Union of Comoros: Request for Disbursement Under the Rapid Credit Facility and Purchase Under the Rapid Financing Instrument—Debt Sustainability Analysis

Request for Disbursement Under the Rapid Credit Facility and Purchase Under the rapid Financing Instrument-Press Release; Staff Report; and Statement by the Executive Director for the Union of Comoros

Abstract

Request for Disbursement Under the Rapid Credit Facility and Purchase Under the rapid Financing Instrument-Press Release; Staff Report; and Statement by the Executive Director for the Union of Comoros

Public Sector Debt Coverage

1. The coverage of public sector debt remains unchanged from the most recent DSA. The debt stock covers the central government, as well as government-guaranteed debt of state-owned enterprises (SOEs). SOEs cannot access the debt market on their own, nor can the social security fund. External debt is defined using a residency criterion.

2. The contingent liability stress test accounts for the likely costly resolution of the insolvent state-owned postal bank (SNPSF) and associated financial market risk. Accounting for 20 percent of the financial sector deposits, SNPSF is a macro-critical financial institution. The contingent liabilities from financial markets account for the cost of its restructuring, which is added to the standard minimum value of 5 percent of GDP that represents the average cost to the government of a financial crisis in LICs. The contingent liability for SOE debt is set to zero, since all the government-guaranteed debt is included in the DSA. The contingent liability of other elements of the general government is set at 1.8 percent of GDP, the estimated level of domestic arrears at end-2018. Overall, Comoros’ total contingent liabilities are estimated at 10.6 percent of GDP.

Background

Recent Debt Developments

3. Comoros benefited from extensive debt relief at the beginning of this decade. After reaching the HIPC Completion Point in 2012, Comoros’ external debt was reduced by 12.7 percentage points of GDP, to 10.9 percent of GDP at end-2013.

4. Comoros’ external public and publicly guaranteed (PPG) debt is mainly held by official bilateral creditors, and most is on concessional terms. The debt held by official bilateral creditors more than doubled during 2015–18, increasing its share in total external debt to 60.2 percent. At end-2018, all external debt is on concessional terms, with fixed interest rates, except for a loan from the French export credit insurer COFACE (EUR 3.4 million, 0.3 percent of GDP).

5. Comoros has continued to take on concessional debt. Since 2013, Comoros has contracted five new external concessional bilateral loans, totalizing US$158.7 million, to construct a thermal electricity generation plant, rehabilitate the road network, and strengthen telecommunications infrastructure. The newest loan (US$83 million, 7 percent of GDP), contracted with a Chinese bank in late 2018 to strengthen telecommunication infrastructure, has a maturity of 30 years, including a 5-year grace period, and an interest rate of 1 percent, implying a grant element of 44.7 percent. The undisbursed amounts of these loans are included in the DSA baseline scenario on the grounds of disbursement projections provided by the authorities. Domestic borrowing is limited (to 0.1 percent of 2018 GDP) a three-year loan contracted with the local representative of India’s EXIMBANK in 2017.

6. The World Bank (WB) recently did not provide a waiver that would have enabled Comoros to take on a large non-concessional loan. In 2018, the authorities contracted from the Eastern and Southern African Trade and Development Bank (TDB) a non-concessional loan of (Euro 40 million, 3.7 percent of GDP). Disbursement of this loan requires a non-concessional borrowing waiver from the WB, which the Bank did not provide. Against this backdrop, the present DSA highlights the implications for debt sustainability of contracting the TDB loan, where the authorities will make full use of US$15 million in 2019.

7. The authorities’ action plan for clearing external arrears was not fully executed. This plan envisaged gradually and completely clearing arrears by March 2019 and seeking rescheduling or cancelation of debt and arrears where possible. The latest available information indicates that the authorities did not fully implement this plan, and at end-2018 external arrears reached US$5.9 million (0.5 percent of 2018 GDP). Of these, arrears of US$2 million (0.2 percent of GDP) were owed to France, Kuwait, India, and Saudi Arabia. Another US$0.9 million were owed to Mauritius and have been canceled since. The remainder was owed to Arab Bank for Economic Development in Africa (BADEA) and OPEC Fund for Development. The authorities are committed to clearing these arrears and have a credible plan for their clearance.

8. Comoros’ domestic arrears stock remains highly uncertain and was tentatively estimated KMF 9.1 billion (1.8 percent of GDP) at end-2018. Waiting for a comprehensive audit of the domestic arrears, staff included this amount in the contingent liability test.

