Djibouti and the IMF
News Brief: IMF Completes Djibouti's Review Under the PRGF Arrangement
Free Email Notification
of Intent, Memorandum of Economic and Financial Policies
Mr. Horst Köhler
Dear Mr. Köhler,
1. The attached memorandum of economic and financial policies describes the structural reform and macroeconomic adjustment program for 2001 and 2002. It updates the memorandum of economic and financial policies attached to the letter that we sent to you on July 11, 2000, which covered the period July 1999-June 2002. Following slippages and delays in some reforms in 2000, the government of Djibouti introduced corrective measures to bring the program back on track in 2001 and thereafter. In support of this program, Djibouti requests waivers of all the performance criteria that could not be met, and completion of the second review under the Poverty Reduction and Growth Facility (PRGF) arrangement approved by the IMF Executive Board on October 18, 1999. The conclusion of this second review under the PRGF arrangement has been delayed approximately one year to allow the government to introduce the necessary measures to bring the program back on track. Owing to this delay, two disbursements of SDR 2.726 million each, which should have been available for this period, could not be released. Given the measures introduced in 2001 and the reform program planned for 2001 and 2002, the government of Djibouti requests that the disbursements under the PRGF arrangement be reorganized so that the SDR 5.452 million corresponding to the disbursements that had to be delayed may be distributed among the three remaining disbursements that are scheduled to take place before the expiration of the arrangement. Accordingly, the government requests a third disbursement under the PRGF in the amount of SDR 3.635 million following the conclusion of the second review. Further, the government requests that the amounts of the disbursements linked to the third and fourth reviews be increased to SDR 4.543 million and SDR 5.452 million, respectively.
| 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 of the Republic 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 continuing to fulfill 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.
I. Economic Developments in 2000 and 2001 and Performance under the Program
A. Macroeconomic Performance in 2000 and Early 2001
1. In 2000, Djibouti's economy recorded real GDP growth estimated at about 1 percent, resulting in a further deterioration in per capita incomes. Growth continued to be supported by significant activity at the port, where tonnage increased by about 4 percent from December 1999 to December 2000, and by the 5.4 percent rise in electricity production. However, the vitality of these sectors only partially offset the effects of the reduced French military presence and stagnating public expenditure. The consumer price index rose by 2.4 percent from December 1999 to December 2000, a pace one-half percentage point higher than in the previous year. This slight increase in inflation is explained in large measure by increased transportation prices brought about by rising petroleum prices in the second half of the year.
2. The fiscal deficit amounted to 1.8 percent of GDP in 2000 (on a payment order basis), compared to the equilibrium projected in the program. This slippage reflects revenue shortfalls, lower than projected grant disbursements, and current expenditure overruns. Tax revenue came to DF 21.1 billion as against the program target of DF 21.9 billion. The gap is attributable to lower than expected collections of direct taxes, in particular of real estate taxes and business licenses, as well as to the exemption from the surtax on petroleum products granted to the Electricité de Djibouti (EDD)1 and the nonincorporation into the budget of the solidarity surtax on qat, tobacco products, and alcohol levied to finance the Arta Conference on Peace in Somalia.
3. Current expenditure totaled DF 29.6 billion, thereby exceeding the program target by 1.3 percent of GDP. This overrun stems largely from exceptional factors, associated for the most part with the organization of the Somalia Peace Conference, the occurrence of epidemics, and the drought besetting the region. The Peace Conference received no financial support from abroad and was financed in its entirety by domestic resources. The efforts to establish lasting peace in Somalia are aimed at contributing to stability in the region, which will have a positive impact on Djibouti's economy. The expenditure overrun also reflects weaknesses in the management of public expenditure, with recourse to offsetting operations and payment of expenditures without prior payment order issuance. Lower-than-projected capital expenditure resulting from smaller than anticipated external financial support attenuated the slippages on the current expenditure side. Some delays in project execution, as well as problems completing the second program review, explain the low level of external disbursements. The deterioration in the fiscal position resulted in the accumulation of new domestic payments arrears (0.9 percent of GDP), whereas the program called for arrears elimination equivalent to 3.3 percent of GDP.
4. In the monetary sector, bank deposits increased by only 1.6 percent between December 1999 and December 2000 in a context of slack economic growth and the accumulation of domestic payments arrears. The breakdown of these deposits by type remained stable through out the period. The pronounced increase in credit to the private sector, of about 12.5 percent, was reflected in an 11.5 percent decline in the net foreign assets of the commercial banks. The latter had to deal in particular with sizable payments of documentary credits during the last quarter of the year. The net international reserves of the monetary authorities remained below the ceiling set by the program. The extent to which base money and government deposits with the Banque centrale de Djibouti (BCD) were covered by the latter's gross foreign assets increased by 3 percentage points, from 112 percent at end-1999 to 115 percent at end-2000.
