Djibouti: Fifth Review Under the Extended Credit Facility Arrangement, Request for Augmentation of Access and Rephasing, Request for Waivers of Nonobservance of Performance Criteria, and Request for Waiver of Nonobservance of Performance Criterion Resulting in Noncomplying Disbursement
Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Djibouti.
Author: International Monetary Fund
Publication Date:
24 Jul 2012
eISBN:
9781475505856
Language:
English
Keywords:
ISCR; CR; ECF arrangement; IMF Executive Board; government; Extended Credit Facility arrangement; authority; request; Djibouti authorities; government transition; government balance; government deposit; ambitious investment plan; international community
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This paper presents findings of the Fifth Review of Djibouti’s economic performance under the extended credit facility (ECF) arrangement. The drought in Djibouti has worsened water scarcity, reduced agricultural production and cattle stock, and accelerated refugee inflows. The authorities have requested an augmentation of access under the ECF of 60 percent of quota. As a result of exogenous shocks, financing needs for 2011–12 are expected to be higher than previously projected, despite the pledges from the international community to help Djibouti address the impact of the drought.

Abstract

This paper presents findings of the Fifth Review of Djibouti’s economic performance under the extended credit facility (ECF) arrangement. The drought in Djibouti has worsened water scarcity, reduced agricultural production and cattle stock, and accelerated refugee inflows. The authorities have requested an augmentation of access under the ECF of 60 percent of quota. As a result of exogenous shocks, financing needs for 2011–12 are expected to be higher than previously projected, despite the pledges from the international community to help Djibouti address the impact of the drought.

I. Background

1. Security risks are increasing with the government’s military involvement in Somalia. In December, the government sent a battalion to Somalia as part of the African Union mission supporting the Transitional Federal Government, challenging the threats made by the insurgent organization Al-Shabaab. The Djibouti military contingent in Somalia will be the third largest after those from Uganda and Burundi.

2. Djibouti has been severely affected by the double blow of the drought in the Horn of Africa and the global commodity price shock:

  • Drought: While most of the damage is concentrated in Somalia, the drought has also affected a large share of the population as well as refugees from the region (Box 1). Although the drought should have a small impact on growth, since the port and trade with Ethiopia are not directly hit, it is having a significant effect on the economy through lower fiscal revenues and higher spending, and increased imports of food and fuel.

  • Commodity price shock: The spike in the food and oil prices last year has translated into an average effective import price increase estimated at 12 percent in 2011, broadly comparable to the 14 percent increase experienced in 2008. In particular, food prices are now projected to increase by a cumulative 32 percent in 2011-12 from 2010, significantly higher than the 19 percent increase in the Fourth Review Staff Report (CR/12/169). The price shock has boosted the diesel subsidy put in place to limit the cost of transportation for the poor, and has forced the government to increase transfers to the state-owned energy company Eléctricité de Djibouti (EDD), squeezed by the high oil prices.

As a result of these shocks, the current account deficit is projected to rise from about 6 percent of GDP in 2010 to about 12 percent in 2011 and 2012.

3. The authorities have requested an augmentation of access by 60 percent of quota ($15 million) under the ECF to meet the additional financing needs driven by the exogenous shocks. The international community has pledged $47 million over 2011–13 to help Djibouti address the impact of the drought. Of these, $45 million should be disbursed over 2011–12 in the form of current transfers ($30 million) and capital transfers ($15 million). However, these funds will not be enough to cover the additional balance of payment needs for 2011–12, projected at $18 million more than in the Fourth Review Staff Report (CR/12/169) due to a higher current account deficit and lower capital account surplus (Text Table 1). The current account deficit is projected to worsen by $14 million compared to the scenario in the Fourth Review Staff Report (CR/12/169), as the increase in imports caused by higher prices and the impact of the drought more than compensates a decline of FDI-related imports, better-than-expected export performance, and drought-related current official transfers. The capital account balance is expected to worsen by about $4 million due to lower-than-expected FDI, despite drought-related official capital transfers. The requested ECF augmentation would cover about $15 million of the 2011-12 financing needs, with the remaining $3 million expected to come from lower accumulation of international reserves.

Text Table 1.

Djibouti: Additional Financing Needs Compared to the Program (CR/12/169)

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

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

Includes combined price and volume effects.

Figure 1.
Figure 1.

