Abstract
Comoros remains in debt distress, pending the achievement of the completion point under the Highly Indebted Poor Country (HIPC) Initiative. The outlook for 2012 is broadly consistent with expectations under the Extended Credit Facility (ECF) arrangement. The IMF Executive Board has approved a three-year ECF arrangement to support Comoros’ medium-term economic recovery efforts. The government has continued pursuing a prudent external debt management policy. Achievement of the government’s fiscal objectives requires close adherence to the fiscal program to enhance the efficiency of tax and customs administration and to expand the tax base.
I. Introduction
My Comorian authorities would like to thank staff for the constructive policy dialogue and useful advice provided under the ECF. They remain firmly committed to the Fund-supported program and have continued to make progress in its implementation. The current third ECF review assesses performance at end-December 2010. All quantitative performance criteria were met, except the criteria on the accumulation of external debt service arrears and the accumulation of domestic payments arrears. My authorities request the completion of the third review and a waiver for the nonobservance of the quantitative performance criterion on the accumulation on domestic payments arrears at end-December 2010.
Following the reversal of the 2010 wage increase—validated by the country’s highest court in mid-2011—, program implementation resumed steadfastly and by end-2011 the authorities achieved considerable progress in meeting all the targets and objectives of the program, demonstrating strong program ownership. Corrective measures were swiftly taken to redress the budget including through stronger revenue mobilization. Closer coordination with the World Bank and other international partners helped accelerate the pace of structural reforms including, in the area of public financial management, the approval by Parliament of a new personnel framework for ministries, and in the area of public enterprises reform, the adoption of crucial measures to overhaul the telecommunications parastatal.
More broadly, my authorities will pursue the restructuring of all domestic public enterprises which they view as critical to strengthening the country’s competitiveness and enhancing growth. With the assistance of the World Bank, the African Development Bank, and the European Union, they will continue their efforts to finalize the reform of all public utilities in accordance with the agreed agenda and timetable.
My authorities are also endeavoring to meet all HIPC Initiative completion point triggers by the end of the year, at the time of the fourth ECF review. In this regard, progress towards meeting all completion triggers continues to be satisfactory with fifteen out of sixteen completion point triggers either already met or on-track to being met prior to the fourth review.
II. Recent Economic Developments
Overall, macroeconomic performance improved in 2011. Real GDP growth rose to 2.2 percent—from 2.1 percent in 2010 and 1.8 percent in 2009—driven by private consumption (thanks to strong remittances flows), and public and private investments (especially FDI from the Gulf region). Higher remittances and relatively large FDI both boosted construction while agricultural production improved. Foreign aid, including budget support, also played a crucial role in the overall good economic performance.
The fiscal stance strengthened in 2011 with the domestic primary balance recording a surplus of 1.6 percent of GDP (compared with a deficit of 1.6 percent a year earlier) thanks to the good performance of customs, large revenues under the economic citizenship program, and wage restraint. Domestic revenues rose from 14.3 percent in 2010 of GDP to 16.1 percent in 2011 (including exceptional nontax revenues). The wage bill dropped from 9.2 percent of GDP in 2010 to 8.5 percent of GDP in 2011.
Inflation, however, rose by 7 percent (end-year) from 6.6 in 2010 and 2.2 in 2009. High world food and oil prices were the main drivers of inflation. In addition, a higher oil import bill and FDI-related imports widened the current account deficit to 9.5 percent of GDP in 2011 from 7 percent in 2010.
III. Medium-Term Policies
My authorities are committed to fully implementing all fiscal and structural measures agreed under the program which are key to attaining the projected growth levels of about 4 percent in the medium-term. The doubling of growth to 4 percent by 2014 from last year’s 2.2 percent—above population growth—will in turn contribute to raising the populations’ living standards and further reducing poverty.
A. Fiscal Policy
Efforts to consolidate the budget will be pursued consistent with the objectives of the program. On the revenue side, the authorities are implementing key measures to further strengthen revenue mobilization and reinforce tax and customs administration, notably through the establishment of the new General Administration of Taxes and Government Property (Administration Générale des Impôts et des Domaines) and the appointment of its Board of Directors. This new administration, intended to strengthen relationships between the central tax authority of the Union and the tax offices of the islands, should be operational by end-March 2013.
In the event of shortfalls in revenue or grants, the authorities will adopt compensatory measures, including a reduction of spending on goods and services and on investment. Conversely, any budget support received in excess of the programmed amounts will be used to settle domestic payments arrears and to increase deposits at the central bank.
On the expenditure side, efforts will mainly focus at better controlling the wage bill. Thus, parliament recently adopted a new law establishing organizational frameworks for the civil service. The objective of the reform is to further generate efficiency gains in payroll management (following the completion last year of the civil service census) and a rigorous implementation of the new integrated wage payment system that is expected to take effect in September 2012.
B. Structural Reforms and Poverty Reduction
1. Public Enterprises
Of the three main parastatals undergoing restructuring with assistance from the World Bank, the African Development Bank, and the European Union—in the energy, telecommunications, and oil import sectors—, the restructuring process is most advanced for Comores Télécom. With the signing in April 2012 of a partnership contract between the government and IFC to assist in the privatization process of Comores Télécom, a call for expressions of interest to identify potential strategic partners will be launched by end-December 2012.
In the energy sector, various studies financed by development partners are under way to diagnose and define a long-term strategy for the sector which will help facilitate agreement on arrangements to restructure the electricity parastatal, Ma-Mwé. In the more immediate future, the government is focused on finalizing an emergency rehabilitation plan for MaMwé with technical assistance from the World Bank.
2. Poverty Reduction Strategy
The government completed last year its first annual status report on the implementation of the PRSP, and should complete the second annual progress report by end-June 2012. While encouraging progress was achieved in various areas, following the assessment made by development partners, the government agreed that insufficient coordination among the departments involved in the implementation of the strategy along with limited absorption capacity resulted in a relatively lesser outcome than initially envisaged. Therefore, to enhance the effectiveness of the strategy, the government has finalized with African Development Bank support, a refocused action plan for the PRSP. They intend to implement it vigorously with technical and financial support from development partners.
Furthermore, in close collaboration with the World Bank, the government has developed a list of priority sector expenditures which will be monitored by the committee responsible for monitoring PRSP implementation. These efforts are intended to ensure that the savings generated from debt relief under the HIPC Initiative are used to finance priority sectors.
IV. Conclusion
Despite recent delays in program implementation, I would like to reaffirm my authorities’ full commitment to the policies and objectives of the ECF- supported program, as shown by the bold institutional reforms recently undertaken in a very difficult environment. The newly elected government has renewed efforts to achieve fiscal consolidation and has accelerated structural reforms. To give my authorities more time to implement their program and attain its objectives, they are requesting an extension of the current ECF by fifteen additional months (through December 2013) and the rephrasing of its disbursements. Given the measures taken and the commitment of the authorities, I would appreciate Directors’ support for my authorities’ requests.