Djibouti and the IMF

Country's Policy Intentions Documents

See also:
Poverty Reduction Strategy Papers (PRSPs)



Djibouti
Enhanced Structural Adjustment Facility Medium-Term Economic and Financial Policy Framework 1999–2002
Prepared by the Djibouti Authorities in Collaboration with the
Staffs of the International Monetary Fund and the World Bank
October 2, 1999

Contents

  1. Introduction

  2. Recent Economic Developments, 1996-99
        During 1996-98
        During 1999

  3. Core Tasks

  4. Medium-Term Macroeconomic Framework and Strategies, 1999/2000-2001/02

  5. Social Impact of Adjustment and Poverty Alleviation
    1. Fiscal Policy
    2. Financial Sector Policies
    3. External Sector Policies
    4. Civil Service and Pension Reform
    5. Privatization and Public Enterprise Reform
    6. Other Structural Reforms
    7. Sectoral Policies and the Environment
    8. Social Safety Net and Poverty Alleviation Arrangements

  6. Balance of Payments and External Financing Requirements

  7. Technical Assistance, Statistical Issues, and Program Implementation

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  1. Djibouti: Selected Economic and Social Indicators,
    1995-2002
  2. Djibouti: Income and Social Indicators
  3. Djibouti: External Financing Requirements, 1995-2003
 

 

I.  Introduction

1.  Djibouti faces natural and endogenous constraints. Natural resources are limited, and arable land represents only a small proportion of the country's area. However, the geographical location of Djibouti gives the country a strategic position, and it possesses a major port and supporting transport infrastructure which play an important role in regional transit trade and related services. Per capita income is low, and social indicators have lagged behind those of other developing countries.

Contents

II.  Recent Economic Developments, 1996-99

During 1996-98

2.  Over the period 1996-98 Djibouti implemented a macroeconomic adjustment and structural reform program supported by a stand-by arrangement (SBA) with 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.

3.  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.

4.  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.

5.  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 prudential 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.

During 1999

6.   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.

7.  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 the banking 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.

Contents

III.  Core Tasks

8.  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 are essential for 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.

9.  Realizing these objectives will require policy reforms that address a core set of issues. First, structural impediments continue to restrain economic growth. Therefore a restructuring of the economy through a significant broadening and deepening of the structural reform program is essential. The key aims of the restructuring are 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. Second, human resource development has been inadequate to the tasks of accelerated growth and poverty reduction as is evident from the weak social indicators. This reflects the low levels of current and capital expenditures for the education and health sectors which must be increased in the context of overall sectoral reform programs. Third, there is a need to further strengthen the structure of the budget by addressing: tax system inelasticity; a wage bill that still exceeds the economy's resource base; and insufficient social spending. Fourth, the financial sector suffers from weak intermediation owing in part to difficulties in enforcing loan contracts. The program aims at alleviating these conditions. Fifth, the balance of payments remains vulnerable due in particular to a small export base, a high dependence on imports and foreign financial assistance, and declining receipts from expatriates. Therefore policy reforms are needed to address external sector viability. Sixth, the country needs to resolve the environmental problems of water scarcity and deforestation.

Contents

IV.  Medium-Term Macroeconomic Framework and Strategies, 1999/2000-2001/02

10.  The government's medium-term adjustment and reform program for the three-year period beginning July 1, 1999 is summarized in the policy matrix provided in the Annex. It is directed at providing a macroeconomic and structural environment conducive to achieving the overall program objectives. 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 to 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.

11.  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.

Contents

V.  Economic Policies for 1999/2000-2001/02

A.  Fiscal Policy

12.  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. As noted below, the major 1999 fiscal reforms relate to reformed and increased petroleum product taxation, introduction of a road-user charge on trucks exiting the port, and a start at the reorientation of expenditures toward quality improvements.

