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The following item is a Letter of Intent of the government of Djibouti, which describes the policies that Djibouti intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Djibouti, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.
 

Djibouti, October 2, 1999.

Mr. Michel Camdessus
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Camdessus:

1. The attached Memorandum on Economic and Financial Policies spells out the government of Djibouti's medium-term structural reform and macroeconomic adjustment program covering the period July 1999-June 2002. In support of this program, the government requests an arrangement under the Enhanced Structural Adjustment Facility in an amount equivalent to SDR 19.082 million (120 percent of quota). The Memorandum also provides the specifics of the government's reform and adjustment objectives and policies for the first year program beginning July 1, 1999.

2. The government believes that the policies set out in the attached Memorandum will achieve the objectives of the program. However, it stands ready to take any additional measures appropriate for this purpose, and will consult periodically with the Fund-in accordance with the Fund's policies on such consultations-about the progress being made in implementation of the program and about any policy adaptations considered appropriate for the achievement of its objectives. The government will also provide the Fund with all information needed to assess progress in implementing policies and in achieving the objectives of the program.

3. The government's assessment is that its reform program will require external financial support in order to ensure its success.

4. The President has indicated to government ministries and agencies that their full cooperation in implementing the reform program will be required. He has also designated the Ministry of Finance and the National Bank of Djibouti to act as the coordinating agencies of the government in this collaborative effort. Our institutions are fully committed to fulfilling these responsibilities.

5. The government appreciates the assistance provided by the IMF in formulating the economic reform program and looks forward to continued collaboration with the Fund in its reform endeavors.

Sincerely yours,

 

/s/
Yacin Elmi Bouh
Minister of Economy, Finance
and Planning, in charge of Privatization
  /s/
Djama M. Had
Governor,
National Bank of Djibouti

 

INTERNATIONAL MONETARY FUND

REPUBLIC OF DJIBOUTI

Memorandum on Economic and Financial Policies

I. Recent Economic Developments, 1996-99

1. Over the period 1996-98 Djibouti implemented a macroeconomic adjustment and structural reform program supported by a stand-by arrangement (SBA) from the IMF.1 Under the program the government succeeded in reducing macroeconomic imbalances. Inflation declined sharply and averaged 1.5 percent annually as against an average 5 percent inflation rate over 1993-95. The improvement in inflation performance reflected in particular the strengthening of the government's fiscal position and the appreciation of the U.S. dollar—to which the Djibouti franc is pegged—against other major world currencies. The economy's real growth performance is estimated to have been relatively flat over 1996-97, but a recovery took hold in 1998 due to Ethiopia's decision at mid-year to channel its transit trade through the port of Djibouti. The recovery was constrained, however, by a decline in the provision of services to expatriates owing to initiation of the French military retrenchment that is taking place largely over 1998-2000. Consequently, while overall growth in 1998 is estimated at about 1.5 percent, the estimate would be 3 percent if the effects of the retrenchment were excluded.

2. The cash fiscal position moved from a deficit of nearly 5 percent of GDP in 1995 to a small surplus in 1998 largely owing to reductions in the government wage bill as well as strengthened expenditure monitoring. The financing of the budget relied primarily on concessional external resources. Recourse to the domestic banking system was limited apart from the counterparts to IMF and AMF purchases. In the monetary sector, the money supply contracted over 1996-97 as the flat growth performance and eroded confidence in economic prospects resulted in a weak demand for credit and sizable placements of private resources abroad. With the pickup in economic activity in 1998, there was a recovery in credit demand and monetary growth although private placements abroad remained relatively sizable and suggested continued confidence issues. Over the period, confidence issues also contributed to a shift out of Djibouti franc deposits into foreign currency deposits.

3. The balance of payments recorded overall deficits averaging 4 percent of GDP. They reflected current account deficits of 3 percent on average and the more than offsetting of a sizable three-year capital account surplus by a large negative errors and omissions entry including unidentified private capital outflows. Although gross foreign assets held by the National Bank of Djibouti (BND)—which operates as a currency board—declined in line with its monetary liabilities, they continued to provide at end-1998 the mandated cover for the board's monetary and lender of last resort (LOLR) responsibilities, namely, monetary cover of 100 percent and nearly the targeted margin for the LOLR function of 15 percent. Commercial bank gross foreign assets—the primary source for external payments under the currency board arrangement—also declined, but still provided at end-1998 7.5 months of cover for imports for domestic use. The 1998 external debt service-to-exports ratio and the debt-to-GDP ratio (both after rescheduling) were 7 percent and 66 percent, respectively. The external performance also entailed debt service arrears attributable to certain public enterprises which were equivalent to 2.5 percent of total public sector debt at end-1998. Most of these arrears relate to a request for debt relief which is pending with one bilateral creditor. They also entailed some public enterprise arrears to multilateral creditors.

4. The structural measures implemented under the SBA included: tax policy improvements; initiation of a demobilization program applying to the military and security personnel that had been mobilized during the 1991-94 civil war; a major reduction in the government wage bill (apart from demobilization) achieved through a downsizing of civil service staff by 20 percent and a lowering of the government wage structure by 20 percent; measures to enhance bank soundness and bank supervision—including the initiation of on-site bank inspections and improvements in off-site analysis; some liberalization of government control over the labor market; and permitting private equity participation in the public enterprises.

