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Public Information Notice (PIN) No. 04/23
March 19, 2004
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

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IMF Concludes 2003 Article IV Consultation with Djibouti

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2003 Article IV consultation with Djibouti is also available.

On January 7, 2004, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Djibouti.1

Background

Macroeconomic performance in 2002 was mixed. After growing on average at about 1.3 percent per year from 1999-2001, real GDP grew by an estimated 2.6 percent in 2002—a level, however, that barely stabilized the continued decline of real GDP per capita observed during the last decade. This acceleration reflected an increase in government investment on social housing and buoyant port activities as Djibouti was able to attract additional transshipment activities. Consumer prices barely increased in 2002, maintaining the long-standing record of modest inflation in the country.

In the fiscal sector, following two years of steady improvement, the deficit widened. Despite higher revenues and grants, the overall fiscal deficit (payment order basis) increased to 3.5 percent of GDP from less than 2 percent in 2000-01. This deterioration reflected in particular a sharp increase in spending, notably goods and services and transfers. The authorities, however, managed to keep the wage bill—which accounts for almost half of current spending—under control in 2002 and further increased tax revenue by 0.6 percent of GDP to 21.1 percent—one of the highest levels in low-income countries. In addition, domestic arrears, in particular those associated with wage payments, were reduced. Meanwhile, broad money growth continued to be very strong in 2002 owing to higher net foreign assets of commercial banks. In contrast, credit to the private sector declined for the third year in a row, as bank lending remained prudent amid an upward trend in nonperforming loans.

With imports associated with higher investments on the rise, the external current account deficit widened in 2002. Nonetheless, this deficit was more than offset by a surplus in the capital account resulting from higher external project financing and continued large unidentified capital inflows channeled through money changers. Despite the depreciation of the U.S. dollar, to which the Djibouti franc has been pegged at the same parity since the early 1970s, Djibouti's real effective exchange rate in mid-2003 remained 60 percent more appreciated than in 1980.

Limited progress was made in 2002 in advancing key structural reforms. The preparation of the 2000-01 financial accounts and intangible assets of the remaining public enterprises was completed in the second half of 2003. In addition, banking supervision has been strengthened. However, the long-overdue adoption of a revised labor code is still under discussion with labor unions, while the reform of the investment code and the accompanying streamlining and reduction of tax exemptions continue to be debated within the cabinet.

Executive Board Assessment

Executive Directors noted that, following several years of financial adjustment efforts, Djibouti continues to face serious challenges. Poverty is pervasive and increasing, with high unemployment and large groups of the population lacking access to essential social services. Economic growth remains too low to contribute to an effective decline in poverty, and the economy remains highly dependent on the Djibouti port and its associated activities as well as on the foreign military presence.

Directors considered that macroeconomic performance and progress in implementing reforms during the last arrangement under the Poverty Reduction and Growth Facility were mixed. Despite the restoration of some degree of fiscal discipline, overall fiscal performance lagged well behind the program objectives, leaving very limited room for higher social expenditures. Although a number of—mainly fiscal—reforms were introduced, privatization and work on reforming the investment, labor, and commerce codes did not proceed as envisaged, while recent measures such as the establishment of three new public enterprises are an additional source of concern. Against the backdrop of the numerous slippages in policy implementation, Directors underscored the critical importance and urgency of putting in place a well-designed and realistic reform strategy, which the authorities will need to implement with strong ownership and determination. Technical assistance will play a crucial role in helping Djibouti strengthen its limited administrative capacity.

Putting economic growth on a higher and sustained path is a key challenge facing the authorities in the period ahead. Directors urged the authorities to support private sector development, in particular by increasing the pace and depth of reforms designed to strengthen Djibouti's external competitiveness. This will require a much more forceful and coherent implementation of the government's strategy of broad-based structural reforms and maintenance of financial stability. Key priorities should be to reduce high labor costs, dismantle barriers to entry, and improve the regulatory environment for business and investment.

Directors expressed a wide range of views about the desirability of an action on the exchange rate to further improve Djibouti's external competitiveness. Some Directors considered that a carefully considered realignment of the exchange rate at an appropriate time should not be ruled out as one element of an overall policy package of structural reforms to restore external competitiveness. At the same time, Directors recognized that Djibouti's currency board arrangement has so far been a major source of stability within the economy, and that significant supportive policy steps—including prudent fiscal, monetary, and wage policies as well as the establishment of an appropriate safety net—would be required to accompany any action on the exchange rate. In light of this, and given the narrow production base of Djibouti's economy, a number of other Directors felt that the restoration of competitiveness would be better pursued through a focused and decisive effort to address the structural rigidities in the economy.

