Djibouti and the IMF
Press Release: IMF Executive Board Reviews Djibouti's Poverty Reduction Strategy
June 4, 2004
Country's Policy Intentions Documents
Free Email Notification
of Intent and Memorandum of Economic and Financial Policies
Mr. Horst Köhler
Dear Mr. Köhler:
1. The economy and the social situation in Djibouti are still weak, despite seven years of adjustment effort under the IMF-supported programs. The fiscal position has gradually been restored and progress has been made toward reforming public finances. The heavy domestic fiscal arrears have started to come down since 2001. However, the structural reform program, intended to remove the obstacles to growth, has not been completed. Economic growth has consequently remained insufficient to foster job creation and reduce poverty.
2. Last year, the government expressed interest in negotiating a second arrangement under the Poverty Reduction and Growth Facility (PRGF). However, the staff considered that because of substantial additional budgetary resources from military agreements with France and the United States, the Republic of Djibouti would not, for the time being, need a Fund program with drawings. Moreover, during its recent 2003 Article IV discussions, the Executive Board of the IMF expressed the wish that the authorities establish a strong track record of implementing their economic and financial policy, before concluding such an agreement. In particular, it wished for completion of the last program's structural reforms agenda to enhance growth, and for the adoption of a 2004 budget that would support growth and poverty reduction.
3. The attached Memorandum on Economic and Financial Policies (MEFP) describes the structural reform and macroeconomic adjustment program for 2004. The government believes that the policies described in the attached MEFP clearly reflect the authorities' commitment to economic reforms and lay a solid foundation for implementing their economic policy. These policies are also a good starting point for subsequently embarking on the negotiation of a second PRGF arrangement with the IMF. The government therefore requests that the Fund staff closely monitor execution of this program (as is usually done under Fund-supported programs) covering the period January-December 2004.
4. The government will provide Fund staff with all necessary information to assess policy implementation and fulfillment of the program targets. The authorities also intend to review with Fund staff the progress made under the program every three months.
5. The government appreciates the help that the IMF has provided in preparing the economic reform programs since 1996, and attaches considerable importance to continued collaboration with the IMF.
Accept, Sir, the assurance of our high consideration.
1. Over the past 15 years, Djibouti's economy has experienced severe domestic and external shocks, including a civil war during which the size of the armed forces jumped from 4,000 to 16,000 in a single year. In addition, our country has had to cope with flows of refugees from neighboring countries estimated at 120,000 in 1999 (i.e., approximately 20 percent of the population), lingering regional conflicts, and a reduction in French military presence.
2. Faced with this difficult situation, adjustment has become an unavoidable economic necessity for our country to return to a sound macroeconomic environment. This was the option chosen by the government in April 1996 when a stand-by program (1996-99) was put in place, followed by a Poverty Reduction and Growth Facility (PRGF) arrangement, from October 1999 to December 2002. During the six years of fiscal adjustment, the authorities have made considerable efforts to rehabilitate the macroeconomic framework.
3. After three years of implementation (1999-2002), this program has made it possible to: (a) stabilize tax revenues by enhancing the efficiency of revenue collection efforts through the adoption of a package of legislative and practical measures; (b) rationalize expenditure through implementation of a cash-flow management plan; (c) raise the expenditures allocated to the social sectors; and (d) stabilize the wage bill/budgetary revenue ratio.
4. However, while the goals of macroeconomic stabilization have been achieved, strong and sustainable economic growth has not yet been restored. The adverse effects of the adjustment measures have weighed most heavily upon the most vulnerable strata of Djibouti's population; this is illustrated by the results of the most recent household survey conducted in July 2002 (EDAM-2), indicating that 45.2 percent of the population is poor.
5. Poverty reduction in Djibouti must thus be the cornerstone of any efforts to promote development in our country. The Poverty Reduction Strategy Paper (PRSP) prepared by the government, using a participatory approach, is a response to this challenge. Our main goal is to build an enabling environment for growth and the accumulation of human capital in such a way as to achieve long-term reductions in poverty and unemployment while improving the living conditions of all our citizens. Such a strategy reflects a long-term vision aimed at harnessing Djibouti's strategic assets, its geographic location, and its port, and at developing its human resources, so as to achieve far-reaching improvements in the economy's competitiveness and to acquire an advantageous position in the world economy.
