## cr1787

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### Executive Board assessment and priorities
- Directors noted the ambitious increase in infrastructure investment—mostly debt-financed—contributes to a broadly favorable outlook but elevates fiscal and debt vulnerabilities.
- Key policy priorities urged by Directors:
  - Strengthened debt policy and management.
  - Tax reform.
  - Structural reforms to improve efficiency and governance of public enterprises.
  - Measures to strengthen the business climate and support private-sector-led growth.
- Currency board: Directors observed the currency board arrangement has served Djibouti well and should be maintained at an unchanged parity; exchange rate may be somewhat overvalued in real effective terms (considerable uncertainty); competitiveness should be strengthened through structural reforms.

### Key quantitative indicators (selected 2014–18)
- National accounts (Annual percentage change):
  - Real GDP: 2014: 6.0; 2015: 6.5; 2016: 6.5; 2017 (Proj.): 7.0; 2018 (Proj.): 7.0
  - Consumer prices (end of period): 2014: 2.8; 2015: 1.9; 2016: 3.0; 2017 (Proj.): 3.0; 2018 (Proj.): 3.0
- Central government (In percent of GDP):
  - Revenues and grants: 2014: 30.9; 2015: 37.2; 2016: 32.5; 2017 (Proj.): 30.8; 2018 (Proj.): 29.9
  - Expenditure: 2014: 40.5; 2015: 58.9; 2016: 48.3; 2017 (Proj.): 32.4; 2018 (Proj.): 30.6
  - Overall balance (commitment basis): 2014: -9.6; 2015: -21.7; 2016: -15.8; 2017 (Proj.): -1.5; 2018 (Proj.): -0.6
  - Overall balance (cash basis): 2014: -10.1; 2015: -22.2; 2016: -16.3; 2017 (Proj.): -2.0; 2018 (Proj.): -1.1
  - Memo: Overall balance excluding large projects: 2014: -4.0; 2015: -0.9; 2016: -0.4; 2017 (Proj.): 0.3; 2018 (Proj.): -1.1
- Monetary sector:
  - Broad money (Annual change in percent): 2014: 6.5; 2015: 19.0; 2016: 8.0; 2017 (Proj.): 8.7; 2018 (Proj.): 8.3
  - Currency board cover (in percent): 2014: 110; 2015: 107; 2016: 109; 2017 (Proj.): 109; 2018 (Proj.): 109
- External sector (USD millions and associated ratios):
  - Current account balance (USD): 2014: -399; 2015: -549; 2016: -542; 2017 (Proj.): -436; 2018 (Proj.): -444
  - Current account balance (In percent of GDP): 2014: -25.1; 2015: -31.8; 2016: -28.6; 2017 (Proj.): -20.9; 2018 (Proj.): -19.3
  - External public and publicly guaranteed debt (USD millions): 2014: 792; 2015: 1,197; 2016: 1,606; 2017 (Proj.): 1,814; 2018 (Proj.): 2,008
  - External public and publicly guaranteed debt (In percent of GDP): 2014: 49.9; 2015: 69.3; 2016: 84.8; 2017 (Proj.): 86.9; 2018 (Proj.): 87.3
  - Gross official reserves (USD millions): 2014: 381; 2015: 355; 2016: 373; 2017 (Proj.): 419; 2018 (Proj.): 435
  - Gross official reserves (In months of next year's imports of goods and services): 2014: 3.4; 2015: 3.1; 2016: 3.4; 2017 (Proj.): 3.7; 2018 (Proj.): 3.6

### External position and exchange rate assessment
- International reserves: reported at "3.4 months of imports" (end-2016 actual: 3.4 months).
- Real exchange rate:
  - Appreciated by about 1.2 percent in August 2016 y-o-y; REER has appreciated by about 7.7 percent since 2014.
  - EBA-lite assessment: REER overvaluation estimates:
    - Adjusted current account approach: 24 percent overvalued in 2015.
    - External sustainability approach: 29 percent overvalued (2016 base); targeting end-2015 net IIP over 10 years implies about 43 percent overvaluation.
  - Elasticity of current account to REER estimated at -0.20.
- Reserve adequacy:
  - Optimal reserves estimated at 3.1 months of imports at end-2016 (cost of holding reserves proxied by marginal product of capital: 6.15 percent).
  - Actual reserves at end-2016: 3.4 months; reserve cover under currency board at end-2016 estimated at 109 percent (required cover at least 100 percent).

### Debt dynamics, DSA findings, and scenarios
- Current situation:
  - "Djibouti continues to be at high risk of debt distress."
  - Debt-to-GDP ratio increased from "50 percent at end-2014 to an estimated 85 percent of GDP at end-2016."
  - Much of the debt consists of government-guaranteed public enterprise debt.
- DSA baseline projections:
  - In the baseline with high and sustained growth of "6-7 percent in 2017-21," the debt-to-GDP ratio reaches a maximum of "87 percent in 2018-19" (peak external PPG debt projected to 87.3 percent in 2018).
  - PV of PPG external debt (baseline): 82-83 percent in 2016–18.
  - Debt service implications: total external PPG debt service projected to increase to about US$350–400 million per year by 2024 and thereafter (peaking at 9.1 percent of GDP in 2024).
- Downside scenario (alternative):
  - Growth "does not exceed 4.5 percent."
  - Public sector external non-concessional borrowing continues at "$350 million annually (about 17 percent of GDP) over the next five years."
  - Under this scenario the debt ratio increases further and exceeds "110 percent of GDP by 2021."
  - Budget deficit would increase to "5-6 percent of GDP" and debt service would absorb "up to 17 percent of budget revenue."
- Stress-test highlights:
  - One-time 30 percent nominal depreciation in 2017 would raise PV of external debt-to-GDP above 117 percent (B6 scenario).
  - Under baseline PV of debt-to-GDP (selected): 2016: 83; 2017: 83; 2018: 82; 2019: 81; 2020: 78; 2021: 75; 2026: 50; 2036: 28.
  - Under adverse scenarios A1/A2/B4, PV of debt-to-GDP can rise to 95–202 percent by 2036 depending on scenario.

### Financial sector performance and vulnerabilities
- Banking sector performance:
  - NPLs increased from "14 percent in 2013 to close to 23 percent in June 2016."
  - Provisions declined to "56 percent of NPLs"; authorities confirmed banks hold collateral on the rest.
  - Bank profitability "dropped over the past few years"; loan concentration is high and all banks had to obtain exemptions from single borrower exposure limits.
  - Some international banks have discontinued correspondent bank relationships, causing payment difficulties for banks.
- Financial inclusion:
  - Only 25 percent of adults possess a bank account.
- Safeguards and central bank:
  - CBD published audited financial statements for 2013–15; internal audit function established; CBD has yet to provide management letters on internal controls.
- Recommended banking and financial reforms:
  - Strengthen risk-based bank supervision and enforcement of prudential ratios.
  - Introduce a CAMELS bank rating system and a minimum reserve requirement.
  - Establish a bank resolution mechanism.
  - Improve loan classification, write off unrecoverable loans, increase provisions, and establish a strategy for bank recapitalization without public resources.
  - Strengthen the AML-CFT framework; join MENA-FATF; intensify supervision of cross-border activities.
  - Operationalize SME credit guarantee fund, expand mobile banking, strengthen credit information system, and develop Islamic banking framework.

### Fiscal developments, revenue mobilization, and arrears
- Fiscal context:
  - Large investment projects raised public external debt and contributed to large fiscal deficits: central government budget excluding two large projects aimed at a small deficit of 0.4 percent of GDP in 2016; including the two projects, overall fiscal deficit estimated at 16 percent of GDP in 2016.
  - Tax revenue slightly exceeded projections in 2016; non-tax revenues underperformed by about 1.5 percent of GDP; grants shortfall of 1.8 percent of GDP.
  - Wage bill contained at 10.2 percent of GDP; interest payments reached 1.4 percent of GDP (compared to 0.6 percent in 2015).
  - Domestic budget arrears steady at 0.5 percent of GDP.
- Revenue mobilization recommendations:
  - Launch comprehensive review of tax expenditures, exemptions, and special tax regimes (including free zones) to broaden the tax base and increase government revenue.
  - Planned 2017 measures: install cash registers for VAT-registered businesses; transfer management of business license tax and local real estate taxes to regional authorities; appoint customs commissioners; introduce customs risk analysis; adopt code of ethics for customs; expedite customs clearance.
  - Expenditure-side measures: contain wage bill via hiring freeze outside health and education; functional expenditure reviews; prioritize goods and services spending; increase targeted social transfers; allocate resources for maintenance of large externally financed infrastructure; introduce automatic adjustment for energy prices; set up a treasury single account and medium-term budgetary framework.
- Arrears and clearing:
  - External arrears: arrears to India (0.6 percent of GDP at end-2015) cleared in May under restructuring; as of end-November 2016 external debt arrears still amounted to 0.7 percent of GDP owed mainly to Iran (0.3 percent of GDP); arrears to Belgium, Italy, and Spain total 0.2 percent of GDP pending conversion negotiations.

### Public enterprises, governance, and PPPs
- Debt and PE links:
  - At end-2016, 32 percent of external debt was owed by the central government; 68 percent was government-guaranteed debt of public enterprises—77 percent of which was owed to China’s EximBank.
- Governance issues:
  - Weak governance undermines PE operational efficiency and financial soundness, posing fiscal and banking sector risks (insufficient operational independence, weak oversight, lack of transparency, persistent losses, domestic arrears).
- Reforms and actions:
  - Code of Good Governance for PEs approved April 2016; plans to adopt implementing regulations and a management training guide in early 2017.
  - Intention to appoint new executive boards and sign performance contracts with five public enterprises by June 2017.
  - Recommended: consolidate PE accounts semiannually; establish risk management framework for fiscal risks; phase out PE tax exemptions; evaluate PPP fiscal implications and factor into medium-term fiscal projections; eliminate monopoly status and open key sectors to private operators (e.g., telecommunications).
- Debt management institutional steps:
  - Finalize a debt strategy and hold a national debt conference; introduce an explicit debt anchor (public debt-to-GDP ratio and path); establish a national public debt committee; create a database to monitor PE debt, guarantees, and collateral; regularly publish comprehensive public and private sector debt data; prioritize staying current on all debt service obligations.