5. The balance of payments showed an overall deficit estimated at US$18 million, compared with a programmed deficit of US$23 million. This reflects a current deficit, including grants, of 7.2 percent of GDP, a sharp increase over the 1999 level of 0.6 percent of GDP. The purchase of gantry cranes for the port and the increase in the international price of petroleum products had a negative impact on the trade balance. Moreover, grants, in particular for budgetary assistance, were smaller than projected. The capital balance registered a deficit equivalent to 3.3 percent of GDP owing to sizable outflows of private capital. This deterioration in the overall balance of payments was reflected in a sizable decrease in the net foreign assets of the commercial banks of US$17 million. In addition, new external payments arrears in respect of the external debt not eligible for rescheduling were accumulated in the amount of US$1.5 million in a context in which loan disbursements from multilateral lenders for program support purposes fell short of projected levels.
6. The program's quantitative performance criteria for end-July 2000 were met as regards net credit from the commercial banks to the government, government and public enterprises nonconcessional external debt, government borrowing from public enterprises, and net international reserves. However, the criteria relating to the wage bill, the outstanding stock of domestic and external arrears, and net credit from the BCD to the government were not observed, although the gaps were quite small as regards the wage bill and net credit from the BCD to the government. In view of the corrective measures (described below), which have been or will be implemented before completion of the second review, including in particular the restoration of fiscal discipline, the government seeks a waiver in respect of all the quantitative performance criteria that have not been met.
7. As regards the performance criteria for end-December 2000, those pertaining to the wage bill, net credit from the BCD and the commercial banks to the government, government borrowing from the public enterprises, the government and public enterprises nonconcessional external debt, and net international reserves, were observed. Only the criteria on the outstanding stock of domestic and external arrears (adjusted for the shortfall in external budgetary assistance) were not met, owing to the worsening of the fiscal position and the financial situation of some public enterprises.
8. During the first half of 2001, economic growth continued to be driven by the activity of the port, where tonnage for the first five months of the year increased by about 5 percent over the same period of 2000. Inflation remains moderate, with prices rising by 1.6 percent between May 2000 and May 2001. The fiscal situation was characterized by an additional accumulation of domestic arrears during the first quarter of 2001 amounting to nearly DF 900 million (0.9 percent of GDP). It proved impossible to adjust budgetary expenditure to the low revenue levels recorded in January-March. Implementation of the cash flow plan beginning in April made it possible to hold expenditure down below total revenue and thereby to reduce the net amount of arrears by approximately DF 1,250 million between end-March and end-September 2001. However, the revenue level for the first six months of the year did fall short of projections, requiring a substantial contraction in certain expenditure on equipment and transfers during the second quarter. Improved revenue performance during the third quarter of the year allowed a smoother implementation of the cash flow plan.
B. Structural Reforms in 2000
9. In the area of structural reforms, the measures described below were called for under the first program review and implemented by end-2000. The specific taxes on petroleum products were adjusted to the agreed levels with effect from July 2000. At the same time, the oil companies were authorized to increase petroleum product prices freely on two occasions, in October and November 2000, so as to bring them into line with international prices plus domestic taxes and expenses. These adjustments were made despite a difficult social context and triggered substantial social unrest. In addition, the objectives of the 2001 budget law adopted by Parliament on December 31, 2000 were consistent with the objectives discussed with IMF staff. Fiscal data were reported monthly with a four-week lag. However, foreign trade data were prepared incompletely and forwarded behind schedule, owing to poor coordination between the Revenue Directorate and the Statistics Directorate and to the time required to adjust customs data.
10. A number of other reforms did not proceed as planned. The measures aimed at improving the management and monitoring of public expenditure, including in particular the introduction of a cash flow plan and the strict control of payments of expenditures for which payment orders had not been issued in advance, were not implemented during the second quarter of 2000. The organization of the Somalia Peace Conference, which lasted several months, resulted in such pressures that these reforms could not receive the attention they required. The exceptional circumstances surrounding the organization of the Somalia Peace Conference did not make it possible to make significant progress in this area. Preparatory work on the privatization strategy by the World Bank and the reform plan for the pension funds were delayed. The demobilization program for military and security personnel affected only 490 individuals in 2000 as compared to the target of 1,300, in part owing to the delays in the disbursement of the external assistance intended to cover the payment of demobilization bonuses. It has not yet been possible to submit the final draft version of the new labor code to parliament because the labor unions, as a result of internal dissension, have yet to provide their evaluation of the draft. In view of these considerations and the undertakings with respect to structural reforms in 2001, the government also requests a waiver of the structural performance criteria that could not be met at end-December 2000, and of the continuous performance criterion concerning foreign trade data.
II. Program for 2001-02
11. The government will continue and intensify its reform program in 2001 and 2002 so as to put the economy of Djibouti on the path of higher growth, boost per capita incomes, reduce unemployment, roll back poverty, and ensure domestic financial viability. The government's macroeconomic objectives for 2001-02 consist, of particular, in ensuring GDP growth in volume terms of at least 1.5 percent and limiting inflation to 2.5 percent. Structural reforms will be implemented in order to make it possible for the targeted increase in economic growth in the medium term to be achieved. In addition, the macroeconomic program will be based on a fiscal discipline and rehabilitation effort. In the short term, regaining control over public finances will receive particular priority.