Djibouti: External Sector, 2005–11

(In U.S dollar millions)

Citation: IMF Staff Country Reports 2012, 197; 10.5089/9781475505856.002.A001

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

Impact of the Horn of Africa Drought

Djibouti is being hit hard by the drought. Of a total population of 818,000, about 120,000 citizens, mostly in the rural areas, and about 20,000 refugees from Somalia and Ethiopia are suffering from the food insecurity caused by the drought started in the winter of 2011. The overall impact has been much wider:

  • Water: The drought has exacerbated the endemic lack of water, which has damaged or made unusable most of the existing wells. The drought has also reduced the levels of groundwater.

  • Agricultural production: Domestic agricultural production has fallen by about 40 percent, boosting food imports and increasing the population’s dependency on international organizations and NGOs.

  • Cattle: Adding to the pre-existing dry conditions of the last four years, the drought has led to exceptionally high mortality rate of cattle. More than half of the cattle stock is affected through weight loss or disease. The loss of cattle and fall in its market value are leading to severe income loss for farmers.

  • Energy: The demand for energy has increased because the fuel is needed to pump water from deeper wells, transport food and water, and meet the higher demand for air conditioning and refrigeration.

  • Refugees: The drought has accelerated the inflow of refugees from Somalia and Ethiopia to Djibouti, raising their number from about 15,000 before the summer to over 20,000 in September, and increasing the associated spending on food and services, partly borne by the budget.

  • Financial contributions of the population: Households and businesses have contributed to public initiatives to help the population affected by the drought. Moreover, many families have stepped up transfers to family members in the countryside and abroad (mainly Somalia and Ethiopia).

The international community has responded generously to the authorities’ appeal for additional external assistance over the next three years. The government has stepped up spending on wells, water extraction and transport, and food distribution, but alone it is not able to address the needs created by the drought and has therefore launched during the summer an appeal for help to the international community. So far, the government has received pledges for $47 million from bilateral and multilateral donors. The government intends to use the funds for immediate response to urgent needs, but also for medium-term projects for food and water access, agricultural improvement, and disaster prevention.1

1/ In evaluating the impact of the drought, staff coordinated with the joint World Bank, European Union, and UNDP needs assessment mission.

II. Recent Economic Developments and Program Performance

4. The estimate for economic growth in 2011 has been revised downward due to lower FDI and the exogenous shocks. GDP growth is still expected to have increased from 3.5 percent in 2010 to 4.4 percent in 2011 (revised from 4.8 percent in the Fourth Review Staff Report CR/12/169) thanks to the recovery of transshipment activity, with two companies starting operations in the Doraleh Container Terminal, and of transit trade to Ethiopia. Due largely to the government’s subsidies on food and fuel, transmission of international prices to inflation has been limited; nevertheless, domestic prices are estimated to have risen from 4 percent in 2010 to 5 percent in 2011 and 2012. Gross international reserves fell from $231 million at end-2010 to $224 million in November, because of the large imports and weak fiscal performance. External competitiveness improved in 2011 due to the differential between inflation rates in Djibouti and in Ethiopia, its main trading partner.

Figure 2.
Figure 2.

Djibouti: Real GDP Growth, 2001–11

(In percent)

Citation: IMF Staff Country Reports 2012, 197; 10.5089/9781475505856.002.A001

Source: IMF World Economic Outlook, Sept. 2011.
Figure 3.
Figure 3.

Djibouti: Domestic and International Food Prices, 2005–11

(Average, in percent)

Citation: IMF Staff Country Reports 2012, 197; 10.5089/9781475505856.002.A001

Sources: IMF World Economic Outlook, Sep. 2011; Djibouti authorities; and Fund staff projections.
Figure 4.
Figure 4.

Djibouti: Central Bank Reserves, 2005–11

(In US$ millions)

Citation: IMF Staff Country Reports 2012, 197; 10.5089/9781475505856.002.A001

1/ Gross foreign assets of the CBD in percent of monetary liabilities (reserve money and government deposits).
Figure 5.
Figure 5.

Djibouti: Effective Exchange Rates, 1999–11

(2005=100)

Citation: IMF Staff Country Reports 2012, 197; 10.5089/9781475505856.002.A001

Source: IMF Information Notice System.
Text Table 2.

Djibouti: Main Macroeconomic Indicators, 2008–12

article image
Sources: Djibouti authorities; and IMF staff estimates.

In months of following year’s imports.

Figure 6.
Figure 6.

