This 2008 Article IV Consultation highlights that Djibouti’s macroeconomic performance improved significantly, but inflation pressures are intensifying. Real GDP growth accelerated to 5.3 percent in 2007, driven mainly by foreign direct investment concentrated in the construction and port services. Executive Directors have welcomed Djibouti’s strong economic growth driven by large foreign direct investments in the port and other key sectors of the economy. Directors have also emphasized the importance of maintaining the fiscal consolidation objective, with a view to controlling inflation and creating fiscal space to finance the poverty reduction strategy.


This 2008 Article IV Consultation highlights that Djibouti’s macroeconomic performance improved significantly, but inflation pressures are intensifying. Real GDP growth accelerated to 5.3 percent in 2007, driven mainly by foreign direct investment concentrated in the construction and port services. Executive Directors have welcomed Djibouti’s strong economic growth driven by large foreign direct investments in the port and other key sectors of the economy. Directors have also emphasized the importance of maintaining the fiscal consolidation objective, with a view to controlling inflation and creating fiscal space to finance the poverty reduction strategy.

September 17, 2008

I - Introduction

I would like to express the deep appreciation of my Djiboutian authorities to Management and Staff for their support and for the constructive policy dialogue during the recent discussions on the 2008 Article IV consultation and the new program supported by an arrangement under the PRGF.

Notwithstanding the adverse impact of the surge in global prices of oil and food and the tension at the border with Eritrea, my Djiboutian authorities have made commendable progress towards preserving macroeconomic stability and laying out required conditions for a successful implementation of a new PRGF-supported program. Economic growth accelerated in 2007 driven by large foreign direct investments. External competitiveness improved through further real effective depreciation of the Djiboutian franc and key structural reforms were implemented, notably, the enforcement of a new labor code, the physical audit of the civil service, and the adoption of a PRSP prepared in collaboration with the World Bank and the Fund.

High oil and food import price shocks have had severe impact on Djibouti’s cost of living. In response, the authorities introduced temporary measures to eliminate consumption taxes on five basic food staples and reach agreement with importers and retailers to cap their profit margins on these food items. However, going forward, my Djiboutian authorities are strongly committed to continue their efforts in maintaining macroeconomic stability, stimulate foreign and domestic investment, expand growth, create jobs, reduce poverty and accelerate structural reforms. In order to strengthen their efforts, my authorities are requesting a three-year arrangement under the PRGF. The well documented debt sustainability analysis has underscored the high risk of debt distress Djibouti is facing. My authorities are hopeful that a successful implementation of the new PRGF-supported program will help mobilize the support of their development partners, advance in structural reforms, improve competitiveness and sustained higher economic growth.

II - Recent Macroeconomic Developments

The stable political situation and foreign investments flows in 2006-07 have led to significant improvements in macroeconomic performance. Real GDP accelerated to 5.3 percent in 2007 from 4.8 percent in 2006 thanks to investments in the construction and port services sectors. The overall fiscal deficit remained at about 2.5 percent with a basic fiscal deficit narrowing from 7.2 percent in 2006 to 4.9 percent in 2007 as the current expenditure declined to 26.5 percent in 2007 from 30 percent in 2006. However due mainly to the increase in imports financed by foreign investments and the surge in food and oil prices, the current account deficit stood at about 25 percent and was more than offset by the large capital and financial account surplus. The gross official reserves increased to USD 130 million or to a currency board cover of 116 percent. The credit to the private sector also increased by 23 percent in 2007 after being stagnant over the past years.

The strong commitment of my Djiboutian authorities to improve the competitiveness of the economy has translated into significant progress in implementing structural reforms. The reform of the civil service has advanced with the completion of the physical audit and the establishment of a single registry of civil servants. A new labor code came into force. The reform of the social safety system was implemented by merging two of the three pension funds. The computerization of the expenditure chain was finalized. The audited financial statements of public enterprises for 2004 and 2005 were published on the website of the ministry of finance in December 2007. This practice will continue by publishing the 2006 audited statements in 2008. The authorities announced in the 2008 budget law the introduction of the VAT early 2009 and also adopted the proposed measures for this introduction including an action plan. Progress has also been made in unifying and simplifying the system of tax exemptions by merging the various preferential tax regimes. With regard to the anti-money laundering, an assessment of the system in place was conducted by the Fund’s Legal Department. In addition the Central Bank of Djibouti benefited also Fund’s technical assistance in implementing the international financial reporting standards (IFRS).

My Djiboutian authorities are fully aware on the urgent need to improve the competitiveness of the economy by lowering domestic production costs and preserving macroeconomic stability. They are determined to pursue the implementation of structural reforms and strengthen the regulatory framework for the development of the private sector seen as an engine of growth and job creation in order to alleviate poverty. To this end my authorities intend to further mobilize the support of their development partners and will organize a donors’ conference in November 2008.

III - Medium-Term Program and Policies for 2008-09

The medium-term economic and financial strategy under the PRGF supported program is consistent with the National Initiative for Social Development (INDS) launched in January 2007. This strategy aims at (i) placing the economy on a path of sustainable growth to reduce unemployment, mitigate poverty and improve social indicators; (ii) ensuring domestic financial stability by controlling inflation; (iii) increasing competitiveness and maintaining prudent management of foreign indebtedness; (iv) improving fiscal management and transparency and (v) strengthening administrative and institutional capacity.

In implementing this strategy my Djiboutian authorities intend to take full advantage of the country’s political stability, strategic position on the most used sea route, the currency board arrangement and its participation in the Common Market for Eastern and Southern Africa (COMESA) to modernize and develop the economy and transform Djibouti into a regional trade and services hub.

