Assessment of Performance Under the Program Supported by Emergency Post-Conflict Assistance and Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility: Staff Report; Supplement, Informational Annex; Staff Statement, Press Release on the Executive Board Discussion; and Statement by the Executive Director of Comoros

This paper discusses an assessment of Comoros’s performance Under the Program Supported by the Emergency Post-Conflict Assistance (EPCA). Overall performance under the EPCA-supported program has been broadly satisfactory. Nearly all EPCA performance indicators for end-March 2009 were observed. Revenue collection was stronger than anticipated. On the spending side, recent measures to improve expenditure management are gradually restoring order in spending operations, although continued difficulties have been experienced in managing the wage bill. All but one of the structural indicators were met.


This paper discusses an assessment of Comoros’s performance Under the Program Supported by the Emergency Post-Conflict Assistance (EPCA). Overall performance under the EPCA-supported program has been broadly satisfactory. Nearly all EPCA performance indicators for end-March 2009 were observed. Revenue collection was stronger than anticipated. On the spending side, recent measures to improve expenditure management are gradually restoring order in spending operations, although continued difficulties have been experienced in managing the wage bill. All but one of the structural indicators were met.

I. Background

1. Political conditions have improved markedly since the eviction of secessionist president Bakar and the election in June 2008 of a pro-Union president on the island of Anjouan. Another milestone was achieved in May 2009 when a constitutional amendment enhancing central government authority over budget and economic management was successfully approved through a fair and open national referendum. These developments bode well for reform going forward. However, tensions between the Union and islands authorities remain, fueled by the latter’s reluctance to cede more power to the central government.

2. Economic activity has yet to recover from a long period of political instability (Figure 1). In 2008, real GDP growth increased modestly to 1 percent, underpinned by activity in subsistence agriculture, donor-funded public works, and private sector construction; and at end-year inflation rose to 7.4 percent. Despite strong worker remittances inflows, high prices for energy and food imports, as well as the release of pent-up import demand at the end of the Anjouan crisis, pushed the external current account deficit to 11.3 percent of GDP in 2008. Economic activity has been subdued in 2009, and real GDP growth is unlikely to exceed 1 percent this year, notwithstanding a marked improvement in the terms of trade. Constraining factors include a difficult external environment, resulting in lower-than-anticipated spending for public works and the postponement of key private sector infrastructure projects in tourism.

Figure 1.
Figure 1.

The Comoros: Recent Economic Developments, 2003–2008

Citation: IMF Staff Country Reports 2009, 307; 10.5089/9781451809213.002.A001

Sources: Comorian authorities; and IMF staff estimates.

3. Fiscal measures implemented since 2008 are strengthening the fiscal position. Underpinning the performance are reforms to improve revenue collection, better control spending, and, more generally, enhance the efficiency of budget management; although continued difficulties in managing the wage bill have been experienced. The primary fiscal deficit is projected to decline to 1.6 percent of GDP in 2009 (2.7 percent in 2008).

4. Monetary policy has remained supportive. In 2008, credit growth to the private sector was strong and is projected to increase by 10 percent in 2009, in part reflecting trade-related activity. Also, the opening of two new banking institutions in the country is expected to enhance financial intermediation and support private sector activity.

5. Pending comprehensive debt relief under the HIPC and MDRI, Comoros’ external debt, including sizable arrears, remains unsustainable. The ratio of NPV of government debt-to-exports of goods and services is projected at the equivalent of 230 percent at end-2009. However, the government has reached agreement with creditors to defer repayment of arrears at end-December 2008 (excluding past frozen debt of the postal system to France) amounting to US$13.95 million and debt service obligations falling due in the 2009, equivalent to US$1.8 million.

II. Performance Under the EPCA

6. Despite challenging domestic and external circumstances, overall performance under the EPCA-supported program has been broadly satisfactory. Nearly all EPCA performance indicators for end-March 2009 were observed (Text Tables 1 and 2). Revenue collection was stronger than anticipated, the upshot of continuing efforts, including enhanced computerization, to improve customs and tax administration. On the spending side, recent measures to improve expenditure management, especially the introduction of a new treasury committee, appear to be restoring order in spending operations, notwithstanding continuing difficulties in managing the wage bill. As a result, the end-March 2009 target for the primary domestic budget balance (0.6 percent of GDP) was met; and the target for net domestic credit to the government was observed with a substantial margin (0.5 percent of GDP). Nevertheless, given the lack of domestic bridge resources to address short-term treasury financing needs, repayment of US$0.575 million in first-quarter debt service to the World Bank was effected with a slight delay. All structural indicators were met but one, as progress on the computerization of wage payment operations continued to be slow in the main island of Ngazidja.