Djibouti: Money and Credit, 2005–11

(Year-on-year, in percent)

Citation: IMF Staff Country Reports 2012, 197; 10.5089/9781475505856.002.A001

Sources: Djibouti authorities; and Fund staff estimates and projections.
Figure 7.
Figure 7.

Djibouti: Deposits, 1994–2011

(In DF millions)

Citation: IMF Staff Country Reports 2012, 197; 10.5089/9781475505856.002.A001

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

5. After years of strong growth, money and credit stagnated in the first nine months of 2011. Broad money fell in the first months of 2011, driven by the fall in domestic currency deposits caused by the uncertainty related to the elections, and to a few large depositors moving their deposits abroad when the Banque Agricole group sold Banque Indosuez-Mer Rouge (BIS-MR), the second-largest commercial bank in Djibouti, to the Bank of Africa group at the beginning of the year.1 Concurrently, private-sector credit contracted by 10 percent in the first three months of 2011, before gradually picking up again. By September, as the political situation stabilized and the impact of the one-off factors played out, both money and credit largely recovered and are expected to have posted positive growth by year-end.

6. Budget execution in the first semester of 2011 was disappointing because of weak tax collection and the exogenous shocks. On the revenue side, tax collection faltered due to the elections, the prolonged government transition, and the impact of the drought on taxpayers who in many cases contributed to relief initiatives and supported family members. Furthermore, excise revenue was lower than expected, reflecting the cost of the diesel subsidy implemented to contain the rise in transport costs for the poor, which was 0.8 percent of GDP higher than programmed.2 On the expenditure side, the government broadly maintained spending discipline but also had to bear unprogrammed drought-related spending of about 0.2 percent of GDP.

7. Therefore, program performance was weak. The authorities missed the end-June performance criteria on net credit to the government (by 0.6 percent of GDP) and on the government balance (by 0.2 percent of GDP), as well as the continuous criteria on domestic arrears, due to delays in social contribution payments, and on external arrears, which were accumulated in the second half of 2011 for a total of about $7 million as government liquidity dried up and high oil prices reduced EDD’s capacity to pay debt service. Given the shortfall in revenues, the authorities had to cut expenditures heavily, penalizing in particular social spending, and therefore missed the floor on the end-June indicative quantitative target. They met seven out of thirteen structural benchmarks due up to December, and met three more with delay.

8. The authorities are committed to paying external debt service regularly. They have undertaken a range of actions: (i) to help prevent occurrence of new arrears, the debt division of the ministry of finance will report to staff monthly debt obligations and repayments on public and publicly guaranteed debt; (ii) the debt division will be strengthened by additional staff financed by UNDP; (iii) if needed to avoid accumulation of external arrears, the treasury will pay the debt service due on debt contracts which should be serviced by public enterprises under an agreement between these enterprises and the government; and (iv) the ministry of finance will create a macroeconomic unit to help monitor the ECF arrangement (prior action), in close coordination with the debt division.

III. Policy Discussions

9. Discussions focused on the economic situation and the impact of the drought, program performance, and policies for 2011–12. In the real sector, the authorities’ main concern is the impact of the drought and high food and fuel prices on the poor. In the fiscal sector, the challenges are catching up with tax collection and maintaining fiscal discipline despite the subsidy costs, drought-related spending, and transfers to EDD. Public debt issues center on preventing the new accumulation of external arrears and resuming the regular repayment of existing domestic arrears. In the monetary and financial sector, the emphasis is on strengthening bank supervision.

A. Real Sector

10. Important progress was made in addressing the cost of electricity and the availability of water, key obstacles to development in Djibouti:

  • Interconnection with the Ethiopian electricity grid: The interconnection meets about 50 percent of Djibouti’s electricity needs at very low cost, which is helping EDD absorb the losses deriving from high oil prices (EDD electricity tariffs are set for a breakeven at 70 dollars per barrel). Later, EDD should be able to lower electricity tariffs for customers, easing one of the most serious constraints on private sector activity. EDD’s plans to build a thermal power station, at an estimated cost of $130 million (about 9 percent of GDP), to replace the existing, ageing facility, have been temporarily suspended while the impact of the interconnection and Djibouti’s geothermal potential is evaluated with the help of donors. However, EDD remains in need of reform, and the authorities are working with the World Bank, the European Union, and other donors to streamline the organization, revise the fuel procurement system, and develop a medium-term strategy for the energy sector.