A. Macroeconomic Forecasts

9. The medium to long-term macroeconomic assumptions underlying the present DSA incorporate higher GDP and growth numbers, higher services export and lower revenues. The baseline scenario includes April 2019 WEO assumptions and the latest available information on Comoros’ debt.

  • Revised GDP series. In 2018, Comoros’ statistical authorities released the 1993 national accounts standards (SNA1993) with help from the IMF and the WB. The level of GDP was revised up by more than 70 percent, and annual growth was revised up by 1.1 percentage points, over 2007–16. Consequently, the public and publicly guaranteed external debt to GDP ratio has declined by 12.6 percentage points to 18.9 percent of GDP in 2018. These revisions impacted also the levels of public and private investment. Over the medium term, growth is expected to accelerate from 3 percent in 2018 to 3.3 percent over the medium and 3.5 percent over the longer term (a rate of growth slightly higher than in the DSA prepared for the 2018 Article IV consultation). Cyclone Kenneth, which hit Comoros in late April 2019, will bring some volatility around this growth path in 2019 and 2020.

  • Revised inflation numbers. Inflation rate was revised downward by 0.6 percentage points to 1.6 percent between 2012 and 2018. In the short term, inflation rate is expected to reach 3.2 percent in 2019 due to the supply shocks caused by Cyclone Kenneth, 1.4 percent in 2020, and 2 percent over the medium-to long-term. The level of long-term inflation rate remains similar to the previous DSA’s.

  • External sector. The current account deficit (CAD) remains marked by a large goods and services deficit, partially balanced by public and private transfers. Exports of services projections were revised up in line with stronger performance of travelling and tourism in 2017–18. The CAD is projected to peak at 7.7 percent of GDP in 2019, compared to 3.8 percent of GDP in 2018, reflecting in part the impact of the cyclone. Exports of goods will be affected for some years by the loss of part of agricultural plants as a result of the cyclone, and imports of building and food items will also be higher. The goods and services deficit will be financed through an increase of remittances, aid, and public borrowing.

  • Fiscal. In 2019, the overall fiscal deficit on a cash basis is expected to widen to 3.3 percent of GDP (from 0.4 percent of GDP in 2018), including grants. The 2019 fiscal situation will be marked by an increase of current and capital spending for reconstruction post-Cyclone Kenneth, which will be partially balanced by an increase of grants. Fiscal revenue is expected to decline by 1.8 percentage points to 9.5 percent of GDP in line with adverse impacts of the cyclone. Starting in 2020, the fiscal situation will gradually normalize, with the deficit converging to 2.3 percent of GDP over the long-run.

  • External borrowing. As before, the DSA assumes that all contracted-but-undisbursed concessional loans will be fully disbursed over the coming years, as planned by the authorities. New borrowings on concessional terms are also projected to rise over the medium term, however the path will be marked by a larger increase over the reconstruction period. The assumption of increased external borrowing to finance the country’s development needs plays a key role in the DSA and explains to some extent the upward slope of the debt burden indicators, particularly for debt level indicators. While this assumption is not based on concrete borrowing plans, it reflects the view that under baseline assumptions, Comoros will wish to borrow into the future to finance productive infrastructure investments. Comoros is also expected to continue to benefit from significant grant financing, leaving the grant element of new borrowing at about 45 percent. Projections include a one-time disbursement of 50 percent of the quota in July 2019, of which 33.3 percent is provided by the Rapid Credit Facility and 66.7 percent by the Rapid Financing Instrument. It includes also a non-concessional financing of US$15 million from the TDB in 2019 (see DSA paragraph 6 above).

  • Domestic borrowing. As in the previous DSA, domestic borrowing is assumed to remain very limited over the medium-term. Domestic borrowing is expected to reach 4 percent of GDP in 2039, reflecting a gradual deepening of domestic financial markets.

10. The debt sustainability framework’s newly-added realism tools suggest that the baseline projections are reasonable (Figures 3 and 4). The difference over 2019–20 between the baseline growth projections and growth projections implied by standard fiscal multipliers reflects the impact of cyclone Kenneth: in 2019, supply constraints lower growth despite a fiscal expansion, and thereafter growth rebounds despite gradual fiscal adjustment as supply constraints recede (see Annex I to this staff report). Similarly, the 3-year adjustment in the fiscal primary balance seems credible, as it does not fall in the upper quartile of the distribution of past adjustments.

