KEY ISSUES• The Comorian economy continues to grow although at a slightly slower pace. Economic growth in 2014 is projected at 3.3 percent, adversely affected by electricity disruptions and slower-than-expected implementation of the public investment program. Inflation has remained subdued. Staffs’ baseline assumption is that real GDP growth will average around 4 percent per annum over the medium term, provided reforms are implemented.• Implementation of the 2014 budget was challenging, particularly after mid-year. While revenues were broadly on target, resources were inadequate to meet the higher- than-budgeted wage bill resulting from an increase in teacher salaries in March and previously un-budgeted expenditures, including on elections. Domestically-financed investment spending was severely constrained and temporary arrears were incurred on salaries and external debt.• The key short-term challenge is to find a better balance between available resources and expenditures so that arrears can be avoided. Spending plans need to be based on realistic expectations of the resources likely to be available. The 2015 budget is premised on this principle but the scope for domestically-financed investment is inadequate as obligatory spending on wages and salaries and debt service absorbs most of domestic revenue.• For the medium-term the key challenges are to create fiscal space for infrastructure investment and social spending, accelerate inclusive growth and employment generation, and reduce poverty. The authorities need to focus their efforts on strengthening revenue administration and public financial management to expand fiscal space and improve transparency. Weaknesses in the business environment, including inadequate infrastructure, especially in the energy sector, and difficulties in contract enforcement represent important challenges.
A coordinated effort by International Financial Institutions (IFIs), bilateral donors, and the Comorian authorities, led to a meaningful improvement in Comoros’ macroeconomic performance during the 2009-13 period under the ECF arrangement. The country also achieved satisfactory progress on key structural reforms leading up to the HIPC completion point in 2012 while making advancements on key social indicators. The IMF’s close involvement along with the authorities’ resolve to undertake difficult reforms have enabled a sound economic performance while also, importantly, helping catalyze donors’ support. Since then, however, preserving hard-won macroeconomic gains has been challenging, and progress on structural reforms has been limited.
The authorities acknowledge that in the short- and medium-term, part of regaining the reform momentum requires the kind of “quick-win” measures recommended by staff, for example, in the fiscal area. The authorities welcome the recommended measures and are taking the necessary steps in the 2015 budget to address identified fiscal weaknesses. However, to achieve more meaningful progress in other areas, there is a need to address a number of uncompleted reforms initiated in the context of the 2009-13 ECF and leading up to the HIPC completion point with the assistance of the donor community. This will require a stronger, more sustained and coordinated involvement of IFIs and other development partners, as the authorities lack the capacity, planning ability, and financial resources to finalize these reforms on their own. This is especially true for the restructuring of the electricity company, for example, which continues to exert a significant drag on the country’s growth potential.
Comoros’ distinctive features as a small island state also make the authorities’ task of further enhancing growth particularly challenging. Limited natural resource endowment and a very small market, inhibit the realization of economies of scale. Furthermore, Comoros lacks the kind of dominant industries found in some other small island states such as tourism or a financial sector. The economy is dominated by the public sector with no alternative engines of growth coming from the private sector. Addressing these deep-rooted challenges requires a comprehensive approach to the development of the country and progress will be dependent on a strong and sustained involvement of donors. These structural weaknesses are generally shared among small island states and require a unique approach to development with a particular strong focus on growth compared to other LICs as noted in the “Staff Guidance Note on the Fund’s Engagement with Small Developing States”1.
II. Recent Developments and Outlook
- Growth is estimated to have reached 3.3 percent in 2014 (from 3.5 percent in 2013) and is projected to revert to 3.5 percent in 2015 driven by public investment which remains one of the country’s main engines of growth.
- Inflation remains in check within the 2.5-3 percent range on average in 2014 and 2015. Stable and low domestic food and fuel prices and a prudent monetary policy stance within the CFA zone have contributed to containing inflation.