  • Desalinization plant: A $100 million desalinization project, funded by the European Union and to be completed in 2015, will address Djibouti’s medium-term water needs. Aside from the effect of the drought, Djibouti suffers from meager rainfall and a limited, highly salty water table.

B. Fiscal Issues

Fiscal policy

Figure 8.
Figure 8.

Djibouti: Fiscal Revenues, 2005–11

(In DF millions)

Citation: IMF Staff Country Reports 2012, 197; 10.5089/9781475505856.002.A001

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

11. The authorities targeted a deficit of 0.4 percent of GDP in 2011. The revised target realistically takes into account the difficulty of making up fully for the poor tax revenue collection in the first months of the year, the cost of the diesel subsidy (1.2 percent of GDP higher than in the program) and the nonprogrammed spending for the drought (for 0.4 percent of GDP) and transfers to EDD (for 0.2 percent of GDP), which were only partially offset by lower equipment and investment spending. The target implies a weakening by about 0.8 percent of GDP in the fiscal stance for 2011 compared to the program, which envisaged a budget surplus of 0.4 percent of GDP. The additional deficit financing would come from a weaker improvement in the government financial position vis-à-vis the CBD. The authorities committed to cutting further equipment and investment spending to meet the targeted deficit.

12. Exceptional revenue measures supported the fiscal effort in (the remainder of) 2011. The authorities stepped up tax collection by publishing a list of late tax payers and more rigorously enforcing the existing exemptions through the implementation of the ASYCUDA customs software. Despite social and political sensitivities, they also increased diesel prices in October, November, and December by a total of 4 percent (the increase was a prior action) to reduce to some extent the subsidy by narrowing the gap between domestic and international prices.

13. The authorities intend to develop a fuel subsidy reform plan. Even with the planned price hikes, the diesel subsidy will be very costly. Furthermore, the universal price subsidy is an inefficient social protection tool, especially given that most of the benefit is accrued to the better-off owners of diesel-powered cars and trucks. In the coming months, the authorities therefore plan to develop, with the help of Fund technical assistance, a reform strategy that would allow diesel prices to adjust to international prices based on the automatic smoothing mechanism (which is currently applied for all fuel products except diesel and kerosene) and that would target more efficiently the most vulnerable parts of the population.

14. The 2012 budget will be balanced. The authorities agreed to a budget (already approved by the National Assembly) that would maintain debt sustainability, strengthen the financial position with the banking system, and repay the domestic arrears as scheduled. Tax revenues will increase slightly in percent of GDP as a result of the ongoing tax revenue measures. The authorities also committed to continuing tight controls on current spending, including by maintaining the freeze on public-sector hiring (excluding health and education). They will also maintain the existing freeze on public-sector wages, with the exception of the lowest salary level, which will be increased in 2012 as a measure to fight poverty.3

Fiscal sector reforms

15. With the end of the government transition, the authorities are more focused on structural fiscal reform:

  • Tax revenues: the authorities have already increased staffing in the VAT unit, and raised the VAT threshold in the 2012 budget (structural benchmarks for end-December 2011). The ministry of finance will enforce the obligation to fill tax returns by companies benefitting from tax exemptions (new structural benchmark for end-March 2012). The authorities have introduced the software ASYCUDA to all external trade in 2011 (structural benchmark for end-December 2011).

  • Public financial management: the ministry of finance has resumed the bimonthly treasury planning meetings, after a pause during the ministry’s internal reorganization. The authorities have secured financing from the African Development Bank to acquire the software needed for the reclassification of the budget consistent with GFS 2001 (structural benchmark for end-December 2011). They will also keep under review their food subsidy program based on farms in Ethiopia and Sudan.

  • Program monitoring: throughout the first three quarters of 2011, fiscal reporting to the Fund has been systematically late, and web posting of the fiscal tables has continued to go beyond the agreed two-month lag. To address these delays, the ministry of finance will create a unit charged with coordinating the program measures and reporting, including fiscal tables, and will carry out macroeconomic analysis in support of budget planning (prior action).