Revenue and tax policies

13.  The program envisages several far-reaching tax reforms 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.

14.  The tax reform program initially addresses indirect taxation. First, a reform of petroleum product taxation and its administration was initiated in August 1999—in conjunction with a full freeing up of this market (see below). The reform is directed at generating increased revenue in an administratively easy manner, simplification, and reducing relative price distortions. It entails significantly increased specific excise taxation for diesel and aviation fuel—which account for about 40 percent of domestic product consumption. The increases—which will move these excises to levels equivalent to about one-half of the excise presently applying to gasoline (equivalent to about US$2 per gallon)—will be phased in over 1999-2001 in three tranches in order to avoid price shocks. In this regard, a front-loaded tax increase was implemented for aviation fuel in August. For diesel—which is a socially sensitive commodity, the government needs to proceed cautiously in 1999 following the freeing up of the petroleum market and before implementing an increase in the diesel excise in order to be able to observe how consumers and the oil companies respond to the free market environment and freely fluctuating prices. Therefore if domestic retail prices fall sufficiently in the new free-market environment in response to either downward moves in world oil prices or to competitive pressures on oil company distribution and profit mark-ups, or if an overall revenue shortfall were to emerge, the government will implement the first of three equal tranche increases of the diesel excise reform. If full implementation of the 1999 tranche does not prove feasible or necessary, any shortfall would be compensated for over 2000-01 in order to ensure that diesel excise taxation in the 2001 budget would incorporate the full three tranche increase. It is expected that implementation will entail small adjustments at two-month intervals. When fully implemented the new excises for diesel and aviation fuel would contribute an additional 2 percent of GDP to revenue collections in 2001. The petroleum product excises are in addition to the 33 percent ad valorem consumption tax presently in force for all petroleum products.

15.  For social safety net and environmental (see below) reasons, the tax reform will also eliminate the excise applying to kerosine—the cooking fuel for lower income groups. This tax concession would entail a full-year revenue loss of 0.2 percent of GDP in 1999. However the kerosine excise elimination will not be implemented until the first full tranche of the diesel excise increase is in effect.

16.  Second, the consumption tax will be reformed in 2000 by: replacing the present complex structure of seven ad valorem and multiple specific rates with at most a three-rate ad valorem structure; limiting the exemptions allowed under the Investment Law; and eliminating all other ad hoc exemptions except those required by international agreements. The tax would apply equally to both imports and the comparable domestic product. In the context of the consumption tax reform, a reform of excise taxation as applied to alcohol, tobacco, and khat will also be implemented and the export tax will be eliminated. Third, the government intends also in 2000 to eliminate nuisance taxes and fees—including the stamp tax—as well as to simplify the structures of other retained taxes and fees.

17.  The petroleum product and consumption tax reforms target higher revenue contributions in order to facilitate the lightening of the direct tax burden. However, the government believes that the freeing of the petroleum product market to competitive forces will likely put downward pressures on domestic retail prices given presently high distribution charges and importer and retailer mark-ups. Also the consumption tax reform is expected to facilitate lower rates owing to the elimination of exemptions and to tightened administration made possible by the simplified tax structure.

18.  Regarding direct taxation, the government is committed to replacing by 2001 the current complex and inefficient personal and corporate income tax systems. For the personal income tax, the reformed system will entail: the aggregation of personal income from all sources; introduction of a single simplified schedule for tax rates and brackets; broadening the tax base by limiting exemptions and deductions; and reducing tax rates. For the corporate income tax, exemptions would be limited to those provided in the reformed Investment Law; the presently high taxable income threshold would be lowered; and a single rate would be set equal to the top personal marginal income tax rate. Both reforms would entail parallel reform of the Investment Law in order to significantly reduce income tax exemptions granted under that Law. With the foregoing indirect and direct tax reforms, the contribution of indirect taxation is presently estimated to rise from 13.5 percent of GDP on average under the SBA to 17.5 percent in 2002 while that of personal income taxation would decline by 3 percentage points to 8 percent. Nevertheless on average over 1999-2002 overall taxation would remain at about the 25 percent of GDP level which applied under the SBA. The overall tax ratio needs to be sustained in order to compensate for the loss of public enterprise profit transfers that is expected to result from the privatization program.

19.  Revenue administration is expected to benefit from the tax simplifications. However, the government will also introduce in 2001 a mandatory taxpayer identification number system and initiate a revenue administration reform program which would address, inter alia, accounting, auditing and enforcement issues. In the interim, in order to enhance tax receipts, the Ministry of Economy and Finance will initiate in 1999 a system of salary incentives for high performers in its tax collection units.

Expenditure policies

20.  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 (see below). Therefore 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. (A comparison of total current spending including the counterparts of grants-in-kind is not possible owing to the lack of grants-in-kind data before 1998.)

21.  As noted the goals of limiting current expenditure and improved spending quality will be facilitated in particular by the further wage bill reductions. Substantial progress was made under the SBA in reducing government staffing and salary levels. In terms of staffing, at end-1995 total government employment of about 23,000 entailed 12,400 regular staff (including regular police and military) and 10,600 mobilized personnel. With the general staffing reduction and implementation of the first phase of the demobilization program over 1997-98, these staff levels by end-1998 had been reduced by 20 percent and 55 percent, respectively, leaving government employment at about 14,800. The wage bill declined from 24 percent of GDP in 1995 to 16 percent in 1998. Under the program the government is committed to pursuing four initiatives in order to further lower the wage bill. First, the demobilization program will be continued over 1999-2000 and will entail the demobilization of all remaining mobilized personnel. These demobilizations had been expected to be completed by end-1999. However, the recent hostilities between two neighboring countries and related security concerns for Djibouti have required that the government rephase the demobilization program. At this time and in line with the presently anticipated winding down of regional hostilities, the government plans to complete the second phase of demobilization by end-1999 and the third phase by end-2000. If hostilities were to convincingly cease earlier, the government would accelerate the demobilization program.

