This 2016 Article IV Consultation highlights difficulties the economy of Comoros encountered in 2015 and the first half of 2016. An ongoing crisis in the electricity sector and slower-than-expected implementation of the public investment program were the main factors behind the slower growth. Inflation remained well anchored at an annual rate of about 2 percent. Fiscal policy was challenging for most of 2015 as the impact of slower economic growth was compounded by lower revenues. Growth is projected to pick up somewhat to 2 percent in 2016, and revenues are projected to increase to 12 percent of GDP.
The Comorian economy is facing growing macroeconomic imbalances. To help address these imbalances and also create the conditions for a higher, more sustainable growth, the authorities have requested the assistance of the IMF under a Staff Monitored Program. The staff’s advice has been invaluable, helping to formulate strong reform measures, particularly in the fiscal area in which the design of a reform program has appropriately focused on strengthening further revenue administration and public financial management.
2. Policy Context
Following presidential elections held in April 2016, and declared free and transparent by international observers, the newly elected president, Mr. Azali Assoumani, appointed a government with a mandate to take immediate actions to address the country’s weak fiscal revenue collection and the high public sector wage bill. The authorities recognize that a stable macroeconomic environment is a prerequisite for reviving economic growth. They are also aware that a precondition for macroeconomic stability is fiscal stability based on a balance between available resources and expenditures. However, fiscal imbalances in Comoros are deep-rooted and structural in nature. These result notably from a particularly narrow production base, which typically characterizes island economies like Comoros. The country also lacks the kind of dominant industries that are found in other small states notably tourism, and a financial sector. In addition, the Comorian economy is dominated by the public sector with no alternative engines of growth.
The authorities are determined to achieve progress in their efforts to address fiscal imbalances. In this process, the assistance of multilateral and bilateral partners will be critically important. My authorities are grateful to the country’s partners for their continued technical and financial support.
The country’s weak business environment continues to hamper economic activity due to persistent electricity shortages, a largely run down road network, and a costly and inefficient telecommunications sector. To address these bottlenecks, the authorities are also taking steps to accelerate the implementation of their development strategy adopted in 2015 (Stratégie de croissance accelérée et de développement durable, 2015-2019). As part of this strategy, greater focus is put on infrastructure investment in the electricity, road, and telecommunications sectors to overcome obstacles to growth. In addition, the authorities are aware that improving other aspects of the business environment, including the legal and judicial framework, will be key to boosting private sector activity over the medium term. However, Comoros’ limited natural resource endowment and a small market impede the realization of economies of scale, making the authorities’ aim of further enhancing growth outcomes particularly challenging. 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.
The authorities would like to reiterate their strong commitment to build a sound track record under the SMP, with a view to paving the way for an ECF-supported program as soon as possible. Such a Fund-supported program will contribute to addressing more effectively longer term challenges facing the country and helping catalyze donor support. The authorities remain committed to a prudent debt management strategy and aim to continue contracting external borrowing only on concessional terms and also only for high-priority projects that bring a clear economic benefit to the country’s growth potential.
3. Recent Economic Developments and Outlook
Persistent electricity shortages and the slower-than-expected implementation of the public investment program have largely contributed to the country’s recent weak growth performance. The economy grew only at an average of 1.5 percent between 2014 and 2015, and growth is projected to reach 2.2 percent in 2016. Inflation was moderate at about 2 percent in 2014-15, thanks largely to the fixed exchange rate system which continues to serve the country well. The international reserve position has reached a strong 9.1 months of imports in 2015 thanks in large part to external grant and remittances.
The fiscal situation, however, continues to be particularly challenging due to the very large imbalance between the country’s domestic revenues and current expenditures. The wage bill, in particular, absorbs 80-90 percent of tax revenues. Should this unsustainable trend continue, the financing gaps would reach 3-4 percent of GDP in 2016 and 7-8 percent in 2017.
The overall outlook for the Comorian economy remains challenging, as well. The public investment program continues to encounter delays in execution and financing, and the electricity situation is yet to be resolved. To address the persistent electricity shortages, the authorities have recently invested in power generation and intend to continue taking steps in this direction. This will provide much-needed additional electricity supply in Comoros over the medium term. In the telecommunication sector, the authorities intend to lower the cost and improve the quality of telecommunication services in Comoros through increased competition between Comores Télécom and TELCO, the holder of the new telecommunications license.
These investments in the electricity and telecommunications sectors, along with other infrastructure projects should help raise growth over the medium term to approximately 3.5-4 percent.
4. Policy Agenda and Implementation
The authorities’ main policies focus on containing the imbalance between domestic revenue mobilization and current spending. They plan to undertake a number of fiscal policy measures for end-2016 and 2017. These revenue measures include the application of a 5 percent consumption tax on telecommunication services, and also ensuring that the profitable state-owned enterprises contribute additional dividends to the treasury. On the spending side, the main focus is on containing the wage bill by cancelling all employment contracts granted since January 1, 2016.
The authorities’ budget proposal for 2017 will be prepared based on the macroeconomic framework agreed with Fund staff under the SMP. It aims at further containing the public sector wage bill through better control of the number and salaries of public sector employees. The main near-term revenue administration reforms are derived from recent Fund TA, and include concentrating the tax treatment of all large companies in the large tax payers’ unit located on Grande Comore, and expanding the lists of large and small and medium-sized tax payers while ensuring that those on the lists pay their taxes.
The authorities intend to implement a number of measures and reforms to strengthen public financial management. These measures will help ensure that the central registry of public sector workers covers the Union and the three islands and that only workers in the registry are paid. The authorities will also undertake a comprehensive audit of domestic arrears at the Union level, and make sure that all of the offsets between the government, the state-owned oil importing company, and the state-owned electricity company are eliminated.
The authorities share the staff’s assessment that the Comorian financial system is overall adequately capitalized and liquid but that banks’ profitability had been sluggish, the ratio of non-performing loans rising, and provisioning lagging. Against this backdrop, the central bank remains committed to continuing to closely monitoring financial sector stability. The government and the central bank will also continue to monitor developments in the postal bank (SNPSF) and will prepare an action plan for the resolution of the bank’s difficulties by March 31, 2017.
The Comorian authorities are determined to undertake all necessary adjustment measures to reduce macroeconomic imbalances and place Comoros on a sustainable growth path. They look forward to embarking on a medium-term program of reforms with the Fund’s support, under an ECF arrangement. The authorities believe that such an arrangement with a particular focus on addressing the country’s structural impediments to growth would help catalyze donors’ assistance to address the country’s macroeconomic and structural challenges.