Statement by Laurean Rutayisire, Executive Director for the Union of the Comoros

Recent developments in the Comoros point to slow, uneven, yet significant progress in political normalization. Overall performance under the Extended Credit Facility-supported program has been broadly satisfactory. The government understands the need to continue fiscal consolidation in support of macroeconomic objectives, targeting a reduction of the domestic primary deficit. In the structural area, program focus will be on public finance management and key sectors critical to improved growth performance. Debt relief is crucial to securing medium-term external debt sustainability and for success of the program.

Abstract

Recent developments in the Comoros point to slow, uneven, yet significant progress in political normalization. Overall performance under the Extended Credit Facility-supported program has been broadly satisfactory. The government understands the need to continue fiscal consolidation in support of macroeconomic objectives, targeting a reduction of the domestic primary deficit. In the structural area, program focus will be on public finance management and key sectors critical to improved growth performance. Debt relief is crucial to securing medium-term external debt sustainability and for success of the program.

I. Introduction

On behalf of my Comorian authorities, I would like to thank the Executive Board, Management, and staff for their continued support to the Union of the Comoros.

Important progress towards the stabilization of the political situation in Comoros has been achieved last year with the passing of the May 2009 referendum. My authorities are now focused on accelerating the implementation of ongoing economic reforms. They have adopted a full PRSP in September 2009 and have requested the support of the IMF under the ECF with the objective of stabilizing the economy and laying the foundations for a higher and more sustained growth to combat poverty more effectively. The IMF-supported program also seeks to strengthen fiscal discipline to create the fiscal space that would enable higher spending in priority areas and in basic infrastructure. The ECF remains broadly on-track.

My authorities are aware that over the next three years of the program, a firm commitment to the agreed reforms will be crucial for reaching their medium-term development objectives, and they would like to reaffirm their determination to a firm implementation of the program policies presented in their Memorandum of Economic and Financial Policies. They intend to maintain a prudent fiscal policy stance and put in place the needed structural reforms to enhance the competitiveness of the economy and raise the population’s living standards. Against this backdrop, economic growth is projected to increase from an estimated 2.1 percent in 2010 to 3.5 percent in 2012–above the population’s rate of rate of growth’ led by the gradual recovery of the world economy and the development of infrastructure projects, both public and private, notably in the tourism sector.

In support of their policies, my authorities fully appreciate the financial aid and policy advice provided by the Fund and other development partners during these critical times as they are crucial to improving Comoros’ growth outlook and social conditions. They welcome in particular the debt restructuring granted by the Paris Club in November 2009 and the pledges and disbursements made following the donor’s conference in Qatar in March 2010. They call on the international community to continue to support their reform efforts by maintaining the provision of crucial financial aid including debt relief.

As the debt sustainability analysis shows, Comoros remains in debt distress and HIPC and MDRI debt relief will be key to restoring the country’s medium-term debt sustainability. My authorities would like to reiterate their full commitment to a prudent debt management strategy and will refrain from contracting of guaranteeing any non-concessional debt during the period of the program. They will use the savings resulting from the reduction in debt service obligations under the HIPC Initiative to finance the priority sectors identified in the PRSP.

II. Performance under the ECF

Performance under the ECF continues to be broadly satisfactory. All three prior actions to the current review have been met: the 2010 supplementary draft budget law was submitted to the National Assembly; a reform strategy for Comoros Télécoms has been adopted by the Council of Ministers while a new Board of Directors for the Société Comorienne des Hydrocarbures has been appointed; and, a report on Treasury balances outstanding has been completed and forwarded to staff.

At end-December 2009, only two of the fifteen quantitative and structural indicators were not met. The primary fiscal balance recorded an overrun due to a higher than anticipated wage outlays and transfers, including transfers to Comores Télécoms to improve the country’s connectivity to the rest of the world through a fiber-optic cable project adopted at the regional level; and the reform strategy for the two state-owned enterprises (telecommunications and petroleum products) were not adopted by the initial end-September 2009 deadline.