22.  The second and third initiatives to lower the wage bill relate to the retirement program and the civil service reform (see below). However, the magnitudes of the wage bill savings from these undertakings cannot be determined at this time, and therefore no quantifications have been incorporated in the present formulation of the medium-term budget. Such assessments will be incorporated into revisions of the medium-term budget as estimates become available. Fourth, the 1999 original budget continued the freeze on the total number of government staff except for the education and health sectors as well as on the total nominal wage bill. On the basis of the demobilization program and the hiring/wage freeze, the wage bill/GDP ratio under the present medium-term budget scenario is projected to decline to under 12 percent by 2002.

23.  Regarding the retirement program, the government over 2000-02 intends to pursue the early retirement of certain high-salaried civil service and military personnel and to enforce regular and overdue retirements. With respect to the latter two categories of staff, regular retirements have been delayed for many staff owing to a lack of pension fund resources in large part deriving from government arrears to the pension funds. Therefore, the government intends to avoid new arrears to the pension funds and has provided in the wage bill allocation in the medium-term budget for the required regular contributions due from staff and the government. Moreover cash payments to clear a large proportion of government arrears to the pension funds have also been budgeted. With these resources, the government will ensure that overdue retirements are cleared and regular retirements take place as scheduled. As under all three components of the retirement program higher-salaried retiring staff would be replaced (if needed) by lower-salaried new hires, it is expected that there will be sizable savings for the wage bill. These staff turnovers are additionally expected to yield improvements in staff quality since it is anticipated that new hires would largely comprise younger and better educated personnel.

24.  With the presently-quantified wage bill savings from demobilization and with other budget economies, the present medium-term budget estimates envisage that expenditures for priority purposes would in the aggregate rise from 12 percent in 1998 to 17 percent by 2002. This quality reorientation was initiated in 1999 as the social spending and maintenance components of the budget for this year were increased for the program beyond the levels approved in the original budget. Regarding medium-term social outlays for education, health, and the social safety net, such spending would rise at present from 6 percent of GDP in 1998 to 12.5 percent by 2002. This spending will be funded from budget resources and concessional resources made available under the African Development Bank's (AfDB) Social Fund Credit and the World Bank's Public Works and Social Development Credit (see below). Public investment outlays are envisaged to average 5 percent of GDP over 1999-2002. While this ratio is lower than the exceptional level of 1998—which reflected a rapid drawdown of resources in the pipeline, in absolute terms it would be on average 50 percent higher than the average for 1996-97. Maintenance outlays, moreover, would rise from 0.3 percent of GDP in 1998 to an average of 1 percent during the program period reflecting in particular higher road maintenance spending given the importance of regional transit trade to Djibouti's economy.

25.  The expenditure levels for priority purposes as presently envisaged under the program—particularly for the education and health sectors and the social safety net—are tentative as the government expects to be able to increase their levels further as the program evolves. In this regard, resources would become available through the further wage bill savings deriving from the retirement program and civil service reform, and the government will seek increased donor contributions given the country's large requirements in these areas. As such resources cannot presently be quantified, they have not at this time been incorporated in the medium-term outlook. Also the government by end-March 2000 will undertake a public expenditure review in collaboration with World Bank staff focusing on spending requirements for the priority areas. Following completion of this review, the Bank intends to support priority outlays by a Public Expenditure Reform Credit (PERC). These resources have been incorporated in the medium-term scenario.

26.  Under the program, the government is committed to addressing in a far-reaching manner the problem of domestic payment arrears. Its policy is to avoid any new arrears and to undertake significant steps to address its outstanding arrears relating to the wage bill, the pension funds, and private suppliers. To this end, the government has established explicit annual schedules in the medium-term budget for addressing these arrears. The government intends to make cash payments in order to clear all wage arrears and to sizably reduce its arrears to the pension funds. All arrears to private suppliers will be initially settled by issuing them treasury bills bearing a competitive market interest rate pending redemption of the bills as cash resources become available. In this latter regard, the European Union (EU) is considering providing assistance to the government in clearing arrears to private suppliers. The treasury bill program will be initiated in 2000. The bills would be negotiable but could not be purchased by the banking system. The government also has arrears to certain of the six major public enterprises and will resolve these arrears in the context of the privatization program (see below) Additionally, the government in August 1999 assumed the financial liabilities of a closed public agency that formerly had authority to control the grain market (see below). Its liabilities are held by the domestic private sector, and the addressing of its debt and arrears will also be implemented in 2000 in the context of the above-noted treasury bill program.