### Inclusion, poverty, labor, and gender
- Poverty and labor statistics:
  - About 41 percent of the population is poor; 23 percent live in extreme poverty.
  - Unemployment rate is 39 percent in 2015 (DISED, 2015); female unemployment: 49 percent; male unemployment: 34 percent.
  - Only 29 percent of women aged 15 to 64 are active in the labor market compared to 54 percent of men.
  - Female literacy: 53 percent; male literacy: 67 percent; female literacy in rural areas: 20 percent.
  - Extreme poverty rate within female-headed households: 21 percent; within male-headed households: 21 percent.
- Demographics and labor challenges:
  - Almost 75 percent of the population is younger than 35 years.
  - Services and construction together account for about 13 percent of formal employment.
- Policy recommendations for inclusiveness:
  - Economic diversification into tourism, fishing, transport, and telecommunication sectors.
  - Improve business environment and social safety nets; provide targeted cash transfers to the most vulnerable.
  - Job and skills training programs; deepen financial sector and expand access to microfinance and rural finance; support SME development.

### International cooperation, projects, and outlook
- International cooperation and Chinese involvement:
  - "Intensive cooperation with China continues." Chinese investors and China EximBank are main sources of foreign loans for major projects, including rail and port investments.
  - Early 2016 cooperation on a "new free economic zone" and framework for fast-track entry of Chinese banks.
- Outlook (staff baseline assumptions):
  - Growth projected to "increase to 7 percent in 2017–19" supported by large public investments (railroad and multipurpose port).
  - Inflation will "remain below 3 percent."
  - The "2017 fiscal deficit is targeted at 2 percent of GDP with the completion of the rail road project."
  - Over the medium term, the fiscal deficit projected to "decline further and stabilize at around 1 percent of GDP."
  - Current account deficit projected to "drop to 21 percent of GDP in 2017 and will decline gradually and stabilize at around 18–20 percent of GDP in the medium term."
  - International reserves projected to "remain at 3 months of imports."
  - In baseline debt-to-GDP peaks at "87 percent in 2018-19" with growth of "6-7 percent in 2017-21."
- Risks:
  - Downside: low investment efficiency; slowdown in international trade or Ethiopia; regional tensions and refugee/migrant inflows; major economic slowdown in China.
  - Upside: stronger impact of economic reforms and favorable external environment could yield stronger, more inclusive growth and reduce debt ratios more quickly.

### Statistics, technical assistance, and consultation cycle
- Data adequacy:
  - Data provided are broadly adequate for surveillance but shortcomings remain (national accounts, fiscal timeliness, PE contingent liabilities).
  - CPI basket revised; new CPI series available since January 2016; new GDP series to be published by end of 2017.
- Technical assistance requested/ongoing:
  - METAC and IMF assistance on tax policy, public debt policy and management, consolidation of public sector accounts, national accounts, monetary and financial statistics, reserve management, and supervisory frameworks.
- Consultation cycle:
  - Staff recommends next Article IV consultation be held on the standard 12-month consultation cycle.

### Concise list of key policy recommendations
- Slow the pace of public sector borrowing and establish a debt management strategy, including a debt law and a public sector debt anchor.
- Avoid borrowing on non-concessional terms; limit new borrowing (including by PEs) to concessional loans.
- Minimize direct financial participation in PPPs; avoid explicit guarantees and implicit contingent budget liabilities.
- Strengthen debt management capacity, coordination of institutions, and capacity to evaluate PPP-related fiscal risks.
- Launch comprehensive review of tax expenditures, exemptions, and special tax regimes to broaden the tax base and increase government revenue.
- Reform public enterprises to enhance efficiency, governance, and capacity to manage large investment projects; open public monopolies to competition where feasible.
- Improve the business climate, strengthen competition, and support private-sector-led, inclusive growth.
- Strengthen banking supervision, enforce prudential ratios, introduce a bank rating system and minimum reserve requirement, establish bank resolution mechanisms, and prioritize AML-CFT strengthening.
- Maintain the currency board arrangement at unchanged parity; pursue structural reforms to improve external competitiveness.
- Improve statistics: revise national accounts and prepare consolidated financial statements of the public sector and central government.

*Source: IMF Staff Report for the 2016 Article IV Consultation (Djibouti), February 7, 2017.*

### 3.4 months of imports.

### 3.4 months of imports.

### Banking sector performance and financial inclusion
- Performance of the banking sector remained weak and financial inclusion limited despite recent efforts.
- Financial sector characteristics:
  - High level of nonperforming loans.
  - High credit concentration.
  - Low profitability.
  - Vulnerability to adverse shocks.

### Executive Board Assessment — fiscal and debt vulnerabilities; policy priorities
- Directors noted the ambitious increase in infrastructure investment—mostly debt-financed—contributes to a broadly favorable outlook but elevates fiscal and debt vulnerabilities.
- Key policy priorities urged by Directors:
  - Strengthened debt policy and management.
  - Tax reform.
  - Structural reforms to improve efficiency and governance of public enterprises.
  - Measures to strengthen the business climate and support private-sector-led growth.
- Debt sustainability strategy recommendations:
  - Adopt a public debt law and set an explicit debt anchor, such as public debt-to-GDP ratio along with a debt path.
  - Reduce the pace of government borrowing and avoid borrowing on non-concessional terms, including by public enterprises.
  - Minimize direct financial participation in PPPs and avoid explicit guarantees and implicit contingent budget liabilities.
  - Strengthen debt management capacity, coordination of institutions involved in contracting debt, and capacity to evaluate PPP-related fiscal risks.
  - Stay current on all debt service obligations.
- Tax policy recommendations:
  - Launch a comprehensive review of tax expenditures, exemptions, and special tax regimes with a view to reducing them to broaden the tax base and increase government revenue.
- Structural and inclusion reforms:
  - Accelerate implementation of structural reforms to support broad-based, inclusive, and private-sector-led growth.
  - Reform public enterprises to enhance efficiency, strengthen governance, improve capacity to manage investment projects, and open public monopolies to competition.
  - Improve the business climate, strengthen competition, address distributional dimensions of growth, support private sector development, and invest in human capital and education.
- Monetary and financial policy recommendations:
  - Focus on banking and external stability as well as financial inclusion.
  - Central Bank of Djibouti to strengthen risk-based bank supervision, reduce credit concentration, better enforce prudential ratios, introduce a minimum reserve requirement and bank resolution mechanisms, and strengthen the AML-CFT framework.
- Exchange rate and competitiveness:
  - Directors observed the currency board arrangement has served Djibouti well and should be maintained at an unchanged parity.
  - Noted the exchange rate may be somewhat overvalued in real effective terms, with considerable uncertainty.
  - Called on authorities to strengthen competitiveness through structural reforms.

### Key quantitative indicators (selected economic and financial indicators, 2014–18)
- National accounts (Annual percentage change):
  - Real GDP: 2014: 6.0; 2015: 6.5; 2016: 6.5; 2017 (Proj.): 7.0; 2018 (Proj.): 7.0
  - Consumer prices (end of period): 2014: 2.8; 2015: 1.9; 2016: 3.0; 2017 (Proj.): 3.0; 2018 (Proj.): 3.0
- Central government (In percent of GDP):
  - Revenues and grants: 2014: 30.9; 2015: 37.2; 2016: 32.5; 2017 (Proj.): 30.8; 2018 (Proj.): 29.9
  - Expenditure: 2014: 40.5; 2015: 58.9; 2016: 48.3; 2017 (Proj.): 32.4; 2018 (Proj.): 30.6
  - Overall balance (commitment basis): 2014: -9.6; 2015: -21.7; 2016: -15.8; 2017 (Proj.): -1.5; 2018 (Proj.): -0.6
  - Change in arrears: 2014: -0.5; 2015: -0.6; 2016: -0.5; 2017 (Proj.): -0.5; 2018 (Proj.): -0.4
  - Overall balance (cash basis): 2014: -10.1; 2015: -22.2; 2016: -16.3; 2017 (Proj.): -2.0; 2018 (Proj.): -1.1
  - Memo: Overall balance excluding large projects: 2014: -4.0; 2015: -0.9; 2016: -0.4; 2017 (Proj.): 0.3; 2018 (Proj.): -1.1
- Monetary sector (Annual change in percent of broad money):
  - Broad money: 2014: 6.5; 2015: 19.0; 2016: 8.0; 2017 (Proj.): 8.7; 2018 (Proj.): 8.3
  - Currency board cover (in percent): 2014: 110; 2015: 107; 2016: 109; 2017 (Proj.): 109; 2018 (Proj.): 109
- External sector (In millions of US dollars):
  - Current account balance (USD): 2014: -399; 2015: -549; 2016: -542; 2017 (Proj.): -436; 2018 (Proj.): -444
  - Current account balance (In percent of GDP): 2014: -25.1; 2015: -31.8; 2016: -28.6; 2017 (Proj.): -20.9; 2018 (Proj.): -19.3
  - External public and publicly guaranteed debt (USD millions): 2014: 792; 2015: 1,197; 2016: 1,606; 2017 (Proj.): 1,814; 2018 (Proj.): 2,008
  - External public and publicly guaranteed debt (In percent of GDP): 2014: 49.9; 2015: 69.3; 2016: 84.8; 2017 (Proj.): 86.9; 2018 (Proj.): 87.3
  - Gross official reserves (USD millions): 2014: 381; 2015: 355; 2016: 373; 2017 (Proj.): 419; 2018 (Proj.): 435
  - Gross official reserves (In months of next year's imports of goods and services): 2014: 3.4; 2015: 3.1; 2016: 3.4; 2017 (Proj.): 3.7; 2018 (Proj.): 3.6
  - Exchange rate (DF/US$, end of period): 2014: 177.7; 2015: 177.7; 2016: 177.7; 2017 (Proj.): ...; 2018 (Proj.): ...
  - Real effective exchange rate (yearly average, 2005=100): 2014: 96.4; 2015: 102.7; 2016: 103.8; 2017 (Proj.): ...; 2018 (Proj.): ...
  - Real effective exchange rate (Change in percent; depreciation -): 2014: 0.5; 2015: 6.6; 2016: 1.1; 2017 (Proj.): ...; 2018 (Proj.): ...