A. Fiscal Policy
12. In the context of the 2001 budget adopted in December 2000, the authorities adopted the objective of reducing the fiscal deficit on a payment order basis (including grants) to 0.6 percent of GDP as against a deficit of 1.8 percent of GDP in 2000 and to achieve a domestic budget surplus of 1.4 percent of GDP. Revenue and grants were projected to total 31.9 percent of GDP, or 0.9 percent more than in 2000, while total expenditure was to be capped at 32.5 percent of GDP, or 0.3 percent less than in 2000. The improvement in revenue over the preceding year's level was mostly attributable to the level of direct taxes (+0.8 percent of GDP). On the expenditure side, the initial budget called for a reduction in current expenditure of 2.0 percent of GDP while investment expenditure is expected to increase by 1.7 percent of GDP over the 2000 level. However, the 2001 budget law does not include appropriations for financing additional social programs.
13. Regarding tax receipts, two key measures were part of the initial budget for 2001, namely: (a) the introduction of a tax on selected services,2 and (b) the transfer of the collection subdirectorate from the Directorate of the Treasury and Government Accounting to the Directorate of Revenue and Government Property in order to improve the coordination and complementarity between the assessment and collection functions.3 The solidarity tax on tobacco, alcohol, and qat introduced by the supplementary budget law for 2000 to finance the Somalia Peace Conference has been abolished. On the expenditure side, the initial budget for 2001: (a) renewed the freeze on civil service hiring, except in the education, health, and justice sectors; and (b) sought to control scholarship expenditure by ensuring the training of Djibouti students in the country (opening of a university center in Djibouti) or at the more affordable university centers in Africa and the Maghreb countries.
14. To ensure that the objectives of the 2001 budget are met, a cash flow plan has been put in place, accompanied by a reorganization of the expenditure sequence and improvements in the administration and collection of direct and indirect taxes. In addition, on the basis of the data and information available for the first five months of 2001, the authorities have further updated their public finance program for 2001 and adopted accordingly a supplementary budget law in August 2001 which includes a number of measures on the revenue and expenditure sides.4 Additional external financing has also been identified with a view to increasing expenditure under the public investment program as well as current expenditure for the social sectors. The objective of this supplementary budget law is to contain the deficit on a payment order basis to 0.6 percent of GDP.
15. To strengthen the management of public expenditure and overcome the slippages observed in 2000, offsetting operations have been eliminated, and the new government accounting regulation adopted in early 2001 limits payments of expenditures without prior payment orders strictly to external debt service operations and the imprest funds. In addition, the operating conditions of the imprest funds are now strictly regulated.5 The provisions adopted identify: (a) the purpose of the funds, namely to cover urgent expenditures or small expenditures which fall outside the regulatory procedure for expenditure execution; (b) the nature of the expenditures payable from the funds; (c) the maximum amount of the advance; (d) the deadline for producing background documentation; and (e) the authorized unit amount of expenditures. Furthermore, all accounts of government institutions maintained with the commercial banks, except joint accounts for projects with double signature of donors and Djibouti authorities, will be transferred to the central bank before end-2001.
16. Based on the trends observed for the period January-May 2001, the projections on budgetary revenue for 2001 as a whole indicated a shortfall from the objectives of slightly less than DF 1 billion. To cover this shortfall and achieve the objectives set, several measures were introduced in the supplementary budget law. First, the tax on services (taxe sur les prestations de services (TPS)), initially introduced in the 2001 budget but not previously implemented, will be levied on telephone bills as from January 1, 2001 as well as on hotel bills.6 The solidarity surtax on qat was reintroduced with effect from August 2001. The introduction of a new penalty system will make it possible to speed and strengthen the collection of the taxes and levies outstanding at end-2000. To this end, the following steps have been or are to be taken beginning in July 2000: preparation of the list of delinquent taxpayers, taxpayer reminders, publication of the list identifying those delinquent taxpayers not responding to the reminders, and application of the penalties prescribed. This series of measures will make it possible by end-2001 to collect approximately DF 800 million in taxes and levies outstanding at end-2000. Securities income, including the dividends paid by the port and the BCD, increased by DF 200 million over the initial budget for 2001. On the expenditure side, the indemnity payments to police officials have been streamlined and reduced. In addition, the budget appropriations for goods and services expenditure have been reduced for all ministries other than the ministry of education, the ministry of health, and the office of the president of the republic. These measures partially offset an increase of almost DF 400 million in the wage bill for security personnel attributable in large measure to the delayed implementation of the plan for demobilizing government forces. These measures combined, as well as the disbursement of the expected budgetary assistance, will make it possible to reduce the stock of domestic budgetary arrears by about DF 2.8 billion in the course of 2001. The reduction efforts will be focused largely on wages and contributions to the pension funds.