C. Public Debt

16. External public debt should decline slightly from 56 percent of GDP at end-2010 to 55 percent at end-2011, but Djibouti remains at high risk of debt distress (Box 2). Debt sustainability will be affected by the government’s ambitious investment plan, focusing on energy, water, and infrastructure, which is being revised in connection with the new national strategy for poverty reduction (Initiative Nationale de Développement Social, INDS).4

17. External arrears were accumulated in the second and third quarter of 2011. The authorities accumulated external arrears for less than 0.1 percent of GDP to Paris Club creditors in the second quarter, leading to the nonobservance of the related performance criterion, which was waived at the approval of the fourth review (Fourth Review Staff Report CR/12/169). However, starting in May, because of extremely tight treasury liquidity and the difficult financial situation of EDD, the authorities accumulated arrears to the Arab Fund for Economic and Social Development, the Arab Monetary Fund, the Islamic Development Bank, the Kuwait Fund for Arab Economic Development, the OPEC Fund, the World Bank, and Paris Club creditors (Germany, France, and Spain) which reached in the second half of the year a total amount of $7 million, or about 0.6 percent of GDP. Some of these arrears were accumulated on debt service payments taken in charge by public companies (including EDD) on behalf of which the government had contracted the loans. All the external arrears were cleared in October-December.

18. The authorities are committed to avoiding further external arrears. Following the accumulation of arrears in the first quarter of 2011, the authorities started to more rigorously following the external debt service schedule and strengthening the tracking vis-á-vis creditors of executed debt service payments, including payments on debt contracted to finance public enterprises. In addition, the authorities committed themselves to additional remedial actions: (i) to help prevent recurrence of new arrears, the debt division of the ministry of finance will report to staff monthly debt obligations and repayments on public and publicly guaranteed debt; (ii) the debt division will be strengthened by additional staff financed by UNDP; and (iii) if needed to avoid accumulation of external arrears, the treasury will pay the debt service due on debt contracts which should be serviced by public enterprises under an agreement between these enterprises and the government. The macroeconomic unit will also improve the coordination with the debt division. Finally, a stronger fiscal position will prevent the accumulation of further arrears, and likewise, the interconnection will support EDD’s financial position and allow it to resume regular debt service payments.

19. Debt rescheduling efforts are continuing, and the authorities are making best efforts to reach agreements with the remaining official bilateral creditors. To comply with the comparability of treatment requirement in the Paris Club agreement, the authorities are seeking similar terms from non-Paris Club creditors. They have already signed agreements with Saudi Arabia and are in negotiation with Kuwait and the United Arab Emirates.

20. The authorities are repaying domestic arrears. They committed to repay the arrears scheduled for 2011 (including the arrears accumulated to public utilities in 2009), the remaining domestic arrears previously scheduled for 2010, and the government’s 2009 dividend advance from Banque Commerce et Industrie. To lay the basis for regular updates of the cross-debt with public enterprises, the authorities concluded stock-taking agreements with EDD and Djibouti Telecom in September, and with the water company ONEAD in November (structural benchmark for end-September 2011).

Debt Sustainability Analysis

The updated DSA confirms that Djibouti remains at a high risk of debt distress. Under the baseline, the present value (PV) of the debt-to-GDP ratio is projected to decrease from 51 percent in 2011 to 33 percent in 2031, and remains above the threshold of 30 percent until 2013. The PV of the debt-to-exports ratio also breaches its indicative threshold of 100 percent until 2025. However, the PV of the debt-to-revenue ratio and the debt service ratios are below their indicative thresholds.

Stress tests show that external debt sustainability is most vulnerable to a devaluation of the currency. The PVs of the debt-to-GDP ratio and debt -to-revenues ratio are most vulnerable to a onetime devaluation of the currency (Djibouti operates a currency board arrangement pegged to the US dollar). On the other hand, the debt service-to-export ratio and the debt-to-export ratio are most vulnerable to an export shock, highlighting the vulnerability of debt sustainability to port services.

The macroeconomic assumptions for 2011–31 remain broadly the same as in the last DSA. Real GDP growth rate in the long run is projected at 5.8 percent, while inflation is expected to remain at 2.5 percent. The current account deficit is expected to stabilize at about 12 percent of GDP in the next few years, mostly due to large assumed FDI inflows, and then gradually decrease to about 5 percent of GDP in the long run.

uA01fig01

Djibouti: Debt Dynamics, 2011–31

Citation: IMF Staff Country Reports 2012, 197; 10.5089/9781475505856.002.A001

The results of the public-sector DSA mirror those of the external DSA. In the baseline scenario, public debt indicators are projected to improve in the medium term. The PV of the debt-to-GDP ratio is projected to decrease from 61 percent in 2011 to 34 percent in 2031. The PV of debt-to-revenue ratio would also decrease from 174 percent to 103 percent in 2031, reflecting Djibouti’s relatively high and stable government revenues.