Figure 1.
Figure 1.

Comoros: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2019–29 1/

Citation: IMF Staff Country Reports 2019, 272; 10.5089/9781513510972.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2029. Stress tests with one-off breaches are also presented (if any), while these one-off breaches are deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.2/ The magnitude of shocks used for the commodity price shock stress test are based on the commodity prices outlook prepared by the IMF research department.
Figure 2.
Figure 2.

Comoros: Indicators of Public Debt Under Alternative Scenarios, 2019–29

Citation: IMF Staff Country Reports 2019, 272; 10.5089/9781513510972.002.A002

* Note: The public DSA allows for domestic financing to cover the additional financing needs generated by the shocks under the stress tests in the public DSA. Default terms of marginal debt are based on baseline 10-year projections.Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2029. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.
Figure 3.
Figure 3.

Comoros: Drivers of Debt Dynamics – Baseline Scenario

Citation: IMF Staff Country Reports 2019, 272; 10.5089/9781513510972.002.A002

1/ Difference between anticipated and actual contributions on debt ratios.2/ Distribution across LICs for which LIC DSAs were produced.3/ Given the relatively low private external debt for average low-income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation.Sources: Comorian authorities, and IMF staff estimates and projections.
Figure 4.
Figure 4.

Comoros: Realism Tools

Citation: IMF Staff Country Reports 2019, 272; 10.5089/9781513510972.002.A002

Sources: Comorian authorities, and IMF staff estimates and projections.

B. Country Classification and Determination of Stress Test Scenarios

11. Comoros’s debt carrying capacity is assessed as medium (Text Table 4). The April WEO update maintains the Composite Indicator (CI) score at 2.97. The import coverage of reserves constitutes the second largest contributor to Comoros’ CI. Under the medium category of debt carrying capacity, the relevant indicative thresholds applicable to the public and publicly guaranteed external debt are 40 percent for the PV of debt-to-GDP ratio, 180 percent for the PV of debt-to-exports ratio, 15 percent for the debt service-to-exports ratio, and 18 percent for the debt service-to-revenue ratio. The benchmark for the PV of total public debt under medium debt carrying capacity is 55 percent.

Text Table 1.

Public Sector Debt Coverage Under the Baseline Scenario

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Sources: IMF staff.
Text Table 2.

Coverage of the Contingent Liabilities’ Stress Test

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The default shock of 2% of GDP will be triggered for countries whose government-guaranteed debt is not fully captured under the country’s public debt definition (1.). If it is already included in the government debt (1.) and risks associated with SoE’s debt not guaranteed by the government is assessed to be negligible, a country team may reduce this to 0%.

Sources: IMF staff.
Text Table 3.

Nominal Stock of External PPG Debt, 20181

(Millions of U.S. Dollars; end-of-period)

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Following Paris Club cancellation of all its HIPC-eligible debt, rescheduling of short-term debt in arrears, and restructuring non-Paris club debt.

Excludes $2.72mn of hospital debt owed by Comoros to France that is the subject of ongoing negotiations.

The Mauritius loan and its arrears were canceled in early 2019.

Source: Comorian authorities.
Text Table 4.

Comoros: Calculation and Contribution of the Cm Score Components

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Sources: Comorian authorities, World Bank, and IMF staff.

12. Stress tests follow standardized settings. The contingent liability stress test is based on the quantification of potential contingent liabilities discussed above. The standardized stress tests apply the default settings. Comoros remains exposed and vulnerable to natural disaster shocks, such as tropical cyclones, storms and, the eruption of the Karthala volcano. Consequently, Comoros qualifies for the natural disaster scenario. Given limited mitigating factors, the size of the shock is fixed at 10 percent of GDP.

Debt Sustainability

C. External Debt Sustainability

13. This update suggests that Comoros maintains its external debt distress rating at moderate (Figure 1). As in the previous DSA, all debt and debt service indicators remain below their respective thresholds. However, all the debt and debt service indicators exhibit in the baseline an upward trend over the long run, highlighting limited GDP growth, a narrowed base of export, and only very limited progress in creating fiscal space.