Fiscal Policy and Debt Sustainability

The authorities are strongly committed to improve fiscal management and implement their poverty reduction strategy. In this regard, they will strengthen revenue mobilization, streamline public expenditure and increase fiscal transparency. In particular, the overall fiscal deficit, on a commitment basis will be reduced from 2.6 percent of GDP in 2007 to 1.9 percent in 2008 and to 1.8 percent in 2009. In order to meet this target, the authorities have initiated strong measures to increase tax revenue and reduce non priority current expenditure.

On the revenue side, based on progress made in modernizing tax administration and establishing the unified integrated tax department, the authorities will introduce in January 2009 a value- added tax (VAT). The VAT will coexist with the sales taxes (TIC) until the introduction of the external common tariff (TEC) under the COMESA arrangement. The VAT will be applied at a single general rate of at least 7 percent and will yield net revenue equivalent to 1.1 percent of GDP in 2009. In addition, a set of measures to promote taxpayer compliance, simplify the tax system and broaden the tax base while consolidating the tax administration will also be implemented. The investment code will be revised by end-February 2009 with a view to streamline tax exemptions and strengthen the procedures and resources for monitoring exemptions.

On the expenditure side, the authorities aim at increasing the effectiveness of public spending and cash management. In this regard, the government accounts through the banking system will be merged into a single Treasury account by end-May 2009. FAD recommendations in the areas of budget classification and preparation of a comprehensive medium-term budget framework will also be implemented in 2009. In order to reduce average purchase costs by achieving large economies of scale, the public procurement of government departments is to be centralized as of August 2008. The stock of domestic payment arrears will also be reduced by 2.5 percent of GDP in 2008-09.

The authorities welcome the conclusions of the debt sustainability analysis conducted by the Fund and the World Bank which indicates that Djibouti’s risk of debt distress in the short term continues to be high despite some improvement in the medium-term projections. External and total government debt are estimated respectively at 59.3 percent and 62 percent of GDP in 2007 including arrears. As regards external arrears, the authorities will negotiate shortly a debt restructuring agreement with the Paris Club. They are also determined to avoid the accumulation of further arrears and intend to improve debt management practices through appropriate technical assistance. Furthermore, they will avoid contracting or guaranteeing nonconcessional loans and will also ensure that public enterprises do not borrow on non concessional terms.

Monetary Policy and Financial Sector Issues

The authorities reaffirm their commitment to maintain the currency board arrangement as it has served to enhance confidence in the Djiboutian franc and banks and remain essential to attract investments. The recent food and oil price shocks have pushed inflation whose impact was partially contained through temporary measures. The authorities are of the view that in the context of a currency board, efforts to contain inflation should focus on fiscal restraint and on reforms aimed at alleviating capacity constraints and fostering competition. The central bank intends to introduce in 2009 after consultation with banks and technical assistance from the Fund, the reserve requirements on deposits to mop up excess liquidity from the banking system and contribute to price stability. The introduction of this new monetary instrument within the framework of the Banking Law will preserve the profitability and financing capacity of the banking system.

The competition within the banking system has been increased with the establishment of three new banks. It has also led to lower intermediation spreads and new banking services. To enhance the integrity of this expanding banking system, the Central Bank will strengthen its supervisory capacity in accordance with the Basle principles. In the same vein the required minimum capital of banks will be doubled in 2009 from DF 300 million to DF 600 million. Moreover, the authorities are looking forward to the recommendations of the FSAP mission assigned to highlight the vulnerabilities of the new financial system and enhance its role as a catalyst for economic growth. Recommendations made by the recent IMF Legal Department in the area of AML/CFT will be fully implemented to raise awareness and increase the effectiveness of the monitoring in the public and private sectors.

Structural Reforms and Competitiveness

The authorities will step up their efforts to further advance in implementing the structural reforms which remain critical to improve Djibouti’s external competitiveness and foster growth and alleviate poverty. In addition to fiscal and financial reforms, the authorities will also enhance the legal and regulatory framework for business through in particular the submission of the new Commercial Code to the National Assembly by end-November 2008 and streamlining the creation for the creation of enterprises under the coordination of the one stop shop at the National Investment Promotion Agency (ANPI) with departments concerned with private investment.

In order to further reduce the costs of production factors, efforts aiming at restructuring and fiscal consolidation of Djibouti-Telecom, ONED and EDD will be enhanced with a view to improve the quality of their services, ensure their financial viability and increase their productivity. With regard to electricity supply in particular, the authorities intend to develop alternative sources. A major agreement was signed with Ethiopia to enable the import of electricity from that country. The new labor Code will be complemented by the adoption of the remaining implementing decrees by end-May 2009 and by end-August renegotiate all collective bargainings agreements.

The authorities are fully aware on the need to strengthen governance and transparency to improve the business climate. In this respect, the General Inspectorate of Finances will be further enhanced with its restructuring and continuously building of its capacity.

On the external front, the authorities are determined to maintain the existing free trade system. The COMESA’s common external tariff will be adopted as soon as an agreement is reached by the member countries on the applicable rates and other technical aspects meeting the WTO requirements.

The authorities’ efforts to improve the quality and timeless of statistic will continue. My authorities are grateful to their development partners for the technical assistance provided in this area. They intend to carry out by end-February 2009 a full population census which will be followed by a comprehensive household expenditure survey with a view to revise the weights used in the CPI basket, update various social indicators and provide new poverty and income distribution estimates.

IV - Conclusion

My Djiboutian authorities are determined to pursue the implementation of sound policies and far-reaching structural reforms to sustain economic growth, increase job creation and make significant inroads in achieving the MDGs. To supplement their efforts, a sustained assistance from the international community is needed. In this regard, my authorities are requesting Fund support through a PRGF arrangement.

Djibouti: 2008 Article IV Consultation and Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility: Staff Report; Staff Statement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for Djibouti
Author: International Monetary Fund