Statement by Mr. Raghani, Executive Director for Comoros, and Mr. Sidi Bouna, Senior Advisor to the Executive Director July 24, 2019

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


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

I. Introduction

1. My Comorian authorities would like to thank Management and staff for the prompt response to their request for rapid assistance in the wake of the cyclone that hit the Comoro islands in April 2019. They thank staff for the fruitful policy discussions held in Moroni in June 2019 and for the assistance in the efforts to assess the extent and cost of the damage caused by the cyclone.

2. Cyclone Kenneth has had a severe and widespread impact on the islands. It hit a fragile country with immense development needs and caused extensive damage, particularly in rural areas where most of the poor are located. The damage produced by the cyclone is substantial, requiring financing estimated at $150 million (12.5 percent of GDP) of which $120 million are needed for rebuilding infrastructure and $30 million for urgent humanitarian relief.

3. The authorities are grateful to the international community for its support in these difficult times. They request the assistance of the Fund under the Rapid Credit Facility (RCF) and the Rapid Financing Instrument (RFI) to address the large balance-of-payments and fiscal needs that have arisen from the impact of the cyclone. They intend to use the Fund’s financial assistance for budget support given their limited fiscal buffers. The authorities are confident that the Fund’s assistance will help mobilize much-needed additional resources from the international community.

II. Recent Economic Developments, Outlook and Risks

A. Economic Developments

4. The cyclone has had a sizeable impact on the economy. Growth projections for 2019 have been revised downward to 1.3 percent from an estimate of 3 percent before the cyclone, as many key sectors, particularly agriculture, have been affected. This, coupled with the devastating impact on infrastructure, lowers the country’s productive potential. Inflation, as well, has been revised upward to 3.2 percent in 2019 from an initial 2 percent estimate due to the adverse effects of the cyclone on farming and agriculture. The 2019 budget was also immediately impacted, as the authorities have had to reallocate scarce resources to emergency needs, by increasing spending in priority areas, including to repair some infrastructure and provide emergency relief and assistance to the populations in need. Accordingly, the primary fiscal deficit will widen in 2019 to 5.1 percent of GDP from a relatively modest 1.2 percent in 2018. A supplementary budget for 2019, taking into account the effects of the cyclone on the population and the economy, will be presented to Parliament in October 2019. The current account deficit is also projected to increase further in 2019 to 7.7 percent of GDP from 3.8 percent in 2018, as exports of the country’s mains crops decline while cyclone-related food imports increase. As a result, foreign exchange reserves will fall from 7 to 5.6 months of import cover.

B. Outlook and Risks

5. The country’s medium-term outlook remains challenging and the authorities have now to cope with the effects of the cyclone in addition to enduring issues that have been a drag on growth, in particular electricity shortages and a narrow exports base. Over the medium-term, the impact of the cyclone will continue to weigh on the fiscal and current account balances. However, the increased fiscal spending associated with reconstruction efforts will give a boost to growth to 4.2 percent in 2020, and 3.5 percent annually approximately over the period 2021–24. Inflation will decline in 2020 as farming recovers and will stabilize around 2 percent over the medium-term.

6. The authorities share the staff’s assessment of the risks to the outlook. Pre-cyclone risks have grown in recent months. These include notably a weaker global growth, a decline in remittances, lower commodity prices, climate-related decline in agriculture production, geopolitical tensions in neighboring regions, financial vulnerabilities, and limited implementation capacity. In addition, the recent natural disaster has reduced even more the country’s buffers to absorb future shocks. The authorities reiterate their firm commitment to prudent policies and sound reforms to help mitigate these risks, including on governance. However, sustained support from the international community remains essential, particularly in the current post-cyclone environment. We urge donors to continue to provide the necessary support to Comoros. As noted in the staff report, grant financing below expectations is also an important risk that could affect recovery efforts.