At end-March 2009, three of ten quantitative and structural performance indicators had not been met. In particular, net credit to the government exceeded program projections and the domestic revenue target was missed by a small margin. The structural benchmark on computerization of payroll operations was only partially met.

III. Policies for 2010

A. Fiscal policy

My authorities are determined to make every effort to curb the fiscal slippages that occurred in 2009 to protect the fiscal consolidation objectives under the ECF. Corrective measures are being implemented to strengthen the mobilization of fiscal revenues and significantly improve the control of expenditure particularly the wage bill with the objective of narrowing the primary fiscal balance to 1.5 percent of GDP from 2.6 percent in 2009. The 2010 fiscal financing gap of 3.3 percent of GDP will be covered entirely by budget support from the European Union, the World Bank, the African Development Bank, Gulf region partners, and the IMF. If the government receives external budget support in excess of programmed amounts, it will consult with the IMF regarding its use.

To achieve their domestic revenue mobilization goal in 2010, my authorities will–in addition to the introduction of new taxes including a 5 percent increase in the tax on petroleum products and the rate of the excises on tobacco and alcohol–enhance the effectiveness of tax and customs administration including by opening new tax centers in the different islands and by improving the management of taxpayers based on the recommendations of the Fund’s Fiscal Affairs Department. Furthermore, based on the completed report on the Treasury’s balance of outstanding tax claims that was communicated to staff (one of the prior actions under the program), a more systematic recovery of the tax liabilities will be undertaken.

As for the measures to control expenditures, the authorities will cap total spending at 23.2 percent of GDP. As regards more specifically the wage bill, steps have been taken to rein them in, notably through the decision to allow new recruitment solely in priority sectors and within the limits permitted by the number of departures. Spending in education and health, however, will increase in 2010 to 5.9 percent of GDP from 5.2 percent in 2009, consistent with the authorities’ poverty reduction strategy.

B. Monetary policy

Monetary policy will remain prudent and continue to be conducted within the anchor of Comoros’ membership to the Zone Franc which has served the economy well including by keeping the inflation rates low over the years.

The central bank has completed a new safeguards assessment and has started implementing its main recommendations. In particular, the central bank’s cash holdings will be audited and certified annually by an external auditor, and the financial statements will be prepared in accordance with international standards starting in 2011. In addition, the central bank’s comptroller will review the monetary data reported to the IMF before they are sent.

C. Balance of payments and external debt

The external current account deficit is expected to widen slightly in 2010 to 8.9 percent of GDP from 7.9 in 2009. This reflects the forecasted rebound in world energy and food prices. While seeking a substantial external debt relief within the framework of the enhanced HIPC Initiative and on terms similar of those provided by the Paris Club creditors, the authorities would like to reaffirm their commitment to a prudent debt policy to avoid jeopardizing the sustainability of the country’s external debt.

D. Structural reforms

The authorities are determined to accelerate the implementation of its reform strategy of state-owned enterprises. In addition to the progress made in the telecommunications and hydrocarbon sectors (prior actions under the program), they will complete a reform strategy of the electricity company with the assistance of the AfDB by end-December 2010.

In the area of public administration, the authorities will take measures aimed at securing medium-term budget viability. In this regard, the authorities recently submitted to Parliament new personnel frameworks for ministries compatible with the level of available budgetary resources with the aim of reducing the level of civil service staffing to approximately 10,600 from the current total of 12,300.

IV. Conclusion

Given the demonstrated good performance under the ECF, I would like on behalf of my authorities, to request from the Executive Board, approval of Comoros’ completion of the first review under the ECF and the reaching of the decision point under the enhanced HIPC Initiative.

Union of the Comoros: First Review Under the Three-Year Arrangement Under the Extended Credit Facility and Request for a Modification of Performance Criteria and Financing Assurances Review: Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for the Union of the Comoros.
Author: International Monetary Fund