5. Over January-June 1999, macroeconomic developments continued to be broadly favorable. There were indications—including a brisk growth of commercial bank lending to the private sector—that economic activity continued to recover, and Djibouti's new CPI data indicate that over the second quarter the price level continued to be stable in part reflecting the continued strong position of the U.S. dollar and the Djibouti franc against other world currencies.

6. Fiscal developments were somewhat weaker than envisioned in the original 1999 budget. The budget was directed at a continued tight fiscal stance and targeted a full-year cash deficit equivalent to 1.7 percent of GDP. In the event, the January-June deficit at 1.2 percent of GDP exceeded the first-half deficit projected under the original budget (0.9 percent of GDP) owing mainly to shortfalls in revenue collections and delayed disbursements of external grants for budgetary support (by US$5 million). The revenue shortfalls were due in large part to temporary special factors. Therefore, it is expected that the first-half revenue and external grants shortfalls will be largely corrected over the balance of the year. Monetary developments recorded only a small increase in broad money. While private credit growth remained strong, the delayed disbursements of foreign grants for budgetary support entailed a rundown in thebanking system's foreign exchange position. There was also some unwinding of the earlier movements into foreign currency deposits—suggesting improved confidence. The monetary data for January-June indicate an overall external deficit on the order of US$5.5 million—which essentially reflected the delayed disbursements of foreign grants—and sizably diminished private capital outflows.

II. Medium-Term Macroeconomic Framework and Policies, 1999/2000-2001/02

7. Djibouti made sound progress over 1996-99 in both macroeconomic adjustment and structural reform. However, the government recognizes that the consolidation of adjustment and in particular further far-reaching structural reforms directed at a restructuring of the economy are essential for realizing its overall objectives of placing the economy on a higher growth path, raising per capita income, reducing unemployment, alleviating poverty, enhancing the country's social indicators, ensuring domestic financial stability, and moving toward external viability. The restructuring is required in order to establish an environment conducive to a recovery of private sector confidence and a private sector lead role in the growth process, as well as to enhance the economy's responsiveness to policy measures.

8. The government's medium-term adjustment and reform program for the three-year period beginning July 1, 1999 is directed at providing a macroeconomic and structural environment conducive to achieving the overall program objectives cited above. For the four calendar year period 1999-2002, the government's macroeconomic targets entail: real GDP growth of 3 percent on average; increasing real per capita income in order to maintain support among the population for the adjustment and reform program; annual inflation of at most 2 percent; containing the overall balance of payments deficit to 2.5 percent on average; and maintaining the mandated BND monetary and LOLR cover ratio. Commercial bank import cover is expected to average seven months. The growth target reflects the adverse effect of the French military retrenchment. Abstracting from this development, the growth target would be 4 percent per annum. Investment is projected to rise and average 13 percent of GDP vis--vis 9 percent on average during 1996-97. (In 1998 investment was exceptionally high due to sizable outlays for electricity generators and an unusually rapid drawdown of resources in the pipeline.). The targeted acceleration of economic growth will depend on a positive private sector response to the program's structural reforms—particularly its fiscal, privatization, deregulation, legal, and sectoral reforms. With the shift of Ethiopia's transit trade to Djibouti, the lead growth sectors are envisaged to be the transport and related service sectors, namely, port and trucking services as well as cargo-handling, insurance, and tourism. Additionally, the goods export sector—which largely comprises the local processing of imported goods—is expected to contribute to higher growth. To expand the delivery and improve the quality of social services and to enhance social indicators, budget expenditures for education, health, and the social safety net are to be sizably increased, and national development and reform programs will be implemented in the education and health sectors.

9. The program's macroeconomic objectives will also be advanced by further fiscal consolidation which would be consistent with low monetary growth and inflation and the maintenance of positive real interest rates. The core structural reforms are to be directed at: completion of the demobilization program, adoption of a retirement program, and civil service reform—which together will ensure a further lowering of the wage bill; tax, revenue administration, and budget management reforms; pension fund reforms; a restructuring of budget expenditures in order to improve the quality of spending; a significant privatization program which will address the ownership/management of the six major public enterprises and related legal reforms; deregulation and other legal reforms—including reforms of the Labor and Commercial Codes and the establishment of commercial courts; banking system reforms; and the further upgrading of bank supervision.

Fiscal Policy

10. As the major macroeconomic policy tool, the medium-term fiscal stance will be directed at maintaining macroeconomic stability and strengthening the external position. To this end, a tight fiscal policy will be pursued as reflected in a cash budget deficit target of 3 percent of GDP. The deficits will be financed only from concessional foreign resources, the counterparts to IMF and AMF net purchases, and domestic nonbank resources as needed. There will be no noncounterpart domestic bank borrowing or borrowing from the public enterprises. At the same time the structure of the budget will be enhanced by measures to reform the tax system and contain expenditures while upgrading their quality. Consistent with these medium-term fiscal policies, the original 1999 budget was amended in August in order to initiate the revenue and expenditure policy reforms entailed by the medium-term program. The major reforms entailed reformed and increased petroleum product taxation and the related institutional reforms, introduction of a road-user charge on trucks exiting the port, and a start at the reorientation of expenditures toward quality improvements.

11. The program envisages far-reaching reforms of indirect and direct taxation in order to enhance tax efficiency and elasticity and achieve tax simplification, while increasing reliance on indirect taxation and reducing direct taxation in order to enhance incentives. The specifics of the government's tax reform program and steps to enhance revenue administration are provided in the government's Policy Framework Paper (PFP) (paragraphs 14-19).

