Statement by Mr. Mohamed-Lemine Raghani, Executive Director for the Union of The Comoros, and Mr. Sidi Bouna, Senior Advisor to the Executive Director April 22, 2020

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 the 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 the Comoros

I. Introduction

The global pandemic has hit the Union of the Comoros severely less than a year after Cyclone Kenneth. Although no cases of the coronavirus have yet been reported in the archipelago, the impact on the economy has been severe, as visits to the islands have dropped, particularly from the large diaspora, and remittances inflows —which contribute significantly to supporting domestic demand and also account for an important share of the receipts in the balance of payments—have fallen sharply. As a result, Comoros’ financing needs—both fiscal and external—have increased substantially. It should also be noted that the economic impact of the pandemic could be significantly larger should the virus spread in Comoros.

The authorities are requesting emergency assistance under the RCF and RFI to help mitigate the effects of the global pandemic on Comoros. They are also seeking additional financial support from other international partners to help meet the remaining large financing needs.

II. Economic Context and Impact of the Pandemic

In 2019, Comoros’ economic performance had weakened compared to 2018, largely due to the shock caused by Cyclone Kenneth. In an effort to promote macroeconomic stability, the authorities had adopted a 2020 budget in line with the macroeconomic framework agreed upon with the Fund. They had also discussed extensively with staff the key elements of a strategy to tackle the country’s fragility. Growth was projected to recover in 2020 when the global outbreak of COVID-19 occurred.

III. The impact of the pandemic on Comoros stems mainly from the indirect effects of the severe global recession.

The global slowdown is adversely affecting remittances inflows, a key source of income for many Comorians households Growth is now projected to contract by 1.2 percent in 2020 compared to +4.4 percent in projections made in the context of the recent 2019 Article Iv consultation held in March 2020. Both external and domestic demand are projected to decline this year amid considerable uncertainty surrounding the country’s medium-term outlook due to the global downturn. The current account deficit will widen in 2020 to 5.7 percent of GDP from 5.5 percent, due in part to the substantial drop in international oil prices which will help reduce the fuel import bill. The fiscal primary deficit is expected to increase to 7 percent of GDP from 2.7 percent, reflecting the size of the country’s fiscal needs. Comoros relies heavily on external donors to finance the fiscal and BOP deficits, which are estimated at 4.7 percent of GDP and 5.2 percent of GDP, respectively.

IV. The Authorities’ Policy Response

In the aftermath of the global COVID-19 outbreak, the Comorian authorities have taken swift actions to shield their population and the economy from the coronavirus pandemic, including by closing the airport and schools and banning large gatherings. With the assistance of the WHO and other partners, they have also taken preventive measures against a potential outbreak in Comoros through the adoption of a plan to help prevent the virus from spreading, including by setting up quarantine centers and ensuring that healthcare workers have the necessary medical equipment and supplies to treat potential patients infected by the virus.

On fiscal policy, the key priority has been to scale up spending in the health sector in order to enhance the country’s preparedness for a potential outbreak in Comoros while also providing targeted support to the population. The increase in health spending is estimated to amount to approximately 2 percent of GDP. Fiscal revenues are expected to underperform in 2020 due to the recession as well the decision by the authorities to lower import taxes on a few essential products, notably food and medical equipment. Given that the Fund’s RCF/RFI financing will be used for budget support, the authorities have committed to strengthen the reporting and control of these resources. To ensure transparency, they will provide regular updates on the use of these funds which they will also audit in less than a year. The findings and recommendations of the audit will be made public. Regarding the country’s external arrears, the authorities have reiterated their commitment to clearing those arrears by the end of 2020. It is worth noting that Comoros’ debt remains sustainable and the risk of debt distress is moderate.

As regards the financial system, the pandemic has further exacerbated the sector’s vulnerabilities. These stem, among others, from elevated non-performing loans (NPLs) as well as difficulties to find a long-term solution to the postal bank, SNPSF. Nonetheless, the central bank has committed to providing adequate liquidity to the financial system which is also affected by the decline in remittances and to that extent, it has lowered banks’ minimum reserve requirement. The monetary authorities have also encouraged local banks to address flexibly the loan restructuring requests made by their clients that have been affected by the crisis.

V. Conclusion

Comoros is confronted, once again, to a major exogenous shock which is having a severe adverse impact on the population and the economy. The authorities very much appreciate the IMF’s swift consideration of their request for assistance under RCF/RFI to deal with the significant financial needs that have arisen. They count on the Executive Board’s approval of this highly needed support. They are also hopeful that this assistance will help catalyze additional donor support.

Once the effects of the global pandemic recede, the authorities will resume their policies aimed at enhancing macroeconomic stability and creating the necessary conditions for higher, sustainable and more inclusive growth. In doing so, they intend to maintain a close engagement with the Fund as they also strive to address more effectively the longer-term challenges facing the country, particularly the need to overcome fragility and increase economic resilience.