6. Against this backdrop, the government attaches the utmost importance to continuing its partnership with the IMF on the basis of a new program. The measures proposed in this memorandum reflect a political commitment to pursuing the reforms, having due regard for the importance of mobilizing additional external resources associated with the government's poverty reduction strategy.
II. National Economic Developments in 2003
7. Economic activity in 2003 presented encouraging results. The transportation systemthe linchpin of the country's economic activitymade significant headway in comparison with the same period in 2002:
8. Economic growth was also bolstered by electricity production, which grew by 5.2 percent between 2002 and 2003. Furthermore, public investment (including spending on additional social programs) through December 31, 2003 (DF 7.436 billion) was up by 58.4 percent compared to the same period in 2002. These investments focused on infrastructure and roads (32 percent), urban development and housing (35 percent), national education (13 percent), and government participation in two new enterprises.
9. Accordingly, based on the results outlined above, the growth in real GDP is estimated at 3.5 percent by end-2003. This level of growth will help improve the rate of growth in per capita GDP, which should turn positive for the first time in a decade (+0.7 percent), in spite of galloping population growth estimated at 2.8 percent, and inflation (largely imported) at 2.1 percent (up from 1.5 percent in 2002).
10. On the monetary side, at end-December 2003, M3 had grown by 17.8 percent over the same period in 2002. This increase chiefly reflects the accumulation of local currency deposits. Conversely, net foreign assets grew by 26.8 percent, particularly those of commercial banks (DF 46.172 billion), while credit to the economy (DF 26.226 billion) recorded a drop of -2.9 percent.
11. The government budget outturn as of December 31, 2003 reflects total revenues of DF 37.962 billion (up by 22.7 percent as a result of the additional revenues collected from foreign military forces and from domestic resources, which rose by 4.3 percent), and total expenditures in the amount of DF 40.490 billioni.e., an upturn of 16.8 percent largely reflecting increases in public investment expenditure (+58.4 percent) and current expenditure (+10.3 percent). The largest element in this expenditure was the wage bill, which nonetheless remained stable in terms of the GDP and the slight increase was due in part to the inclusion in the budget of the costs involved in incorporating the FRUD fighters in the army in 2003, as a result of the peace accord signed in 1999 and 2001 with the FRUD and the FRUD army. This situation gave rise to an overall deficit on a payment order basis of DF 2.528 billion-i.e., 2.3 percent of GDP (compared to a deficit of 3.5 percent of GDP in 2002).
12. Thanks to additional revenues, arrears were settled more rapidly in 2003. Pension funds and civil servants were the principal beneficiaries. In addition, the Djibouti government has refrained from accumulating external arrears.
III. Medium-Term Macroeconomic Framework and Strategy (2004-06)
13. The reform program focuses on putting in place a favorable macroeconomic and structural environment with the following objectives:
14. In this context, the macroeconomic objectives for the period 2004-06 are as follows:
15. However, higher growth rates can only be achieved if the private sector responds favorably to the reforms. These key structural reforms will focus on the following main areas:
IV. The Program for 2004
A. Macroeconomic Coordination
16. The policies in 2004 and beyond will focus on: (a) achieving sustainable increases in the growth rate; and (b) strengthening economic competitiveness. The government must address these two issues head-on if it is to ensure the successful implementation of the national poverty reduction strategy.
17. The macroeconomic goals envisaged for 2004 are to:
16. Economic growth in 2004 will be supported by the gradual emergence of a new and dynamic environment in the services sector, thanks to the planned construction of the Doraleh port complex (Oil Terminal, Container Terminal, and the industrial and commercial free zone). The Doraleh project, which began in June 2003, will in the near term create 500 new jobs as work progresses.
17. Public investment in the transport and telecommunications sectors (new road for the Djibouti-Galafi corridor, construction of urban bypass roads for the RN1 highway, and installation of a fiber-optic telecommunications network) coupled with further construction of low-cost housing and school and public health infrastructure, as well as productive investment in fisheries, agriculture (Special Food Security project (PSSA) and rural well-drilling), and livestock (future center for the re-exportation of cattle) will help boost the growth rate in 2004.