Text Table 1.

The Comoros: Quantitative Indicators Under the EPCA1

December 2008 - March 2009

(In millions of Comorian Francs)

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Definitions of quantitative indicators and adjusters are provided in the Technical Memorandum of Understanding (TMU).

Cumulative from January 1, 2008 for end-December 2008, and from January 1, 2009 for end-March 2009.

NCG is based on end-December of previous year in the monetary survey, and includes IMF assistance.

As of December 31, 2008, the accumulation of payments due (change in float) was CF 1705 mn.

Excluding trade credits.

Text Table 2.

The Comoros: Structural Indicators Under the 2008–09 EPCA

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III. Policy priorities and Macroeconomic Framework under the PRGF

7. The medium-term reform agenda promotes sustained strong growth to achieve deeper gains in poverty alleviation and faster progress toward the Millennium Development Goals (MDGs). In support of these goals the authorities’ program and related conditionality are designed with a view to (i) consolidate the fiscal position and achieve sustainability through a strengthening of the domestic primary balance together with debt relief in the context of the HIPC/MDRI initiatives; and (ii) deepen the structural reform agenda to address core economic distortions in order to provide the basis for stronger economic growth (MEFP, Tables 1 and 2). Specifically, the medium-term reform program will be geared to:

  • Accelerating recent progress in fiscal consolidation and restoring external viability;
  • Promoting financial sector soundness;
  • Strengthening institutions and improving governance; and
  • Improving the investment climate.

8. The proposed PRGF arrangement supports a policy agenda anchored in Comoros’ I-PRSP 1, which was submitted to the consideration of the IMF and World Bank Boards in May 2006 (Box 1). The I-PRSP identifies seven strategic pillars and encompasses 35 priority programs with a total estimated cost of about US$400 million, most of which are for energy and infrastructure improvements. Given severe capacity and financing constraints, the PRGF-supported program draws on a conservative medium-term fiscal scenario that projects donor support of US$ 61.2 million (10.8 percent of GDP) per annum. The program will, however, accommodate additional aid flows that may become available.

The Comoros: I-PRSP, Poverty and the MDGs

Poverty remains pervasive in Comoros, with 37 percent of households–or about 45 percent of the population–living below the poverty line (estimated at about US$700 income per capita per year). The incidence of poverty varies across islands and is generally higher in rural areas. Comparison of 1995 and 2004 data shows that the overall situation seems to have improved (from 47 to 37 percent poverty incidence), albeit inequalities in per capita expenditures increased substantially, mostly due to variances in inflows of remittances from the Diaspora.

To address the poverty challenges, Comoros’ I-PRSP centers around three main objectives: (i) sustained economic growth; (ii) improved human capital development; and (iii) improved governance and political stability. The I-PRSP sets seven core strategic axes: generate conditions for sustainable development; boost the private sector by focusing on growth sectors; strengthen governance, justice, and security; improve the health status of the population; promote education and professional training to improve human capital; promote a healthy environment and sustainable development; and strengthen security and efforts to combat terrorism.

Achieving the PRSP objectives will require unwavering efforts to improve public financial management as well as inroads in inter-island cooperation. It will also require higher international financial aid in the form of immediate support to finance pressing social services, public investment and technical assistance needs, but also in the form of comprehensive debt relief.

There has been good progress on several of the MDGs, namely: achieving universal education, promoting gender equality and empowering women, and reducing child mortality. One of the most challenging targets—especially in the wake of the food price crisis—will be to halve the proportion of people who suffer from hunger.

A. Promoting Growth in a Low Inflationary Environment

9. The key macroeconomic objectives under the PRGF for 2009–12 are to (i) raise real GDP growth to 3–4 percent by program end, (ii) limit annual inflation to around 3 percent, and (iii) contain the external current account deficit below 10½ percent of GDP by 2012 (Figure 3).

Figure 2.
Figure 2.

The Comoros: Medium-Term Framework, 2009–2012


Citation: IMF Staff Country Reports 2009, 307; 10.5089/9781451809213.002.A001

Sources: Comorian authorities; and IMF staff estimates.
Figure 3.
Figure 3.