12. The government's expenditure reform program will focus on reducing the current expenditure/GDP ratio (excluding the counterparts of grants-in-kind)—particularly through reductions in the wage bill—while also realizing improvements in the quality of outlays through higher spending for the priority purposes of education, health, the social safety net, public investment in infrastructure, and maintenance—particularly for the road sector. This reorientation is less than the government would wish, but available resources are limited owing to the need to lighten the direct tax burden and clear domestic payment arrears. Under the program the current expenditure/GDP ratio (excluding the expenditure counterparts of grants-in-kind) is projected to decline to 26 percent of GDP on average over 1999-2002 compared with an average of 29 percent during the SBA period. The specifics of thegovernment's expenditure reform program and its programs to address domestics arrears and enhance expenditure management are elaborated in the PFP (paragraphs 20-27).

Financial Sector Policies

13. The tight fiscal stance envisioned under the program will underpin the maintenance of low monetary growth and inflation. Broad money growth is projected to average about 5 percent annually. Money demand and the private sector's demand for credit are expected to rise about in line with the expansion in economic activity, while improved economic prospects and confidence along with increased interest rate flexibility are expected to significantly reduce the attractiveness of private sector placements abroad. Interest rates are not controlled by the government, and are presently positive in real terms. The program's tight fiscal stance and its low monetary growth and inflation targets are expected to sustain positive real rates. The government's financial sector structural reform program—which addresses interest rate flexibility, maintaining the integrity of the currency board arrangement, and strengthening the banking system—is detailed in its PFP (paragraphs 29-33).

External Sector Policies

14. The government is committed to maintaining Djibouti's presently fully free exchange and trade systems. No exchange restrictions apply to current or capital account transactions, and trade is fully open without recourse to import bans or export prohibitions. Tariffs are not levied, but imports are subject to the consumption tax at the same rates as apply to the comparable domestic product. No changes are envisioned in these external policies during the program period. The reform program targets an improved export performance including in particular the accelerated growth of transport and related services. Activity in these sectors increased significantly in 1998 following the shift of Ethiopia's transit trade to Djibouti's port, and future prospects are promising. The government does not propose to intervene in the economy in order to directly promote exports. Instead its export promotion strategy will rely on improving the overall functioning of the economy through pursuit of appropriate macroeconomic policies and structural reforms

15. The government is committed to a policy of external competitiveness. This will be monitored under the program on the basis of developments in external indicators: namely, in exports of goods and services of local origin; net foreign assets of the commercial banking system; relative prices and wages vis--vis trade partner countries that are relevant for assessing Djibouti's competitiveness; and for the future the conventional measure of real effective competitiveness. The latter measure presently is not a meaningful indicator for historically tracking competitiveness developments as Djibouti until recently did not possess a national CPI or an adequate CPI proxy for periods before 1994. As a temporary alternate approach, the analysis of relative prices and wages vis--vis relevant trade partner countries will be utilized in conjunction with the other external indicators listed above in order to form judgments regarding the appropriate competitiveness policy stance. The government considers that the effectiveness of changes in competitiveness policy is constrained by rigidities in theeconomy and weak private sector confidence, and that under these circumstances policy measures need to be appropriately sequenced. Therefore its approach is to first put in place under the restructuring strategy certain key structural reforms in order to enhance the economy's responsiveness and in order to build confidence, and then to pursue revisions in competitiveness policy as may be indicated. This sequencing approach has been the motivation for the implementation of the measures to free up interest rates and the petroleum product market, and underlies the government's commitment to early labor market and early tax reform.

16. The government intends to maintain Djibouti's presently prudent debt management policy. In view of the country's low per capita income, it will continue to seek financial assistance in the form of grants or very concessional long-term credits, and will strictly limit recourse to the contracting or guaranteeing of nonconcessional debt by the public sector. However to some extent, nonconcessional debt might prove unavoidable for certain public enterprises, for example, for the port for upgrading its infrastructure. Djibouti has relatively limited public sector bilateral debt—40 percent of total debt—which is held by seven bilateral creditors. There are some bilateral debt servicing arrears which as noted earlier relate to credits extended to certain public enterprises and for which a rescheduling is pending with one bilateral creditor. In order to lower the country's debt service obligations, the government intends in conjunction with the program to request from Paris Club creditors multi-year debt rescheduling on the most generous available terms. It also intends to request debt rescheduling from all other official bilateral creditors on at least comparable terms. Government multilateral debt accounts for nearly one-half of Djibouti's total multilateral debt, and there are no arrears. However, the government has guaranteed the debt of certain public enterprises to certain multilateral creditors for which debt service is in arrears. The government intends to settle these public enterprise multilateral arrears by end-1999 utilizing resources to be provided by the EU.

Real Sector Policies

17. The government's real sector structural reform program is broad in scope and addresses in particular: civil service reform and an accompanying pension fund reform; privatization of the six major public enterprises and concomitant legal reforms; the resolution of cross debt and cross arrears among the enterprises and the government; domestic trade and price liberalization; labor market, investment law, and commercial code reform; and government-led development and reform programs for the education, health, transport, and non-urban water sectors. The content of the government's medium-term structural reform programs in the real sector is elaborated in the government's PFP (paragraphs 39-56).