Directors considered that the large additional revenue from the foreign military now stationed in Djibouti should provide ample room for additional social expenditures and repayment of domestic debt. They regretted the large increase in nonessential expenditures in the revised 2003 budget, and urged the authorities to significantly alter allocations in favor of higher and well-targeted expenditures in priority sectors. In particular, the military demobilization program should proceed in order to allow a decline in the wage bill, usage of utilities should be much better controlled, and non-essential expenditures on goods and services should be reduced.

Directors encouraged the authorities to implement decisively the plan, prepared by the ministry of finance, to clear the stock of audited domestic budgetary arrears. They observed that repaying the arrears equitably and according to transparent priorities will greatly contribute to restoring the government's financial credibility.

Directors commended the authorities for the progress made in modernizing tax administration and strengthening the expenditure management process. Provided that further progress is made to integrate the functions of tax management, control, and collection, the tax administration reforms bode well for the introduction of a value added tax in early 2006 as currently planned. Directors encouraged the authorities to further enhance the transparency of public finances, in particular by publishing the reports of the public finance auditor's office and bringing all government accounts under the direct control of the ministry of finance's treasurer.

Directors saw the adoption of an anti-money laundering law and the beginning of an external audit of central bank accounts as encouraging steps toward protecting the integrity of Djibouti's financial system. They also welcomed the authorities' strategy to develop microfinance institutions. Priorities for the period ahead should be the adoption of the revised banking law and central bank statutes, the strengthening of the banking supervision capacity of the central bank, and more frequent inspections of financial institutions.

Directors urged the authorities to fully normalize their relations with donors and settle all remaining external arrears. They noted that recent improvements in the external debt database should help strengthen external debt monitoring and avoid any new accumulation of external arrears.

To address statistical weaknesses, which continue to hamper policy analysis and monitoring, Directors encouraged the authorities to forcefully implement the recommendations of the various Fund technical assistance missions, and to consider participation in the Fund's General Data Dissemination System.

Directors considered that an effective and well-focused Fund staff-monitored program will provide an appropriate framework for assisting the authorities with the establishment of the needed track record of policy reform, in particular by completing the unfinished reform agenda of the previous PRGF arrangement. Such a program should lay the foundation for and be commensurate with an envisaged successor PRGF arrangement, building on efforts to strengthen institutional capacity and carefully taking into account the social impact of alternative reform scenarios.


Djibouti: Selected Financial Economic Indicators, 1999-2003 1/


       

Est.

Proj.

 

1999

2000

2001

2002

2003


           
           

National income and prices

         

Read GDP (annual change in percent)

2.2

0.7

1.9

2.6

3.0

Consumer prices (annual average)

2.0

2.4

1.8

0.6

2.0

           
 

(In percent of GDP)

           

Consolidated government operations

         

Total revenue and grants 2/

30.9

31.0

28.2

29.4

34.5

Total expenditures

33.1

32.8

29.7

32.9

35.6

Overall balance (payment order basis)

-2.2

-1.8

-1.4

-3.5

-1.0

Change in arrears (decrease -)

1.3

0.5

-0.6

-0.7

-2.9

Overall balance (cash basis)

-0.8

-1.3

-2.0

-4.2

-3.9

Government domestic arrears (stock) 3/

29.3

29.6

28.9

27.8

24.9

           
 

(Change from proceeding December; in percent of broad money)

           

Money and credit

         

Broad money

5.2

1.1

7.5

15.7

5.1

Net foreign assets

5.7

-7.3

16.1

15.7

3.9

Net domestic assets

-0.5

8.4

-8.6

0.0

1.2

           
 

(In percent of GDP; unless otherwise indicated)

   

External sector

 

Current account

-0.6

-7.2

-4.3

-6.2

-5.3

Overall balance

1.5

-3.3

3.0

9.0

1.3

Official external debt after rescheduling 4/

62.8

66.9

65.2

66.8

66.5

Central bank gross foreign assets

         

(in months of imports) 5/

3.2

2.9

3.2

3.1

2.8

           

Exchange rate

         

Real effective exchange rate 6/

         

(end-year change in percent; depreciation - )

6.7

9.3

3.3

-8.4

-10.7

           

Sources: Djibouti authorities; and IMF staff estimates and projections.

1/ Based on official data as of November 2003.
2/ Starting 2003, includes the additional revenue from France and the United States.
3/ Domestic arrears include wage arrears and arrears to private and public suppliers for goods and services and pension funds.
4/ Public- and publicly-guaranteed debt of the central government and the public enterprise sector.
5/ Imports of goods for domestic use and nonfactor services.
6/ Data available through June 2003.


1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.




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