27.  A budget management reform is to be implemented with the 2002 budget in order to realize effective budget—and particularly expenditure—formulation, control, and monitoring and to promote improved transparency and governance. The government recognizes that implementation of this reform will be challenging, and therefore the substantial preparations and technical assistance which will be required will need to be initiated in 2000 in collaboration with World Bank staff (in a lead role) and IMF staff. The reform will be a central component of the World Bank PERC. It will be preceded and supported by the establishment in 2000 of an independent authority to act as external controller and auditor general for the government (Cours des Comptes) and by reforms in 2001 of government procurement procedures.

B.  Financial Sector Policies

28.  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 also improved economic prospects and confidence along with increased interest rate flexibility are expected to significantly reduce the attractiveness of private sector placements abroad.

29.  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. However in this area, the close similarity of commercial bank interest rate structures and their large spreads have given rise to concerns within the government regarding collusion by banks in the setting of deposit and loan interest rates. This situation derives from an agreement sponsored by the bankers' association. Therefore, as the government is committed to putting in place conditions for competitive domestic financial markets and competitively-determined interest rates, the BND in August 1999 instructed all banks to implement the following measures in order to promote independent interest rate setting by banks: to abrogate their association agreement regarding interest rate levels; to cease coordination of their interest rate structures; to publicly post and update at least weekly their full interest rate structure; and to report these posted rates weekly to the BND. These measures are expected to result in narrower spreads as well as a better fit against US dollar rates—the Djibouti franc's parent currency. The government realizes, however, that ultimately ensuring competitively-determined interest rates would best be addressed through liberal—but prudentially appropriate—bank licensing procedures. Therefore, in the context of the forthcoming reform of the Banking Law, the BND intends to revisit bank licensing procedures to ensure that they do not discourage competition within the sector. The above-cited bankers' association agreement also encompassed a fixed structure for an extensive set of bank fees and charges which were to be observed by all banks. Therefore also for competitive market reasons, the BND in August additionally instructed banks to implement measures similar to those listed above in the case of bank fees and charges.

30.  The financial sector reform program will also be directed at maintaining the integrity of the currency board arrangement; and at continuing efforts to maintain the soundness of the commercial banking system and to promote its development. The currency board's integrity will be underpinned by the program's tight fiscal stance and by maintaining the strength of the BND's gross foreign asset position. Apart from these considerations, the BND Law will be reviewed with IMF technical assistance in order to identify adjustments that would be beneficial—including a strengthening of central bank independence, and a reformed BND Law will be prepared. It is presently envisaged that the reformed BND Law would be implemented by end-2000.

31.  The government is committed to strengthening the banking system by continuing the work on prudential issues undertaken by the BND since mid-1996 with IMF technical assistance. While the two major operating commercial banks—which are subsidiaries of major French banks—have strong positions and meet international standards, prudential issues relating to other banks need to be resolved. In this regard the third operating commercial bank—which is a subsidiary of a bank located in a neighboring country—is not in observance of certain prudential requirements. In view of this situation, the BND has been in consultation with the parent bank and is seeking to resolve outstanding prudential issues by end-1999. If these issues are not resolved, actions will be initiated to close the bank. Two other commercial banks, which had experienced prudential difficulties, have been closed. Their liquidation is being overseen by the BND and will be completed by end-June 2000. Moreover, the BND over the past year has also been reviewing with IMF technical assistance the Banking Law, prudential regulations, and the prudential supervision operations of BND. On the basis of this review, the BND has decided that reforms of the Banking Law and prudential regulations would benefit the economy. A reformed Banking Law will be prepared also for implementation by end-2000. This would set the stage for concomitant reforms of bank regulations as needed. The strengthening of BND's prudential supervision capacity—including its off-site and on-site inspection activities—will be continued and will encompass increased staffing and training for the BND's supervision department.

32.  At present the banking system confronts difficulties in enforcing loan contracts owing to shortcomings in the judicial system. As a result, intermediation is weak. While the BND has established a credit risk bureau to provide banks with information regarding borrower creditworthiness in order to limit the need for judicial enforcement of loan contracts, the government considers this approach to be passive as it does not assist banks in resisting pressures to lend and does not actively encourage defaulting borrowers to regularize their positions. Therefore in order to alleviate the loan contract enforcement and weak intermediation problems, the BND in July 1999 established a notification system under which the BND will compile quarterly from submissions required of all banks a list of defaulting borrowers whose nonperforming credits exceed threshold amounts as confirmed by the banks' internal auditors; distribute this list quarterly to all banks; and prohibit banks from extending any new credits to these borrowers until their loans are regularized. Initially the thresholds for placing borrowers on the notification list will relate to credits of DF 10 million or more that have been in arrears for at least three months. The threshold amount will be subsequently lowered annually over 2000-02 at the beginning of the year in order to broaden the coverage of this measure. Banks were required to submit their lists of defaulting borrowers as of end-June 1999, and the first notification list is to be issued by end-September 1999.