17. A monthly cash flow plan was introduced in early April 2001.7 The aim of this plan is to adapt expenditure flows to revenue flows and avoid any accumulation of new domestic payments arrears. The government cash flow management commission chaired by the prime minister's chief of staff is responsible for drawing up, monitoring, and implementing this cash flow plan.8 The cash flow plan is devised on the basis of the budget and was revised in line with the supplementary budget law. On the revenue side, it excludes administered revenue [recettes pour ordre].9 Expenditures are ranked, starting with mandatory expenditures including the payment of monthly wages (including social contributions and contributions to the pension systems), housing assistance, the autonomous budgets, and debt service. Other expenditures are classified by order of decreasing priority. With effect from July 1, 2001, all expenditure other than wages are paid in the month following payment authorization since July 1, 2001. Wages, on the other hand, will continue to be paid several months after their authorization, but the equivalent of at least one month's wages will be paid each month. The regular payment of wages during the same month as they are authorized will resume with the next fiscal year starting in January 2002. Based on the experience gained with the first six months of implementation, cash flow management will continue to be strengthened with a view to the complete elimination by end-2001 of the stock of expenditures authorized in 2001 but not yet paid. To this end, the amount of commitments and authorizations each week will be modulated in accordance with revenue collections for the weeks before. In addition, the provisional monthly cash flow plan will be updated each month on the basis of effective revenue and expenditure through the preceding month. The cash flow plan has initially been established with a view to reducing the stock of expenditures authorized in 2001 but not yet paid, estimated at DF 1.4 billion at end-May 2001, by about half before end-September 2001.10 This target was surpassed as the amount of expenditure authorized but not paid was brought down to about DF 450 million at end-September 2001.
18. The budgetary framework for 2002 will target achieving a domestic budget balance equivalent to approximately 0.3 percent of GDP. Revenue level equivalent to about 24 percent of GDP is expected to be achieved by maintaining the measures introduced in the supplementary budget law for 2001 and is based on the assumption that the direct tax reform will be revenue neutral at a minimum. On the expenditure side, the reduction in civil service staffing projected by end-2001 with the retirement of more than 850 employees and the implementation of the demobilization program in 2001 and 2002 will make it possible to reduce the wage bill (excluding the cost of the departure allowances paid to ex-combatants) by about DF 1 billion from the 2001 level and to increase the number of employees in social sectors (education and health) and in justice. This will provide maneuvering room for financing additional expenditure for the social sectors within the framework of the poverty reduction strategy. The domestic budget surplus, as well as the expected external budgetary assistance, should allow for the cash repayment of domestic budgetary arrears in an amount equivalent to slightly more than 3.5 percent of GDP.
B. Budgetary Reforms
19. With a view to regaining control over public finances and creating a modern tax system, the authorities decided to accelerate their efforts to reform the management of expenditure and to strengthen and improve the direct tax system and its administration.
20. In the expenditure area, a number of legislations will be adopted by the government in November 2001. These legislations will simplify and improve the public expenditure channels and procedures, in accordance with the recommendations of a technical assistance mission from the IMF Fiscal Affairs Department and other donors.11 The measures include: (a) the introduction of new budget and accounting nomenclatures featuring functional and economic classifications; (b) the incorporation of the special accounts into an annex to the budget; (c) the reorganization of the central structures of the ministry of economy and finance in order fully to restore the budget preparation function, eliminate redundancies in the area of budgetary control, and separate the function of investment program execution from the economic analysis function now being performed by the directorate of economy; and (d) provisions allowing for the allocation of shared expenses and the introduction of expenditure authorizations by spending ministry. With the exception of the incorporation of the special accounts into an annex to the budget, which was done as part of the supplementary budget law, the effective date for all the other measures is January 1, 2002. These reforms will lay the groundwork for a decentralization of expenditure management to the spending ministries in the medium term.
21. As regards direct revenue, the supplementary budget law for 2001: (a) introduced a new tax return filing system12 and a reform of the prosecution and penalties system;13 (b) established the large enterprise unit and the single taxpayer identification number based on the business license;14 and (c) created a tax auditing structure in order to generalize pinpoint examinations and thereby ensure better coverage of the full range of taxes. In order to ensure the harmonious introduction of these reforms, a working group consisting of the director of the treasury, the director of revenue and government property, and the deputy director of direct revenue has been set up. In 2002, the merging of the professional taxes will take place, tax provisions will be harmonized with those of the other Common Market for Eastern and Africa (COMESA) member countries, and a study will be conducted on the introduction of a turnover tax foreshadowing a value-added tax in the medium term. In addition, the customs service has been reorganized and work is in progress to introduce the automated system for custom data (ASYCUDA) with assistance from the United Nations Conference on trade and Development and other donors.