The Comoros: Exchange Rate Developments,1998-2008

Citation: IMF Staff Country Reports 2009, 307; 10.5089/9781451809213.002.A001

10. Within the medium-term framework spelled out above, real GDP growth is projected to double to 1½ percent in 2010 (0.8 percent in 2009). The modest recovery is to be driven by accelerated (donor-funded) public works and increased FDI in tourism—as currently suspended projects are resumed. Other contributing factors would include the gradual improvement in world economic conditions and in the investment climate. Following a partial rebound in 2009 on the back of falling import prices, the terms of trade would decline modestly with a firming of import prices as the global economy recovers. Nevertheless, import growth would remain relatively strong, spurred by remittances and higher FDI.

B. Strengthening Fiscal Policy and Achieving External Sector Sustainability

11. Sustained fiscal consolidation will require implementing strong measures to boost revenue collection and improve the composition of expenditure (Box 2 and MEFP, ¶ 14-26). The fiscal strategy under the new PRGF arrangement will aim to make space for priority sectors under the I-PRSP, begin reducing domestic payments arrears, and prevent further deterioration of debt sustainability. The revenue-to-GDP ratio is targeted to rise by 1.2 percentage-points to 14.3 percent of GDP by 2012, and current primary expenditure will modestly decline as the wage bill and outlays on goods and services are gradually contained; this will allow an increase in transfers to selected medical and education institutions and in growth-supporting capital spending; as well as a narrowing of the domestic primary budget deficit to 0.8 percent of GDP (Table 2B). As a result, each category of expenditure will, on average, be 0.3 percentage-of-GDP higher during the program period compared to their level of the preceding two years.

Table 1.

The Comoros: Selected Economic and Financial Indicators, 2007–12

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Sources: Comorian authorities; and IMF staff estimates and projections.

Errors and omissions for 2007. The program financing gap for 2009-12 could be covered as expelled out in the Text Table 4.

Balance of payments revised in accordance with new official historical data.

NPV of external debt 2009 - 2012, different than those in the LIC-DSA which takes into account the PRGF purchase of 152.5 percent of quota.

Table 2.A

The Comoros: Consolidated Government Financial Operations, 2007–12

(Millions of Comorian francs, cumulative, unless otherwise indicated)

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Sources: Ministry of Finance; and IMF staff estimates.

The program financing gap for 2009-12 could be covered as expelled out in the Text Table 4.

Table 2.B

The Comoros: Consolidated Government Financial Operations, 2007–12

(Percent of GDP, cumulative, unless otherwise indicated)

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Sources: Ministry of Finance; and IMF staff estimates.

The program financing gap for 2009-12 could be covered as expelled out in the Text Table 4.

Fiscal Measures Under the PRGF-Supported Program

Authorities are committed to implement an ambitious fiscal strategy based on the following measures (MEFP ¶14-26):


  • Establishment of a unified tax administration for the three islands, organized along functional lines, with a strong headquarters operating center
  • Posting of island tax offices (centre des impôts) reporting to the (Union) General Directorate of Taxes (DGI)
  • Strengthening of tax audits through the introduction of issues oriented audits and intensification of intelligence and exchange of information between the tax and customs administrations
  • Simplification and better enforcement of taxpayer registration procedures
  • Increase in the LTU’s operating budget
  • Improvement of tax arrears collection management
  • Elimination of ad hoc customs and tax exemptions
  • Completion and early implementation of a comprehensive revenue-mobilization strategy
  • Establishing a resident tax advisor


Achieving the targeted budget consolidation gains would notably require:

  • Adoption of the organic staffing frameworks for the island ministries before end-March 2010; initiation of a comprehensive civil service reform aimed at increasing the effectiveness of public administration while reducing staffing and the wage bill to levels compatible with medium-term budget viability (MEFP, ¶ 27)
  • Freezing civil service recruitments
  • Full computerization of the civil service payment roster
  • Reducing wage payments gradually to 7.9 percent of GDP by 2012 (8.7 percent and 8.4 percent in 2009 and 2010, respectively)
  • PEM reforms, following completion of a comprehensive PEM reform strategy

Domestic arrears

  • Clearance of domestic arrears outstanding at end-June 2009, based on the recommendations of an audit and arrears-clearance strategy to be completed by end-October 2009 (structural benchmark under the program)
  • Net arrears reduction of 0.7 percent of GDP in 2009.

