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
Author: International Monetary Fund
Publication Date:
07 Sep 2010
eISBN:
9781455203789
Language:
English
Keywords:
ISCR; CR; authority; expenditure measure; budget execution data; revenue performance; credit growth; investment expenditure; financing gap; IFC TA; per-capita GDP; FDI inflow; Arrears
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The overall fiscal position improved and the reduction in domestic arrears was triple the program target. The direct impact of the global financial crisis on Djibouti has been limited. The financial system has not been affected by the global crisis, and capital adequacy has improved slightly despite increased competition. GDP growth remained strong in 2008, and inflation decelerated during the fourth quarter. The risk of external debt distress remains high. Banks remain profitable and have not been affected by the global financial crisis.

Abstract

The overall fiscal position improved and the reduction in domestic arrears was triple the program target. The direct impact of the global financial crisis on Djibouti has been limited. The financial system has not been affected by the global crisis, and capital adequacy has improved slightly despite increased competition. GDP growth remained strong in 2008, and inflation decelerated during the fourth quarter. The risk of external debt distress remains high. Banks remain profitable and have not been affected by the global financial crisis.

I. Background

1. Discussions on the first review of the arrangement under the PRGF were held against the backdrop of record high economic activity in 2008, shadowed by the looming impact of the global economic slowdown. Djibouti’s strategic location and political stability continued to attract sizable FDI inflows. The authorities have grasped these opportunities to lift growth, increase employment and reduce widespread poverty.1 In this vein, the main objectives of the PRGF-supported program remain fostering balanced growth and financial stability, improving competitiveness, reducing inflation, and strengthening the external position (EBS/08/105).

2. The political situation remains stable, despite the conflict with neighboring Eritrea and piracy out of Somalia. Djibouti has complied with UN requests in its border dispute with Eritrea, but troops remain deployed along the disputed territory. The strong foreign military presence reduces the risk of an escalation.

II. Recent Economic Developments and Performance under the PRGF

3. GDP growth remained strong in 2008 and inflation decelerated during the fourth quarter (Table 1 and Figure 1). Real GDP growth was estimated at 5.8 percent, driven by strong FDI inflows and bank lending to all sectors but industry. Despite the international financial crisis, the increase in trade-related services (in particular, transshipment and transport activities related to Ethiopia) strengthened economic performance. After peaking at 14.8 percent in September 2008, inflation decelerated to 9.2 percent at year-end, following international commodity price developments.

Table 1.

Djibouti: Selected Economic Indicators, 2006-09

(Quota: SDR 15.9 million)

(Population: 0.82 million; 2006)

(Per-capita GDP: $946; 2006)

(Poverty rate: 42 percent; 2002)

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Sources: Djibouti authorities; and Fund staff estimates and projections.

The large deterioration in 2008 is due to two components: large FDI-related capital imports and the impact of food and oil price shocks on imports.

Includes grants.

Actual payments made, including net change in arrears and excluding rescheduled debt service.

Domestic arrears include those owed to public wages, private suppliers, the pension funds, and public enterprises. External arrears include on interest only (arrears on principal are counted as an item of “external financing”).

Unlike the May 2007 staff report, cattle reexports for 2006 and 2007 are recorded on net basis.

In months of the following year’s imports.

Gross foreign assets of the CBD, in percent of monetary liabilities (reserve money and government deposits at CBD).

Figure 1.
Figure 1.

Djibouti: Selected Recent Economic Developments

Citation: IMF Staff Country Reports 2010, 277; 10.5089/9781455203789.002.A001

Sources: National authorities; and Fund staff estimes.1/ Sub-Saharan Africa excluding South Africa and oil exporting SSA economies.

Composition of the nominal wage bill, 2007-08

(in millions of Djiboutian Francs)

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Source: Djibouti authorities and Fund staff.

Office of the Inspector-General of Finance (see LOI ¶17).

