Public Information Notice No. 04/9

Public Information Notice: IMF Concludes 2002 Article IV Consultation with the Comoros

February 13, 2004

On October 30, 2002, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Comoros.¹

Background

In December 2001, the country overwhelmingly approved, in a referendum, a new constitution, which provides for wide-ranging autonomy to the islands. However, the lack of agreement between the Union and island governments on the allocation of responsibilities and resources has prevented the formulation of a fiscal policy for the remainder of 2002 and in the medium term, and consequently, the extension of the staff-monitored program (SMP).

Despite the political difficulties, economic developments were broadly positive in 2001 and the first half of 2002. Real GDP growth is estimated to have reached 2 percent in 2001, reflecting the lifting of the embargo on Anjouan, higher domestic demand, and the resumption of donor-financed projects. Consumer price inflation accelerated to 6 percent during 2001, owing to demand pressures, but slowed to 4 percent by June 2002.

The Union government revenues improved in 2001 relative to 2000, increasing from 10 percent of GDP to 11 percent, even though they were lower than targeted by 0.7 percent of GDP. Expenditures on goods and services were higher than envisaged under the program, partly due to outlays related to the political reconciliation effort. As a result, the overall domestic surplus (before exceptional expenditure) fell short of the program target by 1.9 percent of GDP, leading to new domestic nonwage and external debt service arrears. The Union government revenues dropped in the first half of 2002, due to a combination of factors, including the effects of the political situation on tax administration and on the operations of the port of Moroni, the diversion of imports to Anjouan and the delay in implementing some tax measures. The overall domestic budget surplus is estimated at 1.2 percent of GDP at end-June 2002, compared with a target of 3.5 percent of GDP, leading to new external debt service arrears. While the revenues in Anjouan improved both in 2001 and the first half of 2002, partly owing to the tax competition, they were almost fully absorbed by the wage bill.

The strong growth in export earnings and the conversion of French francs in circulation into Comorian francs (CF) in connection with the introduction of the euro in January 2002 led to an expansion of broad money of about 33 percent in the twelve months to June 2002 and to an increase in the net foreign assets of the BCC to the equivalent of about 11 months of imports of goods and nonfactor services by June 2002.

The balance of payments improved sharply in 2001. The external current account deficit (excluding official transfers) narrowed by more than 2 percentage points of GDP to 0.5 percent of GDP in 2001, owing to considerable improvement in the terms of trade, combined with a decline in the balance of services and an increase in private and public transfers. Because of the currency conversion and disbursements from the World Bank, the capital account turned positive. As a result, the overall balance of payments rose markedly and net international reserves of the BCC increased from US$43 million to US$62 million by end-2001.

Performance under the SMP was mixed. The quantitative benchmarks on net domestic financing of the budget and net international reserves were met, the latter by a large margin; and the wage bill was broadly in line with the program. However, the benchmarks on government revenues and no new arrears to multilateral creditors were missed. Regarding the structural benchmarks, there was some progress, although some measures were implemented with delay.

Executive Board Assessment

In commending the authorities for their efforts at political reconciliation, Executive Directors indicated that the return to democratic institutions should enhance the prospects for addressing the deep-rooted macroeconomic problems and fostering growth. This was essential to help address the widespread poverty and the challenging social conditions in the country. To this end, Directors urged the authorities to build on the recent progress to work out quickly the by-laws (lois organiques) of the new constitution, which will define the responsibilities for macroeconomic policies and financial relations between the Union and the three island governments. They stressed the importance of agreeing in the meantime on a transitory arrangement for power and resource sharing that would minimize disruptions to economic activity.

Directors were encouraged by the broadly positive economic developments in 2001 and the first half of 2002, despite the difficult political circumstances and serious capacity constraints. They noted that performance under the recent staff monitored program was mixed, with consumer price inflation under control and a substantial increase in international reserves. However, the fiscal outcome was weak, and the authorities could not resume debt-service payments to all external creditors, as had been initially envisaged. Directors urged the authorities to pave the way for a new SMP by having all four governments at least agree on the main principles and an implementation schedule for decentralization and the preparation of prudent budgets for all governments for 2003. A solid track record under a new SMP could lead to discussions on a program that could be supported by a Poverty Reduction and Growth Facility arrangement and pave the way for eventual debt relief under the Heavily Indebted Poor Countries Initiative.

Directors emphasized the need for promoting and maintaining a stable macroeconomic environment, in addition to creating a viable political system, in order to nurture an environment conducive to generating domestic and foreign private sector investment and attracting donor support. To this end, it was important to pursue, as part of an effective economic program, a more disciplined and coordinated fiscal policy, maintain tight monetary conditions, and implement deeper structural reforms, in particular in the utility and domestic financial sectors. Strengthening governance was also critical.

Directors encouraged the authorities to pursue with determination in the period ahead their efforts to strengthen the tax and customs administrations, reduce exemptions, and reinforce overall public expenditure management. Wage restraint and a comprehensive public sector employment reduction plan would be key to sustain fiscal discipline. On decentralization issues, Directors were encouraged by the authorities' agreement to formulate macroeconomic policy at the Union level and maintain the present role of the central bank in monetary policy and banking supervision. However, they stressed that an early consensus on a common revenue authority, in line with the Fund technical assistance recommendations, would be important to protect customs revenues by eliminating tax competition.

Directors considered that the Comoros' participation in the franc zone continued to provide an anchor for financial stability. The pegged exchange rate regime would help keep inflation under control, but required the pursuit of prudent financial policies. They stressed the need to accelerate structural reforms to strengthen the performance of the utilities and parastatal sectors and of the civil service, to help reduce costs, and increase the country's external competitiveness.

Directors welcomed the steps taken by the authorities to improve prudential regulations for the banks and internal controls of the central bank. They considered that competition in the financial sector should be fostered by licensing new, reputable banks. Efforts to develop and implement the appropriate legislation on anti-money laundering and combating the financing of terrorism were also highlighted.

Directors urged the authorities to make every effort to resume debt-service payments and normalize their relations with multilateral and bilateral creditors, while continuing to pursue prudent external debt management practices.

Directors commended the authorities for the progress made in preparing an interim Poverty Reduction Strategy Paper through broad-based participation, and they looked forward to the completion of the full PRSP by end-May 2003.

Directors noted that improvements in the Comoros' statistical database were needed for effective economic analysis and surveillance, and they encouraged the authorities to press ahead with their efforts to strengthen further the compilation of macroeconomic and social statistics. Directors recommended that a national bureau of statistics be established to collect economic and social data, as well as poverty indicators, on the three islands, in order to ensure a common and consistent database. In this regard, they urged the authorities to make good use of available technical assistance, which should be planned and coordinated in the context of decentralization.