33.  Djibouti has a single specialized bank—the Djibouti Development Bank (BDD). In the past the bank experienced mounting non-performing loan problems. Therefore the bank's operations were frozen by the government in 1996, and the bank was only allowed to pursue loan collections. An audit of the bank completed in 1999 determined that the bank was insolvent and should be restructured or liquidated. On this basis, the freezing of the bank's operations was reaffirmed in April 1999, and the bank was required to initiate the monthly reporting of the status of its collections to the BND. The government has not yet decided how it should proceed in resolving the bank's status since there are counterbalancing considerations. While the government subscribes to the principle of liquidating problem banks, at the same time commercial bank preference for servicing large established customers translates into a situation where small borrowers—the BDD's customer base—are now essentially shut out of the domestic financial market. Therefore for the immediate present the government intends to approach certain donors to ascertain the feasibility of their financing a restructuring of BDD or replacing it with private sector credit cooperative arrangements. Nevertheless, if resources for restructuring are not forthcoming by end-June 2000, the liquidation process will be initiated.

C.  External Sector Policies

34.  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.

35.  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 the economy 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 freeing up of the labor market and to early tax reform.

36.  Djibouti's 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.

37.  The government intends to maintain Djibouti's presently prudent debt management policy as reflected in its low debt ratios. 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. Moreover, the Ministry of Economy and Finance (MOEF) will seek to improve its monitoring of foreign debt contracting and servicing by adoption of the UNCTAD/DMFAS system with financial assistance from the EU.

38.  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 request 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.

D.  Civil Service and Pension Reform

39.  Notwithstanding the civil service staff reductions implemented over 1996-98 and the demobilization program for 1999-2000, the government is aware that there cannot be a durable fiscal consolidation or a durable improvement in the quality of public administration without a comprehensive formal civil service reform. The government's civil service reform—which will be undertaken in collaboration with the World Bank and would be implemented over 2001-02—in its first phase will entail a comprehensive rationalization of the civil service's institutional arrangements, staffing, and salary structure. The staffing rationalization would incorporate an evaluation of the qualifications of personnel and decisions regarding retention or release. Significant technical and financial assistance will be required to successfully pursue this reform, and therefore preparations will begin in 2000 following the finalization of an action plan and other preparations by mid-2000. The second phase of the civil service reform—to be initiated subsequent to the program period—will be directed at upgrading the quality of government services through training programs to improve skills and the orientation of staff toward service and the quality of delivery.

40.  To support civil service reform and the retirement programs, the government is committed to implementing a pension fund reform program beginning in 2001 in collaboration with the World Bank. The reform will apply to the two public sector and the single public enterprise/private sector pension funds—which would be merged. The pension fund reform would be directed at establishing sound legal and financial bases for the merged fund's operations including a resolution of the cross debt and cross arrears between the pension funds and the government.

E.   Privatization and Public Enterprise Reform

41.  The public enterprises are presently burdened by management problems, overstaffing, and high operating costs. Therefore the major thrust of the government's real sector—and public enterprise—reform program will be accelerated privatization in order to improve the operational efficiency of assets now under public enterprise control and thereby reduce operating costs and prices to consumers; enhance competitiveness—particularly of the port; and broaden the scope for private sector development. Nonviable enterprises which cannot be privatized will be liquidated. In line with these principles, the government over July-September 1999 privatized four small enterprises.

42.  Regarding the six major public enterprises—namely, the port, the national electricity utility, the urban water utility (in Djiboutiville), the two national telecommunications utilities (which are to be merged), and the airport, the government is committed to the privatization of these enterprises. For this purpose a review of the key elements of privatization strategies for each of these enterprises was undertaken in June 1999 in collaboration with World Bank staff. On this basis the government has decided to pursue the following privatization strategies: for the port, privatization of its main operational functions and services; for each of the three utilities, sale of a controlling interest to a private sector strategic operator; and for the airport, the privatization of its management. The core principles of the privatization strategy for each enterprise consistent with the above decisions will be adopted and published by end-June 2000; a reformed Privatization Law allowing for implementation of these strategies will be enacted; appropriate financial advisors to carry out the strategies will be recruited by end-September 2000; and a regulatory framework that will ensure a competitive environment will be established. The port and the telecommunications utility will be offered for bids by end-June 2001, and the national power and urban water utilities and the airport by end-2001. The technical and financial assistance requirements for the privatization program which are to be supplied by the World Bank will be substantial. The government expects to fully complete these two sets of privatizations by end-2001 and end-June 2002, respectively.