4. Despite exceptionally large spending due to the war and peaking commodity prices, strong revenue performance and larger grants swung the overall fiscal balance into a surplus of 1.3 percent of GDP (Table 2 and Figure 2). The overall fiscal deficit excluding grants, reached over 11 percent of GDP. Nonetheless, the base deficit increased only by 1.1 percent of GDP, as the authorities continued their public wage bill retrenchment policy,2 and a substantial part of grants were directed to paying domestic arrears (DF5.6 billion, 3.2 percent of GDP), which were over three times the amount programmed in net terms. In terms of the composition of the nominal wage bill increase in 2008, health, education and the military were the main contributors. Nevertheless, spending overruns due to the food and oil prices shock and the conflict with Eritrea led to a decline in social spending.3 In addition, monthly gross accumulation of domestic arrears occurred, thus breaching a continuous quantitative performance criterion (QPC). This accumulation was mainly due to shortcomings in treasury management, as administrative procedures for payments of new bills were not set up to pay current bills with priority over preprogram ones. Furthermore, the lack of Treasury securities to exchange for preprogram accumulated arrears made it impossible to settle these through interest-bearing debt swaps (LOI ¶3).

Table 2a.

Djibouti: Central Government Fiscal Operations, 2007-14

(In millions of Djibouti francs)

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Sources: Djibouti authorities; and Fund staff estimates and projections.

Includes €7.5 million of ITS, personal income taxes, from the French, as negotiated in their military leasing agreement.

Annual leasing fees from French (€30 million) and US ($30 million) military bases, which include the payment of TIC on behalf of French soldiers.

Previously included in transfers.

For 2008, includes, in order of magnitude: utilities (electricity, water and telecoms), civilian goods and services diverted to the war, health and education, president’s office, (misclassified) maintenance of investment spending, and other categories.

Includes €5 million (out of a total of €30 million) of foreign-financed current spending (from French military as stipulated in their leasing agreement).

Excludes housing subsidies. In 2008, one third of these transfers were social if one excludes the National Solidarity Fund.

Excludes DF1,300m of current military spending financed domestically (from the contribution of the port to nontax revenues, i.e. dividends).

Projected repayments are for direct government debt due (i.e. not government guarantees).

Includes Paris Club debt rescheduling.

For 2007-08, the residual is due to TOFE misclassification and adding up errors which have been corrected by staff. For 2009 onwards, the financing gap is naught.

Defined as domestic revenue minus expenditure financed from domestic sources.

Table 2b.

Djibouti: Central Government Fiscal Operations, 2007-14

(In percent of GDP)

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Sources: Djibouti authorities; and Fund staff estimates and projections.

Includes €7.5 million of ITS, personal income taxes, from the French, as negotiated in their military leasing agreement.

Annual leasing fees from French (€30 million) and US ($30 million) military bases, which include the payment of TIC on behalf of French soldiers.

Previously included in transfers.

For 2008, includes, in order of magnitude: utilities (electricity, water and telecoms), civilian goods and services diverted to the war, health and education, the president’s office, (misclassified) maintenance of investment spending, and other categories.

Includes €5 million (out of a total of €30 million) of foreign-financed current spending (from French military as stipulated in their leasing agreement).

Excludes housing subsidies. In 2008, one third of these transfers were social if one excludes the National Solidarity Fund.

Excludes DF1,300m of current military spending financed domestically (from the contribution of the port to nontax revenues, i.e. dividends).

Projected repayments are for direct government debt due (i.e. not government guarantees).

Includes Paris Club debt rescheduling.

For 2007-08, the residual is due to TOFE misclassification and adding up errors which have been corrected by staff. For 2009 onwards, the financing gap is naught

Defined as domestic revenue minus expenditure financed from domestic sources.

Figure 2.
Figure 2.

Djibouti: Recent Fiscal Developments

Citation: IMF Staff Country Reports 2010, 277; 10.5089/9781455203789.002.A001

Sources: National authorities; and Fund staff estimates.1/ Data for Algeria corresponds to 2007 and only includes civil administration employees.

Monthly Variation of Domestic Arrears, September-December 2008

(In millions of Djiboutian Francs)

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Source: Djibouti authorities monthly TOFE.