12. HIPC and MDRI debt relief is crucial to securing medium-term external sustainability (2009 DSA Update) 2. The approval of the proposed PRGF arrangement would set the stage for Comoros reaching the HIPC decision point in mid-2010; and achieving the HIPC completion point and MDRI debt relief by 2012. Under this scenario, with net PRGF access assumed at 140 percent of quota and 35 percent of the net loan disbursed in 2009, the country’s NPV of debt-to-exports ratio would fall from 260.4 percent in 2009 to 71.1 percent in 2013. At which point, the debt service ratio would be reduced to 2.4 percent, from a projected 13.6 percent in 2009. Ahead of a possible HIPC decision point, the government has reached understandings with its creditors, except major multilaterals, on (i) deferring US$13.95 million of the stock of external payments arrears outstanding at end-2008, and (ii) deferment of debt service obligations falling due in 2009; until the HIPC decision point. At which time the authorities would seek debt relief on these amounts as part of a comprehensive resolution of the country’s debt situation within the HIPC/MDRI process. To prevent further deterioration of debt sustainability, Comoros will continue relying mostly on grants.

C. Monetary and Financial Sector Priorities

13. Monetary and exchange rate policy will continue to be governed by the exchange rate peg under the Franc Zone arrangement. This has provided the country’s main anchor of price stability. While Comoros has experienced moderate real effective exchange rate (REER) appreciation in recent years, mostly underpinned by a strengthening of the euro vis-à-vis the U.S. dollar, a recent assessment of external competitiveness established that the country’s REER was broadly in line with economic fundamentals 3.

14. Promoting the entry of new banking institutions to enhance financial sector intermediation and strengthening supervision will be high priorities. Until recently, the financial sector comprised only one foreign-owned commercial bank, a development bank, a postal savings bank, and two networks of Micro Finance Institutions (MFIs). In the last two years, the Central Bank of Comoros (BCC) has granted licenses for the opening of two new foreign commercial banks, including one branch of Tanzania’s EXIM Bank; parallel to this, the MFIs continue to grow. These developments are bringing about much needed expansion of financial intermediation. Against this background, to strengthen financial sector supervision, including for MFIs, the IMF working with the Banque de France is providing technical assistance. In addition, the BCC is finalizing a memorandum of understanding with the Central Bank of Tanzania, which will provide for the latter’s participation in regular oversight activities of the EXIM Bank.

D. Strengthening Institutions and Improving Governance

15. Strengthening public financial management constitutes a central part of the authorities’ program. In the recent past, lack of cooperation between the Union and island authorities had prevented information sharing and policy coordination, undermined budget execution, expenditure management, and tax administration, and posed governance problems. To build institutional capacity and improve efficiency, the authorities have moved to centralize selected government functions, and to establish inter-government committees and administrative units charged with compiling and disseminating financial information and coordinating policies. Supported by development partners, measures will also be implemented to improve public budgeting, accounting, and procurement procedures (MEFP, ¶ 20-23).

  • Building institutional capacity. Budgetary management is being strengthened through the unit established to consolidate monthly fiscal data from the Union and island governments. The authorities have also set up a weekly cash-flow management committee chaired by the Union Ministry of Finance.
  • Improving operations and transparency of public administration. The High Authority for the Public Administration will play a key role including: (i) preparing the institutional and legal framework for public administration reforms, (ii) coordinating all the public entities, and (iii) supervising the Union-wide application of the administrative and financial management procedures (MEFP, ¶ 27).
  • Providing better statistics. A donor supported comprehensive review, most notably for fiscal and balance of payment statistics, will serve as a basis for setting up a medium-term action plan (MEFP, ¶38).

E. Improving the Investment Climate

16. Removing impediments to trade and creating conditions for export and economic diversification are critical for accelerating private sector development and putting the economy on a path of sustained strong growth. Improvements in the investment climate will be needed to attract FDI, and encourage a shift in the use of large remittances from consumption to growth-oriented investment. Key issues to be addressed include streamlining the trade regime and enhancing competition.

  • Streamlining the trade regime. After eliminating all export taxes, the authorities recently reduced the average weighted import tariff to less than 20 percent, as part of Comoros’ obligations under COMESA (MEFP, ¶ 36).
  • Enhancing competition. The authorities’ medium-term action plan focuses on the restructuring and possible divestment of public enterprises; opening the ownership of the state-owned telecommunications (Comores Telecom), hydrocarbons (SCH), and electricity (MA-MWE) companies to the private sector, with IFC/World Bank and the African Development Bank’s support. The government also intends to improve business licensing practices and investors’ protection, and to reform the judiciary (MEFP, ¶ 34-35).

IV. Donor Support, Technical Assistance, Access, and Program Monitoring

17. The new PRGF arrangement is part of a broad-based donor reengagement effort for Comoros. Most development partners have either completed or initiated preparations for financial and technical assistance frameworks for the country, as summarized below (Text Table 3).

Text Table 3.

The Comoros: Technical Assistance Provision

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Includes financing to foster agricultural sector supply in response to higher international prices.