### Context and recent developments
- Context:
  - Djibouti is expanding transportation and utilities infrastructure to leverage its strategic location as a shipping hub and host to military bases.
  - Vision Djibouti 2035 targets medium-term growth of 7.5–10 percent per year, tripling per capita income, and reducing unemployment through five pillars: peace and national unity, good governance, economic diversification, human capital development, and regional integration.
- Investment program and debt:
  - Large-scale investment program financed by external debt raised public external debt from 50 to 85 percent of GDP in two years.
  - At end-2016, 32 percent of external debt was owed by the central government; 68 percent was government-guaranteed debt of public enterprises—77 percent of which was owed to China’s EximBank.
  - In 2016, the grant element of new debt was estimated at 36 percent.
- Poverty and labor market:
  - About 41 percent of the population is poor; 23 percent live in extreme poverty; unemployment rate is 39 percent.
  - Large investment projects have had limited impact on jobs to date, employing high-skilled, often foreign, labor.
- Humanitarian and regional pressures:
  - Donors and UN agencies estimate about a quarter of the 1 million population requires assistance, including about 60,000 refugees, asylum seekers, and migrants.
- Fiscal developments and arrears:
  - Central government budget (authorities’ definition excluding two large investment projects) aimed at a small deficit of 0.4 percent of GDP in 2016; including the two projects, overall fiscal deficit estimated at 16 percent of GDP in 2016.
  - In 2016, tax revenue slightly exceeded projections; non-tax revenues underperformed by about 1.5 percent of GDP due to lower dividend transfers; grants shortfall of 1.8 percent of GDP due to disbursement delays.
  - Wage bill contained at 10.2 percent of GDP; interest payments reached 1.4 percent of GDP (compared to 0.6 percent in 2015).
  - Domestic budget arrears steady at 0.5 percent of GDP (about one month of the wage bill).
  - Mixed progress on external debt arrears: arrears to India (0.6 percent of GDP at end-2015) cleared in May under restructuring; as of end-November 2016 external debt arrears still amounted to 0.7 percent of GDP owed mainly to Iran (0.3 percent of GDP); arrears since late 2011 to Belgium, Italy, and Spain total 0.2 percent of GDP pending conversion negotiations; short-term arrears at end-November 2016 amounted to 0.2 percent of GDP owed to Arab Development Funds and India.
- External sector:
  - Current account deficit large and investment-driven: 32 percent of GDP in 2015; estimated 29 percent of GDP in 2016.
  - Deficit financed mainly by public sector borrowing (about two thirds) and net FDI (one third).
- Currency board:
  - Ratio of reserves to base money in 2016 estimated at 109 percent; official exchange reserves supportive of the currency board.

### Key policy recommendations (concise list)
- Slow the pace of public sector borrowing and establish a debt management strategy, including a debt law and a public sector debt anchor.
- Continue tax system reform by reviewing and reducing tax expenditures, exemptions, and special regimes (such as free zones) to expand the tax base and increase government revenue while fostering economic growth.
- Reform public enterprises to enhance efficiency, competitiveness, and capacity to manage large investment projects.
- Improve the business environment and governance to attract investors, develop the private sector, create jobs, and promote sustainable and inclusive growth.
- Focus monetary and financial policy on banking system stability, financial inclusion, and external stability.
- Maintain the currency board with adequate coverage and supportive fiscal policies.
- Finalize the revision of GDP and prepare consolidated financial statements of the public sector and central government.

*Source: IMF Staff Report for the 2016 Article IV Consultation (Djibouti), February 7, 2017.*

### 3.4 months of imports. Although the real exchange rate appreciated by about 1.2 percent in August

### cr1787 - 3.4 months of imports. Although the real exchange rate appreciated by about 1.2 percent in August

### External position and exchange rate
- International reserves are reported at "3.4 months of imports."
- The real exchange rate "appreciated by about 1.2 percent in August 2016 y-o-y" but "stayed close to its 2010 level" due to favorable inflation differentials with trading partners.
- The exchange rate is assessed as "somewhat overvalued based on the EBA-lite methodology."
- The currency board arrangement "has helped instill confidence and improve predictability in international transactions."
- The sensitivity of the current account to changes in the real exchange rate is low because:
  - Exports mainly comprise "the use of port services by Ethiopia and services and rents related to foreign military bases."
  - High dependence on imports for food and fuel results in "a low price elasticity of imports."

### Debt dynamics and distress assessment
- "Djibouti continues to be at high risk of debt distress, as all debt sustainability indicators are above their thresholds for a prolonged period."
- Debt-to-GDP ratio increased from "50 percent at end-2014 to an estimated 85 percent of GDP at end-2016," primarily reflecting disbursements from newly contracted loans.
- "Much of the debt consists of government-guaranteed public enterprise debt."
- The DSA indicates "solvency and liquidity risks are high and have increased since 2015, especially in the short run."
- Debt service falling due is "scheduled to rise significantly over the next few years" and "the scope for additional borrowing is low."
- In the baseline scenario with "high and sustained growth of 6-7 percent in 2017-21," the debt-to-GDP ratio "reaches a maximum of 87 percent in 2018-19."
- An alternative downside scenario assumes:
  - Growth "does not exceed 4.5 percent"
  - Public sector external non-concessional borrowing continues at "$350 million annually (about 17 percent of GDP) over the next five years"
  - Under this scenario, "the debt ratio increases further and exceeds 110 percent of GDP by 2021."
  - The budget deficit would increase to "5-6 percent of GDP" and debt service would absorb "up to 17 percent of budget revenue."

### Financial sector vulnerabilities
- Commercial banks’ non-performing loans (NPLs) increased from "14 percent in 2013 to close to 23 percent in June 2016."
- Provisions declined to "56 percent of NPLs"; authorities confirmed banks hold collateral on the rest.
- Bank profitability "dropped over the past few years" and loan concentration is high; "all banks had to obtain exemptions from single borrower exposure limits."
- Banks have recently experienced payment difficulties as "some international banks have discontinued their correspondent bank relationships."

### International cooperation and investment
- "Intensive cooperation with China continues."
- Chinese investors are involved in many investment projects and are "the main source of foreign loans."
- In early 2016, Djibouti signed a cooperation agreement with China on a "new free economic zone aimed at establishing an international transshipment hub" and setting a legal framework for "a fast-track entry of Chinese banks in Djibouti."

### Outlook and risks
- Staff baseline scenario assumptions and projections:
  - Current macroeconomic policies continue and planned reforms are implemented (comprehensive tax reform, improved business climate, strengthened debt management, and other reforms).
  - Growth projected to "increase to 7 percent in 2017–19" supported by large public investments (railroad and multipurpose port).
  - Inflation will "remain below 3 percent."
  - The "2017 fiscal deficit is targeted at 2 percent of GDP with the completion of the rail road project."
  - Over the medium term, the fiscal deficit is projected to "decline further and stabilize at around 1 percent of GDP" under assumptions stated.
  - The current account deficit will "drop to 21 percent of GDP in 2017 and will decline gradually and stabilize at around 18–20 percent of GDP in the medium term."
  - International reserves are projected to "remain at 3 months of imports."
  - In this scenario the debt-to-GDP ratio peaks at "87 percent in 2018-19" with growth of "6-7 percent in 2017-21."
- Downside risks identified:
  - Low investment efficiency could increase fiscal liabilities and the risk of debt distress.
  - A slowdown in international trade or economic growth in Ethiopia would adversely affect growth, fiscal revenues, and the external position.
  - Continued regional tensions and refugee/migrant inflows could weaken public finances, investor confidence, and social cohesion.
  - A major economic slowdown in China could negatively affect financing for major projects.
- Upside possibility:
  - Higher impact of economic reforms and a favorable external environment could yield stronger, more inclusive growth and reduce debt ratios more quickly.

### Policy discussions and recommendations
- Key discussion themes: (i) public debt policy and management; (ii) revenue mobilization and phasing out exemptions; (iii) public enterprises and governance; (iv) business environment, inclusiveness, and social policies; (v) financial stability, competitiveness, and safeguards; and (vi) statistics and technical assistance.

A. Strengthening Public Debt Management
- Urgent priorities:
  - "Slowing the pace of government borrowing and avoiding non-concessional loans."
  - Limit new borrowing, including by public enterprises, to concessional loans.
  - Recognize "limited space for financial participation in public-private partnerships (PPP)."
- Recommended actions:
  - Finalize a debt strategy and hold a national debt conference to reach consensus on debt policy and priorities.
  - Introduce an explicit debt anchor (e.g., target a specific debt-to-GDP ratio).
  - Perform regular DSAs.
  - Establish a national public debt committee to centralize and coordinate new borrowing decisions and evaluate costs and risks.
  - Create a database to monitor PE debt, government guarantees, and collateral; regularly publish comprehensive public and private sector debt data; consolidate PE borrowing and debt explicitly in public sector accounts.
  - Avoid recurrence of debt service arrears; develop a time-bound plan for clearing existing arrears; prioritize staying current on all debt service obligations.
- Authorities’ stance:
  - Broadly agreed with concerns over debt sustainability and acknowledged rising external debt and contingent liabilities of public enterprises pose risks.
  - Aim to finance next wave of projects mainly through FDI and PPPs.
  - Working on a draft debt law and considering an appropriate debt anchor; requested assistance on debt policy and debt management and evaluation of PE contingent liabilities.
  - Explained short-term arrears in 2016 owed to treasury cash-flow pressures and are optimistic about terms for arrears under negotiation.

B. Mobilizing Revenue and Phasing-out Exemptions
- Imperative: "Greater domestic revenue mobilization" to generate fiscal space and finance social and growth-enhancing projects and service public debt.
- Constraints: "Widespread tax exemptions and special regimes, such as tax free zones" limit revenue potential.
- Measures taken in 2016 budget:
  - Exemption of the lowest income earners from income tax.
  - Broadening of the capital gains tax on real estate.
  - Reduction of import license fees.
  - Introduction of a differentiated scale for company registration fees.
  - Revision of the stamp duty and licensing fees.
  - Elimination of the excise tax on fruit and vegetable juices and carbonated beverages.
  - Continued gradual reduction of the consumption tax (TIC) by replacing it with the VAT and excise taxes.
- Planned measures in 2017:
  - Install cash registers in businesses subject to the VAT.
  - Transfer management of the business license tax and local real estate taxes to regional authorities.
  - Appoint customs commissioners to enable customs officers to focus on inspection work.
  - Expedite customs clearance by introducing a risk analysis system.
  - Adopt a code of ethics for customs personnel and an inspection charter.
  - Assess impact of changes to ensure they improve revenue or remain revenue neutral.
- Further recommended reforms:
  - Review tax expenditures and exemptions in line with World Bank technical assistance.
  - Make tax incentives part of common law, convert the investment code into an investor charter, and reassess the tax regime for free zones.
  - Phase out the distortive consumption tax and replace it with VAT and excise taxes.
  - Reform the tax directorate, strengthen human resources and control systems, introduce integrated information and risk analysis systems, expand online tax payments gradually, establish a dispute management system, and improve local tax collection and management.
  - For customs: strengthen customs valuation, introduce risk analysis, and improve dispute mechanisms.
- Expenditure-side recommendations:
  - Contain the wage bill via a hiring freeze outside health and education, complemented by functional expenditure reviews.
  - Better prioritize spending on goods and services.
  - Preserve and significantly increase targeted social transfers and invest in human capital (education and health care).
  - Allocate sufficient resources for maintenance of large externally financed infrastructure.
  - Introduce a mechanism for automatic adjustment of energy prices to avoid recurrence of fuel subsidies.
  - Continue efforts to set up a treasury single account and a medium-term budgetary framework.
- Authorities’ stance:
  - Broadly shared recommendations and plan to review tax expenditures and exemptions, noting planned reforms will likely face strong opposition from vested interests.
  - Requested additional technical assistance on tax reforms and tax expenditures.

