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.
The Executive Board of the International Monetary Fund (IMF) completed today the first review under the three-year Poverty Reduction and Growth Facility (PRGF) arrangement with Djibouti (see Press Release 08/211). The completion of the review enables the immediate disbursement of SDR 1.476 million (about US$ 2.3 million), bringing the total amount disbursed under the program to SDR 5.34 million (US$ 8.2 million).
The Board also approved the authorities’ request for four waivers of nonobservance of performance criteria, and modification of performance criteria. The waivers were approved because the non-observance was minor (for the delay in the submission of the VAT law), temporary (for the accumulation of external arrears), and on the grounds of implemented corrective actions. These include the implementation of a single treasury account and the strengthening of administrative procedures to avoid an accumulation of new arrears to domestic public and private providers (for the accumulation of domestic arrears), and preventive measures to reduce the vulnerability of electricity supply, including by strengthening the financial position of the electricity company through reducing public arrears.
Following the Executive Board discussion, Mr. Murilo Portugal, Deputy Managing Director and Acting Chairman, stated:
“The implementation of the main monetary and fiscal measures envisaged under the PRGF-supported program has helped Djibouti sustain high economic growth and bring down inflation to single digits. Nevertheless, program implementation has been hampered by, among other things, weaknesses in administrative capacity, and the authorities are giving high priority to addressing such weaknesses.
“Adherence to the program’s medium-term macroeconomic policies will be crucial. Observance of the fiscal consolidation path is particularly important. In order to strengthen Djibouti’s fiscal and debt sustainability, additional revenue and expenditure measures are being implemented in 2009. The introduction of a value added tax, the broadening of income taxation, the suspension of patent exemptions for foreign direct investment, and an increase in non-tax revenues related to the resumption of fees on imported oil will contribute to strengthen the country’s revenue performance.
“The main expenditure measures—a freeze on public sector salaries and recruitment, except in health and education, and reinforced control of nonessential current expenditure—are necessary to achieve the necessary fiscal consolidation, while allowing for an increase in poverty-related spending. Every effort should also be made to improve the terms of the country’s financing, including by concluding bilateral agreements with Paris Club and non-Paris club creditors, seeking highly concessional assistance, and strengthening current debt management practices.
“Financial stability will be further strengthened with the help of IMF technical assistance. The central bank plans to upgrade its banking supervision and crisis prevention capacity. Accelerating the implementation of structural reforms to lower production costs, strengthen public utilities, and improve the investment climate is also crucial to enhance Djibouti’s competitiveness and reduce external vulnerabilities,” Mr. Portugal said.