43.  As noted above, new legal arrangements will need to be put in place to support the privatization program. The government by end-June 2000 will obtain National Assembly approval of the Privatization Law which is presently under preparation in order to establish transparent rules and procedures regarding tendering, sales conditions, liquidation, use of sales proceeds, treatment of redundant labor, and buyout policies. Moreover for the three privatized utilities which will continue to have near monopoly positions, the government will need to enact by end-2000 the new Regulatory Law that will establish a regulatory agency or agencies operating under a simple and flexible regulatory framework. Technical and financial assistance from the World Bank will be required for these purposes. For the airport or other retained enterprises where only management will be privatized, it will moreover be necessary to reform by end-2001 in collaboration with World Bank staff the present Public Enterprise Law in order to incorporate amendments that would prevent future government ad hoc interference in enterprise operations and would afford the privatized management full operational, pricing, and labor policy autonomy.

44.  In preparation for the treatment of public enterprise debt and arrears in the context of the privatization program, the government by end-1999 will finalize an update (as of end-1998) of the compilation undertaken under the SBA of the cross arrears and cross debt among all enterprises (including in particular the six major enterprises) and the government. All enterprises have been required to submit to the MOEF by end-September 1999 their balance sheets and operating accounts for 1998. On this basis a netting out of cross debt and cross arrears among the enterprises and the government will be executed. Regarding the settlement of such net debt and net arrears, for the six major enterprises there would be no need for the government to settle its net arrears or net debt to these enterprises if they were to be fully (100 percent) sold to the private sector since in this case the companies would be collapsed with the sale of their assets. This principle would also apply to the net debt and net arrears among the six enterprises themselves. However, if this were not to be the case, net arrears and net debt will need to be addressed. Therefore for the cases of the port and the airport—which in the government's present view of the privatization program may not be fully sold, explicit annual schedules for the phased settlement over 2001-02 of the government's net arrears and net debt to these enterprises—or vice versa depending on the outcome of the compilations—will be established by end-March 2000 for incorporation in the program. Such schedules have not been incorporated into the present medium-term budget and macroeconomic scenarios owing to insufficient data, but would be incorporated in the scenarios for the second-year arrangement following completion of the compilations.

45.  The government will also undertake by end-1999 a new compilation for all enterprises of their debt and arrears to third parties—for example private sector suppliers. On the issue of the debt and arrears to third parties of those enterprises whose assets will be sold fully or in part to the private sector, the government will assume responsibility for their third-party debt and arrears, and will implement settlement of such obligations over 2001-02 utilizing the financial resources that will become available from the sale of their assets. All enterprises whose assets are retained—for example, the airport—will be required to settle their third party arrears from their own resources. For this purpose, explicit annual schedules for the phased settlement of these arrears over 2001-02 will also be established by end-March 2000 for incorporation in the program. Additionally these enterprises will be required to observe their third-party debt-servicing requirements. On its part the government at this time expects to settle its net arrears or net debt to retained public enterprises through the issuance of treasury bills. The government's net arrears or net debt to private sector third parties would be addressed as noted earlier through treasury bills and possibly EU assistance. The government may also provide debt forgiveness to certain enterprises if warranted.

46.  It is not possible at this time to estimate whether the forthcoming privatizations will generate net receipts for the budget. Therefore no forecasts for privatization receipts (or costs) have been incorporated in the present medium-term budget. Such information will be entered into the budget as firm estimates become possible. While certain enterprises—such as the port—have significant value, other enterprises—such as the power and water utilities—confront significant technical and financial problems. Moreover the government would confront costs in settling the debt and arrears of the five major enterprises to third parties or to retained enterprises and in executing buy out/retirement packages for redundant staff. Nevertheless if there were to be net proceeds after these charges, these would be utilized first to reduce central government debt.

F.  Other Structural Reforms

47.  The government attaches importance to domestic price and trade liberalization under the program. First, as noted above the government in August 1999 fully freed up the domestic petroleum product market in conjunction with the initiation of the reform of petroleum product taxation. The freeing up entailed cancellation of the previous fixed retail price regime by elimination of the government's authority—exercised through an independent government agency—to control domestic petroleum product prices and trade. The freeing up was introduced in order to ensure that prices before taxes and before distribution and profit mark-ups would be those applying in international markets and that tax revenues would not decline or subsidies emerge in an environment of high world prices. The agency therefore is no longer empowered to intervene in any manner in the petroleum product market—including with regard to product prices, volumes, distribution costs, or mark-ups—or to receive tax revenues or government mark-ups. With the reform, all taxes applied to petroleum products—both excises and the consumption tax—are paid by the importing oil company directly to the treasury. Second, the government in August 1999 eliminated its authority to control domestic grain trade and prices and closed in preparation for liquidation the inactive public agency which previously administrated this authority.

