Despite continued headwinds, the Comorian economy's performance slightly improved in 2017.
The Comorian authorities are appreciative of the candid and constructive policy discussions they held with staff in the context of the Article IV consultation. They have continued to take decisive steps to address the country’s macroeconomic imbalances and impediments to growth, including infrastructure bottlenecks. Fiscal performance improved significantly in 2017, following renewed efforts to better mobilize revenues and contain nonpriority expenditure. Power supply and distribution improved substantially, which impacted positively the country’s business climate and growth prospects. Favorable external factors have also played a role in Comoros’ positive macroeconomic performance in 2017, including higher prices of the commodities exported, strong remittances inflows, and significant grants from the country’s Middle Eastern partners.
While welcoming the recent improvement in growth performance, the authorities are keenly aware that continued reform efforts will be needed to place Comoros on a higher and more inclusive growth path that would help improve the population’s living standards in a sustainable manner. In view of the challenging medium-term outlook, they intend to build on the progress they have achieved so far, and pursue growth-enhancing reforms as part of their development strategy, SCA2D (“Stratégie de croissance accélérée et de dévelopment durable, 2015–2019”). The authorities recognize that a stable macroeconomic environment is a prerequisite for strong and inclusive growth, and look forward to Fund’s capacity development support as they deepen their reform efforts ahead.
II. Medium-Term Policies
The authorities expect medium-term economic prospects to be more sanguine than anticipated under the staff’s baseline scenario characterized by slight improvement in the growth outlook. Underpinned by a strong commitment to macroeconomic stability, their ambitious policy and reform agenda under the SCA2D is poised to go a long way toward stimulating growth performance, notably by removing infrastructure bottlenecks and enhancing the business environment.
Fiscal Policy and Debt Management
In 2017, Comoros experienced a strong fiscal performance. The fiscal deficit narrowed substantially following successful efforts to enhance tax administration and revenue collection to rein in current expenditures as a share of GDP, and keep capital expenditures relatively stable.
Looking ahead, the authorities agree with staff that sustained reforms are needed to create fiscal space for public investment and priority social spending. In particular, this will entail further strengthening revenue mobilization and maintaining strict control over public expenditure. Due consideration will be paid to the so-called “quick-win” measures detailed in the excellent Selected Issues Paper as well as other recommendations formulated by staff in the context of the recent Fund technical assistance. The analysis and recommendations made in the SIP provide welcome insights about the experience of comparable small states. It is noteworthy that implementation of a number of measures is underway, consistent with some staff’s recommendations, including the recovery of the stock of tax arrears.
The authorities take note of staff’s assessment that the country’s risk of debt distress remains moderate. They remain committed to prudent debt management, including by continuing to prioritize external borrowing on concessional terms subject to the availability of such financing. The clearance of remaining external arrears has been initiated in the past few months and is intended to be completed by the end of the first quarter in 2019.
To improve competitiveness and basic services, overcoming infrastructure gaps will be key. As the authorities work to implement high priority public investments, including the deep-water port and hospital, they will continue to carefully review available financing options with a view to preserving debt sustainability.
Monetary Policy and Financial Sector Reforms
Comoros’ central bank has initiated a reform to the monetary policy framework in an effort to modernize policy tools and address potential vulnerabilities, including structural excess liquidity. In this endeavor, the monetary authorities intend to carefully sequence the envisaged reform measures in line with staff’s advice.
While the financial sector is well-capitalized and liquid, high NPLs continue to weigh on the growth of credit to the private sector. As rightly indicated in the Selected Issues Paper, it is important to note that large NPLs are held by smaller, non-systemic financial institutions which tend to have larger provisioning. The authorities are fully aware that addressing high NPLs is key to optimizing the contribution of the financial sector to the ongoing economic recovery. They will pursue efforts to address existing vulnerabilities in the financial system, including structural excess liquidity which hinder the adequacy of lending to the private sector. In parallel, compliance with the new regulatory will contribute to improving loan classification and provisioning and help enhance asset quality by facilitating timely write-off of NPLs, whenever warranted.
As indicated in Annex III of the staff report, Comoros’ external position remains in line with medium-term fundamentals and desirable policies. The current account deficit narrowed substantially thanks to strong commodity exports partly driven by an increase in international prices of vanilla as well as higher remittances and external grants. In parallel, international reserves remain at a comfortable level, covering over 8 months of prospective imports of goods and services.
The authorities are determined to take necessary steps to strengthen the business climate and improve competitiveness. Economic activity in Comoros has been hampered for many years by persistent electricity shortages, inadequate transportation infrastructure, and cost-ineffective telecommunications services. While meaningful progress has been achieved in these areas in recent years, especially in the electricity sector, ample scope exists for making further inroads in addressing remaining bottlenecks. Thus, as part of their development strategy SCA2D, a great focus is put on infrastructure investment in the electricity and transportation 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.
The Comorian authorities are determined to pursue their efforts to address Comoros’ daunting policy challenges and place the country on a higher and more sustainable growth path. They intend to advance their reform agenda to make further progress in this direction, as envisioned in the context of their development strategy. In this regard, the support of multilateral and bilateral partners will be critical for the successful implementation of this strategy. In particular, the authorities look forward to maintaining a close engagement with the IMF, as they pursue their policy and development objectives.