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© 2010 International Monetary Fund
September 2010
IMF Country Report No. 10/277
Djibouti: First Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility—Staff Report; Statement by the IMF Staff Representative; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Djibouti
In the context of the First Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, the following documents have been released and are included in this package:
the staff report for the First Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, prepared by a staff team of the IMF, following discussions that ended on March 21, 2009, with the officials of Djibouti on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on May 18, 2009. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.
a statement by the IMF Staff Representative; and
a Press Release summarizing the view of the Executive Board as expressed during its June 17, 2009 discussion of the staff report that completed the review;
a statement by the Executive Director of Djibouti.
The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.
Copies of this report are available to the public from
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International Monetary Fund
Washington, D.C.
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INTERNATIONAL MONETARY FUND
DJIBOUTI
First Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, Request for Waivers of Nonobservance of Performance Criteria, and Modification of Performance Criteria
Prepared by the Middle East and Central Asia Department in collaboration with other departments
Approved by Amor Tahari and Dhaneshwar Ghura
May 18, 2009
Discussions for the first review of the arrangement under the Poverty Reduction and Growth Facility (PRGF) were held in Djibouti during March 7-21, 2009. The staff team comprised Mr. Delgado (head), Ms. Beidas-Strom, Messrs. Al-Ghelaiqah, Puig (all MCD), and Orav (SEC). The mission met with the ministers of finance, energy, trade, labor, and social affairs; the governor of the central bank; other senior officials; private sector representatives; and development partners. Mr. Bah (OED) attended most meetings.
The current three-year PRGF arrangement was approved in September 2008 in the amount of SDR 12.72 million (80 percent of quota). The authorities are requesting the second disbursement under the arrangement (SDR 1.476 million).
A safeguards’ assessment mission took place during June 29-July 9, 2008, and an FSAP was conducted during October 18-November 1, 2008 and December 14-18, 2008.
Contents
Executive Summary
I. Background
II. Recent Economic Developments and Performance under the PRGF
III. Policy Discussions
A. Medium-Term Macroeconomic Framework
B. Macroeconomic Policies During 2009
C. Structural Policies During 2009
IV. Program Issues
V. Staff Appraisal
Box
1. Paris Club Rescheduling Agreement
Figures
1. Selected Recent Economic Developments
2. Recent Fiscal Developments
3. Total Factor Productivity, 2004-08
4. NPV of External Debt-GDP Under Alternative Scenarios, 2008-28
5. Medium-Term Macroeconomic Projections
Tables
1. Selected Economic Indicators and Projections, 2006-09
2. Central Government Fiscal Operations, 2007-14
3. Balance of Payments, 2007-14
4. Monetary Survey and Banking Sector Indicators, 2004-09
5. Medium-Term Macroeconomic Projections, 2008-14
6. Reviews and Disbursements, PRGF Arrangement 2008-11
7. Indicators of Capacity to Repay the Fund 2007-18
8. Key FSSA, Safeguards and AML/CFT Recommendations
Appendixes
1. Letter of Intent and Revised Memorandum of Economic and Financial Policies
2. Supplementary Technical Memorandum of Understanding
Executive Summary
Overall performance under the PRGF-supported program has been mixed but the main monetary and fiscal measures have largely been implemented. The overall fiscal position improved and the reduction in domestic arrears was triple the program target. The nonobservance of four performance criteria was either minor (VAT law), temporary (external arrears), technical in nature and nonsubstantive (domestic arrears), or due to exceptional circumstances (nonconcessional finance). The authorities are implementing strong corrective actions to enhance capacity, improve administrative procedures, and strengthen public companies’ financial position in order to avoid further nonobservance of conditionality. The main macroeconomic risks going forward are a slowdown in port activity, lower foreign direct investment (FDI), shortfalls in external assistance or budgetary revenues, and a protracted conflict with Eritrea.
The direct impact of the global financial crisis on Djibouti has been limited. Economic growth remained strong at 5.8 percent of GDP while inflation reached 9.2 percent. Fiscal performance strengthened in 2008 despite expenditure overruns due largely to the conflict with Eritrea. However, the overall deficit swung into a surplus of 1.3 percent of GDP due mainly to exceptionally large grants and strong revenue performance. Domestic arrears fell sharply to 13 percent of GDP and the primary fiscal deficit was below its debt-stabilization level. The authorities remain committed to seeking better financing terms through a forthcoming donors’ conference.
A deceleration in growth is expected throughout the medium term, but this would not affect the main macroeconomic policies. For the rest of the program period, growth and inflation are projected to decelerate to an average of about 5 ½ percent and 5 percent, respectively, due to lower FDI and international commodity prices. The program’s fiscal consolidation path would continue through the introduction of a value-added tax (VAT), wider application of income taxation, and strong nonsocial expenditure control. Improved prioritization is reflected in the growing share of projected social expenditure.
The financial system has not been affected by the global crisis, and capital adequacy has improved slightly despite increased competition. The banking sector is vulnerable to a deterioration of credit quality and interest rate changes. The Central Bank of Djibouti (BCD) aims to enhance its capacity to oversee the growing sector as recommended in the FSAP and address the vulnerabilities noted in the safeguards assessment (SA).
Staff supports the authorities’ request for waivers for the nonobservance of four performance criteria on external arrears, domestic arrears, nonconcessional finance, and the submission of VAT to the National Assembly, and the modification of the forward looking performance criterion on domestic arrears.
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Press Release No. 09/216
FOR IMMEDIATE RELEASE
June 17, 2009
International Monetary Fund
Washington, D.C. 20431 USA
Telephone 202-623-7100 • Fax 202-623-6772 • www.imf.org