18. The main economic policy measures envisaged in the program are highlighted below.
B. Fiscal Policy
19. The budget for FY 2004, adopted by Parliament on December 29, 2003 and promulgated by the President of the Republic, looks as follows compared to estimates results for 2003: total revenues up by 1.29 percent, despite the 12.3 percent reduction in additional resources from France and the United States. Own domestic resources are up by 4.3 percent. Government expenditure is down by 0.93 percent from 2003 with a slight increase of 0.29 percent in current expenditure, and a 6.37 percent decline in investment expenditure.
20. With respect to revenues, the measures planned for meeting the 2004 budget goals are as follows:
In addition, the computerization of the tax administration, which will be completed by December 2004, will facilitate efforts to administer taxes more efficiently.
21. As for personnel expenditure, the government undertakes to:
22. Spending on goods and services has increased significantly in recent years as a result of higher expenditure on power, water, and telephone services. The government is committed to:
25. To improve the management of government expenditure and of the institutions responsible for preparing and monitoring the budget, the government intends to:
C. Financial Sector Reform
23. In the area of financial sector reforms, the authorities have continued their efforts to ensure the integrity and efficiency of the banking and financial system. For that purpose, the authorities adopted a new anti-money laundering law at end-2002 and have proposed amendments to the Central Bank of Djibouti (BCD) Charter and the banking law. The revised texts are to be submitted to the Council of Ministers for approval and are expected to be adopted by Parliament by end-June 2004.
24. With regard to the financial system supervision program, in December 2003, the BCD undertook an on-site inspection of a commercial bank with technical assistance from an IMF advisor. The BCD also carried out on-site inspections of three exchange bureaus during the second half of 2003. The BCD will inspect the main exchange bureaus in 2004, and will continue to strengthen its capacity to oversee the banking system with on-site audits of at least one bank per year.
25. As in the three preceding years, the external audit for the BCD's 2002 accounts was performed by an international audit firm at end-2003. The BCD will continue to have its accounts audited by external auditors in 2004, and will publish its financial statements together with the auditors' opinion.
26. Regarding the liquidation of two banks (BDMO and Albaraka), the efforts to recover their claims and the gradual repayment of depositors continued in 2003. However, the authorities intend to wrap up the liquidation process before end-2004, notwithstanding the slow pace of legal proceedings and the risks arising from certain debtors' insolvency.
27. The authorities intend to put in place an appropriate regulatory framework for microfinance and to subject those institutions engaged in this activity to regular supervision by the BCD.
28. To give depositors access to a broader range of financial products, the authorities have been considering developing new financial products in Djibouti.
29. Finally, in the area of technical assistance, in 2004, the authorities intend to enlist the services of the IMF to support BCD staff in regard to new financial products (financial leasing, young entrepreneur loans, risk capital, and financial engineering), monetary statistics, and anti-money laundering, by strengthening financial investigation techniques as part of the continuous training program for supervisors.
D. External Sector Policy
30. Debt management and monitoring are one of the government's priorities. After establishing in 2001 an agency with sole responsibility for the State's external resources, the Djibouti authorities acquired and installed a debt-management and analysis system in 2003. The establishment of this database enabled an exhaustive classification of loan agreements, recording the terms of those loans, as well as past and present drawings and payments.
31. In 2004, the government will pursue its cautious debt management policy, and will refrain from contracting or backing nonconcessional loans. Furthermore, the government will include, in the external debt service, those outlays related to new external loans, while refraining from accumulating new external and domestic payments arrears. The government will respect the order of priority between the various creditors in the plan for settling domestic payments arrears (private creditors, salaried government employees, social public entities, and public enterprises). Furthermore, effective July 2004, the government will resume contact with Paris Club creditors, particularly with Spain and Italy, in order to restart negotiations.
E. Structural Reforms: Improving Competitiveness and Poverty Reduction
32. The government attaches the utmost importance to the promotion of private investment, which is the driving force behind economic growth. In order to achieve this objective, it is planned to adopt a new investment code designed to attract foreign capital in 2004. This code will enable the exemptions system to be simplified and rationalized.
33. Also, to enhance labor market flexibility, the government will adopt by June 2004 the draft labor code prepared by the committee established for this purpose by the ministry of labor and national solidarity, which has had the benefit of input from the International Labor Office (ILO).
