## 2.   Growth Has Not Translated Into Corresponding Labor Markets Gains

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### Introduction — growth pattern and labor market disconnect
- Real GDP level grew by 50 percent between 2013 and 2021.
- Average growth rate of 5.5 percent since 2005 did not translate into formal labor market gains:
  - 2017 unemployment rate (national definitions): 47 percent (higher than 1996 level of 44 percent).
  - Labor force participation: 45 percent (32 percent among women).
  - Labor informality: 50 percent.
  - Caisse Nationale de Sécurité Sociale reported around 67,600 registered workers in 2021, corresponding to about 10 percent of the working age population.
  - 2017 extreme poverty rate: 21 percent (rural regions: 45 percent).
- Capital‑intensive investment-led expansion and growing skill mismatches increased structural unemployment and limited job creation.

### Okun’s Law — empirical findings and interpretation
- Method: Okun’s Law estimated allowing for potential fluctuations in coefficients during the period of heightened investment; regression extension used to backcast unemployment for 1999–2012.
- Structural break and parameter changes:
  - 1999–2012: estimated impact of a 1 percent output gap on unemployment = 0.32 percent.
  - Investment boom period: impact declined to 0.05 percent.
  - Natural level of unemployment (ILO definition) increased by about 2.4 percent, from 24.4 percent to 26.8 percent.
- Interpretation:
  - Job creation became less sensitive to economic growth during the investment boom—Okun’s slope declined and relationship shifted up—indicating lower job intensity of growth and higher structural unemployment.

### Okun’s Law estimation details and exact regression results
- Gap version notation preserved:
  - u_t^c = β y_t^c + ε_t and u_t = u_t^* + β y_t^c + ε_t.
- Unemployment series extension model (estimated over 2013–2022; fit ≈ 65 percent):
  - Registered unemployed: 3.208** (1.309)
  - Working age population: 4.939+ (2.940)
  - Constant: -66.199 (38.495)
  - Observations: 9
  - R2: 0.650
  - Note: + p < 0.14, * p < 0.10, ** p < 0.05.
- Okun’s Law coefficients by specification (sample 1999–2012 and 2013–2021; Observations: 23 each):
  - Column (1) — time-invariant structural unemployment:
    - Output gap: -0.169+ (0.144)
    - Constant: 25.32** (0.296)
    - Observations: 23
    - Adjusted R2: 0.01
  - Column (2) — structural level allowed to vary (Post 2012 dummy):
    - Output gap: -0.243** (0.0659)
    - Post 2012: 2.386** (0.334)
    - Constant: 24.39** (0.219)
    - Observations: 23
    - Adjusted R2: 0.71
  - Column (3) — interaction between Post 2012 dummy and output gap:
    - Output gap: -0.323** (0.0472)
    - Post 2012: 2.341** (0.317)
    - Output gap X post 2012: 0.270** (0.126)
    - Constant: 24.37** (0.220)
    - Observations: 23
    - Adjusted R2: 0.728
- Interpretation of results:
  - Negative relationship between output gap and cyclical unemployment; larger (more negative) output gap coefficients in specifications with a post-2012 structural shift (e.g., -0.243** and -0.323**).
  - Positive and significant Post 2012 dummy (2.386** and 2.341**) indicates a higher structural level of unemployment post-2012.
  - Positive and significant interaction term (0.270**) modifies the output gap effect in the post-2012 period.
  - Policy implication: stimulate labor‑intensive growth and invest in human capital given limited job creation under the capital‑intensive port-driven model and higher post-2012 structural unemployment.

### Reliance on capital‑intensive sectors and employment generation
- Sectoral drivers:
  - During 2010–2021 about 80 percent of the variation in GDP growth is explained by growth in port activity.
  - Modern port facilities use large amounts of automation and do not generate large employment.
  - During 2015–2021 the transport sector generated less than 7 thousand new jobs, against a cumulated real GDP growth of more than 35 percent.
  - The economic boom of the last decade directly benefitted only about 1 percent of Djiboutians of working age.
- Mechanisms:
  - Shift toward capital‑intensive projects and job‑scarce service activities (e.g., transit trade) reduced job intensity of growth.
  - Informality is high but appears historical; the structural break in Okun’s elasticity coincides with port infrastructure development, which does not employ informal workers.