C. Domestic Arrears
22. The reduction of domestic budgetary payments arrears is one of the highest priorities of the government's reform program. In an initial stage, technical assistance financed by the European Union (EU) made it possible to conduct a partial audit of the existing stock of arrears.15 A supplementary audit of the stock of domestic arrears will be carried out as rapidly as possible and completed early in 2002 with the assistance of experts financed by the World Bank. The partial audit already completed covered arrears vis-à-vis private suppliers since 1996 and initiated a survey of arrears vis-à-vis public enterprises. The supplementary audit will need to cover arrears vis-à-vis public enterprises and agencies (including the pension funds) and arrears in respect of wages and compensation of government employees and, to the possible extent, arrears vis-à-vis private suppliers before 1996. The Government of Djibouti will at the same time examine in detail all possible mechanisms for clearing the stock of arrears. A detailed plan for eliminating and restructuring these arrears will be finalized and adopted early in 2002, before the completion of the third review, with a view to implementation before mid-2002. These mechanisms should include, among other things, the issuance of treasury bills in accordance with the principles laid down in the memorandum of economic and financial policies prepared for the first program review. In addition, it should be possible to repay a portion of the arrears in cash. Furthermore, some of the arrears, in particular those vis-à-vis private suppliers and public enterprises, should be cancelled by offsetting them against cross-debts, including these creditors' overdue tax payments. The resources of the Fiscal Consolidation Credit (FCC) from the World Bank should make it possible to clear some of the arrears vis-à-vis the pension funds in the context of their reform. As indicated above, the government accords the highest priority to the nonaccumulation of new arrears.
D. Demobilization Program and Program to Retire Government Employees
23. The government will continue the program for demobilizing military personnel recruited in the early 1990s. Owing to some delays in the disbursement of external assistance in support of this reform, in 2000 the demobilization affected only 490 individuals as compared to the initial objective of 1,300. However, following the peace agreement signed with the armed Front for the Restoration of Unity and Democracy (FRUD) on May 12, 2001, marking the end of a painful decade of domestic conflict, the government plans to revive and complete the demobilization program in 2001-03. More than 700 members of the armed FRUD have already been demobilized in June 2001 using assistance made available to Djibouti by the EU in early 2001. The government also plans to demobilize some 1,000 individuals from the government's own security forces by end-2001, financing the departure allowances with its own resources. The remaining mobilized persons, numbering about 2,700, will leave the security forces in the course of 2002-03. In 2002, at least 1,000 individuals will be demobilized before end-June 2002, with the aim of generating additional savings for the 2002 budget of approximately DF 160 million. In this context, it will rely upon supplementary assistance from the EU in the amount of €1.6 million, which is expected to be made available to Djibouti upon an evaluation of the demobilization activities to date. This assistance will make it possible to demobilize as many as an additional 700 ex-combatants in early 2002. In addition, the government will demobilize at least another 300 individuals before mid-2002, financing the departure allowances by using its own resources.
24. The Ex-Combatant Reintegration Program financed by a World Bank project will be refocused on training and assistance activities targeting disabled ex-combatants because of the small amount of available financing. To this end, external financing to cover the demobilization bonuses and associated programs for demobilized personnel are necessary in order to make their reintegration more effective and improve their social situation.
25. The reduction of civil service staffing combined with strict controls on employees' wages and benefits will constitute the major instrument for reducing the wage bill. The government intends to reduce civil service staffing by means of a plan for the retirement of those personnel now eligible and through voluntary departures. At present, such a plan continues to be constrained by the financial position of the pension funds, which lack sufficient resources to cover a sizable number of additional retirees. The government intends to introduce, in cooperation with World Bank staff, a pension plan reform plan, which will constitute a component part of the FCC. The major objectives of the reform will be to modify the contribution and benefits parameters in order to ensure the financial sustainability of the pension funds. These measures, together with the resumption of social contributions payments for government employees to all the pension funds, will make it possible to normalize the retirement of these personnel on their normal eligibility dates. The cash payment of all contributions payable to the pension funds since the start of 2001 and through end-September will constitute a prior action necessary for the conclusion of the second review. The reforms will be finalized in cooperation with the World Bank before end-2001. Immediately following disbursement of the FCC, the government will retire all civil servants and contractual employees who have already reached retirement age, amounting to some 880 persons. The cost of resolving these outstanding cases is estimated at about DF 500 million. These retirements and the implementation of the demobilization plan will make it possible to reduce the wage bill (excluding the cost of departure allowances for those being demobilized) in 2002 by about DF 1 billion as compared to 2001.
E. Structural Reforms
26. Continuing the country's efforts to create an environment conducive to development of the private sector, the Djibouti authorities intend to finalize the draft labor code by end-2001. To ensure that the code reflects the concerns of all relevant parties in the working world, the authorities will endeavor to gather the comments and observations of labor unions in addition to those already submitted in 2000 by employer groups. This labor code should then serve as a basis for future discussions on the various collective bargaining agreements.
27. In the investment area, in January 2001 the authorities created a national investment promotion agency (Agence nationale pour la promotion de l'investissement (ANPI)). This agency is intended gradually to assume the task of promoting private investment, a function currently split between various state institutions, and thereby offer a one-stop shop for any new investor. More specifically, the ANPI has four missions: (a) to create the regulatory conditions for establishing new enterprises; (b) to establish a business-friendly climate by providing potential investors with the economic, financial, and legal information they need for introducing and expanding investments; (c) to act as an intermediary facilitating contacts between the various parties concerned; and (d) to identify investors.