- The fiscal stance has deteriorated in 2014 due to the substantial drop in nontax revenues—the previous Economic Citizenship Program (ECP) has been cancelled—, and to the increase in teachers’ salaries despite a sizeable downward revision in capital spending. In 2015, the more limited use of tax exemptions along with cuts in goods and services expenditures and also the postponement of domestically-financed capital expenditures are projected to contribute to an improvement of the fiscal stance. On the new ECP, the authorities remain confident that they will be able to reach an agreement soon. They intend to discuss and seek advice from staff on how to optimize the use of these resources, as soon as they become available.
- While the current account deficit has declined in 2014 to 7.4 percent of GDP, it is projected to widen to 11 percent in 2015 despite strong remittances inflows. This development is driven by high imports associated with the public investment program. Consequently, international reserves are projected to decline from 5.6 months of imports cover in 2014 to 4.9 months in 2015.
- Outlook: the near-term outlook is mostly affected by the country’s limited fiscal space and the associated reduction in capital spending along with long-standing weaknesses in the electricity sector. The longer term outlook, however, appears more favorable as new investments are launched in areas with comparative advantage such as tourism and fisheries along with the resumption of other public investments, including domestically financed.
III. Policy Adjustments
Following the 2014 fiscal slippages, the authorities have welcomed the staff’s advice and recommendations aimed at redressing the situation. They have adopted a 2015 budget that aligns more closely revenues—based on more realistic assumptions—and expenditures—better prioritized—while limiting recourse to statutory advances from the central bank—which are contained by the ceiling under the CFA zone arrangements—with the goal of ultimately eliminating arrears both domestic and external. The focus of this year’s budget is also to further limit the wage bill.
An important long-term fiscal challenge the authorities have been struggling with over the years is raising the country’s revenue-to-GDP ratio. They welcome the annex on this issue which will contribute towards this endeavor, and agree, in particular, with the foremost need to contain revenue leakages through the “freeze of the granting of any new customs and tax exemptions”. They also welcome the critical quick-win revenue administration reforms identified, and would like to reiterate their commitment to implementing all of the recommended measures.
The authorities also acknowledge weaknesses in PFM and welcome the recommended quick-win PFM reforms, including the “control of the government wage bill through the enforcement of a ceiling for each of the Union and the three islands” which they intend to fully implement.
The authorities very much appreciate the findings of the DSA update that take into consideration the impact of remittances, and indicate a revision of the rating from high to moderate of the country’s risk of debt distress. They would like to reiterate their commitment to seeking borrowing on concessional terms only, and continuing to address debt management weaknesses with the technical assistance of the IMF and other development partners.
IV. Small Island State
My authorities welcome the acknowledgement by staff of the country’s significant structural obstacles to growth and, in particular, the challenges with efforts to diversify the economy, as a result of the country’s very narrow resources base (3 crops—vanilla, cloves, and ylang-ylang—account for approximately 75 percent of all exports). Comoros is also a very small market which is further fragmented by the limited transport and communication links between the three islands that constitute the Union.
The authorities appreciate the efforts by staff to recommend realistic policy measures and reforms in their discussions, as stressed in the report, cognizant of the country’s limited capacity for implementing comprehensive and far-reaching reforms.
However, it is also clear from the staff’s analysis that devising and implementing a realistic and successful diversification strategy is beyond the reach of the authorities, and will require a strong involvement from development partners.
In spite of a challenging environment, Comoros, with the much-appreciated assistance of development partners, has been able to achieve satisfactory economic and financial progress, over the past years. However, much remains to be done. My Comorian authorities are eager to undertake the efforts needed to raise economic growth, improve the standards of living of the population and place Comoros on a sustainable economic and financial path. In this endeavor, the assistance of developing partners is of vital importance as Comoros has neither the technical nor financial capacity to undertake such reforms on its own. My authorities look forward to embarking on a medium-term program of reforms. Above all, they would like to implement a program of adjustment with the Fund’s assistance, under an ECF arrangement. My authorities believe that such an arrangement with a particular focus on addressing the country’s structural impediments to growth would help catalyze the needed donor involvement to address the country’s macroeconomic and structural challenges. They look forward to the Board’s support for the start of rapid discussions with staff to address these challenges under a new ECF.
Staff Guidance Note on the Fund’s Engagement with Small Developing States (www.imf.org)