IMF Executive Board Concludes 2007 Article IV Consultation with DjiboutiPublic Information Notice (PIN) No. 07/52
May 9, 2007
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
On April 27, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Djibouti.1
Growth performance strengthened in 2006, but was accompanied by accelerated inflation. Despite structural bottlenecks and weak competitiveness, real GDP growth reached 4.8 percent, driven by fiscal expansion and large private investment in the port, construction and services sectors. However, consumer price inflation rose to 3.6 percent in 2006, its highest peak since 2003, reflecting mainly higher prices of food, housing, water, and electricity. Broad money growth continued its trend deceleration of the past few years, in an environment of favorable economic conditions and more attractive financial conditions. Credit to the private sector increased notably compared to previous years, benefiting primarily sectors related to foreign direct investment. With a still low and little diversified export base, the surge in foreign financed related imports led to a sharp deterioration of the trade and current account balances. However, large capital and financial inflows resulted in a substantial increase in gross official reserves, the equivalent of about three months of imports.
Fiscal policy was expansionary in 2006, as strong revenue performance was mitigated by higher spending related to the financing of local elections and the summit of the Common Market for Eastern and Southern Africa (COMESA). While the external debt profile is manageable, the stock of public debt is projected to increase substantially over the period 2006-11. Progress in implementing structural reforms has been slow and many of the structural benchmarks contemplated under the last SMP remain to be fully implemented. The more flexible labor code adopted in December 2005 needs to be fully enacted. The single registry file for the civil service is well-advanced, but not finalized. A civil service reform initiated in early 2006 is still unfolding. There have been various initiatives in the energy sector, but an integrated strategy to reduce electricity production costs in the short and medium term has not been formulated. These measures are crucial to enhance growth prospects, improve competitiveness of the economy, and reduce poverty and unemployment. It is expected that some of these issues will be addressed in the new medium-term poverty reduction strategy that is expected to be formulated in the coming months with the assistance of the World Bank.
Executive Board Assessment
Directors agreed with the thrust of the staff appraisal. They commended the Djibouti authorities for the progress in attracting foreign private investment and transforming the economy into a regional trade and services hub. They welcomed the resulting acceleration of economic growth in the past two years, and the improvement of Djibouti's medium-term growth prospects.
At the same time, Directors observed that major challenges remain. Poverty and unemployment remain widespread, and debt sustainability could become a concern in light of the authorities' ambitious borrowing plans. Directors shared the authorities' concern that growth should not be confined to an enclave around the port, but should be broad-based and accompanied by sufficient employment creation. In this respect, Directors welcomed the new "National Initiative for Social Development," and encouraged the authorities to translate it into a time-bound action plan.
Directors encouraged the authorities to tighten the fiscal stance in order to ensure fiscal sustainability and contain potential inflationary pressures. Simplification of the tax regime, a reduction of tax exemptions, and the introduction of a value-added tax are all needed to boost government revenue, while tight controls on public wages and effective implementation of the ongoing civil service reform are crucial to reduce the government's wage bill. Directors also underscored the need to adhere strictly to the budget, eliminate off-budget transactions, improve cash management by adopting a single Treasury account, and avoid the accumulation of new external or domestic arrears. They encouraged the authorities to strengthen debt and contingent liabilities management, carefully prioritize investments projects, and move ahead with their privatization plans.
Directors agreed that the currency board arrangement has served Djibouti well as a credible anchor for containing inflationary pressures and building the confidence of foreign investors. Directors emphasized, however, that Djibouti's external competitiveness needs to be further strengthened through macroeconomic and structural reform measures. Important measures, in addition to fiscal adjustment, will include the adoption of a strategy to reduce electricity production costs, accelerated and full implementation of the new labor code to enhance labor market flexibility, and improvements in governance and the efficiency of the judiciary system.
Directors welcomed the increased entry of foreign banks, which has helped lower interest rate spreads through increased competition. At the same time, they stressed the importance of strengthening the central bank's supervisory capacities and the regulatory framework, and looked forward to the upcoming evaluation under the Financial Sector Assessment Program later this year. They welcomed the development of new instruments of monetary policy to help contain inflationary pressures. Directors commended the authorities' efforts to clarify the mandate of the Financial Intelligence Unit and to strengthen anti-money laundering regulations.
Directors welcomed the authorities' intention to participate in the IMF's General Data Dissemination Standard, which they considered an important step toward improving the quantity and quality of economic data, particularly in the areas of national accounts, the trade balance, and external debt.
Directors noted the authorities' wish to begin discussions on a program supported by the IMF's Poverty Reduction and Growth Facility, as it would help to accelerate the implementation of structural reforms and mobilize foreign aid. They stressed, however, that to move forward in that direction, the authorities would need to implement the key benchmarks not met under the 2005 staff-monitored program, and prepare a medium-term reform strategy as part of an overall poverty reduction strategy. They would also need to commit to strengthening fiscal discipline, including reducing domestic arrears, and to improving data production and enhancing external competitiveness. A few Directors were of the view that, given the healthy balance of payments and adequate reserve coverage, Djibouti currently does not need Fund financing.