with these CA norms (Table 3).

Figure 5.
Figure 5.

NFA Target Projections and Current Account Sustainability

Citation: IMF Staff Country Reports 2009, 046; 10.5089/9781451809206.002.A001

Source: author’s calculations.
Table 3.

Comoros: Assessment of the REER under the External Sustainability Approach

(in percent of GDP, unless otherwise specified)

article image
Source: author’s calculations

as of end-2007, NFA in Comoros was -34, and current account deficit was 6.7 percent of GDP.

Using elasticity of RER with respect to the CA of 1.6 percent. A minus sign implies depreciation.

Assumes a CA norm of 5.7 percent of GDP, as estimated in the MB-FEER. A minus sign implies a CA reduction.

26. These results suggest that the change in CA needed to achieve external sustainability in the long run (by 2030) is either 2.4 for the high-FDI scenario or 5.5 percent of GDP for the low. Correspondingly, Comoros’s real exchange rate would be overvalued by either 4 percent (high-FDI scenario) or 9 percent (low).

27. Overall, while the BEER-SE approach indicates that as of 2007 the gap between actual and equilibrium REER had been greatly reduced (from 30 to 4 percent undervaluation from 2003 through 2007), the other two approaches indicate that for Comoros a substantial narrowing of the CA deficit may be needed over the medium and long term, which implies that some real depreciation of the exchange rate would be required. Table 4 summarizes the required CA and REER adjustments for each of the three approaches.

Table 4.

Comoros: Assessment of the Current Account and REER

(in percent of GDP, unless otherwise specified)

article image
Source: author’s calculations

Using elasticity of RER with respect to the CA of 1.6 percent.

Change in the Current Account consistent with a constant NFA based on 2007 (- 34 percent of GDP)

IV. Structural Indicators of Competitiveness

28. In addition to macroeconomic and equilibrium exchange rate analysis, a comparative analysis of the quality of the business environment is very important in assessing Comoros’s relative structural competitiveness and potential for economic growth and poverty alleviation. This section looks primarily at survey-based indicators, such as the World Bank’s Doing Business Indicators and Worldwide Governance Indicators.

29. The 2009 World Bank Doing Business Report ranks Comoros in the bottom 20 percent of the economies of the world (155th out of 181) in overall quality of the business environment. Within sub-Saharan Africa, Comoros ranks in the bottom half (25th out of 46). As of 2007, Comoros was also ranked as one of the most difficult business environments in a sample of 32 small island developing states (SIDS). Trading across borders, starting and closing a business, and getting credit are the main areas where improvements are needed. However, in areas like paying taxes and registering property, Comoros compares well with other SDIS countries.

Table 5.

The Comoros and Selected East African Countries: Business Environment

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Source: World Bank Doing Business Survey 2009 report.

Bottom ranking (181) equals worst business climate, top (1) equals best business climate.

30. On structural governance, the World Bank Governance Indicators show that Comoros’s rank has worsened in the last decade, especially on government effectiveness and the quality of regulation (bottom 10 percent) (Figure 6).19 The country’s position has also worsened on political stability and absence of violence, but it has made progress on control of corruption and rule of law. Within the 15-country Franc Zone, Comoros’s position is mixed. It ranks in the top 5 on control of corruption and top 6 on voice and accountability, but it ranks lowest on quality of regulation and fourth worst on rule of law (Figure 7).

Figure 6.
Figure 6.

Comoros: Structural Indicators of Governance, 1996-2007

(percentile rank: 0-100)1

Citation: IMF Staff Country Reports 2009, 046; 10.5089/9781451809206.002.A001

Source: World Bank, and author’s calculations.1 Indicates rank of the country among all the countries in the world; 0 (100) indicates lowest (highest) rank.
Figure 7.
Figure 7.

Comoros and CFA Countries: Structural Indicators of Governance in 2007

(percentile rank: 0-100)1

Citation: IMF Staff Country Reports 2009, 046; 10.5089/9781451809206.002.A001

Source: World Bank, and author’s calculations.1 Indicates rank of the country among all the countries in the world; 0 (100) indicates lowest (highest) rank.
Table 6.

