IMF Executive Board Concludes 2010 Article IV Consultation with Djibouti

Public Information Notice (PIN) No. 11/9
January 24, 2011

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 January 7, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the 2010 Article IV consultation with the Republic of Djibouti.1

Background

Djibouti weathered well the global economic and financial crisis. Real Gross Domestic Product (GDP) growth slowed from 5.8 percent in 2008 to 5 percent in 2009 and remained driven by a strong expansion of the private sector (construction, banking, the new Doraleh container terminal, and shipping) and public investment, even though there was a sharp drop in transshipment activity. Average inflation fell from a peak of 12 percent at end-2008 to 2 percent at end-2009 following the marked contraction in international food and commodity prices. In 2010, growth is projected to decline further to 4.5 percent as Foreign Direct Investment (FDI) and transshipment remain weak and foreign trade and transport services suffered from a temporarily slowdown in the first quarter. Inflation is projected to rise to about 4.5 percent as a result of the rebound in international commodity prices and food imported from Ethiopia due to a temporary change in transportation arrangements from railways to road.

Fiscal performance weakened in 2009. Revenues over-performed comparing to the program due to strong direct taxes, the introduction of the Value Added Tax (VAT), and nontax domestic revenues. However, spending (both budgetary and extrabudgetary) was higher than programmed as the authorities responded to security and social emergencies. The budget deficit (on a commitment basis) reached 4.6 percent of GDP, compared with the program target of 1.8 percent of GDP. Overall, the fiscal stance was relaxed by about 2.5 percent of GDP from 2008. The government’s financing needs led to an increase in commercial bank credit and accumulation of domestic arrears to public utility companies. However, external debt fell from 60 to 58 percent of GDP during 2009. In 2010, the government committed to achieve fiscal tightening through a deficit of 0.5 percent of GDP.

The current account deficit is narrowing. The current account balance declined from 24 percent of GDP in 2008 to 9 percent in 2009 and is projected to fall to 7 percent in 2010, as FDI-induced and related imports fall, terms of trade improve, and exports of maritime services continue to grow. Capital inflows have been weakening but still offset the current account deficit. International reserves are projected to rise from US$217 million at end-2009 to US$237 million at end-2010 (over three months of imports). The real effective exchange rate (REER) appreciated by almost 7 percent in 2008–09, and further in the first eight months of 2010, due mostly to the appreciation of the U.S. dollar and lower inflation in Djibouti’s trading partners. Currency board coverage remains well above the program floor of 105 percent.

The banking sector expanded rapidly, with the number of banks doubling to 10 over the past four years. Increased competition has led to a wider offer of financial products, including Islamic banking, and more attractive deposit terms. Deposits are expected to have grown by over 20 percent in 2008-10. Credit to the private sector has also been growing fast, driven by the construction boom and a healthy foreign trade activity. The medium-term outlook is favorable. An expected rebound in FDI and a positive impact from financial sector and structural reform will continue to contribute to high real GDP growth, which is projected to reach 5.5 percent, on average, over the next five years. Inflation is expected to ease, as international food and fuel prices stabilize, and decline to the country’s historical average of 2–3 percent. The current account deficit is expected to rise gradually to 18 percent of GDP, on average, due to the resumption of FDI-related imports. After stabilizing the fiscal position and repaying domestic arrears, the government would be in the position to run small deficits over the medium term to allow more spending on investment and social needs.

Executive Board Assessment

Executive Directors welcomed the continuing strong growth, driven by private sector activity and public investment. The external balances have improved, and inflation has returned to historical averages. The main challenge over the medium term is to sustain high economic growth, making inroads into unemployment and poverty reduction, as well as the transformation of Djibouti into a logistical and financial hub for the region. Achieving these objectives hinges on attracting foreign direct investment to finance infrastructure projects, and strengthening the competitiveness of the economy through structural reforms.

Directors welcomed the corrective measures taken by the authorities to bring the fiscal position back on track and their commitment to fiscal sustainability. Restoring fiscal discipline is critical to creating fiscal space for priority investment and social programs. Key priorities include improving public financial management and strengthening the budget process. Directors stressed the need to avoid extra-budgetary expenditures and the accumulation of domestic arrears. Efforts to strengthen tax collection and administration and to rationalize tax incentives are also crucial.

Noting that Djibouti remains at a high risk of debt distress, Directors considered it important to pursue prudent debt management strategies. They encouraged the authorities to refrain from nonconcessional borrowing, including by state-owned enterprises, and to undertake a comprehensive review of debt-financed projects.

Directors agreed that the currency board arrangement has served the economy well, contributing to macroeconomic stability. Taking note of the staff’s assessment that the exchange rate appears somewhat overvalued, Directors underscored the importance of further progress on structural reforms to restore lost competitiveness.

Given the rapid expansion of the banking system and credit growth, Directors highlighted the urgency of strengthening supervision, updating the regulatory and legal framework, and improving liquidity management, supported by technical assistance from the Fund. They welcomed the progress in implementing the 2009 Financial Sector Assessment Program (FSAP) recommendations, and looked forward to a rigorous enforcement of the updated Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) legislation.

Directors expressed concern about the continuing weaknesses in statistics, particularly on national accounts. They called for more decisive measures to improve data coverage and reporting to better inform policy-making.


Djibouti: Selected Economic and Financial Indicators, 2008-11
 
  2008 2009 2010 2011
    Prel. Proj.
 
  (Annual change in percent)

Production and prices

       

   Real GDP

5.8 5.0 4.5 5.5

   CPI (average)

12.0 1.7 3.9 2.0
  (In percent of GDP)

   General government

       

   Total revenue and grants

41.9 37.0 35.8 37.0

   Total expenditure

40.6 41.6 36.3 37.0

   Balance (commitment basis)

1.3 -4.6 -0.5 -0.1

   Balance (cash basis)

-1.9 -5.7 -1.6 -1.1
  (Annual change in percent)

Monetary indicators

 

   Net foreign assets

23.1 12.1 -0.4 2.3

   Net domestic assets

10.0 43.1 35.4 21.8

   Broad money

20.6 17.5 7.2 7.5
         

External sector

       

   Current account balance (in percent of GDP)

-24.3 -9.1 -6.9 -11.7

   Gross official reserves (in months of imports) 1/

3.6 4.5 4.1 3.6
 

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

1/ In months of the following year's imports.


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. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.



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