C. Reforming Public Enterprises and Governance
- Challenges:
  - "Weak governance" undermines PE operational efficiency and financial soundness and poses fiscal and banking sector risks.
  - Issues include insufficient operational independence, weak government oversight, lack of transparency, high utility prices, persistent losses, domestic arrears, and budgetary costs.
- Reforms under way:
  - Approval in April 2016 of a Code of Good Governance for PEs.
  - Plans to adopt implementing regulations and a management training guide in early 2017.
  - Intention to appoint new executive boards and sign performance contracts—with organizational and financial audits—with five public enterprises by June 2017.
- Recommended actions:
  - Strengthen management and supervision of PEs.
  - Put in place a joint supervision and audit framework involving the Ministry of Economy Finance and line ministries.
  - Prepare consolidated income statements and balance sheets of PEs every six months.
  - Establish a risk management framework to evaluate and mitigate budget risks.
  - Implement the Code of Good Governance, step up anti-corruption efforts, and phase out tax exemptions for PEs.
  - Evaluate fiscal implications and risks of PPP projects and factor them into medium-term fiscal projections.
  - Eliminate monopoly status of PEs and open key sectors to private operators, particularly telecommunications.
- Authorities’ stance:
  - Generally shared urgency to improve PE efficiency and capacity to manage large projects and intend to strengthen supervision.
  - Noted difficulty of opening public monopolies to private competition and prefer reforming PEs first.
  - Have liberalized renewable energy production and are preparing an institutional and legal framework for PPPs.

D. Improving the Business Environment, Inclusiveness, and Social Policies
- Business environment:
  - Remains relatively unfavorable; private sector is small with much informal activity.
  - Djibouti is ranked "171 out of 190 countries in the World Bank’s 2017 Doing Business report" with low scores on enforcing contracts and protecting investors, getting bank credit, starting a business, getting electricity, and registering property.
  - Without significant improvement, large-scale capital-intensive investments will have limited impact on growth and employment.
- Poverty and inclusiveness:
  - "Extreme poverty remains high and has changed little in the last decades."
  - "Inequality remains high and may be increasing."
  - "In the last decade, growth has not been inclusive and has benefited mostly the upper bracket of the income distribution, while the poorest brackets have become poorer in relative terms."
- Policy recommendations:
  - Improve business environment and strengthen social safety nets to promote inclusive growth and reduce unemployment and poverty.
  - Support economic diversification into tourism, fishing, transport, and telecommunication sectors to create growth and employment.
  - Implement significant sectoral and business environment reforms to advance a private sector-led growth model, including greater use of PPPs.
  - Develop a regulatory framework for PPPs.
  - Provide targeted cash transfers to the most vulnerable as part of strengthened social safety nets.
- Authorities’ stance:
  - Confirmed intention to improve the business climate.
  - A one-stop shop for business registration and ongoing tax reforms are expected to positively affect the Doing Business ranking.
  - Developing sectoral programs in education and healthcare with development partners.

*IMF staff report content as provided in the source document.*

### introduction on the Code of Good Governance for PEs will also help improve the business climate,

### cr1787 - introduction on the Code of Good Governance for PEs will also help improve the business climate,

### Inclusion, Social Programs, and Governance
- Authorities are preparing the 2017 household survey and plan to use its results to inform further policy decisions.
- Authorities are establishing a database of beneficiaries of social programs, with a view to rationalizing and improving targeting.
- Introduction on the Code of Good Governance for PEs will also help improve the business climate, and will be complemented by stepping up anti-corruption efforts.

### Enhancing Financial Stability and Safeguards — Current Performance and Challenges
- Banking sector characterized by:
  - High level of nonperforming loans.
  - Excessive credit concentration.
  - Insufficient profitability.
  - Vulnerability to adverse shocks.
- Financial inclusion limited: only 25 percent of adults possess a bank account and access to credit is difficult.
- Authorities’ recent actions:
  - Setting up a guarantee fund to facilitate access to finance for small companies.
  - Established a Sharia Board for Islamic banking.
  - CBD launched projects to promote mobile banking services to facilitate financial inclusion and plans to develop electronic payment procedures and modernize the credit information system.
- Safeguards and oversight:
  - CBD published its audited financial statements for 2013–15, addressing a priority recommendation from the 2012 safeguards assessment.
  - An internal audit function has been established.
  - CBD has yet to provide management letters on internal controls, in line with the IMF’s safeguard’s policy.

### Enhancing Financial Stability and Safeguards — Recommended Reforms
- Strengthen risk-based bank supervision and enforcement of prudential ratios.
- Introduce a CAMELS bank rating system.
- Introduce a minimum reserve requirement.
- Establish a bank resolution mechanism.
- Take corrective actions for banks in difficulty:
  - Improve loan classification.
  - Write off unrecoverable loans.
  - Increase provisions.
  - Establish a strategy for bank recapitalization without the use of public resources.
- Financial inclusion measures:
  - Strengthen the credit information system.
  - Reduce excessive credit concentration.
  - Operationalize the recently approved credit guarantee fund for SMEs.
  - Expand mobile banking.
  - Develop further the framework for Islamic banking.
- CBD should strengthen its AML-CFT framework, join the MENA-FATF, and intensify supervision of cross-border activities to reduce the risk of further withdrawal of correspondent bank relations.
- Implementation of recommendations from the 2012 safeguards assessment should accelerate, including provision of management letters on internal controls.

### Strengthening Statistics and Technical Assistance
- Data provided to the Fund are broadly adequate for surveillance but shortcomings remain.
  - Progress being made on revising the national accounts, but inadequate data sources hamper their quality.
  - Fiscal data are reported with delays and there are no aggregated data on the accounts and contingent liabilities of PEs.
- Staff recommended strengthening national accounts and fiscal statistics based on IMF technical assistance recommendations.
- The Fund stands ready to support reform and capacity building through technical assistance and training.
- Authorities should continue to seek technical assistance from the IMF, including from the Middle East Technical Assistance Center (METAC), focusing on:
  - Tax policy (tax expenditure and exemptions).
  - Public debt policy and management.
  - Consolidation of the public sector accounts.
  - National accounts.

### Staff Appraisal — Outlook, Risks, and Priorities
- Infrastructure investment boom is remarkable and mostly debt-financed; presents opportunities and risks.
- Key policy priorities:
  - Strengthened debt policy and management.
  - Tax reform to reduce exemptions and special tax regimes.
  - Reforms of public enterprises, governance, and the business climate.
  - Close government coordination for effective implementation.
- Outlook:
  - Remains broadly favorable with considerable, although manageable, risks.
  - DSA indicates a high risk of debt distress.
  - Rising debt service obligations could crowd out priority social spending, even in the near term.
  - Possible slowdown in global trade or in Ethiopia would weigh on growth prospects.
  - Lower growth combined with continued public sector borrowing would put external public debt on an unsustainable trajectory.
  - Withdrawal of correspondent bank relations could strain the currency board arrangement by limiting payment options.
  - Upside: successful implementation of reform agenda (taxation, public enterprise and business climate reforms) could translate into higher growth and a lower debt burden for the budget.

### Staff Appraisal — Specific Policy Recommendations
- Debt management and borrowing:
  - Develop a coordinated debt strategy aiming at establishing debt sustainability.
  - Adopt a public debt law and set an explicit debt anchor, such as public debt-to-GDP ratio along with a debt path.
  - Reduce the pace of government borrowing.
  - Avoid borrowing on non-concessional terms.
  - Limit new borrowing, including by PEs, to concessional loans.
  - Keep direct financial participation in PPPs to a minimum.
  - Avoid explicit guarantees and implicit contingent budget liabilities.
  - Strengthen debt management capacity, coordination of institutions involved in contracting debt, and capacity to evaluate and monitor fiscal risks from PPPs.
- Tax reform:
  - Launch a comprehensive review of tax expenditure, exemptions, and special tax regimes with a view to phasing them out to broaden the tax base and increase government revenue.
- Public enterprises:
  - Reforms should enhance efficiency, strengthen governance, make services more competitive, and improve capacity to manage large investment projects.
  - Authorities advised to open public monopolies (e.g., in the telecom and energy sectors) to competition.
- Structural reforms:
  - Accelerate reforms to translate the investment boom into broad-based, inclusive, and private sector-led growth.
  - Priorities include improving the business climate, introducing greater competition, addressing distributional dimension of growth, and supporting private sector development in employment-potential areas.
- Monetary and financial policy:
  - Continue focus on stability of the banking system, financial inclusion, and external stability.
  - CBD needs to:
    - Strengthen risk-based bank supervision.
    - Introduce a bank rating system.
    - Reduce credit concentration.
    - Better enforce prudential ratios.
    - Introduce a minimum reserve requirement.
    - Put in place bank resolution mechanisms.
    - Take corrective actions to address problems of banks in difficulty.
    - Place priority on strengthening its AML-CFT framework.
- Exchange rate and currency board:
  - The currency board arrangement has served Djibouti well and should be maintained at an unchanged parity.
  - Staff’s analysis suggests the exchange rate is somewhat overvalued in real effective terms, though the extent is subject to considerable uncertainty.
  - Given low sensitivity of the current account to changes in the real exchange rate, external competitiveness should be strengthened through structural reforms rather than exchange rate adjustment.
- Statistics:
  - Authorities strongly encouraged to improve statistics; key priorities include GDP calculations and consolidated financial statements of the public sector.
- Consultation cycle:
  - Staff recommends that the next Article IV consultation with Djibouti be held on the standard 12-month consultation cycle.

