Djibouti -- 2005 Article IV Consultation, IMF Staff Concluding Statement

July 29, 2005

Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries). Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, and as part of other staff reviews of economic developments.

An International Monetary Fund mission visited Djibouti from June 26 to July 10, 2005 to conduct the 2005 Article IV consultation discussions, which provided an opportunity to review economic developments in 2004 and the first five months of 2005, as well as the country's short- and medium-term outlook. The mission also reached understanding ad referendum with the authorities on a six-month staff-monitored program (SMP) covering the June-December 2005 period. The objective of the SMP is to establish a strong economic policy track record that could lead to a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) early next year. The PRGF arrangement would help Djibouti mobilize additional international resources to work toward achieving the country's Poverty Reduction Strategy Paper (PRSP) objectives and Millennium Development Goals.

Regarding the economic program for the remainder of 2005, the IMF team was encouraged by the government's determination since May 2005 to check the sharp deterioration in the fiscal accounts noted at end-2004. To consolidate the improvement in the fiscal accounts during the second half of this year, the supplementary budget for 2005 will implement additional measures to increase domestic revenue collection and limit growth of domestically financed spending, thus facilitating a net reduction in domestic arrears, after a net accumulation of DF 670 million from end-2004 to end-May 2005.

Over the medium term, the authorities agreed with the IMF team that current expenditure must be cut and additional domestic revenues mobilized, including the adoption of a value-added tax (VAT) to satisfy the need to increase sharply poverty-reduction spending and investment and accelerate economic growth while maintaining sustainable fiscal and external positions. In light of the uncertainties associated with a significant portion of fiscal revenue, public expenditure planning should be part of a medium-term framework. At the same time, the authorities are encouraged to implement formal safety net programs to improve the targeting of public spending to the poor.

The IMF team welcomed the government's intention to step up its efforts to improve the country's external competitiveness by adopting structural reforms in line with Djibouti's PRSP, including the labor, commercial, and investment codes, the unified registry of civil servants, and the simplification and unification of the tax exemption regime. The mission encouraged the authorities to consider different policy options for significantly increasing the competitiveness of the economy in order to benefiting the whole economy from the planned construction of the Doraleh port, a new free trade zone, and the expected expansion of trade with the other COMESA countries. All these efforts, together with improved governance and transparency in fiscal management, and a significant improvement in the country's legal system, will likely help address the formidable challenges that Djibouti faces to promote growth, create jobs, and reduce poverty.

The mission wishes to thank the authorities for the productive and cordial discussions that took place throughout its stay in Djibouti.


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