D. Financial Sector Policies

21. The banking sector, according to end-2010 indicators, remains healthy overall, but there are concerns about credit quality and some governance problems stemming in part from regulatory and prudential weaknesses. Available indicators show high profitability and nonperforming loans of about 6 percent of total loans. However, rapid credit growth and strong increase in number of banks in recent years, together with rising exposure to the real estate sector, raise concerns about a possible deterioration in credit quality. Furthermore, the increase in minimum capital envisaged by the new banking law may put many of the smaller banks under severe pressure to find funding. Finally, a banking crisis in Europe might affect the two largest banks which still place a significant share of their liquid assets with counterparts in France. These vulnerabilities may be exacerbated by possible governance problems in the banking sector such as excessive credit concentration, connected lending, and weak internal governance structures, that could arise from remaining weaknesses in the prudential and regulatory framework, the relatively large size of the banking sector in the small Djiboutian economy, and the presence of several small banks.

22. The authorities are strengthening bank supervision. The CBD has created a unit dedicated to supervision, including AML/CFT supervision (structural benchmark for end-June 2011), and has recruited two additional staff for the unit (structural benchmark for end-June 2011). In July, the CBD approved a roadmap for the implementation of the banking law (new structural benchmark for end-September 2011), and has started implementing the provisions of the law, including the tightening of licensing procedures. The authorities conducted onsite inspection of five banks and a micro-finance institution in 2011. All banks now submit a detailed monthly statement on credit, liquidity, and foreign exchange operations.

23. Steps have been taken to improve central bank governance. In September 2011 the CBD Board of Directors adopted an official timetable for quarterly meetings (structural benchmark for end-June 2011). In the context of the ongoing safeguards update, envisaged in the context of the augmentation of access, the CBD agreed to strengthen transparency by publishing the full set of 2010 financial statements, including the opinion letter and disclosure notes (modified structural benchmark for end-December 2011), and intends to adopt an audit committee charter. A safeguards assessment update, envisaged in the context of the augmentation of access, is ongoing.

IV. Program Issues and Risks

24. Due to delays in data provision, revised end-December 2011 performance criteria in line with the authorities’ revised fiscal objectives for the year could not be proposed to the Board. The staff report could not be issued before end-December 2011 due to delays in obtaining data on a presidential airplane acquired in 2010.5 Consequently, the Board can no longer modify the end-December 2011performance criteria on the fiscal balance and net credit to the government. Since the 2011 fiscal balance underlying the revised macroeconomic framework implies a relaxation of about 0.8 percentage of GDP compared to the target set in the Fourth Review Staff Report (CR/12/169), the two performance criteria in question are likely to be missed (fiscal and financing data for end-December 2011 are not yet available). Since the program is supported by an ECF arrangement, waivers for end-December performance criteria are not needed for the completion of the 5th review, but waivers of nonobservance might be needed on occasion of the completion of the 6th review. However, in line with understandings reached with the authorities on a revised macroeconomic framework and accompanying policies, the staff considers that the broader goals of the program are within reach, provided that the end-December 2011 outcome is in line with the revised targets (Text table 3).

Text Table 3:

End-December 2011 Quantitative Performance Criteria and Preliminary Estimates

(In millions of Djibouti francs; unless otherwise indicated)

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

See the Technical Memorandum of Understanding for definitions and adjustor calculations.

25. The authorities request a revision of the structural benchmarks set in the Fouth Review Staff Report (CR/12/169). Given its timeline beyond the end of the ECF arrangement in early June, the authorities request the replacement of the end-June 2012 structural benchmark on the preparation of an estimate of tax expenditure with an end-March 2012 structural benchmark on the preparation of a list of beneficiary companies defaulting on the requirement to file tax returns. This measure is macrocritical since tax returns from companies benefitting from exemptions are essential to calculate total tax expenditures. Following discussions with FIN in the context of the safeguards update, they also clarified the end-December structural benchmark on the publication of the 2010 audited accounts of the CBD. The program envisages prior actions on increasing the diesel price at the pump and creating a macroeconomic unit in charge of program coordination at the ministry of finance.

