Abstract
The article is a review on Djibouti’s Extended Credit Facility (ECF) program and the performance of economic development in the program. The ECF program helped Djibouti to maintain macroeconomic stability, and the period underwent a transformation in the Djiboutian economy. The country saw an economic increase, and the banking system boomed. A positive thought of economic growth is projected in 2012, so plans were targeted to pursue fiscal reforms to improve debt sustainability, strengthening the banking sectors. The authorities of the Executive Board expect another program similar to the ECF.
I – Introduction
My Djiboutian authorities thank staff and management for their continued support in implementing the ECF-supported program, which enabled Djibouti to stabilize the macroeconomic framework and lay the foundations for a sustainable and balanced growth as well as for a substantial poverty reduction. In a difficult environment, marked by severe drought and piracy activities in the region, increases in world prices of fuel and food, Djibouti has successfully implemented its ECF-supported program. The program’s implementation has resulted in sustained economic growth, improved financial public management, and far-reaching structural reforms to underpin fiscal and monetary policies and enhance the economy’s competitiveness. However, my authorities are cognizant that more efforts are needed in order to pursue the transformation of the Djiboutian economy into a sub-regional hub for trade, financial services and transportation logistics.
The authorities’ commitment to reforms and adjustment measures has helped to maintain the program-performance broadly on track at the end of 2011. Fiscal performance improved and a fiscal deficit of 0.7 percent of GDP in line with the program target was achieved. However, bank financing to the government was marginally higher than programmed due to large repayments of domestic arrears while the ceiling on the accumulation of domestic arrears was missed by a very small margin. On the structural front, all benchmarks for 2011-12 were met. However, capacity constraints coupled with delays in donor financing have prevented the authorities to meet their targets on beneficiary companies defaulting on the requirement to file tax returns and on the introduction of the new budget classification consistent with the GFS standards.
Based on their continued efforts and good performance in implementing the ECF-supported program, my Djiboutian authorities are requesting the support of the Board for the completion of the sixth review and waivers for the nonobservance of performance criteria. Given the need to pursue structural reforms aimed at tackling the numerous challenges facing Djibouti, the authorities have expressed an interest for a successor program based on lessons drawn from the completion of their first ECF-supported arrangement.
II - Recent Macroeconomic Developments
During the period covering the current program, macroeconomic stability was enhanced, which contributed to economic transformation of Djibouti. Massive foreign direct investment expanded capacities of the port and hotels, and contributed to a growing construction sector. Transit trade with Ethiopia has continued to develop, and the electricity grids of the two countries were connected. Thanks, in part, to monetary stability stemming from the currency board arrangement, the banking system expanded rapidly with deposits and credit to private sector growing at double-digit rates. In this context, economic growth is projected to increase from 4.4 percent in 2011 to 4.8 percent in 2012. Inflation will decline from 5 percent in 2011to about 4 percent in 2012 due mainly to the stabilization of world food prices, increases in the supply from the state-owned farms abroad and the reduction of electricity tariffs following the connection to the Ethiopian grid.
While the international reserves increased and ensured the coverage of the currency board, the current account deficit remains large owing to the impact of the severe drought and the high commodity prices, which resulted in higher imports in 2011. Unfortunately, the adverse effects of the drought, notably the famine, will persist in 2012, putting continued pressures on government expenditures.
Amid this challenging environment, the authorities maintained a remarkable and broad-based fiscal discipline. Tax collection increased and made up for the shortfall due to the drought and government transition in the first half of 2011. Moreover, cuts in current and investment expenditures helped compensate shortfall in revenues from the lease on the military base and in external assistance. However, a higher-than-planned repayment of domestic arrears resulted in an increase in net bank credit to government. This repayment will help clean up the public enterprises’ balance sheets and make them financially more viable.
