IMF Executive Board Concludes 2013 Article IV Consultation with DjiboutiPress Release No.13/289
July 31, 2013
On July 19, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Djibouti.1
In May 2012, Djibouti completed the 2008–12 Extended Credit Facility (ECF) arrangement during which it maintained economic stability and investor confidence. The program focused on maintaining fiscal discipline and currency board coverage, improving banking supervision, and implementing structural reforms.
Djibouti’s fundamental development challenges remain to reduce widespread poverty and unemployment, and diversify its economy. The bulk of the population has benefited little from the recent economic growth. Forty two percent of the population lives in extreme poverty and 48 percent of the labor force is unemployed.
Recent Developments and Macroeconomic Outlook
Economic activity has been expanding, spurred by large Foreign Direct Investment (FDI) inflows. GDP rose from 4.5 percent in 2011 to 4.8 percent in 2012, driven by port activity, transit trade with Ethiopia, trans-shipment activity, and construction. Inflation declined to 3.7 percent in 2012, thanks to the stabilization of international food prices, and a decline in electricity tariffs for low-consumption households. The current account deficit improved in 2012 to 12.3 percent of GDP and central bank’s international reserves increased slightly, allowing currency board coverage to remain well above the legal 100 percent floor.
Persistent budget deficits raise fiscal sustainability concerns and highlight the need for fiscal reform. A deficit of 2.7 percent of GDP recorded in 2012 was the result of a shortfall in tax revenues, mainly due to poor revenue collection and delayed dividend payments by some public enterprises. However, in the first quarter of 2013, tax collection efforts were stepped up, restoring domestic revenues to their pre-2012 levels. In the first quarter of 2013, the government received $185 million (13 percent of GDP) in revenues from selling a 23.5 percent stake in the holding company for Djibouti’s ports.
The medium-term macroeconomic outlook remains favorable though subject to significant risks. The projections for 2013-16 are a real GDP growth of about 6 percent, an inflation rate of 2.5 percent, and a current account deficit of 13.5 percent of GDP. The main risks are international oil and commodity price shocks, domestic political instability, and adverse economic and political developments in neighboring countries.
Fiscal reforms to enhance revenues should be pursued by expanding the tax base and strengthening tax administration. Efforts to restrain nonessential expenditures should also continue to ensure fiscal sustainability. The central bank made progress in strengthening banking supervision. Further efforts should aim at deepening the financial market and enhancing crisis resolution regulations.
Structural reforms are needed to promote inclusive job-creating and poverty-reducing growth, and diversify the economy. To improve competitiveness and the business environment, Djibouti should pursue efforts to reduce the cost of production inputs including electricity, increasing water supply, and providing in-demand technical training for the labor force.
As Djibouti remains at a high risk of debt distress, nonconcessional borrowings should be avoided, especially in light of the authorities’ ambitious investment projects.
Executive Board Assessment
Executive Directors noted that while Djibouti has achieved strong economic growth, widespread poverty and unemployment pose significant challenges. In addition, the country remains at a high risk of debt distress. To foster inclusive growth and diversify the economy, Directors stressed the need for continued commitment to prudent macroeconomic policies and reforms, and to urgently tackle important structural bottlenecks.
Directors emphasized the importance of ensuring fiscal sustainability, building on recent achievements. Policy should be geared toward strengthening revenue mobilization and improving public financial management. They called for efforts to expand the tax base, improve tax administration, and restrain nonessential expenditures, including wages. Priority should also be given to reforming the fuel pricing mechanism, especially replacing the costly fuel subsidies with well-targeted social safety nets, and to reexamining the tax exemptions system to make it transparent and accountable. Timely settlement of cross-debts between the government and public enterprises and preventing accumulation of new arrears will also be important.
To ensure debt sustainability, Directors advised the authorities to avoid nonconcessional borrowing. Going forward, they saw merit in developing a clear and transparent plan for public investment, particularly major infrastructure projects, financed by the privatization proceeds. Better coordination and rationalization of public investments will help in the efficient use of scarce resources.
Directors agreed that the fixed exchange rate regime, under the currency board arrangement, has served Djibouti well, and should be maintained at an unchanged parity. Noting that the banking sector is relatively sound, Directors encouraged the central bank to further strengthen its oversight capacity to promote financial stability and financial development. Priority should be given to enhancing macroprudential regulation and credit risk analysis, and to reinforcing the anti-money laundering and countering the financing of terrorism framework.
Directors underscored the importance of structural reforms to boost competitiveness and to achieve inclusive and diversified growth. Reform efforts should aim to improve the business climate, particularly by streamlining business regulation, reduce electricity costs, liberalize the telecommunications, and provide skills training to labor consistent with the needs of firms.
Directors took positive note of the authorities’ continued interest in a successor arrangement with the Fund to support the needed policy reforms. They emphasized, however, that this would require strong commitment to the program through implementation of prior actions.