*cr1787 - introduction on the Code of Good Governance for PEs will also help improve the business climate,*

### Box 1. Response to the 2015 Article IV Consultation Key Recommendations

### Box 1. Response to the 2015 Article IV Consultation Key Recommendations

### Fiscal policy
- Design and implement a comprehensive tax reform based on the proposals from the 2015 tax conference.
  - Progress has been achieved. A few measures were introduced in the 2016 budget, and additional measures are planned in 2017.
- Reduce tax exemptions.
  - Little progress. Committees on fiscal policies to be established in 2017.
- Strengthen the institutional capacity to manage investment projects.
  - A new ministry in charge of investments was established in May 2016; however, it is too early to determine its impact.
- Reform public enterprises to ensure their commercial viability.
  - Little progress.

### Debt policy
- Improve coordination among entities involved in contracting external debt.
  - Drafts of a national debt policy and a decree establishing a national public debt committee, which would review loan proposals, have been prepared.
- Develop a strategy to reduce and manage the external debt burden.
  - A draft debt law and a medium-term debt strategy are being prepared.
- Limit non-concessional public or publicly guaranteed borrowing.
  - Limited progress; a new sizable loan was contracted in 2016 to finance the multi-purpose port and the livestock port.

### Financial sector policy
- Address a bank in difficulty.
  - The bank was recapitalized.
- Reinforce bank supervision.
  - With the help of METAC, the most critical areas for strengthening bank supervision have been identified.
- Establish a bank resolution mechanism.
  - No progress.
- Strengthen the income position of the central bank.
  - No progress yet.
- Ensure adequate provisioning for nonperforming loans.
  - No progress; the ratio of provisions to NPL worsened in 2016.
- Establish a guarantee fund for SMEs.
  - The fund has been established, but it is not operational yet.

### Structural policy
- Finalize management arrangements for the railway project.
  - In December 2016, Djiboutian and Ethiopian governments created a joint railway management company.
- Accelerate reforms of public enterprises.
  - A law on the code of good governance of PEs was promulgated in April 2016, but has yet to be implemented. Performance contracts with five PEs are expected to be signed by mid-2017.
- Lower utility costs.
  - No progress.
- Improve the business environment.
  - No progress in Doing Business rankings, although a one-stop-shop is expected to be established shortly.

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

### Appendix I. External Sector Assessment

### Appendix I. External Sector Assessment

### Exchange rate framework and competitiveness
- The currency board arrangement remains appropriate; it has helped underpin confidence and lends greater predictability in managing international transactions.
- The EBA-lite methodology indicates a real exchange rate overvaluation, but the magnitude is subject to considerable uncertainty.
- Djibouti’s foreign trade composition—mainly basic food and fuel imports, port services exports, and services to military bases—suggests low sensitivity to real exchange rate changes.
- Policy implication: Gains in external competitiveness are best achieved by reducing the high cost of doing business and improving governance and the investment climate rather than by exchange rate adjustment.
- The authorities agreed with the broad thrust of the assessment and policy recommendations.

### Current account, trade, and medium-term projections
- External current account deficit deteriorated sharply since 2010, reaching 32 percent of GDP in 2015 driven by investment-related imports from a public sector investment boom and a step-up in FDI.
- 2016: the deficit is expected to contract modestly.
- Medium term (2017–21) projections:
  - Imports (goods and services) growth projected to decelerate to 4 percent per year on average over 2017-21.
  - Export growth projected to average 8 percent per year over 2017-21, driven by expansion in services related to transport and military bases.
  - External project-related borrowing and FDI will continue to finance the current account deficit.

### Real effective exchange rate (REER) movements
- The REER has appreciated by about 7.7 percent since 2014.
- The REER appreciation primarily reflects the rise in the NEER, partly owing to the strength of the dollar (to which the Djibouti franc is pegged).

### EBA-lite assessment and elasticity
- The real exchange rate assessment uses the IMF’s External Balance Assessment (EBA-lite) methodology employing the current account and external sustainability approaches.
- The assessment adjusts variables to strip out the temporary surge in investment-related imports and related fiscal effects in 2015.
- The elasticity of the current account to the REER is estimated at -0.20 (EBA-lite model): import and export elasticities are based on a cross-country panel regression; the overall elasticity uses Djibouti’s import and export shares.

### EBA-lite: current account approach (adjusted)
- The adjusted current account approach suggests the real exchange rate was overvalued by 24 percent in 2015.
- The EBA model-based analysis indicates a current account norm of -5.0 percent of GDP for the current account in 2015.
- Using the estimated elasticity of -0.20, the REER adjustment needed to eliminate the gap between the norm and actual current account is estimated at 24 percent.
- Caveats: estimate subject to uncertainty because regression coefficients are pooled estimates that do not capture country-specific effects; adjustment to strip out temporary investment surge is approximate and may omit elements (e.g., petroleum imports linked to investment).

### External sustainability approach
- The external sustainability method suggests a larger REER overvaluation.
- Using 2016 as base year and a benchmark equal to the projected external position for 2016 (capturing the sharp increase in external borrowing in 2016), the required adjustment implies an REER overvaluation of 29 percent.
- Given high net external liabilities at end-2016 (-81 percent of GDP) and a high risk of debt distress per LIC-DSA, a reduction in net external liabilities is desirable.
- Under the hypothesis of targeting the end-2015 net IIP level (-60 percent of GDP) to be achieved over 10 years, the implied REER overvaluation would be about 43 percent.
- Note: the choice of external position target and time span is a policy choice; the external sustainability approach incorporates the impact of debt financing of the investment surge and may overstate required adjustment if the surge unwinds.

### External Balance Assessment (table highlights)
- Indicator values (percent of GDP, unless otherwise stated):
  - Net IIP: -80.7 (holding Net IIP at projected end-2016 level); -59.6 (achieve end-2015 Net IIP level in 2026)
  - Current account actual: -9.8 (2015)
  - Current account forecast: -17.5 (2021)
  - Policy gap: -0.2
  - Current account norm: -5.0; -11.5; -8.5 (depending on scenario)
  - Current account gap: -4.8; -6.0; -9.1
  - Real exchange rate gap (percent): 24.1; 28.9; 43.4

### Sensitivity of current account to REER and policy implications
- The sensitivity of the current account to REER movements is likely low because:
  - Heavy dependence on imports of food and staples with production constrained by non-price (climate) factors → imports not elastic to exchange rate.
  - Main foreign exchange sources—port services and rental fees for military bases—are set in long-term contracts and are not exchange-rate sensitive.
- Policy implication: improve external competitiveness via structural reforms to lower costs of services (electricity, water, telecommunications) and improve business and investment environment; given the currency board peg to the dollar, fiscal adjustment is the implied policy action if exchange rate adjustment is infeasible.

### Business environment and governance
- Djibouti’s business environment is uncompetitive; more efforts needed to converge to better performers.
- World Bank Doing Business: Djibouti ranked 171 out of 190 countries in the 2017 Doing Business Index Report.
- Production costs are high; electricity tariffs among the highest in the world.
- Low rankings in enforcing contracts, protecting investors, getting bank credit, starting a business, getting electricity, and registering property undermine competitiveness and private investment.
- Authorities’ planned measures: opening a power plant to improve electricity supply, rationalizing business taxes, establishing technical and professional training schools, and making the recently opened one-stop shop fully operational.

### Reserve adequacy and reserves
- Optimal level of reserves for Djibouti is estimated at 3.1 months of imports at end-2016 under the methodology for credit-constrained economies.
  - Cost of holding reserves proxied by marginal product of capital: 6.15 percent (IMF Policy Paper, March 2016).
  - Sensitivity: cost of holding reserves at 5 percent implies optimal reserves of 4.3 months; at 7 percent implies optimal reserves of 2.5 months.
- Actual reserves at end-2016 estimated at 3.4 months of imports.
- Under the currency board arrangement, required reserve cover is at least 100 percent; at end-2016 estimated reserve cover is 109 percent.
- Note: estimates are subject to uncertainty due to data limitations and sensitivity to marginal product/cost of holding reserves.

### Risks to the external outlook
- Downside risks:
  - Lack of diversification: slowdown in international trade or negative growth shock in Ethiopia could stress the balance of payments.
  - Significant increases in world food and oil prices.
  - Risks of rising debt distress if the investment boom does not unwind and is financed by non-concessional external debt, or if projects fail to generate adequate economic returns.
- Upside scenario:
  - Full implementation of reforms to improve governance and the investment climate, favorable external environment, and unwinding of the investment boom would sustain high growth and a stable external position.

### Authorities’ stance
- The authorities agreed with the broad thrust of the assessment and policy recommendations, aligned with their policies aimed at strengthening competitiveness through structural reforms.

---

*Source: Appendix I. External Sector Assessment (cr1787). Djibouti Authorities; and IMF staff calculations.*

### 4. Gender is not a major factor in poverty. The extreme poverty rate within female-

### 4. Gender is not a major factor in poverty. The extreme poverty rate within female-

### Poverty and gender-headed households
- Extreme poverty rate within female-headed households is 21 percent, same as within male-headed households.
- No significant differences in poverty between female and male-headed households in the capital and in rural areas.
- In other urban areas, poverty rate of female-headed households is 29 percent compared to 19 percent for male-headed households.
- The average expenditure per person is broadly equal in both types of households.

### Gender inequality in labor force participation and education
- Only 29 percent of women aged 15 to 64 are active in the labor market compared to 54 percent of men.
- Only about 54 percent of women with at least three years of university studies are in the labor market compared to 76 percent of men.
- Overall female literacy is 53 percent relative to 67 percent for men.
- Female literacy rate in rural areas is 20 percent.
- Djibouti has the highest ratio of maternal mortality in the region and one of the highest in the world.

### Unemployment and employment structure
- Unemployment rate stood at 39 percent in 2015 (DISED, 2015).
- Female unemployment: 49 percent; male unemployment: 34 percent.
- Rural unemployment: 59 percent; urban unemployment: 37 percent.
- Services and construction together account for about 13 percent of formal employment.
- Economic growth has been driven by capital-intensive investment in the ports and related activities, with limited employment creation; many jobs have been filled by expatriates due to a low domestic skills base.
- Agricultural sector is small because of the unfavorable climate.

### Demographics and labor market challenges
- Almost 75 percent of the population is younger than 35 years.
- Large proportion of labor force consists of job market entrants often lacking needed skills.
- Youth unemployment is much higher than the overall unemployment rate.
- Migration to Djibouti from neighboring countries, fueled by the regional refugee crisis, exacerbates labor market pressures.
- Low labor force participation, reflecting low female participation, increases dependence on the working population.