### Mismatches between human and physical capital
- Capital-skill gaps and labor force characteristics:
  - By 2017 Djibouti’s capital stock per capita reached $5.5 thousands per capita, about 60 percent higher than the average for low-income countries (LICs).
  - 62 percent of the labor force had no schooling (against about 30 percent on average for other LICs).
  - In 2017, unemployment among individuals with advanced education was less than half that of those with basic education.
- Okun’s implication:
  - Since 2013, relationship between output gap and unemployment shifted up, increasing structural unemployment from around 24 percent (1999–2012) to almost 27 percent (2013–2021).
  - Higher structural unemployment signals a growing skill-mismatch driven by rapid capital accumulation not matched by human capital improvements.

### The education system — achievements and remaining gaps
- Achievements:
  - Gross primary enrollment ratio: 51.5 percent in 2004 → close to 100 percent in 2022.
  - Number of primary schools: 122 in 2005 → 224 in 2022.
  - Gender parity: 47 percent female students in primary education in 2022, compared to around 32 percent in 2008.
- Remaining challenges and indicators:
  - Low access to preschool in rural areas; high dropouts in transition to lower secondary.
  - Gross enrollment in secondary schools ≈ 50 percent.
  - PTR in 2022-2023: primary 33, lower secondary 25.
  - Lower Middle‑Income countries averages in 2018: primary 27, lower secondary 20.
  - Students per class (Divisions Pédagogique): between 45 to 50 on average across primary and secondary.
  - Vocational training programs underdeveloped; private higher education investment lags.
  - Adult learning programs (ALP) important: almost 90 percent of individuals found to have no formal education in the 2017 household and labor force survey are expected to remain in the labor force at least until 2027.
- External evidence:
  - ALP promote employability and skills development (UNESCO, 2022); participants in developing-country ALP show greater propensity to transition to self-employment (Bluch, 2017).

### Policy directions to translate growth into jobs
- Education and skills:
  - Substantial education investment and reforms to improve employability and reduce capital-skill mismatch.
  - Expand vocational training and adult learning programs to upskill current workforce and accommodate sectoral diversification needs.
  - Improve quality indicators (reduce PTR where feasible; address high students-per-class).
- Diversification and labor‑intensive sectors:
  - Promote alternative economic activities beyond transit trade and FTZs to improve job creation.
  - Priority sectors with employment potential:
    - Construction: authorities project growth of near 40 percent by 2027; training programs can increase domestic participation and reduce reliance on foreign workers.
    - Tourism, primary sector (fisheries, agriculture, livestock breeding), and mining.
  - Primary sector and tourism can offer opportunities for lower-skilled workers; fisheries and livestock may help reduce food dependency.
- Enabling sectors and infrastructure:
  - Development of alternative sectors requires significant investments in production facilities, distribution networks, hotel capacity, and domestic transport connectivity.
  - Reform state monopolies in IT and energy could:
    - Increase connectivity, improve quality, and lower service prices.
    - Reduce electricity costs (electricity bills account for approximately 25 percent of business expenses, World Bank, 2014).
    - Raise energy self-sufficiency and reduce carbon footprint if new capacity is renewable.
    - Improve telecommunication accessibility and prices; in 2017 Djibouti ranked 158 out of 175 in the ITU ICT Development Index.
  - More competitive IT and utilities sector could particularly benefit non-food manufacturing, which was 1.6 percent of value added in 2021.
- Private sector engagement and fiscal constraints:
  - Significant investment needs for diversification are unlikely to be met by public sources given limited fiscal space; larger role for private sector investment required.
  - Liberalization in key sectors (IT, utilities) could attract competition and private infrastructure investment, possibly via international partnerships.
  - Targeted SOE reforms to improve efficiency and mobilize SOE dividends, and tax reforms to enhance revenue mobilization, can support public investment where appropriate.

### Timely labor market statistics — constraint and recommendation
- Frequent collection of basic labor market data (e.g., unemployment rate) remains a priority for policy design and implementation.
- Recommendation: Strengthen capacity of the Djibouti national statistical office to carry out regular labor market surveys, including within the framework of targeted technical assistance programs by the IMF or other international partners.
- Contextual labor market indicators (2017 ILO unemployment survey):
  - Unemployment rate: 27.5 percent.
  - Unemployment rate for 15–34 year olds: 65.1 percent.
  - Unemployment rate for 15–24 year olds: 86.2 percent.
- Health and education spending to build inclusivity:
  - Health expenditure to GDP: around 3 percent from 2010 to 2015; 2 percent in 2019 and 2020.
  - Education expenditure to GDP: 6.4 percent in 2012; 3.8 percent in 2018.
- SDG progress as of 2023:
  - Ranked 150 out of 166 in progress towards the Sustainable Development Goals.
  - 21 percent of SDGs achieved or on track, 58 percent limited progress, 21 percent indicators worsened.