26. The authorities are requesting four waivers for the nonobservance of performance criteria. The waivers for the end-June performance criteria on net credit to the government and on the government balance are justified by the temporary nature of the deviations and the remedial actions on strengthening tax administration and raising diesel prices. The waiver for the continuous criterion on non-accumulation of domestic arrears is justified by the temporary and minor nature of the deviation, since the arrears were accumulated only in three months, for a maximum amount of 0.2 percent of GDP, and were eliminated by the third quarter. The waiver for the continuous criterion on the non-accumulation of external arrears is justified by the temporary nature of the deviation and the remedial measures on improving debt service reporting, debt management, and coordination between the treasury, the debt division, and public enterprises.

27. With the augmentation of access, the program will be fully financed. The authorities are expected to mobilize sufficient exceptional financing from multilateral and bilateral creditors on concessional terms, which include financing for drought-related spending. Donors will continue to support Djibouti mainly through grant and loan project financing, while expected budget support is relatively limited.6

28. The augmentation will be disbursed at the fifth and sixth reviews. To balance the need to meet Djibouti’s financing requirements with the risks arising from program performance, the augmentation will be disbursed equally following the approval of the fifth and sixth reviews of the ECF arrangement. The augmentation of access is not expected to affect Djibouti’s capacity to repay the Fund. With the augmentation, average obligations to the Fund over 2012-22 would rise to 0.5 percent of government revenues (compared to 0.3 percent without augmentation), and to 0.5 percent of exports (compared to 0.3 percent). The remedial actions taken by the authorities to address the weak program performance will strengthen the ECF going forward and support the requested access increase.

29. The program is vulnerable to a number of risks:

  • Wavering political commitment, resulting from vested interests or a flare-up of domestic social unrest, among other causes;

  • Administrative capacity constraints, combined with shortfalls in technical assistance from donors, which could possibly affect the authorities’ ability to implement reform;

  • Unsustainable spending pressures deriving from: (a) higher transfers to EDD due to continued financial losses, (b) uncontrolled spending on the fuel and food subsidy program, and (c) higher-than-expected cost of the mission to Somalia;

  • Fall in international reserves to unsustainable levels—threatening currency board coverage—in case capital inflows and official financing are insufficient to finance the rising current account deficit; and

  • Terrorist acts following the increased involvement in Somalia, which could dent confidence and derail growth.

V. Staff Appraisal

30. Despite weak performance in the first half of 2011, the program is broadly on track. Performance has suffered from the commodity price shock and the drought, but also from the authorities’ weakening attention around the elections and during the prolonged government transition period. However, the authorities have maintained spending discipline, made sufficient progress on their structural reform program, and committed to adequate policies for 2011 and 2012. Staff expects the 2011 program outcome to deviate from the end-December 2011 performance criteria for the fiscal balance and net credit to the government set in the Fourth Review Staff Report (CR/12/169). However, staff is of the view that, if the 2011 macroeconomic outcome turns out in line with the revised macroeconomic framework, the broad objectives of the program would continue to be met. Staff therefore supports the authorities’ request for the completion of the fifth review, the waivers of nonobservance of the end-June performance criteria on the fiscal balance and net credit to the government, and of the continuous performance criteria on the non-accumulation of domestic arrears and non-accumulation of external arrears, in light of the minor deviations from the program objectives and the corrective actions undertaken by the authorities.

31. The international price increase and the drought had a strong negative impact on the Djiboutian economy. The spike in commodity prices, especially on food and fuel, has boosted the import bill, reduced fiscal space, and disproportionately affected the poorest households. The drought has put further pressure on the economy, greatly increasing the population’s reliance on food and services provided by the government and the international community. Staff supports the request for augmentation of access by 60 percent of quota to meet the additional external financing needs resulting from these exogenous shocks, and the related rephasing of disbursements.

32. Under the currency board regime, which has served the country well, macroeconomic stability hinges on sound fiscal policy. Staff welcomes the authorities’ commitment to targeting a budget deficit of 0.4 percent of GDP for 2011 and a balanced budget in 2012. To achieve these targets, the authorities must increase their efforts in tax collection but also remain vigilant about spending pressures. In this regard, the authorities should keep under strict control the financial impact of the increase in the base salary. If spending cuts become necessary in 2012 in the face of lower-than-programmed revenues, they should also focus on the quality of the fiscal adjustment and refrain from disproportionately decreasing capital and social spending, as was the case in 2011.