The Comoros and Selected Small Island States: Cost of Trading Cross Border, 2008

article image
Source: World Bank Doing Business Survey (2008).

V. Conclusions

31. This paper has assessed the external competitiveness of the Comoros. The analysis shows that the real effective exchange rate was broadly in line with economic fundamentals at end-2007. As external and internal imbalances have widened in recent years, the equilibrium REER has depreciated over time. Against a backdrop of steady appreciation of the actual REER, notably due the strengthening of the euro, the gap between the actual and equilibrium exchange rates has noticeably narrowed.

32. Both the macroeconomic balance and external sustainability approaches suggest that a substantial narrowing of the current account deficit—ranging between 8 and 12 percent of GDP—may be needed over the medium term. This would be associated with a real depreciation of the exchange rate of 4–7 percent only, considering the rather strong sensitivity of the current account to changes in the real effective exchange rate.

33. The country fares poorly on structural competitiveness compared to other low-income small states in the region and within the Franc Zone, underscoring the need for wide-ranging structural reforms. The authorities have indicated that measures to address the structural constraints to growth would feature prominently in their medium-term reform agenda—with a focus on state-owned enterprises (SOEs), business licensing requirements, investors’ protection, and the legal system. They also noted that enhanced international trade and foreign direct investment (FDI) would facilitate economic diversification, including development of Comoros’ significant tourism potential, and boost growth.

Appendix I

This appendix provides details on the econometric methodology and the results discussed in the text.

Econometric estimates of trade elasticity

Trade elasticities for Comoros are estimated by applying a standard empirical trade model that relates import volumes to relative import prices and domestic income, and export volumes to relative export prices and foreign income. This model was estimated for Comoros’ imports and exports of goods and services for the period 1985-2007 using annual data described in the appendix (WEO). The underlying model, which assumes constant elasticity and perfectly elastic supply of domestic and foreign-produced goods, takes the following form (in logs):

(0.1)LnMt=α+βLn(PM/PY)t+γLnYt+εt
(0.2)LnXt=α′+β′Ln(PX/PY*)t+γ′LnYt*+εt′

Where M and X denote real imports and exports (i.e. deflated by import and export price index), Y and Y* denote real home and foreign GDP, PM and PX denote the aggregate import and export deflators (in local currency), Py and Py* denote the domestic and foreign

GDP deflators (in local currency), and εt and εt′ are the error terms. The long-run elasticities (β, β′ γ, and γ′) were obtained by estimating, with ordinary least squares (OLS) the static version of the equations above, which can be interpreted as the first stage of the two-step cointegration procedure of Engle and Granger (1987). Alternatively, we also consider a three-variable single-equation error correction model (ECM), which takes the following form,

(0.3)Δ(LnMt)=α0−α1(Ln⁢ Mt−1−β2Ln(PM/PY)t−1−β3LnYt−1)+β0Δ(Ln(PM/PY)t)+β1ΔLnYt+εt
(0.4)Δ(LnXt)=α0′−α1′(LnXt−1−β2′Ln(PX/PY*)t−1−β3′LnYt−1*)+β0′Δ(Ln(PM/PY)t)+β1′ΔLnYt*+εt′

Where β0, β1, β0′, and β1′ estimated coefficients capture the contemporaneous or short-term elasticity of imports and exports to relative prices and income. The coefficient β2, β3 and β2′, β3′ capture the long-run elasticity or equilibrium effect. α1 reflects the speed of adjustment to the equilibrium. To calculate the elasticity of the current account to changes in the real exchange rate (RER), we assume that changes in RER affect the current account solely through the balance of goods and services (TB), in line with IMF-CGER methodology.

Finally, we can compute the current account elasticity to RER changes applying the following formula:20

(0.5)∂(TB/GDP)/(∂RER/RER)=ηX(XGS/GDP)−(ηM−1)(MGS/GDP)

Appendix II

Survey-Based Indicators of structural competitiveness and governance.