28. In the search for new investors, exemptions have constituted and continue to be a stimulus and source of leverage. This has given rise to a multiplicity of duty exemption arrangements which, over the years, have led to tax distortions and encourage tax avoidance. The authorities have now decided to streamline recourse to exemptions, to unify the various systems, and to introduce a genuine exemption management system. Among other measures, the investment commission believes it is essential to review the advantages and benefits granted on a regular basis (every three years) in order to assess them objectively and either renew or abolish them. In addition, the various preferential systems will be reviewed and incorporated into the general tax code by end-June 2002, following a study on the impact of all these exemption systems.
29. Regarding privatization, the authorities are now in the process of exploring, within the context of the World Bank's support and with assistance from potential investors, the possibilities for privatizing public enterprises such as EDD, Office national des eaux de Djibouti, the Djibouti Airport, and Djibouti Telecom. In the energy sector, preliminary discussions have been initiated on a possible geothermal project. This project involves the possible creation of an energy production enterprise that would be sold to the institution responsible for power distribution.
30. Finally, the authorities are currently preparing a new commercial code to govern commerce. The code will consolidate and update the various provisions in force that have been adopted over the years.
F. External Sector Policies
31. The government remains committed to pursuing economic policies that promote the competitiveness of the Djibouti economy. To this end, major structural reforms have been undertaken, as outlined in this memorandum. In particular, the recent creation of an investment promotion agency will make it possible to simplify investment procedures, promote greater transparency for potential investors, and provide them with assistance in setting up their business.
32. The government intends to pursue a prudent external borrowing policy and will continue to seek concessional financing. The creditor members of the Paris Club have agreed to a rescheduling on classic terms of the arrears due as at October 31, 1999 and the amounts falling due between November 1, 1999 and June 30, 2002 on the medium- and long-term external debt contracted or guaranteed by the government of Djibouti prior to March 31, 1998. Bilateral negotiations with the various creditors concerned have been started. These negotiations should be concluded in the near future by bilateral agreements with two such creditors, while significant discrepancies identified during the discussions with the third creditor will be examined by both parties with a view to concluding negotiations as soon as possible. The government also undertakes to negotiate debt rescheduling agreements as soon as possible with all its other creditors at terms comparable to those in the terms of reference transmitted by the Paris Club. In this spirit, in February 2001 the Government of Djibouti concluded a rescheduling agreement with the Saudi Development Fund. Under the terms of that agreement, the payments arrears accumulated in 1998 and 1999 will be rescheduled over a five-year period. Furthermore, an agreement on the partial cancellation of Djibouti's external debt was reached with China in March 2001, and negotiations with the United Arab Emirates are under way. Djibouti has also accumulated external payments arrears on the nonreschedulable debt, including its debt vis-à-vis multilateral donors and lenders. The arrears vis-à-vis multilateral creditors will be eliminated before the conclusion of the second review, and the other arrears in respect of nonreschedulable debt not in dispute will be cleared before end-2001.
G. Financial Sector Policies
33. To promote the integrity and efficiency of Djibouti's banking sector, the banking law and central bank charter have been revised, and the new law and charter were adopted by the national assembly in 2000. The authorities will work to resolve a number of outstanding issues in respect of these laws and plan to amend them in early 2002, before the third review of the program. In particular, the BCD is endeavoring to strengthen the legal framework for combating money-laundering operations and have committed to fully comply with resolution number 1373 of the United Nations Security Council.16 The BCD, in keeping with currency board system in Djibouti, will continue to refrain from financing projects of the nonfinancial private sector.
34. The BCD also continued its efforts to strengthen its banking supervision capabilities, including for on-site inspections. One bank was audited in 2000 and the supervision of a second bank will start by end-2001. This said, the BCD's objective is still to audit each bank once a year beginning in 2002. To achieve this objective, the BCD will need to implement a supplementary training program for its staff. These efforts will be supported in part by technical assistance from the IMF. With assistance from the IMF and the World Bank, the BCD will continue to seek assistance from other donors in support of this training program. The BCD will also ensure that all institutions in the Djibouti marketplace are in compliance with the regulations in force, and will apply all measures at its disposal in any violation, including if necessary the withdrawal of licenses.
35. Two commercial banks, the Banque Al Baraka and the Banque de Djibouti et du Moyen-Orient (BDMO), were placed in liquidation in 1998 and end-1999, respectively. The recovery of these banks' claims and the gradual reimbursement of depositors are proceeding satisfactorily, if slower than anticipated owing to various judicial delays and other constraints. Conclusion of the liquidation process for the BDMO will be announced by end-2001, while the process for the Banque Al Baraka will be completed later in 2002.
36. It was not possible to audit the BCD's accounts for 1999 and 2000 owing to the departure of the state-appointed auditor in place since early 2000, who has yet to be replaced. In order to strengthen the BCD's audit mechanisms, an external auditing firm will be selected through a bid process and contracted in early 2002 (before the third review) in order to conduct an audit of the 1999, 2000, and 2001 accounts during 2002 in accordance with international audit standards. The BCD charter will also be amended in early 2002, before the third review, to institutionalize the modalities of this new external audit mechanism.