5. External sector developments have been marked by peaking international commodity prices and record high FDI (Table 1, 3 and Figure 1). The current account deficit 4 ballooned to 39 percent of GDP, as a result of FDI-related imports and a deterioration in the terms of trade. However, large capital inflows and exceptional finance contributed to an increase in official reserves to $174 million, resulting in a currency board arrangement (CBA) cover of 121 percent (just under 3 months of prospective imports). Despite a recent reduction in electricity tariffs5 and the observed improvement in total factor productivity (Figure 3), competitiveness remains low according to most indicators.

Table 3.

Djibouti: Balance of Payments, 2007-14

(In millions of U.S. dollars, unless otherwise indicated)

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Sources: Djibouti authorities; and Fund staff estimates and projections.

Includes net exports of cattle since 2006.

Includes the French and U.S. contributions for the military bases and outflows of interest due on Paris and non-Paris Club debt.

Excludes exceptional financing.

Figure 3.
Figure 3.

Djibouti: Total Factor Productivity, 2004-08

Citation: IMF Staff Country Reports 2010, 277; 10.5089/9781455203789.002.A001

6. The risk of external debt distress remains high. While the stock of external debt decreased to 59.2 percent of GDP (Table 1 and 3), the net present value (NPV) of debt increased to 53 percent of GDP (Box 1). As a result, external debt is expected to remain above the sustainability threshold until the late 2020s (Figure 4). However, the staff’s analysis concluded that the projected primary fiscal deficit in 2009 is below its debt-stabilizing level.

Figure 4.
Figure 4.

Djibouti: NPV of External Debt-GDP under Alternative Scenarios, 2008-28

Citation: IMF Staff Country Reports 2010, 277; 10.5089/9781455203789.002.A001

Source: Staff projections and simulations.

Paris Club Rescheduling Agreement

Following the approval of the PRGF, Djibouti reached agreement with Paris Club (PC) creditors to reschedule external debt under Houston terms. The resulting reduction of financing needs during the program period will be limited, as the positive effects of the debt service rescheduling is partly offset by the repayment of post-cut off arrears to be completed by 2012.

The gains in terms of NPV of debt are estimated to be only about 1.5 percent of GDP1 due to the large share of external debt that is not in the form of Official Development Assistance (ODA)2 incurred after the cut-off date for eligibility under the agreement. These gains were offset by new debt—with NPV of about 3.5 percent of GDP—uncovered during the reconciliation process.3

1 The staff’s projections assume comparable treatment from non-PC creditors.2 Under Houston terms, ODA is rescheduled at a concessional rate, while non-ODA is rescheduled at the market rate, implying no reduction in the NPV of non-ODA debt.3 The new debt uncovered included arrears to Italy and Germany, as well as a government guaranteed loan from the Netherlands to the Djibouti Port.

7. The QPC on the accumulation of new external arrears was not met temporarily due to technical delays involving weak coordination between two debtor public companies in financial distress and the Treasury, which led to a delay in calling up the government guarantee (LOI ¶3 and 8). In both cases, the payments were met after short delays (9 days and two months). Furthermore, while financial resources were sufficient to face external debt payments, Djibouti also incurred arrears to the Fund for three days due to slippages in the payment process. In addition, exceptional circumstances due mainly to the sharp increase in electricity generation equipment costs and the precarious situation of the EDD,5 which threatened the electricity supply of the country, led the authorities to obtain a loan from the organization of petroleum exporting countries (OPEC) Fund with a concessional element of 10 percent, resulting in the nonobservance of the corresponding QPC (LOI ¶9).

8. Broad money aggregates trended higher in 2008 with the entry of new banks, buoyant economic activity and the exceptional amount of capital inflows and grants (Table 1, 4 and Figure 1). Lending remained largely focused on trade, although medium-term credit for equipment and construction increased markedly.

Table 4.

Djibouti: Monetary Survey and Banking Sector Indicators, 2005-09

(End-of-period, in millions of Djibouti francs; unless otherwise indicated)

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