Public Information Notice No. 00/73

Public Information Notice: IMF Concludes Article IV Consultation with Comoros

September 5, 2000

On July 12, 2000, the Executive Board concluded the Article IV consultation with Comoros.¹

Background

After a two-year suspension, Article IV consultation discussions with Comoros have now resumed. Article IV consultations could not be held in 1998-1999 because of disruptions in government services and continuing political turmoil, including the conflict with the separatist movement on the island of Anjouan. While the latter conflict has not yet been resolved and Anjouan remains outside the control of the Federal Government, government services are now again functioning normally.

Reflecting this unstable political environment, as well as fiscal problems and increasing competition in export markets, the economy continued to contract in 1998-1999. Real GDP is estimated to have declined by 0.5 percent in 1998 and 1.4 percent in 1999, although living standards in the Grande Comore were partly protected by increasing transfers from the Comorian community living overseas. The Comoros is a member of the French Franc Zone and under its fixed exchange rate regime inflation was kept at 3-4 percent per year in 1998-1999.

Although the fiscal situation improved in 1999 following a sharp deterioration in 1998, it remained fundamentally weak, especially because of the high ratio of expenditure on wages and salaries to domestic revenues (53 percent in 1999). The deficit after grants declined from 4.2 percent of GDP in 1998 to 0.7 percent of GDP in 1999, largely because of a fall in foreign-financed capital expenditure; the deficits in 1998 and 1999 were mainly financed by a further accumulation of arrears on wages and foreign interest, and Comoros also incurred further large arrears on repayment of foreign debt. Nevertheless, the government was able to clear debt service arrears to the World Bank, which resumed lending operations in early 2000.

Reflecting the decline in economic activity, broad money and credit to the economy increased by only about 4 percent during the last two years. On January 1, 2000, the Central Bank of the Comoros introduced a flexible interest rate policy, linking rates for the single commercial bank to those prevailing in the Euro zone.

The current balance of payments account (including grants) improved from a deficit of 6 percent of GDP in 1997 to virtual balance in 1999 as a result of a 37 percent increase in private transfers from the Comorian community living abroad, which more than offset a sharp decline in official grants following the suspension of donor assistance. Gross official reserves decreased from 6.6 months of imports of goods and nonfactor services in 1997 to 6.1 months at end-1999.

Executive Board Assessment

Executive Directors noted with concern that the Comoros’ economic performance had continued to deteriorate and that future prospects are still clouded by the political crisis with the separatist movement on Anjouan. Although a deteriorating external environment had played a role in the economic decline, Directors also noted the weaknesses in the implementation of macroeconomic and structural policies. They therefore welcomed the authorities’ recent measures to raise the government revenues, and to strengthen economic management, but stressed that more significant efforts are needed to stabilize the fiscal position and to make progress in privatizing the state-owned corporations.

Directors noted that some progress had been made in strengthening tax administration. However, they stressed that further measures were needed in this area, including a reduction of tax exemptions. They emphasized that efforts to reduce the work force in recent years had not been successful, and that unless the overstaffing problem was addressed, the fiscal situation would remain fragile. They observed that, while a reduction in staffing levels was the best long-term solution to lower the wage bill, a reduction in wages—or at least a freeze, coupled with more regular salary payment—would help ease the tension in the short run. They welcomed the authorities’ readiness to take actions along this line. Directors also stressed the importance of strengthening fiscal management and monitoring.

Directors welcomed the settlement of arrears to the World Bank, and the ensuing resumption of the Bank’s project activities in the Comoros. In the face of mounting arrears in debt service payments, they urged the authorities to initiate a dialogue with their multilateral and bilateral creditors. They considered that greater efforts to mobilize domestic resources and significant external support, including debt rescheduling, would be needed to settle all remaining arrears.

Directors emphasized that, given the exchange rate regime, which has served the country well, the return to sustained growth would require determined implementation of structural policy reforms aimed at improving efficiency and competitiveness. To that end, the authorities were urged to accelerate the privatization program, and to strengthen competition through further gradual trade liberalization and appropriate modifications of the regulatory and legal framework, including the commercial and labor codes. Directors considered that a reinforcement of the rural credit networks within the regulatory framework of the banking sector could play a key role in channeling savings into productive investments.

Directors observed that the statistical database remains very weak. They recommended that the authorities give a high priority to improving the collection and methodology of core macroeconomic statistics to enhance macroeconomic monitoring. In view of Comoros’ limited resources capacity, Directors encouraged the authorities to request the needed technical assistance.