Statement by Kossi Assimaidou, Executive Director for Djibouti, February 6, 2012

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.


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.


1. On behalf of my Djiboutian authorities, I thank management and staff for the continued support to their efforts to implement the economic and financial program under the ECF arrangement. At this juncture, Djibouti is facing tremendous challenges stemming from capacity constraints and a difficult environment characterized by elevated commodity prices, insecurity in the Horn of Africa, and a severe drought that heavily affected the region. These shocks have affected the implementation of the program—notably on the fiscal front—and widened the financing needs for 2011-12 despite the pledges from the international community to support the country in responding to the impact of the drought. Nevertheless, the authorities’ commitment to prudent policies and the implementation of adjustment measures, helped to maintain the program on track, although some performance criteria, quantitative indicative targets and structural benchmarks were missed for end-June 2011.

2. Despite the challenges Djibouti is facing, the authorities remain committed to the objectives of the program. They intend to pursue their efforts to strengthen the implementation of the adjustment program under the ECF, which is aligned with the National Social Development Initiative (INDS).

3. Based on their commitment to sound policies under the program, my authorities request Directors’ support for the completion of the fifth review under the ECF-supported arrangement. They also request Directors’ support for the waivers of the nonobservance of the end-June 2011-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 external arrears. Moreover, to complement the financing committed by multilateral and bilateral donors in meeting the financing needs generated by the exogenous shocks, the authorities request an augmentation of access and the related rephasing.

Recent economic developments: impact of the drought

4. The population and economy of Djibouti have been heavily hit by the severe drought in the Horn of Africa, insecurity in the region and the increase in global commodity prices. In this context, the authorities’ prudent policies and the recovery of transshipment and of trade to Ethiopia have led to an increase in economic activity in 2011. As a result, real GDP is estimated to have grown by 4.4 percent against 3.5 percent in 2010. However, due to higher imports to address the drought’s effects as well as substantial rise in world food and fuel prices, inflation rose to 5.3 percent in 2011 from 4.0 percent in 2010. The current account deficit widened significantly. As for the gross international reserves, they stood at US$231 million, at end-2010 and despite heavy strains from higher imports and less vigorous than expected resumptions of FDI, they remained broadly stable at end-2011.

5. The fiscal performance notably in the first semester of 2011 reflected the adverse effects of the exogenous shocks. On the revenue side, tax collection was lower than expected due mainly to the drought. On the expenditure side, the authorities maintained discipline while addressing the adverse impact of the drought and instability in neighboring countries. In view of the shortfall in revenues, the authorities had to reduce expenditures heavily, including social spending. Diesel prices were also increased in October, November and December 2011 by a cumulative total of 4 percent, thus helping to reduce the subsidy, and the impact on the budget.

6. The Djiboutian authorities have made important progress in their efforts to further boost economic growth and alleviate poverty. In this regard, the cost of electricity and availability of water, defined as key obstacles to development in Djibouti, are being addressed. On the electricity front, the interconnection with the Ethiopian grid should help to meet about 50 percent of Djibouti’s electricity needs at a lower cost and help EDD absorb the losses incurred from high oil prices. As for water, a desalination plant funded by the European Union will be completed in 2015 and will contribute to address Djibouti’s medium-term water needs.

7. As regards the drought in the Horn of Africa, Djibouti is one of the most affected countries in the region. Indeed, 50 percent of the rural population or 15 percent of the total population were hit. With around 20,000 refugees, the drought has exacerbated a structurally critical food security situation with 14.5 percent of the urban population living in food insecurity. To alleviate this hardship, the authorities launched an appeal for emergency aid to their partners. In the same vein, an inter-ministerial drought committee, including representatives of donors, was set up to follow up this emergency aid. My authorities welcome the positive response received so far from their development partners. However, the drought occurred at a time when there was also a strong surge in world food and fuel prices. In order to meet the additional balance of payments financing needs in 2011-12, my Djiboutian authorities are requesting an augmentation of access to ECF resources of 60 percent of quota.