### Data limitations and surveys
- In 2013, authorities updated the 2012 household survey (EDAM-2012) and updated calculations of key poverty indicators based on new thresholds and methodology (EBC-2013).
- In 2015 authorities published results of a new survey of employment and the informal sector (EESI, 2015).
- The World Bank is providing support to the Directorate of Statistics and Demographic Studies (DISED) for the 2017 household income and expenditure survey to produce reliable indicators disaggregated by region, gender, vulnerability status, etc.

### Growth incidence curves and distributional outcomes (2002–13)
- Household consumption increased on average in 2003-13; mean of the GIC is above zero driven by the 3rd to the 10th deciles.
- GIC is positively sloped indicating an increase in inequality during 2003-13.
- 95 percent confidence interval suggests the growth rate of consumption may not be statistically different from zero for parts of the distribution.
- The lowest decile of the GIC is below the zero consumption threshold indicating the poorest 10 percent experienced a fall in consumption between 2002-13.
- The 95 percent confidence interval around the GIC crosses the horizontal axis several times, particularly the 5th to the 8th deciles, suggesting changes of consumption for those groups could have been negative.
- For the lowest 80 percent of the distribution the curve is below the mid-point consumption growth threshold; consumption of 80 percent of households grew more slowly relative to the top 20 percent.
- All but 5 percent of households enjoyed positive consumption growth, yet relative inequality increased.
- Summary conclusions from the distributional analysis (2002-13):
  - (i) growth and consumption increased;
  - (ii) overall poverty declined but there was no change in extreme poverty;
  - (iii) inequality measured by the Gini index increased;
  - (iv) growth has not been inclusive as it benefitted mainly households in the higher part of the consumption distribution.
- Statistical significance of these results is relatively low.

### Policy recommendations to improve inclusiveness
- Sustained overall economic growth is a precondition for further poverty reduction; in developing countries, growth of average income explains 70 percent of poverty reduction in the short run.
- Give special attention to the distributional dimension of growth: about two-thirds of poverty reduction comes from growth and greater equality contributes the other third; a one percent increase in incomes in the most unequal countries produces a 0.6 percent reduction in poverty, while in the most equal countries it yields a 4.3 percent cut.
- Economic diversification to develop sectors with high growth and employment potential, such as tourism and fishing, and reduce reliance on a single sector (services) catering mainly to one client (Ethiopia).
- Broad-based reforms to improve the business climate are indispensable.
- Well-designed public policies:
  - Use social policies to provide a safety net against extreme poverty and shocks for the poor and vulnerable groups.
  - Fiscal reforms to generate revenues needed to ensure affordability of a social safety net; revamp of the investment incentive system to broaden the tax base is an effective way to increase budget revenues.
  - Redirect resources to targeted measures, such as public works programs, to protect poor households in the short term.
- Strengthen inclusive institutions that ensure rule of law, access to public services, and protection of property and contractual freedom without discrimination.
- Coherent labor market policies to create productive employment opportunities across the economy; focus on employment and productivity increases in rural areas, particularly in fishery, tourism and infrastructure.
- Job and skills training programs to increase employability of the working age population.
- Deepen the financial sector to give the poor better access to financial services; expand and widen credit availability through support for microfinance, rural finance mechanisms, and expansion in credit information sharing.

*Source: cr1787 — Staff Report for the 2016 Article IV Consultation (Informational Annex).*

### 2012. The assessment recommended that the CBD: (i) strengthen independent oversight through a

### cr1787 - 2012. The assessment recommended that the CBD: (i) strengthen independent oversight through a

### Safeguards and Central Bank of Djibouti (CBD) reforms
- The 2012 assessment recommended that the CBD:
  - (i) strengthen independent oversight through a review of the legal framework and establishment of an audit committee;
  - (ii) enhance transparency of its financial reporting practices by timely publication of the financial statements and adoption of International Financial Reporting Standard (IFRS);
  - (iii) establish an internal audit function to ensure the effectiveness of internal controls.
- Progress reported:
  - The CBD recently published its audited financial statements for 2013–15.
  - Authorities have confirmed that an internal audit function has been established.
  - The CBD has yet to provide the related management letters on internal controls to the IMF as required under the safeguards policy.

### Exchange arrangements
- Djibouti has a currency board arrangement.
- The Djibouti franc is pegged to the U.S. dollar at the rate of DF 177.721 = US$1.
- Djibouti is an Article VIII member and maintains an exchange system free of restrictions on payments and transfers for current international transactions.

### Article IV Consultation, FSAP, and IMF presence
- On December 4, 2015, the Executive Board concluded the 2015 Article IV consultation with Djibouti on a lapse of time basis (IMF Country Report No. 16/248).
- The FSAP, including the assessment of the AML-CFT framework, was approved by the Board in June 2009.
- The IMF has had a resident representative office in Djibouti since 1998.
  - The Fund’s Resident Representative is Mr. Joseph Karangwa since February 2015.

### Technical assistance (past two years and mission schedule)
- Recent IMF technical assistance listed (title and date as provided):
  - MCM- Review of Islamic Finance Regulatory and Supervisory Framework November 2014
  - MCM- Reserve Management January 2015
  - MCM- Improving Debt Management Capacity May 2015
  - STA- Monetary and Financial Statistics July 2015
  - MCM- Reserve Management September 2015
  - MCM- Multi-topic MCM mission October 2015
  - STA- Consumer Price Index January 2016
  - STA- Monetary and Financial Statistics December 2016
  - MCM/METAC- Medium term action plan/ Review supervisory Framework October 2016
  - STA/METAC- National Accounts November 2016

### Bank–Fund collaboration (Joint Management Action Plan, January–December 2017; as of December 31, 2016)
- Mutual information on relevant work program (Bank and Fund work programs and technical assistance) with multiple approval dates and provisional schedules (dates provided in source).
- Requests and coordination:
  - Fund requests to Bank and Bank requests to Fund for periodic updates, reports, macroeconomic and financial data sharing, and Fund staff participation in key analytical work.
- Joint products and missions:
  - Joint product in the next 12 months: Debt sustainability analysis (Q4 2017 / Jan 2018 schedule as provided).

### Statistical issues — data adequacy and shortcomings
- General: Data provided are broadly adequate for surveillance but shortcomings remain.
  - Progress in national accounts, but inadequate data sources hamper quality.
  - Shortcomings on balance of payments and external debt persist.
  - Fiscal data are reported with delays and no aggregated data on accounts of, and contingent liabilities from, public enterprises.
  - Djibouti began participating in the GDDS in February 2012 but data is still not reported for the GFS Yearbook.
- National accounts:
  - Compilation resumed since 2012 with GDP estimates for 2008–13.
  - New GDP estimate for 2013 developed within supply and use table framework using the 2008 SNA; new series to be published by end of 2017.
  - Population census completed in 2009; household survey on social indicators and consumption expenditure in 2013.
  - CPI basket revised; new series of CPI available since January 2016.
- External sector:
  - Improvements in balance of payments statistics noted, but problems remain in trade statistics, coverage of direct investment in the BOP, and estimating workers’ remittances.
  - Transition from BPM5 to BPM6 remains to be done; BOP and debt statistics continue to be provided with a lag.
- Government finance:
  - Fiscal data available monthly but with substantial delay (recently a 6-month lag).
  - Foreign-financed capital expenditure reported regularly.
  - GFSM 2001/14 budget classification implemented but not used for TOFE compilation and fiscal reporting.
  - No consolidated public sector accounts beyond central government, including public enterprise debt liabilities.
- Monetary accounts:
  - Monetary statistics generally adequate, covering central bank and aggregated balance sheet of all commercial banks.
  - Monetary and financial statistics TA in July 2015 led to partial implementation (sectorization) but majority of recommendations not implemented due to staffing constraints.

### Table of Common Indicators Required for Surveillance (As of December 2016) — selected entries (dates and frequencies preserved)
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of Latest Observation September 2016; Date Received October 2016; Frequency of Data M; Frequency of Reporting M; Frequency of Publication n.a.
- Reserve/Base Money: Date of Latest Observation September 2016; Date Received October 2016; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Broad Money: Date of Latest Observation September 2016; Date Received October 2016; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Central Bank Balance Sheet: Date of Latest Observation September 2016; Date Received October 2016; Frequency of Data M; Frequency of Reporting M; Frequency of Publication A.
- Consolidated Balance Sheet of the Banking System: Date of Latest Observation June 2016; Date Received September 2016; Frequency of Data M; Frequency of Reporting M; Frequency of Publication A.
- Interest Rates: Date of Latest Observation June 2015; Date Received October 2015; Frequency of Data M; Frequency of Reporting M; Frequency of Publication A.
- Consumer Price Index: Date of Latest Observation October 2016; Date Received November 2016; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Revenue, Expenditure, Balance and Composition of Financing – General Government: Date of Latest Observation June 2016; Date Received October 2016; Frequency of Data M; Frequency of Reporting M; Frequency of Publication n.a.
- External Current Account Balance: Date of Latest Observation December 2015; Date Received September 2016; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A.
- Exports and Imports of Goods and Services: Date of Latest Observation December 2015; Date Received September 2016; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication A.
- GDP/GNP: Date of Latest Observation December 2015; Date Received October 2016; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A.
- Gross External Debt: Date of Latest Observation September 2016; Date Received October 2016; Frequency of Data A; Frequency of Reporting A; Frequency of Publication I.
- International Investment Position: Date of Latest Observation December 2015; Date Received June 2016; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A.

### Debt Sustainability Analysis (DSA) — key findings and projections
- The DSA confirms Djibouti continues to face a high risk of debt distress, and that this risk has increased significantly since engagement in large, externally-financed infrastructure projects.
- External public debt-to-GDP ratio increased from 50 percent in 2014 to 85 percent in 2016.
- Baseline projections over the next twenty years suggest significant and prolonged breaches of the present value (PV) of debt-to-GDP and debt-to-exports thresholds.
- Liquidity ratios are projected to exceed relevant thresholds already in 2018, as amortization on recent large loans starts falling due, suggesting potential liquidity strains in the near term.
- External debt ratios are most sensitive to the exchange rate, non-debt flows, and exports shocks.
  - Exchange rate depreciation is described as a tail risk given Djibouti’s currency board, but a sharp depreciation of the U.S. dollar vis-à-vis the euro and the Kuwaiti dinar could produce sizeable valuation effects.
  - An increase in global interest rates could pose important risks given the significant share of debt with variable interest rates.
- Policy implications from the DSA:
  - Public sector borrowing space is very limited.
  - Pace of external borrowing should be reduced and borrowing on non-concessional terms avoided.
  - Any new borrowing resulting in significant additional short-term debt service should be avoided.
  - Authorities should develop a national strategy to manage the external debt burden aimed at restoring debt sustainability and strengthen coordination among government entities in charge of contracting external loans.