Social Safety Net and Poverty Alleviation Arrangements

18. The government's reform program contains several components directed at putting in place basic social safety net and poverty alleviation arrangements. First, the government will utilize AfDB financial assistance for a Social Fund Program to be implemented over1999-2002 which will fund programs for micro-enterprise credit and the rehabilitation of education and health sector infrastructure. Second, it will also establish with World Bank financial assistance a public works/jobs creation program to be implemented over 2000-2003 in order to provide income support for low income families. Third, the demobilization program is linked to a re-insertion program which is being financed by the World Bank in order to provide training for demobilized personnel. Fourth, the medium-term program incorporates rural development components which are directed at alleviating rural poverty. The content of these latter programs and the government's long-term development and reform programs for the education and health sectors are detailed in its PFP (paragraphs 55 and 56).

Balance of Payments and External Financing Requirements

19. The outlook for the medium-term balance of payments entails a current account position with increased deficits over 1999-2000 averaging 6 percent of GDP before falling to 4 percent by 2003. The higher deficits reflect three factors. First, the program entails a requirement for increased imports—particularly of intermediate and capital goods—as a result of its strategy for restructuring the domestic economy and its higher growth target. In particular with respect to external performance, the government considers that—as with the higher growth objective—realization of the goals of strengthening the balance of payments and moving toward external viability will also require the prerequisite restructuring of the domestic economy as the restructuring would facilitate an expansion of export capacity, better exploitation of import substitution opportunities, and increased foreign direct investment. However given the increased import requirement and that restructuring will take time, the current account initially will be adversely affected. The demand for imported consumption goods will be contained, however, through the tight fiscal stance—particularly the reductions in the wage bill. Import growth is forecast to average 4 percent (after adjusting the 1998 base for the exceptional electricity generator imports noted above).

20. Second, the French military retrenchment entails a 24 percent decline over 1998-2002 in earnings from the provision of services to expatriates. As noted most of the retrenchment is occurring over 1998-2000, and for this period the cumulative earnings loss from this development is expected to exceed the earnings gain arising from the increased provision of transport and related services deriving from the growth of the transit trade to Ethiopia. Consequently the services account surplus of earlier years would not be regained until 2002. To some extent, the loss of service receipts will be offset by increased transfers over 1999-2000 associated with the new economic assistance agreement with the French government, although subsequently the level of transfers from this source is projected to decline toward pre-1998 levels. Third, while it is anticipated that the restructuring program will result in a more rapid growth of locally-produced goods exports, the export base is small with the result that even with rapid export growth the additions to earnings will be moderate.

21. The capital account is expected to be in surplus over the program period—averaging 3.5 percent of GDP. The surplus in large part reflects credits to the government from the World Bank and the AfDB and borrowing by the port authority to finance imports forrehabilitation and expansion. Foreign direct investment is projected to rise in response to the restructuring program and the increased transit trade, and this development is expected to contribute to the expansion in economic activity. Owing to insufficient information, the balance of payments projections do not presently incorporate estimates of foreign private capital inflows that might arise in conjunction with the privatization program. On this basis the overall balance of payments position is expected to record on average a deficit of 2.5 percent of GDP over 1999-2002 compared with an average deficit of 4 percent under the SBA-supported program. The program entails sustaining the mandated gross foreign asset position of the BND, and commercial bank gross foreign assets are expected to remain at about seven months of import cover.

22. The external gross financing requirements for 1999-2002 are projected to average about US$99 million annually. These resources are necessary in order to cover the current account deficit (excluding grants)—particularly the higher import level consistent with the program's growth target; address amortization obligations falling due and payment arrears; maintain BND monetary and LOLR cover; accommodate commercial bank import cover; and execute IMF and AMF repurchases. To cover these requirements, regular financing through disbursements of official grants and loans from bilateral and multilateral sources, public enterprise foreign borrowing, and foreign direct investment are expected to contribute on average about US$75 million annually. Moreover secured debt rescheduling will contribute US$3 million—apart from secured debt forgiveness to be provided by France totaling about US$30 million. This would leave a total four-year financing gap of US$91 million. Presently, identified exceptional financing from multilateral institutions other than the Fund (including the World Bank, the AfDB, and the AMF) is projected to total US$22 million. Total disbursements under the requested Fund ESAF arrangement could provide external financing of nearly US$27 million.

23. After considering identified exceptional financing, the total residual financing gap for 1999-2002 is estimated at US$43 million. To close these gaps, the government, as noted earlier, intends to request multi-year debt rescheduling on the most generous available terms from Paris Club and all other official bilateral creditors. If such debt rescheduling were granted, the 1999-2000 residual financing gaps would be closed as well as the presently estimated gaps for 2001-02.

Technical Assistance, Statistical Issues, Program Implementation, and Currency Board Transactions

24. The government believes that Djibouti will require significantly increased technical assistance to implement its structural reform program, and therefore intends to request continued technical assistance from France and expanded technical assistance from multilateral and bilateral sources. The government considers the provision of the technical assistance requirements identified in the policy matrix attached to its PFP to be critical for the effective implementation of its reform program. Moreover the government will request that the UNDPand IMF establish the multi-faceted joint technical assistance program—as has been done for other countries—which hopefully would receive financial support from bilateral sources.

25. Djibouti's data base is sufficient for macroeconomic program formulation and monitoring although there are weaknesses that attach in varying degrees to the national income, fiscal, monetary, domestic debt and arrears, and balance of payments data. Therefore the reform program aims at upgrading the statistical data base. To this end, the government will undertake some of these upgradings on its own. However as self-improvement efforts may not be possible in most statistical areas, the government believes that extensive technical assistance in statistical techniques and institution building will be required.