34. The authorities intend to promote the expansion of private enterprise by implementing a strategy and mechanisms supported by small- and medium-scale enterprises. The purpose of the approved management centers will be to facilitate and to promote small- and medium-scale enterprises' competitiveness. The authorities will also promote the expansion of microfinance in particular by preparing a national microfinance strategy.
35. The authorities will encourage private sector initiatives by putting in place a plan to restructure the power and water sectors.
36. To promote good governance, the government intends to strengthen the management of public expenditure and to enhance its efficiency. The general aim will be to build upon results already achieved in accordance with the following criteria:
F. Statistical System
37. To be able to have a statistical system that meets international standards in terms of quality, frequency, and dissemination, the government has decided to participate in the IMF's General Data Dissemination System (GDDS). The government will actively seek to implement the IMF technical assistance missions' recommendations in the fiscal and national accounts areas.
V. Program Monitoring
38. Program performance will be monitored through quarterly indicative targets, structural benchmarks, and quarterly progress assessments by IMF staff. The indicative targets for end-March, end-June, end-September, and end-December 2004, as described in Table 1, will focus on: (a) a ceiling on the wage bill; (b) a floor on fiscal revenues (tax and non-tax); (c) a ceiling on spending on goods and services and transfers (excluding foreign-financed military expenditure); (d) a ceiling on net outstanding domestic arrears; (e) a ceiling on net central bank credit to the government; and (f) a floor on net international reserves. The program also includes a zero ceiling on: new external arrears; nonconcessional external debt (except for commercial credit) contracted or backed by the government or a public enterprise; and government borrowings from public enterprises or commercial banks. The principal economic policy measures contemplated by the program are listed in Annex I, including those that are structural benchmarks.
39. The approval by IMF management of the letter of intent and the memorandum on economic and financial policies and their submission to the Executive Board are subject to execution of the following prior measures: (a) completion of the demobilization of 250 former combatants; (b) accounting for the use of the US $4.75 million disbursed by the United States in October 2002; (c) retirement of the entitled government employees; and (d) publication of the 2002 Report of the Chamber of Accounts and Fiscal Discipline. Djibouti will regularly consult the IMF, in accordance with the IMF's policies on the matter, about progress in implementing the policies and measures prescribed in the staff-monitored program.
This Technical Memorandum of Understanding (TMU) contains further information regarding: (a) the indicative targets detailed in the table and Annexes to the Memorandum on Economic and Financial Policies (MEFP); (b) basic information to be conveyed to the Fund through its resident mission; and (c) the authorities' plan for monitoring program execution.
I. Indicative Targets
The definition of aggregates on which ceilings are imposed are given below:
II. Information To Be Given To The IMF Staff
The authorities will report the following basic data through the resident representative to the IMF staff as of January 2004, with a maximum lag of four weeks, unless otherwise indicated:
A. Public Finances
D. External Sector
E. Real Sector
F. Structural Reforms
Assessment of structural reforms. Indicate the progress achieved, explain slippages, if any, and indicate the planned completion date.
G. Other Information (sic)
Other information on principal economic and social measures adopted by the government which are expected to influence program implementation (changes in legislation, regulations, or in any other pertinent text), to be reported in a timely fashion to IMF staff for consultation or information purposes.
Annexes I (sic) to the MEFP (four weeks after the end of the quarter in question).
III. Program Monitoring
To improve the ministry of finance's program monitoring, coordination and monitoring of the reform program will be conducted at ministerial cabinet level by the advisor in charge of the program. He shall head a select technical committee consisting of the budget, revenues, economy, finance, treasury, external financing, and DISED directors, the SAL Coordinator, the representative of the central bank, and the IMF resident representative.
The committee will meet twice a month to take stock of the reconciliation of financial operations recorded in the treasury accounts and at the central bank and the score sheet for execution of structural measures; and to examine other subjects that might impact on program implementation. These working meetings will facilitate preparation of the monthly table of consolidated government operations, the domestic and foreign debt situation, the monetary survey, the updated cash-flow management plan, and the score sheet for execution of structural reforms. These tables will include a comparative analysis of actual results against projections and the implementation timetable, explaining slippages detected, and proposing corrective measures.
All these documents will subsequently be sent to the minister of finance, the governor of the central bank, and to the IMF staff through its resident mission.