Macroeconomic Policies and Structural reforms for 2012

Fiscal policy

8. My Djiboutian authorities will pursue their efforts focused on fiscal consolidation to maintain debt sustainability and non-monetary financing of fiscal deficit, safeguarding fiscal space for social expenditure and modernizing fiscal management. In this respect, the 2012 Budget law approved in December 2011 is in accordance with the objectives of the ECF-arrangement and the INDS framework. In particular, the authorities aim at maintaining the tax revenue-to-GDP ratio constant at the 2011 level with reforms of the VAT and exemptions, as well as further tax collection efforts. They will also raise capital expenditure in sectors with growth potential while pursuing the fiscal restraint given the constraints on the revenue side. Furthermore, my authorities are committed to maintain the hiring freeze in the public sector with the exception of health and education sectors.

9. Efforts to push forward with fiscal reforms will be intensified to enhance capacities for tax collection, expenditure control, and fiscal management. In the context of FY 2012, a commission was established with a mandate to initiate and recommend new tax measures to strengthen the level of fiscal revenues and simplify the business environment. The coordination between the entities managing the VAT and direct tax will be strengthened based on the single taxpayer identification number.

Debt management and sustainability

10. The authorities will continue their efforts to enhance the debt management. They aim at reducing the stock of domestic arrears with possible assistance from donors, and preventing further accumulation. To this effect, controls on the expenditure chain will be strengthened so as not to accumulate further arrears. Prudence in budget appropriations for current expenditure and social spending will also be pursued.

11. With regard to the external debt, the authorities are committed to avoid any future accumulation of arrears including those arising from public enterprises. They will also strengthen capacities in monitoring debt service payments in collaboration with external partners, including the IMF. To preserve Djibouti’s debt sustainability, the authorities will contract only concessional loans and prioritize projects to be funded under the INDS. Public enterprises are required to refrain from contracting non-concessional debt excluding those enterprises managed on a purely commercial basis. In addition, progress has been made on debt rescheduling efforts, with agreements signed on the Paris Club agreement with the remaining official bilateral creditors.

Monetary and financial issues

12. My authorities’ monetary policy will continue to be underpinned by the currency board arrangement to meet the needs of the economy and ensure price stability. They remain strongly committed to maintain a rate of coverage higher than 105 percent of reserve money and government deposits with the Central Bank of Djibouti.

13. In the wake of the banking sector’s expansion, efforts to reform the banking supervision have been undertaken and will continue in accordance with the guidelines of the Financial System Assessment Program and in collaboration with the Fund and other partners. In addition, the charter of foreign exchange bureaus will be reviewed to comply with the new banking law. Moreover, efforts to develop the financial sector and access to finance will be intensified with the support of Djibouti’s development partners including the World Bank and UNDP.

14. The authorities remain committed to implementing the recommendations of the safeguards assessment to enhance the governance of the Central Bank and ensure the integrity of its operations. Starting with the 2011 financial year, financial reports will be completed and published within six months from the end of the exercise. The creation of an audit committee is underway with a view to provide oversight and prepare an audit charter. After amending the laws on combating money laundering and financing terrorism, the authorities are seeking long-term technical assistance from their development partners.

Structural reforms and competitiveness

15. My Djiboutian authorities have made important progress with regard to structural reforms in order to increase Djibouti’s attractiveness for investment. In this regard, they have introduced attractive investment and commercial codes and have approved the law on industrial property. Efforts to address the high costs of factors of production notably electricity, water and labor have been pursued. Inter-connection with Ethiopian’s electricity grid is now completed and covers over 50 percent of current consumption at favorable rates. As for water, donors with a significant support from the European Union will fund a sizeable seawater desalination project.

16. Regarding the labor force, a center to provide training in the skills needed in high-technology sectors was opened. To facilitate the employment of young graduates outside the civil service, the authorities have established an employment promotion fund for the youth as well as a loan initiative for business creation together with its guarantee fund. Efforts focused on restructuring public enterprises and improving the legal and regulatory framework will be pursued with the technical assistance from development partners.

17. The authorities are committed to continue the reform of fuel subsidy with a view to containing its budgetary cost, reinstating the automatic smoothing mechanism and better targeting the needs of the vulnerable segment of population. In this regard, they will seek Fund technical assistance.


18. The authorities’ strong commitment to prudent policies and reforms under the program have helped the Djiboutian economy to weather well the drought and other exogenous shocks experienced in 2011. They are determined to ensure that the program’s objectives will be achieved, in particular sustaining fiscal and debt stability, enhancing resource mobilization, increasing the economy’s competitiveness and growth to fight poverty and youth unemployment. Based on the continued good policy performance in a challenging environment, I would appreciate Directors’ support for my authorities’ request for the completion of this fifth review and the proposed decisions.

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