26. The challenges of the program require an upgrading of institutional arrangements for program implementation and monitoring. To this end, a presidential decree was issued in July 1999 appointing the Minister of Economy and Finance as Chairman of the Interministerial Committee which acts as the economic policy formulation, implementation, and coordinating body. In this capacity the Minister is recognized within the Cabinet to be acting on behalf of the government.

27. The government recognizes that as the BND is a currency board its transactions with the IMF and the AMF and its related counterpart transactions with the government create specific obligations of the government toward the currency board. In this regard, as the government draws down its counterpart deposits at the BND and the economy utilizes the foreign exchange assets made available by the IMF and AMF transactions, the BND will be left with claims on the government and foreign exchanges liabilities to the IMF and AMF which the BND in the future will need to service. Since the currency board does not have the capacity to acquire foreign exchange except in exchange for domestic currency issued— against which the acquired foreign exchange must be held in order to maintain the board's mandated monetary cover, the government must assume responsibility for ensuring that the BND is supplied with the free foreign exchange needed to service its liabilities to the IMF and AMF. This will essentially need to be done by reversing the transactions that gave rise to the BND liabilities, namely, by the government paying down its counterpart debt to the currency board either by utilizing foreign exchange it acquires from other sources or by acquiring and surrendering domestic currency to the board in order to execute the pay down. Therefore during the period of IMF and AMF repurchases it will be necessary for the budget to be sufficiently strong in order that the government will have the financial capacity to service its debt to the BND in the manner described.

III. First Annual Program, 1999/2000

28. The growth objective for the first annual program—which bridges calendar years 1999-2000—is to realize average real GDP growth of 2 percent. While this objective appears modest, it reflects the contractionary effect on the economy of the French military retrenchment. Abstracting from this factor, the growth target is 4 percent per annum. The other central macroeconomic objectives entail: limiting inflation to at most 2 percent;containing the overall balance of payment deficits to 2.5 percent of GDP on average; and maintaining the mandated BND monetary and LOLR cover. Commercial bank import cover is expected to average 7 months.

29. The 1999 program budget is directed at maintaining a tight fiscal stance—with the payment order position targeted at about balance. The cash position reflects the programmed clearance of domestic wage arrears and therefore entails a deficit of  1.6 percent of GDP. The wage arrears settlement provides for cash payments equivalent to about one-fifth of the outstanding amount. As noted earlier the original 1999 budget was amended by a supplementary budget approved by the National Assembly in August in order to incorporate measures adopted for the program.

30. The budget entails an increase in tax receipts equivalent to 1 percent of GDP over their 1998 level owing essentially to the tax increases under the petroleum product excise reform and the road user charge. However as this revenue gain is expected to be offset by lower profit transfers from public enterprises, the overall revenue/GDP ratio is projected to remain at about its 1998 level of 25 percent of GDP. Total expenditures are projected to rise by 1.5 percent of GDP over their 1998 level to 35 percent. Current spending is targeted to rise by 3.5 percent of GDP to 30 percent largely owing to higher outlays for social purposes, materials and supplies, and road maintenance. In part the higher current outlays/GDP ratio is attributable to increased grants-in-kind from France for medical and defense purposes. Social sector outlays are programmed to rise by 2 percent of GDP to 8 percent, while the wage bill is projected to decline by nearly 1 percent of GDP due to the full-year effect from completion of the first phase of the demobilization program in 1998, the implementation over 1999 of the second phase, and continuation of the freeze on government hiring and the wage bill. Public investment expenditure at 4.5 percent of GDP is lower than in 1998 following the sharp increase in these outlays last year owing to the rapid drawdown of the external resource pipeline.

31. The formulation of the 2000 budget is presently tentative and will be revisited during the first review discussions in December. At this time the government anticipates that the payment-order position will move to a surplus of 0.5 percent of GDP owing to higher revenues and grants (taken together by 2 percent of GDP). The further reorientation of spending toward priority purposes would again be facilitated by a decline in the wage bill owing to the continuation of both the demobilization program and the hiring and wage freeze. The cash deficit is forecast to widen to 4 percent of GDP as the government intends to make large cash payments against its pension fund and wage arrears. Financing of the deficit would be as in 1999. The structural reform content of the 2000 budget will entail the second-round increases in petroleum product excise taxation, implementation of consumption and other excise tax reforms, as well as the continued reorientation of expenditures. A public expenditure review to be undertaken in collaboration with World Bank staff in connection with its Public Expenditure Reform Credit (PERC) will be completed by end-March 2000.

32. The 1999/2000 financial sector structural reform program entails a number of important measures. In July-August 1999 a notification system to address delinquent bank credits and enhance intermediation was implemented along with measures to terminate commercial bank coordination of interest rate and fee structures. Following these steps, the BND by end-1999 will complete the liquidation of one of two closed commercial banks and reach decisions regarding the treatment of an operating foreign bank subsidiary confronting prudential difficulties and Djibouti's specialized bank. For the first half of 2000, the reform program will entail preparation of reformed BND and banking laws, liquidation of a second closed commercial bank, and resolution of the status of the foreign bank subsidiary and the specialized bank.