33. The success of the program therefore depends crucially on the authorities’ immediate implementation of the agreed corrective measures. They should focus on catching up with tax collection to achieve the ambitious fiscal targets for 2011 and 2012; regularly execute external debt service payments, including those taken in charge by public companies under agreements with the government; maintain spending discipline; and rigorously keep up with fiscal and debt data reporting and publication. The creation of a macroeconomic unit at the ministry of finance will help in this regard.

34. Furthermore, reform in the fiscal sector is essential for improving fiscal management. Deepening tax revenue reforms, notably in the VAT administration and the reduction of tax exemptions, is necessary to increase revenue potential. Progress in public financial management is encouraging, but more needs to be done, particularly on strengthening the budget process (including increased transparency of budget planning and execution) and tracking domestic arrears and public-sector cross debt.

35. The reform of the fuel subsidy will help to contain its budgetary cost and better target the needs of the poor. Staff welcomes the recent increases in diesel prices and the authorities’ intention to develop, with the help of the Fund, a reform strategy to phase out the universal diesel price subsidy and reinstate the automatic smoothing mechanism.

36. Lowering the cost of energy requires a medium-term strategy centering on the reform of EDD. The oil price increase heightened EDD’s financial difficulties, but problems in the energy sector are long-standing. Only the development of a coherent energy strategy, including the reform of EDD, can prevent further government transfers to EDD and allow for the pass-through to customers of the low cost of the electricity imported from Ethiopia.

37. The CBD should continue focusing on the implementation of the banking law and possible governance issues in the banking sector. The CBD should now develop a solid implementation framework and adequately train its staff. The financial system appears sound, but, in light of the high credit growth, the increase in the number of banks in recent years, and possible shocks from a financial crisis in Europe, the authorities should carefully monitor banking sector developments and be vigilant toward the increase in risks, both systemic and to individual banks. The CBD should also pay attention to possible governance issues in the banking sector. The tightening of bank licensing is an important step in this direction.

Table 1.

Djibouti: Selected Economic and Financial Indicators, 2008–16

(Quota: SDR 15.9 million)

(Population: 0.818 million; 2009)

(Per-capita nominal GDP: $1,383; 2010)

(Poverty rate: 42 percent; 2002)

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

In 2009 includes externally financed projects of public enterprises guaranteed by the government amounting to 3.7 percent of GDP.

Does not include repayment of arrears to public enterprises accumulated in 2009. Repayment of these arrears is included in current expenditure in 2010–12.

In 2009, includes special and general allocation of SDR 14 million.

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

Table 2.

Djibouti: Central Government Fiscal Operations, 2008–12

(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 military, as per leasing agreement.

Annual leasing fees from French (€30 million) and US (US$30 million) military bases, which include the payment of TIC on behalf of French soldiers. From Q3 2010, includes US$3 million from Japanese military base.

In 2009, includes externally financed projects of public enterprises guaranteed by the government amounting to 3.7 percent of GDP.

In 2010–12 includes the repayment of arrears to public enterprises accumulated in 2009.

Includes €5 million (out of a total of €30 million) of foreign-financed current spending from French military as per leasing agreement. The budget classifies this amount as domestic investment spending.

Excludes housing subsidies.

Revised from 2010 to exclude salaries. In 2011 includes only social spending as defined in TMU.

Defined as domestic revenue minus expenditure financed from domestic sources.

Table 3.

Djibouti: Central Government Fiscal Operations, 2008–12

(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 military, as per leasing agreement.

Annual leasing fees from French (€30 million) and United States (US$30 million) military bases, which include the payment of TIC on behalf of French soldiers. From Q3 2010, includes US$3 million from Japanese military base.

In 2009, includes externally financed projects of public enterprises guaranteed by the government amounting to 3.7 percent of GDP.

In 2010–12 includes the repayment of arrears to public enterprises accumulated in 2009.

Includes €5 million (out of a total of €30 million) of foreign-financed current spending from French military as per leasing agreement. The budget classifies this amount as domestic investment spending.

Excludes housing subsidies.

2010 GDP was revised compared to program.

Defined as domestic revenue minus expenditure financed from domestic sources.

Table 4.

Djibouti: Balance of Payments, 2008–12

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

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

Revised to reflect the acquisition of the presidential airplane in Q4 2010.

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.

In 2009, includes special and general allocation of SDR 14 million.

Table 5.

Djibouti: Monetary Survey and Banking Sector Indicators, 2008–12

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

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

In 2009, includes special and general allocation of SDR 14 million.