Despite this progress, my Djiboutian authorities are mindful of the challenges they face in the period ahead, notably reducing unemployment and poverty through higher growth rates, maintaining fiscal discipline through strong revenue collection and expenditure control while preventing the accumulation of new external and domestic arrears. To this end, my authorities are committed to maintaining sound macroeconomic policies for the rest of 2012. They intend to pursue fiscal reforms and achieve a fiscal surplus. They will also continue their efforts to enhance debt sustainability and further improve banking supervision.
III – Policies and Reforms for 2012
Going forward, my Djiboutian authorities are determined to pursue prudent policies and sound structural reforms, building on the progress achieved under the current ECF-supported program. Smooth implementation of the remaining agenda will be critical to the envisioned transformation of Djibouti into a sub-regional hub and to the objectives of reducing the high unemployment and poverty rates. In this endeavor, the authorities expect to continue benefiting from the assistance of the IMF and other development partners.
Fiscal policy and reforms
For 2012, the authorities aim at a budget surplus of 0.5 percent of GDP. They will also pursue their efforts to improve debt sustainability, repay domestic arrears and strengthen the government financial position with the banking system. This requires accelerated efforts in revenue collection and, in particular, tight control on current spending.
The reform of the tax exemption system remains a priority for the authorities. They are committed to compiling and publishing a list of tax-exempt companies as this step is necessary in their efforts to collect tax returns. In addition, a review of the tax framework in consultation with the private sector will be undertaken with a view to support SMEs and boost Djibouti’s role as services and transportation hub in the sub-region. Efforts to enhance the public financial management will also be pursued. Moreover, the authorities remain committed to reforming fuel subsidies. They expect to benefit from Fund’s technical assistance to help design and implement better-targeted social safety nets.
Public debt management
Djibouti’s external public debt ratio remained broadly stable at about 55 percent of GDP in 2011. However, the updated debt sustainability analysis states that Djibouti remains at high risk of debt distress. The authorities are mindful of the risks that could derive from their ambitious investment plan under the long-term vision entitled Djibouti 2035. They are committed to rely on concessional financing and public–private partnerships in their efforts to execute this investment plan while ensuring debt sustainability.
In addition, the authorities have introduced corrective measures following the accumulation of external arrears in 2011, in order to prevent such occurrences. They are also hopeful that, in the context of an approved successor IMF-supported program, an arrangement with the Paris Club could be achieved in their efforts to reduce Djibouti’s external debt stock.
Monetary and financial issues
The currency board arrangement has served the Djiboutian economy well, and the authorities’ efforts to maintain the committed rate of coverage will be enhanced. The banking sector remains profitable and highly liquid according to end-2011 indicators. However, the ratio of non-performing loans increased to 9.4 percent. The authorities agreed that this risk is significant and could be exacerbated by governance problems in the banking sector. Thus, they are strongly determined to intensify their efforts, with the Fund TA, to further strengthen the banking supervision and introduce regulation to put into effect the 2011 banking law.
Structural reforms and competitiveness
Enhancing Djibouti’s competitiveness is at the top of my authorities’ agenda. To this end, their efforts aim at improving the business climate, reducing the costs of factors including labor, electricity and water, as well as restructuring public enterprises for improved public services. The interconnection with the Ethiopian electricity grid has resulted in 30-percent reduction of tariff and substantial decrease in fuel imports by the state owned power company Electricité de Djibouti. In addition, the authorities intend to undertake studies to evaluate available sources for domestic electricity production. They also intend to update the National Initiative for Social Development based on the results of the poverty and household budget consumption survey. This step should pave the way for the donor conference planned to take place towards the end of 2012.
IV – Conclusion
My Djiboutian authorities’ commitment to reforms under the ECF-supported program has helped the country preserve its macroeconomic stability, improve public financial management and make progress in structural reforms with a view to increasing the economy’s competitiveness. Based on their track record, they are requesting the support of the Board for the completion of the sixth review and waivers for non-observance of performance criteria.
My authorities are mindful of the need to pursue the reforms and continue implementing prudent fiscal and monetary policies. In this regard, they are keenly interested in a new arrangement following the present ECF. I would appreciate the Board’s support for my Djiboutian authorities’ request and their efforts ahead.