33. Far-reaching real sector structural reform measures are being introduced in 1999. Following measures introduced over July-September 1999 to eliminate government control over the petroleum product market and to effect the privatization of four small public enterprises, the measures to be implemented later this year will entail: a reform of the port tariff structure; establishment of a program to enforce the maximum road load limit for trucks; and a program to improve the financial positions of the national power and urban water utilities. The major structural reforms to be implemented in the first half of 2000 entail: publication of the core principles of the strategy for privatization of each of the six major public enterprises; finalization of action plans for the privatizations of the port and the telecommunication companies; and enactment of a privatization law and a reformed Labor Code.

34. The balance of payments outlook for 1999-2000 entails current account deficits of some 6 percent of GDP on average and an overall deficit of 2.5 percent. As noted earlier, the widening of the current account deficit vis--vis 1998 reflects essentially the higher imports required for the program's restructuring strategy and growth target and the adverse effect on service receipts from the French military retrenchment. With the 1998 import base adjusted for the exceptional outlays for electricity generators, import growth is expected to average 5 percent. The capital account is expected to be in surplus—averaging 3.5 percent of GDP—largely owing to use of World Bank and AfDB credits, foreign borrowing by the port for rehabilitation and expansion, and increased foreign direct investment.

35. For 1999, the gross external financing requirement is estimated to be US$101 million. This requirement is expected to be mostly covered by regular financing. With these resources, an exceptional financing gap of US$22 million would remain. Identified financing is expected to become available from the AfDB (US$1.6 million) and the AMF (US$0.4 million). IMF resources under the requested arrangement could supply US$3.8 million. After taking these resources into account, a residual gap of US$16.5 million would remain. For 2000 the gross external financing requirement is presently forecast at US$107 million, and after considering the resources available from regular financing, the exceptional financing gap would be US$24 million. Resources from the AfDB, AMF, IMF and World Bank—totaling US$15 million— are forecast to narrow this gap to a residual of US$9 million. The residual gaps for1999-2000 would be closed if official bilateral creditors were to grant Djibouti's request for multi-year debt rescheduling on the most generous available terms.

IV. Program monitoring, prior actions, performance criteria, and reviews

36. The challenges of program will require an upgrading of institutional arrangements for program implementation and monitoring. To this end, a presidential decree was issued in July 1999 appointing the Minister of Economy and Finance (MOEF) as Chairman of the Interministerial Committee (IC) which acts as the economic policy formulation, implementation, and coordinating body. In this capacity, the Minister is understood within the Cabinet to be acting on behalf of the government. The IC has appointed a technical reform program implementation team that will be responsible for: overseeing the implementation of the technical aspects of the reform program; technical coordination among implementing agencies; and reporting on technical implementation to the IC. In its policy coordinating capacity, the IC will vet the information provided by ministries and agencies and oversee the provision of information on program performance to the higher Djibouti authorities, the IMF, the World Bank, and other concerned parties. Aspects of the procedures for the vetting and provision of information have been spelled out in a technical memorandum of understanding agreed with the IMF staff.

37. Implementation of the program under the requested arrangement will be monitored through prior actions, quantitative and structural performance criteria, structural benchmarks, and five reviews. The schedules for disbursements under the arrangement and the attached conditions as well as for Executive Board completion of reviews are presented in the attached Table 1. The prior actions for submitting the request for the arrangement to the Executive Board and structural performance criteria for end-1999 are given in the attached Table 2. All prior actions have been implemented. Subsequently under the arrangement, additional prior actions and structural performance criteria or benchmarks may be established during program reviews.

38. The program will utilize semi-annual quantitative performance criteria and under the first-year program such criteria have been established for end-December 1999 (Table 3). To assist in observing these criteria and those to be established for end-June 2000 during the first review, indicative targets have been established for end-September 1999 and end-March and end-June 2000. Semi-annual quantitative limits will apply to: the wage bill; the stocks of domestic and external arrears; National Bank and commercial bank net credit to the government; government borrowing from public enterprises; and the contracting or guaranteeing by the government or public enterprises of nonconcessional external debt with an initial maturity of more than one year. Semi-annual quantitative floors will apply to the currency board's net international reserves.

39. Other performance criteria include the commitment of the government that it will not: impose or intensify restrictions on payments and transfers for current international transactions; introduce or modify multiple currency practices; conclude bilateral payments agreements that are inconsistent with Article VIII of the Fund's Articles of Agreement; or impose or intensify import restrictions for balance of payments reasons. In addition, continuous performance criteria will apply to the accumulation of new domestic and external arrears (excluding arrears on external debt service obligations under rescheduling negotiations).

40. There will be five reviews under the arrangement. The first review discussions are expected to take place by end-December 1999, and the Executive Board meeting is envisaged for February 2000. The review will address progress in implementing the macroeconomic program for 1999 and will entail an updating of the macroeconomic program for 2000 including confirmation of the consistency between the medium-term program and the proposed 2000 budget. Competitiveness policy will also be addressed.

41. The review will moreover consider the 1999 and 2000 structural reform programs. The status of structural reforms already implemented in 1999 will be assessed—in particular the petroleum product excise tax reform and the related market liberalization; the road user charge; the expenditure re-orientation; the demobilization program; the notification system; and the measures to promote independent interest rate and fee setting by banks. The preparations for and specifications of the structural reforms to be implemented before end-1999 will be reviewed and in particular: the banking sector reforms; the port tariff reform; the program to enforce the maximum truck load limit; and the programs to enhance the financial positions of the power and water utilities. The status of bilateral external debt relief and multilateral arrears regularization will moreover be addressed. Additionally the review will assess preparations and specifications for the structural reforms pertaining to the first half of 2000 and in particular: consumption and other excise tax reforms; an envisaged mandatory retirement program applying to civil service and military personnel; publication of the privatization strategies for the five major public enterprises and preparation of action plans for the privatizations of the port and the merged telecommunications utilities; public sector domestic arrears resolution; the reformed BND and banking laws; resolution of the status of the foreign bank subsidiary and the specialized bank; and the reformed Labor Code and Investment Law.