H. Poverty Reduction
37. Poverty reduction continues to attract the authorities' full attention. In the short term, this is reflected in the priority accorded in the 2001 budget to the social sectors of education and health, whose share in current expenditure is projected to increase from 13.6 percent to 14.3 percent. If additional resources are identified, they will be allocated on a priority basis to the social sectors in the next supplementary budget law. Moreover, the freeze on civil service hiring does not apply to these two key sectors. For 2001, it is therefore planned to hire 149 new personnel in education and health.
38. To situate their poverty reduction activities in a medium-term framework, the authorities have prepared, in close cooperation with representatives of civil society, the labor unions, and nongovernmental organizations, an Interim Poverty Reduction Strategy (I-PRSP). Furthermore, the authorities have started the preparation of a final PRSP document following ownership and broad participation principles. It is based on four lines of action, namely: (a) the creation of conditions for sustained economic growth that is redistributive and anchored on regional markets; (b) the creation of new activities that generate incomes and jobs; (c) the development of human resources and the access to basic social infrastructures; and (d) the modernization of government and promotion of good governance. However, policies aimed at enhancing the economic efficiency and alleviating poverty and exclusion have a financial cost that is far beyond the current means of Djibouti. The financial support of the international community is thus needed to implement this program.
I. Improvement of the Statistical System
39. The government undertakes to do what is necessary to overcome the shortcomings of the existing statistical information system. Indeed, the statistics produced are incomplete, inconsistent, and not fully in compliance with international standards. The government's medium-term strategy for improving the statistical system is aimed at harmonizing and standardizing Djibouti's statistical tools, including the basic concepts used. The shared use of inter-administration files, of the standards, codes, and concepts used internationally, and further computerization should guarantee the production of reliable statistical information rapidly and at a reduced cost.
40. In keeping with this strategy, the government has applied for membership in the Economic and Statistical Observatory for sub-Saharan Africa, which will take effect once Djibouti's subscription payment can be financed. In the context of reforming the tax system and Djibouti's membership in COMESA, efforts are now under way to introduce the United Nations ASYCUDA, which will have a direct and positive impact on foreign trade data. The government is also continuing to work actively to implement the recommendations of the technical assistance missions in the monetary and tax areas. It has also recently requested technical assistance in balance of payments statistics and national accounts from the IMF.
J. Program Monitoring
41. Completion of the second review of the program supported by the PRGF is conditional on implementation of the following prior actions: (a) implementation of the cash flow plan during April-September 2001, with the objective of reducing by at least DF 500 million the stock of unpaid expenditures authorized in 2001 by comparison with the level at end-May 2001, which came to DF 1.4 billion; (b) the nonaccumulation of new arrears each month between June and September 2001; (c) the cessation of any recourse to offset operations and to payments without prior issuance of payment orders starting in January 2001 through October 2001; (d) adoption of a decree establishing the operating modalities for the imprest funds (see paragraph 15); and (e) the settlement of all contributions owed to the pension funds during January-September 2001.
42. Performance criteria have been proposed for end-December 2001 and end-June 2002 as well as benchmarks for end-September 2001 and end-March 2002 (Table 2). The performance criteria include ceilings on the wage bill, the stock of domestic and external arrears, net credit to the government from the Central Bank of Djibouti and the commercial banks, government lending to the public enterprises, and nonconcessional foreign debt contracted or guaranteed by the government or public enterprises with a maturity of more than one year. Quantitative floors will apply to budgetary receipts and the net international reserves of the Central Bank of Djibouti. A number of structural performance criteria have also been proposed for end-December 2001 and end-June 2002 (Table 1).
43. The standard continuous performance criteria will continue to apply, including an undertaking by the authorities not to impose or intensify restrictions on payments and transfers for current international transactions, not to introduce multiple currency practices or modify multiple currency practices in effect, not to conclude bilateral payments agreements that conflict with Article VIII of the Fund Agreement, and not to impose or intensify import restrictions for balance of payments reasons. Moreover, continuous performance criteria on the nonaccumulation of new domestic and external arrears (not including external payments arrears currently being rescheduled), the settlements starting December 2001 at due date of all contributions owed to pension funds, and the provision within a six-week lag of foreign trade data as well as monthly data on revenue, expenditure, and budgetary arrears will continue to apply.
44. The third review will cover the performance criteria and benchmarks for end-December 2001. The discussions for the third review will focus on: implementation of the cash flow plan during the last quarter of 2001; the 2002 budget; preparation and adoption of the plan for settling and restructuring the existing stock of domestic arrears; progress with demobilization; implementation of the public expenditure and direct revenue reforms; the streamlining and unification of tax exemption arrangements; amendments to the banking laws; reform of the pension system; and progress made with introducing a new investment code. The fourth and final review will examine the observance of end-June 2002 performance criteria and will serve as a condition for the final disbursement under the arrangement.
Table 1. Djibouti: Prior Actions for Completion of the Second Review and Structural Performance Criteria for the 2001 Program
1Owing to an overly broad interpretation of the January 13, 2000, arrêté on the exemption from the petroleum product surtax of products intended for the production of electricity, EDD made no payments in respect of the royalty on petroleum products.