The World Governance Indicators (WGI) project reports aggregate and individual governance indicators for 212 countries and territories over the period 1996–2007, across six dimensions of governance. These are:

  • Voice and accountability (VA) measures the extent to which a country’s citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association, and a free media

  • Political stability and absence of violence (PV) measures the perceptions of the likelihood that the government will be destabilized or overthrown by unconstitutional or violent means, including domestic violence and terrorism;

  • Government effectiveness (GE) measures the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government’s commitment to such policies;

  • Regulatory quality (RQ) measures the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development;

  • Rule of law (RL) measures the extent to which agents have confidence in and abide by the rules of society, in particular the quality of contract enforcement, the police, and the courts, as well as the likelihood of crime and violence, and

  • Control of Corruption (CC) - measuring perceptions of the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as “capture” of the state by elites and private interests.

These indicators combine the views of a large number of enterprise, citizen and expert survey respondents in industrial and developing countries. The individual data sources underlying the indicators are drawn from a diverse variety of survey institutes, think tanks, non-governmental organizations, and international organizations.

Statistical Appendix Tables

Table 1.

Comoros: Gross Domestic Product by Sector at Current Market Prices, 2000-07

(In millions of Comorian francs)

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Sources: Directorate of Statistics; and Fund staff estimates.

Including import duties and taxes.

REB = real estate business, and STE = services to enterprises.

Table 2.

Comoros: Gross Domestic Product by Sector at 1990 Constant Prices, 2000-07

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Sources: Directorate of Statistics; and Fund staff estimates.

Including import duties and taxes.

REB = real estate business, and STE = services to enterprises.

Table 3.

Comoros: Source and Use of Resources at Current Market Prices, 2000-07

(In millions of Comorian francs)

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Sources: Directorate of Statistics; and Fund staff estimates.
Table 4.

Comoros: Source and Use of Resources at 1990 Constant Prices, 2000-07

(In millions of Comorian francs)

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Sources: Directorate of Statistics; and Fund staff estimates.
Table 5.

Comoros: Food Crop Production, 2000-07

(In metric tons, unless otherwise indicated)

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Source: Directorate of Agriculture, Ministry of Agricultural Production, Marine Resources, and Environment.
Table 6.

Comoros: Livestock, 2000-07

(In numbers of head)

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Source: Directorate of Breeding, Ministry of Agricultural Production, Marine Resources, and Environment.

The number of cattle declined in 2004 owing to a disease.

Since 1999 data based on new agricultural survey.

Table 7.

Comoros: Production of Meat, Fish, and Dairy Products, 2000-07

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Source: Directorate of Breeding, Ministry of Agricultural Production, Marine Resources, and Environment.
Table 8.

Comoros: Export Crop Production, 2000-07

(In metric tons, unless otherwise indicated)

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Sources: Comorian Office of Vanilla; and Directorate of Projects, Ministry of Agricultural Production, Marine Resources, and Environment.
Table 9.

Comoros: Prices of Export Crops, 2000-07

(In Comorian francs per kilogram)

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Sources: Comorian Office of Vanilla; and General Directorate of Customs.

The yield from 5 kilograms of green vanilla is about 1 kilogram of dried vanilla.

Floor prices.

Table 10:

Comoros: Cost Structure of Vanilla Exports, 2001-07

(In Comorian francs per kilogram)

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Sources: Comorian Office of Vanilla; and General Directorate of Customs.

The yield from 5 kilograms of green vanilla is about 1 kilogram of dried vanilla.

Includes contributions to the Fonds de Solidarité Vanille (CF 1,000/kg). In 2003 it includes a special contribution for social projects of CF 3,232/kg.

For 2004 consists of: 30 tons at $223.7/kg; 8 tons at $140.0/kg; 52 tons at $ 49.5/kg

Table 11.

Comoros: Production and Consumption of Electricity, 2000-07

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Source: Electricity and water company (MAMWE).

The difference between production and consumption reflects power losses and fraud.

Table 12.

Comoros: Indicators of Tourism Activity, 2000-07

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Source: General Directorate of Tourism, Ministry of Transportation and Tourism.

No official data have been provided by the Galawa Hotel.

2003 and 2004 based on Anjouan data.

Includes the Ylang-Ylang, Coelacanthe, and Al Amal hotels.

The Sun Resorts Group includes the Galawa, Maloudja, and Itsandra hotels.

Includes the Kartala, and, since 1986, the Relais de Singali hotels.