42. The government will consult periodically with the Fund about the progress being made in the implementation of the program and about any policy adaptations considered appropriate for achievement of the program's objectives.


1New overall presentations of fiscal, monetary, and external sector data and forecasts have been adopted for ESAF-supported program purposes in order to enhance transparency and facilitate analysis. Also the coverage of certain data entries has been redefined. With these changes, noncomparabilities arise vis--vis the presentations and certain definitions of fiscal, monetary, and external sector data as utilized for the SBA-supported program. Therefore to afford comparability, data relating to the SBA-supported program period have been recast into the ESAF-supported program presentations and definitions.

Table 1: Djibouti: Proposed Schedule of Disbursements Under the Requested ESAF Arrangement, 1999-20021
Amount Date Available Requirements for Disbursement

SDR 2.726 million      After conditions for disbursement are met. Executive Board approval of the ESAF arrangement.
 
SDR 2.726 million On or after February 15, 2000 Observance of end-December 1999 performance criteria and Executive Board completion of the first review.
 
SDR 2.726 million On or after August 15, 2000 Observance of end-June 2000 performance criteria, Executive Board completion of the second review, and presentation of the second annual program.
 
SDR 2.726 million On or after February 15, 2001 Observance of end-December 2000 performance criteria and Executive Board completion of the third review.
 
SDR 2.726 million On or after August 15, 2001 Observance of end-June 2001 performance criteria, Executive Board completion of the fourth review, and presentation of the third annual program.
 
SDR 2.726 million On or after February 15, 2002 Observance  of December 2001 performance criteria and Executive Board completion of the fifth review
 
SDR 2.726 million On or after August 15, 2002 Observance of end-June 2002 performance criteria.

1The program year starts July 1, 1999.

Table 2: Djibouti: Prior Actions and Structural Performance Criteria for the 1999/2000 Program
 
I. Prior actions for Executive Board consideration of the request for an ESAF arrangement
 
1. National Assembly approval of a 1999 supplementary budget enacting the program budget and incorporating the deregulation of petroleum product trade and prices and the implementation of the 1999 petroleum product excise tax increases and the programmed increases in social expenditures.
 
2. Issuance of a BND circular to commercial banks regarding interest rate structures and bank fee and charge structures, as specified in paragraph 13.
 
3. Issuance of a BND circular to commercial banks establishing a notification system, as specified in paragraph 13.
 
4. Completion of the privatization (or liquidation as applicable) of the four public enterprises listed in the policy matrix attached to the government's Policy Framework Paper.
 
5. Issuance of a government decree establishing a road user charge of US$1 per ton of cargo to be paid by all trucks exiting the port and earmarking the tax revenues to the Road Maintenance Fund.
 
6. Issuance of a presidential decree designating the Minister of Finance as Chairman of the Interministerial Committee for Reform Program Co-ordination.
 
II. Structural performance criteria for end-December 1999
 
1. National Assembly approval of a budget for 2000 consistent with the medium-term program's macroeconomic objectives and incorporating the structural reform measures programmed for 2000 as applicable—and in particular the consumption, excise, and export tax reforms; the 2000 demobilization program; the civil service and military retirement program; and continuation of the hiring and wage bill freezes implemented in 1998.
 
2. Implementation of a port tariff reform consistent with strengthening the financial position of the port authority in order to allow for implementation of its program for rehabilitation and expanison.
 
3. Completion and provision to IMF staff of compilations (as of end-1998) of: the debt and arrears of all public enterprises to other public enterprises, the government, and third party suppliers; and of the debt and arrears of the government to each public enterprise.
 
4. Completion of the second phase of the demobilization program which shall entail the demobilization of the remaining 1,648 persons scheduled for demobilization under the second phase.
 
5. Issuance by the national power and the urban water utilities of policy statements setting forth their revenue collection reforms.

Table 3. Djibouti: Quantitative Performance Criteria and Indicative Targets, 1999/2000
(In millions of Djibouti francs; unless otherwise indicated)
  1998
Dec.31

Actual
  1999
  2000
    June 30
Actual
  Sept. 30
Target
  Dec. 31
Criteria
  March 31
 
June 30
        Target

I. Ceiling on the wage bill1,2 3,670   7,476   10,830   14,440   3,473   6,946
II. Ceilings on stocks of arrears3                      
    1. Domestic arrears                      
        a. Wage bill1                      
            Outstanding 4,5 6,767   8,197   5,709   5,588   5,588   5,588
            New6,7,8     1,200   1,200   1,200   1,150   1,150
        b. Private suppliers                      
            Outstanding5 3,574   3,854   3,574   3,574   3,234   2,894
            New6,8 0   0   0   0   0   0
        c. Pension funds                      
            Outstanding5 7,291   7,291   7,291   7,291   6,389   6,229
            New6,8 0   0   0   0   0   0
        d. Other9                      
            Outstanding5 360   360   360   360   270   180
            New6,8 0   0   0   0   0   0
    2. External arrears                      
        a. Government                      
            Outstanding5,10,11 0   0   0   0   0   0
            New6,8 0   0   0   0   0   0
        b. Public enterprises                      
            Outstanding5,10,11 908   776   643   643   643   643
            New6,8 217   11912 119   119   119   119
                       