48.  The government intends to pursue other real sector reforms in collaboration with the World Bank and/or IMF staffs in order to ensure an enhanced free market environment for private sector activity and investment. First, a reformed Labor Code will be prepared, inter alia, targeted at removing obstacles to competitive labor markets and full wage flexibility—including in particular by allowing private sector entities unfettered authority for the hiring and release of employees and by delegating the wage determination process to negotiations between employees and employers—both without reference to any government agency. The reformed Code is expected to be enacted by the National Assembly by end-June 2000. Second, the government will undertake and obtain National Assembly approval by end-June 2000 of reforms of the Investment Law directed in particular at a deregulation of investment procedures relating to licensing requirements and other government controls—in addition to a significant scaling back of tax exemptions. Third, reforms of the Commercial Code that are conducive to private sector development and a new competition law that is conducive to competitive economic practices and markets will be enacted by the National Assembly in 2001. Fourth, the government is committed to establishing commercial courts in order to enhance the legal environment for the private sector.

G.  Sectoral Policies and the Environment

49.  The government's development role will be largely limited to establishing a macroeconomic and structural environment conducive to private sector-led growth. Therefore government-led sectoral development programs will be limited to the education and health sectors and infrastructure development in the national road sector and the non-urban water sector—where the public sector's role is expected to remain important into the long term. In these areas, the government intends to spell out by end-2000 in collaboration with World Bank staff long-term programs that would be implemented beginning in 2001 and could be supported by World Bank technical and financial assistance. These programs are still in the formative stage and full definition and quantification is not yet possible.

50.  The broad orientation of the development programs for the education and health sectors as presently envisaged is summarized below in the context of the overview of social programs. For the transport sector, the government believes that the economy would benefit from articulation and implementation in collaboration with World Bank staff of a long-term program for the development of the national road network—with new investment outlays initially focusing particularly on road links to Ethiopia in order to underpin the role of the port in the overall development of the economy. With regard to the railway link between Djibouti and Ethiopia—which is presently owned jointly by the two governments, the government considers that investments in its modernization in order to improve efficiency, expand cargo capacity, and lower operating costs would significantly benefit the economic growth of both countries. Therefore the government intends to collaborate with World Bank staff in undertaking a study regarding the railway's long-term development. On the basis of the study, the government would then seek to reach understandings with the Ethiopian government on new institutional arrangements for the railway entailing its privatization or a joint operating concession agreement with a private sector company. Generally in implementing the long-term development programs, responsibilities wherever possible would be delegated to the private sector.

51.  Turning to the non-urban water sector, Djibouti confronts a national water scarcity problem, and consequently its non-urban population—namely the population outside Djiboutiville—does not have adequate access to potable water supplies. This situation has adverse consequences for the population's health and standard of living. Therefore, the government is committed to formulating and implementing in collaboration with World Bank staff a long-term program for the development of potable water supplies for the non-urban population. As in other sectoral programs, the government will seek to promote private sector solutions to the water scarcity problem and to ensure that appropriate pricing policies are put in place. Regarding the national power and telecommunications sectors and the urban water sector, the government will delegate development in these sectors to their private sector owners with collaborative oversight provided by the new regulatory agency. However in view of Djibouti's water scarcity problem, the government will through its regulatory role ensure a sustainable use of the aquifers utilized by the urban water utility by requiring that its private sector owners implement a water pricing policy that would conserve this scarce resource.

52.  Meanwhile pending the major privatizations and final articulation of the transport sector strategy, certain policy improvements are to be introduced in 1999 to address pressing issues. First, the heavy transit trade traffic to Ethiopia requires increased maintenance and rehabilitation outlays for the main transit road and the port, and expanded financial resources for these purposes need to be identified. To this end, the government implemented in August 1999 a road user charge initially equivalent to US$1 per ton of cargo payable by all trucks (registered locally and abroad) upon exit from the port in order to provide resources for a Road Maintenance Fund. These resources will first be committed on a priority basis to fully repair the main road link to Ethiopia relying solely on private sector road maintenance contracts. Within the next few months, the government intends with World Bank technical assistance to improve the economic efficiency of the road user charge by formulating it in terms of a truck axle load charge rather than the per ton cargo charge. It also has been decided to implement in collaboration with World Bank staff a comprehensively reformed port tariff structure by end-1999 based on completion of the presently ongoing study of tariff rates. Second, overweighted trucks involved in the expanded transit trade have resulted in the accelerated deterioration of the main transit road. Therefore the government in collaboration with the World Bank staff will initiate by end-1999 implementation of a program to enforce the maximum legal road load limit of 13 tons per axle for all trucks with significant penalties for violations. Initially load limits will be monitored by reliance on trucks' bills of lading, but by end-June 2000 a new weighing station will have been constructed immediately outside the exit from the port as well as two other weighing stations on the main transit road to Ethiopia.