14. The results of the stress tests and alternative scenarios exhibit vulnerability to natural disasters and shocks on exports. A shock to exports is identified as the most extreme shock for the PV of debt-to-exports and the debt service-to-exports ratio.1 It results in a sustained breach of the relevant threshold for the PV of debt-to-exports, and a large deterioration without breach of the debt service-to-exports ratio. The most extreme shock for the PV of debt-to-GDP ratio is natural disaster, for debt service-to-revenue ratio it is a one-time depreciation shock. These results highlight the critical importance of improving external competitiveness and enlarging the export base. They also highlight Comoros’ vulnerability to natural disasters, and the critical role of exchange rate stability under the peg to the Euro.

15. Comoros debt capacity has limited space to absorb additional shocks (Figure 5). The granularity analysis of the external debt suggests that the PV of debt-to-exports ratio shows limited space to absorb shocks, while the remaining indicators have substantial space.

Figure 5.
Figure 5.

Comoros: Qualification of the Moderate Category, 2019–29 1/

Citation: IMF Staff Country Reports 2019, 272; 10.5089/9781513510972.002.A002

Sources: Country authorities; and staff estimates and projections.1/ For the PV debt/GDP and PV debt/exports thresholds, x is 20 percent and y is 40 percent. For debt service/Exports and debt service/revenue thresholds, x is 12 percent and y is 35 percent.

D. Total Public Debt Sustainability

16. Public-sector domestic debt remains minimal in Comoros. Domestic debt is projected to rise gradually from 0.1 percent of GDP in 2019 to 4 percent of GDP in 2039 (see above).

17. There are no breaches of the public debt benchmark under the baseline or adverse scenarios, signaling limited risks (Figure 2). The PV of total PPG debt-to-GDP increases gradually from 13.6 in 2019 to 29 percent in 2039 but remains well below the threshold. Natural disasters are identified as the most extreme shock for both the PV of debt-to-GDP and the PV of debt-to-revenue, and a one-time depreciation constitutes the most extreme shock for the debt service-to-revenue ratio.

Authorities’ Views

18. The authorities agree on the importance of maintaining the risk of debt distress at “moderate”. They commit to seeking grants and concessional financing and to avoid as much as possible non-concessional borrowing.

E. Risk Rating and Vulnerabilities

19. This DSA update maintains Comoros’ external debt distress rating at “moderate” but indicates that the space to absorb shocks is limited. Under current policies, Comoros may well slide into high risk of external debt distress in the next few years as a result of a breach of the PV of debt to exports ratio. In addition, the shocks considered continue to highlight Comoros’ vulnerability to a deterioration of export performance, natural disasters and exchange rate instability.

20. These DSA results underscore the need to strengthen both external competitiveness and debt management capacity. Making faster progress on domestic resource mobilization and enlarging the export base are important to improve macroeconomic performance. Also, cautiously seeking for concessional debt contributes not to slide into high risk of external debt distress.

Table 1.

Comoros: External Debt Sustainability Framework, Baseline Scenario, 2016–39

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.1/ Includes both public and private sector external debt.2/ Derived as [r – g -ρ(1+g) + εα (1+r)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, ρ = growth rate of GDP deflator in U.S. dollar terms, ε=nominal appreciation of the local currency, and α = share of local currency-denominated external debt in total external debt.3/ Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.4/ Current-year interest payments divided by previous period debt stock.5/ Defined as grants, concessional loans, and debt relief.6/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).7/ Assumes that PV of private sector debt is equivalent to its face value.
Table 2.

Comoros: Public Sector Debt Sustainability Framework, Baseline Scenario, 2016–39

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.1/ Coverage of debt: The central government plus social security, government-guaranteed debt. Definition of external debt is Residency-based.2/ The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections.3/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt.4/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period and other debt creating/reducing flows.5/ Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question.6/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Table 3.

Comoros: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2019–29

(in percent)

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the threshold.

Variables include real GDP growth, GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Includes official and private transfers and FDI.

Table 4.

Comoros: Sensitivity Analysis for Key Indicators of Public Debt, 2019–29

(in percent)

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the threshold.

Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP.

Includes official and private transfers and FDI.

1

The most extreme stress test is defined as the test that yields the highest level of debt on or before the tenth year of the projection period.

Union of Comoros: Request for Disbursement Under the Rapid Credit Facility and Purchase Under the Rapid Financing Instrument-Press Release; Staff Report; and Statement by the Executive Director for the Union of Comoros
Author: International Monetary Fund. African Dept.