2This tax on services could not be introduced during the first half of 2001 owing to the lack of implementation modalities, which must be established by decree.
3This transfer will take effect in January 2002 once an integrated computer network linking revenue services to issuing services has been put in place.
4The supplementary budget law was adopted by the national assembly in early September 2001.
5Decree 0136 of July 4, 2001.
6Telephone bills have included the TPS since the start of 2001. However, in the absence of a regulatory framework for this new tax, the amounts collected by the telephone company for this tax were not transferred to the treasury before end-October 2001.
7The cash flow plan and the commission responsible for its monitoring and execution were adopted by presidential decree dated May 26, 2001.
8This commission includes the directors of finance, budgetary control, the treasury and revenue, and representatives of the prime minister's offices. Day-to-day cash flow plan monitoring activities are carried out by a technical committee made up of the deputy directors of budgetary control, accounting, and finance, and the head of the treasury's research and programming unit.
9These include the tax on wages and salaries, and the patriotic contribution paid by government employees, the resources of the Road Maintenance Fund, and miscellaneous revenue to be classified.
10The reports on execution of the cash flow plan will continue to be provided to the IMF staff weekly with a three-day lag has been the case since early May 2001.
11A. Mansoor, A. Bessaha, and M. Hached, "Djibouti: Propositions pour poursuivre le processus de réforme de la gestion de la dépense publique", technical assistance report, June 2001.
12In an initial phase, the tax return filing system will cover only the tax on wages and salaries, the patriotic contribution, and benefits in kind. Grouping them together will allow for the merger and simplification of tax procedures. This new system will take effect on January 1, 2002 following a taxpayer education campaign. Its implementation will have a neutral impact on tax collections.
13The new penalty system is intended to improve collection procedures. The supplementary budget law for 2001 included a wide range of measures ranging from ineligibility for government contracts to the suspension of exemptions, including the publication of lists of delinquent taxpayers.
14The computer applications of the single taxpayer identification number as well as the work to amend the regulatory and legislative framework in support of this change are expected to be completed by end-2001 and early 2002, respectively.
15The stock of domestic budgetary arrears is estimated at DF 21.2 billion at end-2000.
16For this purpose, a national committee in charge of fight against terrorism, in which the financial authorities participate, was established in October 2001.
Djibouti: Technical Memorandum of Understanding
This technical aide-mémoire contains details on: (a) the quantitative performance criteria, benchmarks, and targets shown in the annexes attached to the Memorandum on Economic and Financial Policies (MEFP); (b) basic information to be sent to the IMF through its resident mission; and (c) the plan for monitoring program implementation.
I. Quantitative Performance Criteria, Benchmarks, and Targets
The aggregates on the basis of which ceilings are established are defined below. These aggregates cover the domestic budgetary receipts, the public sector wage bill; financing of the deficit by the central bank and the commercial banks and loans to public enterprises; the stock of cumulative arrears at end-2000 and of the new arrears accumulated from January 1, 2001, on the external and domestic debt; nonconcessional loans; and net international reserves.
II. Information to be Provided to Fund Staff
The authorities will report to IMF staff each month, starting from October 2001, with a maximum lag of six weeks, save as otherwise indicated, through the resident mission, the following basic information:
A. Government Finance
D. External Sector
E. Real Sector
F. Structural Reforms
Review of the structural reforms. Indicate the progress achieved, explain any deviations where applicable, and indicate the expected completion date.
G. Other Information
Other details on major economic and social measures taken by the government that are expected to have an impact on program sequencing (such as changes in the legislation, regulations, or any other pertinent document) will be sent in a timely manner to IMF staff, for consultation or information.
H. Annexes I and II
For each quantitative performance criterion, benchmark, or target, provide the actual outcomes within six weeks following the end of the quarter just ended.
III. Program Monitoring
For the purposes of program monitoring, working meetings are planned, at least weekly, with the participation of representatives of the ministry of finance (budget, direct and indirect taxation, planning, and treasury directorates), the central bank, the Structural Adjustment Program (SAP) coordinator, and the resident representative. Items on the agenda of the weekly meetings include the reconciliation of financial operations recorded in the accounts at the treasury and the central bank, review of progress made in the implementation of structural measures, and discussions on any other topics that might have an impact on program implementation. These working meetings will facilitate the preparation, for every month, of tables on the consolidated operations of the government, the statement of domestic and external debt, the monetary survey, the updated cash flow plan, and progress made in the structural reforms. These tables are accompanied by an analysis comparing actual program performance with the projections and the implementation schedule, giving explanations for deviations, and proposing remedial measures. All of these documents are then forwarded to the minister of finance, the governor of the central bank, the interministerial committee for the coordination and monitoring of structural reforms, and IMF staff.
1 This concept applies not only to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No. 12274 (00/85), August 24, 2000) but also to commitments contracted or guaranteed for which value has not been received.
2WEO database projections as at October 17, 2001.