III. Economic Policies and Reforms Going Forward

7. Immediate measures have been taken to address the needs of the population while ensuring the effectiveness of these measures. The authorities’ key priority has been to protect the poor, and the allocation of budgetary resources were shifted in that regard. Ten percent of public sector wages over two months have been redirected to priority spending. They expect to generate additional savings from the ongoing reform of the administration towards enhanced centralization. They have also sought to strengthen transparency and accountability of budgetary procedures following the financial assistance provided by development partners. Looking forward, the authorities will continue to mobilize both external financing and domestic resources—through savings notably on the wage bill while preserving service delivery—to support their efforts in addressing the cyclone impact in a focused manner. An inter-ministerial committee has been set up to review emergency spending and rigorous budgetary controls have been introduced. The committee is assisted by the United Nations Development Program (UNDP). The authorities will report every quarter on emergency spending. An audit will be conducted within a year and the results of the audit will be published.

8. Continued support from the international community is necessary to tackle the country’s medium-term challenges. Comoros is a small and fragile island with immense challenges that have been hampering growth for many decades. The authorities look forward to discussing these challenges with staff in more details during the next Article IV Consultation. In the meantime, they are determined to make progress in their efforts to address macroeconomic vulnerabilities, including in the fiscal and financial areas.

9. Regarding the fiscal sector, the authorities agree with the necessity to increase significantly domestic revenue mobilization and better control expenditure and contingent liabilities. They intend to accelerate the reform of the revenue administration, in particular the large and medium taxpayer unit and the customs administration, in line with Fund TA recommendations. They will also streamline customs exemptions over time following temporary provision of such customs tax exemptions and expedite procedures to clear imports related to humanitarian relief and reconstruction. Furthermore, they share staff’s view that more is needed to improve public financial management and ensure the effectiveness of the Treasury single account. The authorities will strengthen the oversight of SOEs to mitigate potential fiscal risks through a new inter-ministerial committee that has been established to, among other pressing issues, resolving the question of cross-arrears with the government. The largest SOEs will also be required to prepare audited financial statements by end-2020.

10. The authorities reiterate their commitment to maintaining a prudent borrowing strategy in order to keep the country’s debt sustainable and the risk of debt distress moderate. In this vein, they will endeavor to give priority to grants and non-concessional loans in finance highly-needed infrastructure. They also intend to clear all external arrears by end-2020.

11. As regards the financial sector, the authorities are aware of the need to find a long-term solution to the situation of the postal bank, SNPSF, in order to preserve financial stability and ensure sound financing of the economy. Also, they will continue to monitor NPLs closely in order to reduce the ratio of NPLs to total lending further in order to encourage the recovery of credit to the economy and support growth.

12. Promoting good governance and fighting corruption rank high in the authorities’ reform agenda, with a view to improve the business environment. As stressed by the authorities in their Letter of Intent, they view enhancing governance, transparency and accountability as crucial to improving the perception of development partners and private investors on the country. They are determined to make appropriate use of the funds provided for addressing the effects of the cyclone. Beyond, they would appreciate the support of development partners to strengthen institutions and governance.

IV. Enhancing Resilience to Natural Disasters

13. Cyclone Kenneth has brought at the forefront of the authorities’ economic policies the need to enhance resilience to natural disasters. The authorities have devised a three-pillar strategy to address the country’s vulnerability to natural shocks. The strategy entails reinforcing structural resilience by investing in infrastructure, building financial resilience through adequate fiscal and external buffers, and preparing rapid responses to disasters through contingency planning. They plan to discuss this strategy further with staff during the next Article IV mission.

V. Conclusion

14. Comoros’ difficult economic situation has been further exacerbated by the cyclone and Fund’s financial support is urgently needed to meet the country’s financing needs and catalyze further external assistance. The authorities are grateful to the rapid support of the international community. They are requesting the financial assistance of the IMF and seek the approval of the Board for a disbursement under the RCF and a purchase under the RFI.