2 The EU has allocated euro 45 mn for the period 2008-13 under the 10th European Development Fund.

18. Comoros’ financing requirements for 2009–12 are projected at CF 40.4 billion (annual average of 5 percent of GDP), including CF 12.2 billion (US$34.2 million or 6.5 percent of GDP) for 2009 (Text Table 4). Full coverage of the 2009 fiscal financing gap will be secured with:

  • Budget support from traditional donors, including the World Bank, AfDB, and the European Commission
  • Assistance from Gulf region bilaterals and other partners
  • Deferment of debt service arrears at end-2008 and current obligations falling due in 2009, except with respect to major multilateral creditors, until the HIPC decision point. The authorities have finalized related understandings with concerned creditors.
Text Table 4.

The Comoros: Strategy for filling the Financing Gap, 2009–2012

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Source: IMF staff estimates and projections.

Gross financing requirements for 2009 excludes clearance of debt service arrears accumulated before 2009.

Assuming a new PRGF in an amount of SDR 13.57 million (152.5 percent of quota) and repurchase of EPCA credit of SDR 1.1 million (12.5 percent of quota).

Deferment of end-2008 arrears and 2009 debt service due, excluding major multilateral creditors.

Should mobilized budget support exceed program target for 2009 by the equivalent of at least US$6.5 million (MEFP, ¶ 19), the government intends to settle two months of salary arrears, for December 2008 and January 2009. The financing requirements (line IV of Text Table 4) for 2010-12 averages 3.6 percent of GDP per year, excluding repayment of deferred 2008-09 debt service obligations that are planned to be either canceled or rescheduled on concessional terms under the HIPC process. Comoros would likely be able to mobilize these amounts on highly concessional terms, as reform momentum picks up and more donors extend much needed additional support to the country. If such financing couldn't be secured on favorable terms, a tighter fiscal consolidation path would be needed.

19. The proposed PRGF access level is equivalent to 152.5 percent of quota (SDR 13.57 million or about US$20.90 million), including 12.5 percent for immediate repurchase of EPCA. Comoros faces a protracted balance of payments problem beyond the impact of the current world economic crisis, and the proposed level of access is justified on the basis of a weakening external position, with the external current account deficit increasing to an annual average of 9.7 percent of GDP in 2008/09 and 10 ½ percent of GDP in 2010, respectively; from 6.7 percent of GDP in 2007. This is primarily the upshot of persistently weak export prices for vanilla, clove, and ylang-ylang, the country’s main foreign exchange earners. As a result, the external current account deficit remains well above levels of two years ago despite the recent decline in oil and food prices. Given the large financing needs facing Comoros, the Fund’s relatively strong financial involvement would provide adequate catalytic signal for the large efforts expected from other external partners. As is the case for currency union countries, it is difficult to disentangle the external financing gap and the fiscal financing gap for the country, a member of the Franc Zone, since any Fund financing of the former contributes to fill the latter by the same amount. Upon Board approval, in addition to the 12.5 percent of quota to repurchase the amount outstanding under EPCA, a purchase of 35 percent of quota would be available, for a total purchase of 47.5 percent of quota (1.5 percent of GDP) for 2009; this would contribute to covering fiscal financing requirements amounting to CFs 12.3 billion (6.5 percent of GDP) for the year. The balance would be made available in equal tranches of SDR 1.557 million, on satisfactory conclusion of the six PRGF reviews (Table 6). Purchases under the new PRGF would raise credit outstanding to the Fund to 177.5 percent of quota (from 37.5 percent in December 2008).

Table 2.C

The Comoros: Consolidated Government Financial Operations, 2008–10

(Millions of Comorian francs, cumulative, unless otherwise indicated)

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Sources: Ministry of Finance; and IMF staff estimates.

The program financing gap for 2009-12 could be covered as expelled out in the Text Table 4.

Table 3.

The Comoros: Monetary Survey, 2007–12

(Millions of Comorian francs)

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Sources: Central Bank of Comoros; and IMF staff estimates and projections

Includes net credit to government entities other than public treasury.

Table 4.

The Comoros: Balance of Payments, 2007–12

(Millions of Comorian francs, unless otherwise indicated)

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Sources: Comorian authorities, and IMF staff estimates and projections.

Reflects arrears clearance operations in 2007 with multilateral creditors, ongoing discussions with bilaterals and EPCA budget support grant in 2008.

Table 5.

The Comoros: External Debt and Arrears, Official Creditors, 2008–09

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Source: Comorian authorities. Data not reconciled with creditor statements.

Includes "frozen" unpaid debts of the Postal Service System