### Background and debt composition (selected figures preserved)
- Total public and publicly guaranteed (PPG) debt:
  - Increased from 50 percent of GDP at end-2014 to 69 percent of GDP at end-2015.
  - Projected to increase to 85 percent of GDP at end-2016. (Figures for 2016 based on data available through mid-November 2016.)
- Government-guaranteed public enterprise debt:
  - Accounted for 58 percent of external debt at end-2015.
  - Expected to rise to 68 percent of external debt by end-2016.
- Domestic debt share in total public debt is small and declining.
- Composition table highlights (end-2015 and 2016 projections; amounts in Millions of US$ and percent of GDP / percent of external debt as shown in source):
  - External Debt (end-2015): 1,197 Millions of US$; 63 percent of GDP; 100 percent of external debt.
  - External Debt (end-2016 proj.): 1,610 Millions of US$; 85 percent of GDP; 100 percent of external debt.
  - Public debt (end-2015): 495 Millions of US$; 26 percent of GDP; 41 percent of external debt.
  - Public debt (end-2016 proj.): 508 Millions of US$; 27 percent of GDP; 32 percent of external debt.
  - Publicly-guaranteed debt (end-2015): 696 Millions of US$; 37 percent of GDP; 58 percent of external debt.
  - Publicly-guaranteed debt (end-2016 proj.): 1,096 Millions of US$; 58 percent of GDP; 68 percent of external debt.
  - Stock of external arrears (end-2015): 6 Millions of US$; 0.3 percent of GDP; 0.5 percent of external debt.
  - Domestic Debt (end-2015): 14 Millions of US$; 1 percent of GDP.
  - Note: In the DSA projections all external arrears are assumed to be cleared by 2018. Budgetary arrears equivalent to approximately 0.5 percent of GDP are excluded from domestic debt in the table but included in projections and assumed to be paid off by 2019.
- Major loans and disbursement dynamics:
  - 2013: Two large loans contracted to finance Addis Ababa–Djibouti railway and a water pipeline from Ethiopia for the amount of US$860 million.
  - 2016: Government-guaranteed loan to finance construction of a multipurpose port signed for an amount of US$340 million.
  - These three loans were extended by China EximBank; during 2014–16 disbursements reached a cumulative US$1.1 billion (over 90 percent of the loans contracted).
  - Average grant element on new external borrowing (disbursements) expected to reach 36 percent in 2016, and to decline to 12 percent by 2023 under assumptions of tightening financing terms.
- Debt service and timing:
  - External PPG debt-to-GDP ratio projected to peak at 87.3 percent in 2018.
  - Grace periods end in: railway 2019; water pipeline 2021; multipurpose port 2023.
  - Total external PPG debt service projected to increase to about US$350–400 million per year by 2024 and thereafter (peaking in terms of GDP at 9.1 percent in 2024).
- Currency composition:
  - In 2014, external debt denominated mainly in Kuwaiti dinar (22 percent), U.S. dollar (20 percent), and euro (10 percent).
  - Disbursements related to three large projects increase dollar-denominated debt share to 60 percent in 2021.
- Arrears:
  - May 2016: Outstanding arrears to India ($10.9 million or 0.6 percent of GDP at end-2015) were cleared under a restructuring agreement.
  - As of end-November 2016, external debt arrears on PPG external debt still amounted to 0.7 percent of GDP (mainly to Iran, 0.3 percent of GDP); discussions to reschedule ongoing.
  - Arrears with Belgium, Italy, and Spain: $4.6 million or 0.2 percent of GDP (suspension pending negotiations to convert debts into development projects).
  - Short-term arrears periodically incurred and cleared in 2016; at end-November amounted to 0.2 percent of GDP (owed to Arab Development Funds and India).

### Macroeconomic assumptions used in the DSA (values and phrasing preserved)
- GDP growth:
  - Projected to reach 6.5 percent in 2016 and to accelerate to 7 percent in the medium term on the back of major investments in port facilities, railways and energy.
  - Growth assumed to stabilize at 6 percent in the long term once major investment projects start to bear fruit.
- Current account:
  - Peaked at 32 percent of GDP in 2015 due to large investment goods imports.
  - Expected to decline to 28 percent of GDP in 2016 and 21 percent of GDP in 2017, and subsequently stabilize at around 13 percent of GDP in the long run.
  - Non-interest current account deficit projected at 11 percent in the long run.
- Net FDI inflows:
  - Projected to fluctuate around 11 percent of GDP per annum, covering the non-interest current account deficit beyond 2022.
- Inflation:
  - Projected to stabilize at 3 percent in the medium and long run.
- Fiscal balance:
  - Fiscal deficit about 16 percent of GDP on average during 2014–16.
  - Projected to drop to about 1 percent of GDP from 2018 once the water pipeline project is completed.
- External debt interest rates and grant elements:
  - Average effective interest rate on external debt projected at 2.4 percent in 2016.
  - Effective interest rate expected to exceed 4 percent in the medium term under tightening financing terms.
  - Average grant element of new external PPG borrowing: 36 percent in 2016; expected to drop to 28 percent in 2017 and decline to 20 percent in the medium term, then to 12 percent thereafter.

*Prepared by the staffs of the International Monetary Fund and the International Development Association. February 7, 2017.*

### 7. The results of the external DSA confirm that Djibouti remains at a high risk of debt

### 7. The results of the external DSA confirm that Djibouti remains at a high risk of debt distress

### Summary of risk assessment
- Djibouti remains at a high risk of debt distress (as in the previous 2015 DSA), and the risk of debt distress has increased significantly.
- Debt burden indicators breach their respective policy-dependent thresholds by larger amounts than in the 2015 DSA, and liquidity thresholds are breached for longer periods.
- Note: Sufficient data on stocks and flows of private external debt are not available to make it possible to incorporate the evolution of the private external debt in the DSA.

### Baseline projections and key statistics
- Under the baseline, total nominal public and publicly guaranteed (PPG) debt is projected to reach 85 percent of GDP in 2016 and 87 percent of GDP in 2017–19 before steadily declining over the long run.
- The PV of debt-to-GDP ratio is projected to reach 82-83 percent in 2016–18.
- The PV of external debt-to-GDP and debt–to-exports ratios remain above their policy-dependent thresholds for the entire projection period.
- The PV of debt-to-revenues ratio remains above its threshold until 2026.
- Debt service implications:
  - During 2020-30, debt service will on average reach about one-quarter of total export revenues and one-third of fiscal revenues, implying high liquidity risks in the long term.

- Selected numerical indicators reported in the DSA (current DSA versus previous DSA, September 2015):
  - Real GDP growth (2016 2017 2018 2019 2020 Average 2020–2036)
    - Current DSA: 6.5, 7, 7, 7, 6, 6
    - Previous DSA, September 2015: 6.5, 7, 7, 7, 6, 6
  - Overall fiscal balance (cash basis, percent of GDP)
    - Current DSA: -16.3, -2.6, -1.1, -1.1, -1.3, -1.4
    - Previous DSA, September 2015: -11.9, -1.6, -3.4, -1.1, -0.1, -0.1
  - Current account deficit (percent of GDP)
    - Current DSA: -28.4, -20.8, -18.2, -19, -17.9, -12.2
    - Previous DSA, September 2015: -25.8, -14.8, -14.5, -12.6, -13.1, -14
  - External PPG debt (nominal, percent of GDP)
    - Current DSA: 84.9, 86.9, 87.3, 87.2, 86.6, 63.1
    - Previous DSA, September 2015: 78.7, 79.6, 78.3, 73.5, 68.6, 54.1

### Stress tests and shock scenarios
- Binding shocks identified as most significant: exchange rate, non-debt creating flows, and exports.
- Exchange rate shock:
  - A one-time 30 percent nominal depreciation in 2017 would raise the PV of the external debt-to-GDP ratio above 117 percent.
  - Such a depreciation would cause sizeable and prolonged breaches of thresholds by all debt burden indicators.
  - The Djibouti franc’s exceptional stability vis-à-vis the dollar under the currency board implies the DSA exchange rate stress scenario should be considered a tail risk event.
- Interest-rate and project-related risks:
  - Debt related to the railway project is linked to LIBOR; an increase in global interest rates could pose important risks.
- External demand risks:
  - A slowdown in economic growth in Ethiopia or China and a slowdown in international trade would have a major impact on export revenues and could potentially worsen debt indicators.
- Liquidity stress:
  - Debt service-to-exports and debt service-to-revenue ratios rapidly approach and exceed their respective thresholds in 2019, earlier than in the 2015 DSA, and remain above thresholds for almost the whole projection horizon.

### Public DSA and public debt dynamics
- Total public debt dynamics driven by large share of external debt; domestic debt share is small and declining.
- Under the baseline, overall public debt projected to increase from 54 percent of GDP in 2014 to 88 percent in 2017.
- The PV of debt-to-GDP remains above the 38 percent benchmark until 2029.
- Simulation results:
  - Under fixed primary balance and historical scenarios, public debt dynamics worsen relative to the baseline (because baseline assumes higher projected economic growth and lower primary fiscal deficit than historical values).
- Stress tests show public debt indicators are most vulnerable to an exchange rate depreciation; a one-time 30 percent depreciation in 2017 would lead to major increases in all key ratios and significantly impact the debt service-to-revenue ratio over the medium term.

### Institutional weaknesses in debt management
- Under the existing institutional framework, debt management suffers from weak coordination:
  - Most debt agreements are signed by line ministries and other government agencies while the Ministry of Economy and Finance (and the Public Debt Department) are often involved only at a late stage.
  - Authorities’ capacity to monitor and evaluate debt flows and stocks, and associated budget risks, including through periodic DSAs, would benefit from being strengthened.
- Public enterprise risks and transparency:
  - Given the large role of public enterprises in ensuring the sustainability of PPG debt, increasing transparency on the risks and costs of contingent budget liabilities from public enterprise debt liabilities is important.
  - It would be useful for the authorities to establish a database to monitor public enterprise debt, government guarantees, and related collateral.