53.  Third, the financial positions of the national power and the urban water utilities suffer from inadequate enforcement of fee collection and from illegally taken power and water. To stem these problems, the government will by end-1999 require: the power utility to bill its large customers monthly and other customers at two month intervals; the water utility to bill its customers monthly; and both utilities to discontinue suppling power or water to customers in arrears for more than three months and to adopt programs to limit the illegal taking of power and water.

54.  In the area of the environment, the government needs to address on an urgent basis the deforestation resulting from extensive use by a large segment of the low-income population of scarce wood and brush as fuel for cooking. To contain this problem as well as for social safety net reasons, the government will eliminate the kerosine excise.

H.  Social Safety Net and Poverty Alleviation Arrangements

55.  The government's reform program contains several components directed at putting in place basic social safety net and poverty alleviation arrangements. First, as noted above the government will utilize AfDB financial assistance for a Social Fund Program to be implemented over 1999-2002 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. In this regard, financial support will be provided by: the FAO for a long-term national agricultural development program focusing on livestock and oasis agriculture; and by the AfDB for a long-term national fisheries development program. Both programs are targeted to begin in 2001.

56.  The government attaches great importance to the long-term national reform and development programs for the education and health sectors. For these sectors, the government has established significantly increased annual spending targets in order to raise the country's social indicators. The goals of the program in the education sector will be: required enrollment for all children at the primary and secondary levels; strengthened vocational and technical education; diversified higher education; establishment of national per pupil current and capital expenditure allocation targets; and allocation of expenditures among governates on the basis of enrollment, but with additional per pupil allocations on a one-for-one basis to the extent rural or female enrollment is below the national average. For the health sector, the core goals would be: the rehabilitation and expansion of health facilities below the tertiary level and expansion of preventive care programs by increased current and capital outlays for equipment and supplies; the improved availability of essential drugs by establishing community pharmacies in rural areas; and establishment of administrative and financial autonomy for the major medical care providers.

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VI.  Balance of Payments and External Financing Requirements

57.  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 require the prerequisite restructuring of the economy as it 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).

58.  Second, the French military retrenchment entails a 24 percent decline over 1998-2002 in earnings from the provision of services to expatriates. 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.

59.  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, borrowing by the port authority to finance imports for rehabilitation and expansion, and increased foreign direct investment. Amortization obligations are estimated to be somewhat above their average 1996-98 level due to the expiration of grace periods for some credits. 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.

60.  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.

61.  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.

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VII.  Technical Assistance, Statistical Issues, and Program Implementation

62.  The government believes that Djibouti will require significantly increased technical assistance to implement the structural reform program described above. France has for a long period and continues to provide substantial technical assistance in a wide range of areas, and more recently or presently technical assistance has also been provided by the AfDB, IMF, UNDP, and World Bank As a result of these programs, there has been progress in improving the government's policy implementation capacity. However since the technical assistance demands of the program are extensive, the government intends to request continued technical assistance from France and expanded technical assistance from the above-listed multilateral institutions as well as from other multilateral and bilateral sources. The government considers the provision of the technical assistance requirements identified in Appendix I to be critical for effective implementation of its reform program. Moreover the government will request that the UNDP and 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.

63.  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. Previously Djibouti lacked a CPI, but a new CPI developed with Afristat assistance began reporting on price developments in April 1999. The reform program aims at upgrading the statistical data base. To this end, the government will undertake some of these upgradings on its own. For example, the BND has already begun to address the main weakness in the monetary data which relates to banks not accurately classifying the residency status of their deposit holders or borrowers. Therefore banks were instructed in August 1999 to initiate a program to accurately identify the residency status of their customers, and to begin reporting their balancesheet data to BND on this basis beginning with the end-December 1999 reporting. Apart from this shortcoming, the monetary data is essentially of good quality. However such self-improvement efforts may not be possible in other statistical areas, and therefore the government believes that in such areas technical assistance in statistical techniques and institution building will be required.

64.  The challenges of the program has required 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.


1New overall presentations of fiscal, monetary, and external sector data and forecasts have been adopted for ESAF 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 program. Therefore to afford comparability, data relating to the SBA program period have been recast into the ESAF program presentations and definitions.