I - Introduction

I would like to thank Management and Staff for the constructive policy dialogue held with my Djiboutian authorities within the context of the current review under the PRGF arrangement.

My Djiboutian authorities’ program performances have been broadly in line with the set program criteria albeit temporary deviations. The net repayment of domestic arrears, the settlement of all external payment arrears, the accumulation of government deposits, the ceiling of non social wage bill, the currency board coverage at 121 percent and the accumulation of official reserves were all met. On the structural reform front, the Investment Code was revised before the agreed date in order to streamline tax exemptions and strengthen the procedure to monitor exempted projects. The audited accounts of the social security fund, the main public enterprises and fiscal operations of the state (TOFE) were published on the website of the Ministry of Economy, Finance and Planning.

Due to institutional and human capacity constrains, the performance criteria on external arrears, domestic arrears, nonconcessional borrowing and the submission of VAT law to the National Assembly were temporary missed. However, remedial measures have been put in place. Accordingly, my Djiboutian authorities request waivers for nonobservance of these performance criteria as well as the modification of the performance criteria on domestic arrears.

My Djiboutian authorities are fully aware of the challenges ahead notably the need to widen the base for sustained growth and poverty reduction. Policies laid out in their MEFP for the rest of 2009 and the PRGF program are designed to address these challenges.

II - 2009 Program Policies and Objectives

My Djiboutian authorities are strongly committed to consolidate progress made under the PRGF-supported program and speed up structural reforms in order to sustain economic growth, improve competitiveness, create jobs and reduce poverty.

In the fiscal sector, the authorities’ efforts to further improve fiscal management will be intensified. Fiscal policy will continue to aim at a gradual narrowing of the overall deficit, on a commitment basis. For 2009, an overall deficit of about 1.8 percent of GDP is projected and the authorities remain committed to take needed actions to achieve a balanced fiscal position by 2011. To this end, additional measures to reduce non-social current expenditure including the wage bill will be identified and implemented. Control of current expenditure through freezing recruitment in the public sector, except for health, education and tax administration will be enhanced. In their efforts to fight poverty, the authorities remain also committed to increase social expenditures at about 10.6 percent of GDP. The reduction of the stock of domestic arrears in line with the program’s target will be pursued. To avoid any further accumulation of new domestic arrears, the principles governing the budgetary accounts will be amended including a strict compliance with the definition of arrears in the IMF’s Government Finance Statistics Manual of 2001. To this end, FAD technical assistance will be requested. On the revenue side, the introduction of the VAT, VAT enforcement in the free trade zone, and the amended investment code will help enlarge the revenue base and streamline the exemptions. Efforts to establish a single treasury account have also been intensified and a new treasury management was set up.

As regards monetary and financial polices, the authorities will continue containing inflation, increasing the level of international reserves to sustain the currency board arrangement and further improving financial intermediation. In this context, efforts to strengthen liquidity management will be accelerated with the establishment of reserves requirements for which Fund technical assistance has been requested. In order to create conducive environment for the implementation of reserves requirements, the banking law will be amended in consultation with the banking sector and Fund staff by end-August and presented to the National Assembly by end-December 2009. Therefore, the authorities have requested the amendment of this structural performance criterion to allow the legal process to be fully implemented. Based on the recommendations of the recent Financial Sector Stability Assessment, the authorities will formulate by end-September 2009 an action plan to revise the Banking Law and the banking regulations to make them consistent with international best practices, create an unit with the central bank fully devoted to banking supervision, strengthen licensing requirement, gradually raise the capital adequacy ratio, and upgrade bank inspections. The authorities plan also to increase the minimum capital requirement and introduce the needed amendments in their efforts to further strengthen the legislation creating the currency board. As regards anti-money laundering, the AML/CFT law incorporating recommendations made by the Fund’s Legal Department will be submitted to the national Assembly by end-December 2009.

On structural reforms and competitiveness, the authorities are strongly committed to sustaining the implementation of their reform agenda. Efforts to further improve the environment for more FDI and sustain competitiveness will be accelerated. In regard to the electricity supply and the need to reduce its costs, an agreement to connect Djibouti’s electricity grid to Ethiopia’s grid has been signed. A nonconcessional loan to supplement the 2006 concessional loan was contracted with the OPEC Fund to purchase machinery critical to the production of electricity in order to avoid economic disruption in Djibouti. With the support of the World Bank, a study aiming at the reduction of personnel at the Electricité de Djibouti (EDD) will be conducted and finalized by end-September 2009. Efforts to strengthen the coordination of the national investment promotion agency with the Ministry of Finance are also underway. The authorities remain committed to liberalize the labor market. In order to fully implement the Initiative Nationale pour le Développement Social (INDS), a population census was launched last February and the ensuing poverty and economic assessments will be completed by next September. The authorities plan to prepare an annual progress report on their PRGF implementation by end-September 2009.

In order to further enhance the monitoring of the program and ensure the coordination, the authorities will establish a high level committee to review implementation of program measures including the payment of domestic and external debt. The authorities are also mindful on the need to further improve the quality of statistical data for the monitoring of the program.

On Debt Sustainability and Debt Management, the authorities have reached agreement with Paris Club creditors to reschedule Djibouti’s external debt under Houston terms. Negotiations with non Paris Club bilateral creditors will continue. The authorities intend to organize a donors’ conference to mobilize highly concessional financing for the poverty reduction strategy. The authorities will also request technical assistance from the Fund to improve current debt management practices.

III - Conclusion

My Djiboutian authorities remain strongly determined to pursue implementing prudent macroeconomic policies and structural reforms under the PRGF arrangement. In this context, they will continue working with the Fund and other development partners. I will appreciate Board approval of my authorities’ completion of the first review under the PRGF-supported program, waivers of temporary non observance of performance criteria and modification of performance criteria.