III. Ceiling on National Bank net credit to the
      government13
1,500   2,097   2,133   2,108   2,621   2,657
                       
IV. Ceiling on commercial bank net credit to the
      government14
333   160   108   33   33   33
                       
V. Ceiling on government borrowing from public
      enterprises6,15
0   0   0   0   0   0
                       
VI. Ceiling on contracting or guaranteeing of
      noncessional external debt with a maturity of
      more than one year
      (excluding trade-related credits)
                     
         a. Government 0   0   0   0   0   0
         b. Public enterprises 0   0   1,800   1,800   1,800   1,800
                       
VIII. Floor for net international reserves
      (in millions of US dollars)16
6.7   7.4   10.4   10.4   10.6   10.4
                       
Memorandum items:17                      
Total external budgetary assistance                      
   External budgetary loans 0   0   212   284   293   586
   External budgetary grants 1,617   492   2,084   2,779   785   1,570
   External debt regularization 175   0   1,594   2,126   508   1,016
   Other external budgetary assistance 371   244   853   829   514   549
      IMF net disbursements 240   244   800   758   478   478
      AMF net disbursements 131   0   53   71   36   71

1The wage bill includes, but is not limited to, all gross wages, salaries, indemnities, benefits, and allowances that the government agrees to pay to civilian, military, and security personnel, (whether permanent or temporary) and all other employees of general government, regardless of the means of payment used (cash, check, or other instruments) or the paying agent (Treasury or other entities acting on behalf of the government). The ceilings and targets exclude the costs and savings from the program for the demobilization of security and military personnel. The ceilings and targets will be revised for the costs and savings from the envisaged retirement program when the effect of this program is quantified.
2Cumulative flows from January 1 of each calendar year.
3Stocks at end-of-period.
4If net external budgetary financing flows fall short of the amounts assumed under the program, the ceilings or targets on wage arrears will be adjusted upward by the shortfall. If net external budgetary financing flows exceed the amounts assumed under the program, the government will consult with the IMF staff on the use of the excess.
5All limits or targets are based on the end-1998 actual stock.
6Cumulative flows from January 1, of the calendar year.
7This amount includes a delayed administrative payment of about one month of salaries equal to DF 1, 200 million.
8The performance criteria will apply continuously.
9Arrears owed by Office National de l'approvisionnement des crales (ONAC).
10Any subsequent upward (downward) revision of this stock due to improved data will give rise to an equivalent upward (downward) adjustment of the ceilings and targets for each subsequent period.
11The ceilings or targets will be reduced by the amount that may be obtained under debt reschedulings or debt forgiveness.
12Cumulative flows from January 1, 1999–May 30, 1999. The reduction represents payments to AfDB and other multilateral organizations.
13National Bank net credit to the government is defined as total claims of the National Bank on the government less all government deposits with the National Bank. These deposits include, but are not limited to: the Reserve Fund; cash holdings of the Treasury; and other deposits. Other deposits include, but are not limited to: deposits in blocked accounts; deposits of exceptional external grants; current accounts; deposits in special accounts; and counterpart funds from loans and grants for external budgetary support. Deposits do not include counterpart funds generated from external loans and grants not intended for budgetary support.
14Commercial bank net credit to the government is defined as total claims of commercial banks on the government (including overdrafts and securities and notes issued by the government and held by commercial banks) less all government deposits with commercial banks. Deposits include, but are not limited to: deposits in blocked accounts; deposits of exceptional external grants; current accounts; deposits in special accounts; and counterpart funds from external loans and grants for budgetary support. Deposits exclude counterpart funds from external loans and grants not intended for budgetary support. The commercial banks consist of the three presently operating banks.
15Borrowing from public enterprises is defined as all receipts that give rise to debt of the government to the enterprises. Borrowing includes, but is not limited to: certificates of deposit; loans and advances; and deposits of public enterprises with the Treasury. The coverage of public enterprises is defined to include all domestic nonfinancial enterprises, agencies, funds, and other non-central government entities.
16Net international reserves of the National Bank are defined as gross international reserves less external liabilities and currency issue. The exchange rate to be used is DF 177.721 per U.S. dollar.
    (i) Gross international reserves are defined as the sum of: sight deposits abroad; time deposits abroad; checks in process of collection from foreign entities; operations pending regularization; foreign exchange in cash; sight and time deposits of the Treasury abroad; accounts with the IMF; SDR holdings and any reserve position in the IMF; and all other foreign assets. Capital subscriptions to foreign financial institutions are excluded from gross international reserves.
    (ii) External liabilities are defined as the sum of: external accounts having a credit position and all other foreign exchange liabilities (excluding use of IMF and AMF credit).
    (iii) Currency issue is defined for program purposes as: Djibouti franc bills and coins in circulation (outside commercial and development banks and the treasury); cash held by commercial and development banks and the treasury; and deposits of commercial banks and the government at the National Bank.
17The memorandum items are defined as follows: external budgetary loans and grants are only those in cash and exclude all loans and grants which are listed in the Public Investment Program or those which are earmarked by the donor for specific projects. External debt regularization consists of debt forgiveness and rescheduling, excluding interest.