### Policy recommendations and conclusions
- Overall conclusion:
  - Djibouti remains at a high risk of debt distress; risks have increased compared with the 2015 DSA.
  - Solvency and liquidity risks are significant over the projection horizon; all debt burden indicators breach policy-dependent thresholds by sizeable margins larger than in the 2015 DSA.
  - Debt dynamics and risk of debt distress are particularly vulnerable to adverse exchange rate and export shocks, costlier borrowing costs, and shocks to non-debt creating inflows (FDI).

- Recommended policy actions:
  - Reduce the pace of PPG external borrowing and avoid borrowing on non-concessional terms. Any further non-concessional borrowing will exacerbate the already high risk of debt distress.
  - Slow the pace of new loans contracted or guaranteed by the government.
  - Limit new borrowing, especially for projects managed by public enterprises, to projects that generate sufficient revenues to meet debt service requirements.
  - Implement complementary reforms to strengthen governance and efficiency of public enterprises.
  - If adopting public-private partnerships (PPP) for future projects:
    - Strengthen capacity to evaluate and monitor PPP-related contingent liabilities for the budget.
    - Minimize financial participation in PPPs and avoid providing explicit guarantees or taking on implicit contingent budget liabilities related to PPP project performance.
  - Press ahead with finalization and adoption of a national debt strategy and establishment of a national public debt committee:
    - Ensure the committee serves as a clearing house for approval of all new public sector loans, centralizing and coordinating control over new borrowing, and enabling ex ante evaluation of borrowing costs and risks.
    - Introduce an explicit debt anchor (for example, a target for the medium-term debt-to-GDP ratio) to benchmark and guide sustainable debt policy.
  - Given the sizeable increase in debt service over the medium term, consolidate and strengthen debt management expeditiously.
  - Give priority to staying current on all debt service obligations.

*Source: IMF Staff.*

### 15. The authorities acknowledge the high risk to debt sustainability attached to the

### 15. The authorities acknowledge the high risk to debt sustainability attached to the

### Authorities’ strategy and rationale
- Authorities accept DSA finding of a high risk to debt sustainability but consider debt-financed investment projects critical for Djibouti’s development.
- Viability conditional on: generating sustained strong economic growth and crowding-in sufficient FDI as alternative financing.
- Priorities highlighted:
  - Strengthening governance and efficiency of public enterprises.
  - Improving the business climate.
  - Relying more on financing projects through PPPs involving only a small financial participation, if any, by the government; PPPs to be selected only if profitable and authorities did not expect to provide government guarantees.
  - Use external borrowing for projects considered important and cost effective in absence of alternative financing.
  - Establishing a national debt policy and strengthening public debt management; underscored importance of technical assistance.

### Debt dynamics, risks, and DSA indicators (selected exact figures from tables and text)
- Public and publicly guaranteed (PPG) external debt (nominal) 2013–2016: 46.2, 49.9, 69.3, 84.8 (percent of GDP reported in Table 3).
- PV of PPG external debt (selected years/projections, percent of GDP): 69.2; 82.5; 82.8; 82.3; 80.7; 78.2; 74.9; 49.9; 27.6 (Table 3 / Table 5 presentation).
- PV of PPG external debt (in percent of exports, selected values): 202.9, 235.0, 241.6, 247.2, 249.3, 240.8, 235.1, 174.5, 109.3.
- PPG debt service-to-revenue ratio (in percent): 10.1, 15.9, 8.3, 13.3, 17.8, 16.8, 22.3, 28.8, 30.8, 33.1, 13.2 (Table 3).
- Debt service-to-exports ratio (in percent): 8.3, 12.9, 7.4, 10.6, 14.1, 13.6, 18.1, 22.9, 24.7, 27.8, 12.1.
- Total gross financing need (Billions of U.S. dollars): 0.1, 0.3, 0.5, 0.4, 0.2, 0.2, 0.3, 0.3, 0.3, 0.3, 0.3.
- Nominal GDP (Billions of US dollars, memorandum): 1.5, 1.6, 1.7, 1.9, 2.1, 2.3, 2.5, 2.8, 3.0, 4.7, 11.3.
- Real GDP growth assumptions (percent): 5.0, 6.0, 6.5, 5.1, 1.5, 6.5, 7.0, 7.0, 7.0, 6.0, 6.0, 6.6, 6.0, 6.0, 6.0 (Table 3 / Table 5 entries).
- Effective interest rate (percent, selected): 1.4, 1.8, 1.9, 1.5, 0.2, 2.4, 4.0, 2.8, 4.3, 4.3, 4.0, 3.6, 4.2, 1.1, 3.0 (Table 3 key assumptions).
- Grant element of new public sector borrowing (percent, selected): 38.6, 28.4, 22.3, 20.9, 19.3, 17.0, 24.4, 12.0, 12.0 (Table 5 / Table 3 entries).
- Grant-equivalent financing (in percent of GDP, selected): 7.5, 7.5, 5.4, 5.1, 4.9, 4.5, 3.5, 3.2, 3.5 (Table 3).

### Stress tests and sensitivity analysis (selected exact results)
- Table 4a — PV of debt-to-GDP ratio (baseline and shocks, percent):
  - Baseline: 83 (2016), 83 (2017), 82 (2018), 81 (2019), 78 (2020), 75 (2021), 50 (2026), 28 (2036).
  - A2 (New public sector loans on less favorable terms): 83, 84, 85, 86, 85, 83, 64, 47.
  - B6 (One-time 30 percent nominal depreciation in 2017): 83, 117, 117, 114, 111, 106, 71, 39.
- Table 4a — PV of debt-to-exports ratio (baseline and shocks, percent):
  - Baseline: 235, 242, 247, 249, 241, 235, 175, 109.
  - A2 (less favorable terms): 235, 244, 256, 265, 262, 262, 224, 185.
  - B6 (30 percent depreciation): 235, 242, 248, 251, 242, 237, 176, 110.
- Table 4a — PV of debt-to-revenue ratio (baseline and shocks, percent):
  - Baseline: 294, 306, 306, 307, 302, 294, 208, 120.
  - A2 (less favorable terms): 294, 309, 317, 326, 329, 327, 266, 202.
  - B6 (30 percent depreciation): 294, 432, 433, 435, 429, 418, 296, 170.
- Table 4b — Debt service-to-exports ratio (baseline and shocks, percent):
  - Baseline: 11, 14, 14, 18, 23, 25, 28, 12.
  - B6 (30 percent depreciation): 11, 14, 14, 18, 23, 25, 28, 12.
  - A2 (less favorable terms): 11, 14, 12, 17, 20, 23, 27, 15.
- Table 4b — Debt service-to-revenue ratio (baseline and shocks, percent):
  - Baseline: 13, 18, 17, 22, 29, 31, 33, 13.
  - A2 (less favorable terms): 13, 18, 15, 21, 26, 29, 32, 16.
  - B6 (30 percent depreciation): 13, 25, 24, 32, 41, 44, 47, 19.
- Table 6 — PV of Debt-to-GDP Ratio projections under scenarios (selected):
  - Baseline projections: 84, 84, 83, 81, 78, 75, 50, 28 (2016–2036).
  - A1 (real GDP growth and primary balance at historical averages): 84, 90, 95, 101, 104, 105, 102, 92.
  - A2 (primary balance unchanged from 2016): 84, 97, 109, 121, 132, 140, 167, 202.
  - B4 (one-time 30 percent real depreciation in 2017): 84, 117, 113, 109, 105, 100, 71, 46.

### Policy measures, reforms, and implementation steps (exact programs and actions)
- Ongoing and planned reforms:
  - Establishment of guidelines at ministerial level to increase evaluation, coordination and management of all public sector loans; expected to culminate with establishment of a national debt committee.
  - Negotiations underway to clear outstanding external debt arrears.
  - Plans to increase revenue mobilization with measures to improve VAT implementation, support real estate developers, and strengthen customs administration.
  - Request for technical assistance on tax exemptions and special tax regimes; plan to establish a tax policy unit and a reform steering committee in the year of the report.
  - Prioritization of social spending, investments in human capital, access to education, and health.
  - Implementation of code of good governance for public enterprises (April 2016) and preparation of performance contracts for at least five public enterprises (Djibouti Telecom, Electricité de Djibouti, Fonds de l’Habitat, ONEAD and SID) with aim to formalize by June 2017.
  - Review institutional and legal framework for PPPs; aim to select PPPs only if profitable and limit government guarantees/financial participation.
- Financial sector and supervision steps:
  - Central bank (BCD) strengthened safeguards: publication of audited financial statements on BCD website; creation and operationalization of an audit committee.
  - BCD initiatives: facility for financing small enterprises; establishment of a Sharia Committee to develop Islamic finance; launch of mobile banking services project for rural financial inclusion.
  - AML-CFT progress: ratification and incorporation of universal instruments into national regulation; strengthening of BCD’s Department of Financial Intelligence; recruitment of experienced consultant to accelerate membership to MENA-FATF.
- Job creation, private sector, and social programs:
  - Launch of “Accelerated Growth and Employment Promotion Strategy” (SCAPE) to support growth and employment; measures include reduction of factor costs, strengthening SME supervisory capacities, and enhanced private sector dialogue.
  - Establishment of Economic Development Council of Djibouti (CDED) (September 2016) to coordinate economic policy and formulate investment promotion policies; cooperation with World Bank project “Governance for Private Sector Development and Finance Project”.
  - Focus on economic diversification: fishing sector expansion, tourism development via Office National du Tourisme de Djibouti (ONTD), development of ecotourism centers (Obock region).
  - Steps to expand social safety net: establishment of database of social program beneficiaries to better target social spending.

*Source: IMF staff report and accompanying DSA material as presented in the supplied content unit.*

### Conclusion

### Conclusion

### Development strategy and objectives
- Over the past few years, Djibouti has put in place an important development strategy aimed at transforming the economy by driving infrastructure development, boosting regional integration and upscaling logistical capacities.

### Debt and revenue expectations
- Against the backdrop of the related increase in debt levels, the authorities are confident that the associated increasing revenue streams will foster Djibouti’s economic development and reduce significantly the debt service burden.

### Fund engagement and support
- Fund engagement will be instrumental throughout this process.
- To conclude we appreciate Fund’s continued support for Djibouti, as the authorities endeavor to overcome the challenges facing the country, including the regional refugee crisis.

*Source: IMF staff conclusion (cr1787 - Conclusion).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr1787.pdf_