### Fiscal and tax context relevant to labor and job creation — key figures
- Income taxation:
  - Monthly wages in excess of DJF 50,000 (USD 281) are taxed progressively; top marginal rate of 40 percent applies to incomes of DJF 2 million (USD 11,238) or more.
  - Business profits of natural and legal persons taxed at a flat 25 percent rate.
  - Rental income and most property income (dividends and interest) largely untaxed; pensions tax exempt.
- Indirect taxes:
  - VAT standard rate: 10 percent for businesses with turnover exceeding DJF 20 million (USD 112,381) or DJF 10 million (USD 56,191) for services.
  - Standard VAT rate of 10 percent is lower than Africa average of 16 percent (figure referenced).
- Special regimes:
  - Free Zone Code and Investment Code offer tax preferences, including income tax holidays of up to 50 years.
- Taxpayer compliance (2021):
  - Less than 60 percent of registered business profit tax and VAT payers complied with filing and payment obligations.
- Revenues and grants (Percent of GDP; exact figures):
  - Revenues and grants: 26.5 (2013) → 18.6 (2022)
  - Revenues: 23.3 (2013) → 17.6 (2022)
  - Tax revenues: 13.7 (2013) → 11.2 (2022)
    - Direct taxes: 6.3 (2013) → 5.0 (2022)
    - Business license fees: 1.0 (2013) → 0.6 (2022)
    - Wage tax: 3.1 (2013) → 2.3 (2022)
    - Corporate Income Tax: 1.4 (2013) → 1.3 (2022)
    - Indirect taxes: 6.6 (2013) → 5.7 (2022)
      - TIC: 3.0 (2013) → 2.0 (2022)
      - VAT: 2.3 (2013) → 2.4 (2022)
    - Other taxes: 0.8 (2013) → 0.4 (2022)
  - Non-tax revenues: 9.6 (2013) → 6.5 (2022)
    - SOE dividends: 5.1 (2013) → 1.5 (2022)
    - Tax on Domestic Fuel: 0.6 (2013) → 0.1 (2022)
  - Grants: 3.2 (2013) → 1.0 (2022)
- Comparative tax performance:
  - Djibouti’s tax-to-GDP ratio: 11.2 percent (2022).
  - Comparators: LMICs average 16 percent; non-oil MENA countries 15.9 percent; SSA countries 15.1 percent.

### Tax ratio, revenue targets, and SOE governance
- Tax ratio context and target:
  - Djibouti’s tax ratio is below the 12.75 percent of GDP tipping point identified by empirical literature.
  - Recommendation: aim for tax-to-GDP levels of about 15 percent over the medium-term.
  - Main tax revenue sources: VAT (about 2.3 percent of GDP), wage tax (about 2.3 percent of GDP), customs duties (about 2 percent of GDP); together ≈ two-thirds of total tax revenues.
  - Remaining composition: corporate income tax (1.5 percent of GDP), excise taxes (1.4 percent of GDP), business license fees (0.6 percent of GDP).
- SOE mapping and governance issues:
  - As of February 2024, SEPE had mapped 77 SOEs; received financial accounts from only 14 SOEs.
  - Djibouti scored 3 out of 6 on 2022 CPIA indicator for transparency and accountability in the public sector.
  - 2023 PEFA: score D+ for management of assets; PEFA subscore C for management of financial assets with drivers including lack of SOE performance reporting and monitoring of financial relationships.
  - Oversight dispersed across ministries and auditing bodies; SEPE under-resourced.
  - Sovereign Wealth Fund (SWF) created in 2020 placed profitable SOEs under the Presidency and outside the Code of Good Governance of SOEs; SWF stipulated to receive 20 percent of revenues from military base leases.
- SOE policy priorities:
  - Improve information and monitoring of SOEs; introduce penalties for non‑submission of financial statements; empower SEPE with resources and political buy-in.
  - Accelerate implementation of the 2016 Code of Good Governance of SOEs and pursue rationalization/consolidation of the SOE landscape.

### Formalization, informality, and tax base broadening
- Labor and informality statistics:
  - 2017 employment survey: working age population ≈ 628,000 (population around 950,000).
  - Active population ≈ 44.7 percent of working age population (~280,000 people).
  - 23.7 percent of the working age population had a job (~149,000 people).
  - 67,659 people registered with CNSS as employed (salariés).
- 2016 DISED informal sector survey:
  - 20 percent of the active population in informal employment; three quarters in Djibouti ville.
  - 73.7 percent of informal units led by a woman.
  - Sectoral shares: commercial sector 64.7 percent, services 20.1 percent, industrial activities 11.5 percent, primary sector 3.7 percent.
  - 90 percent of informal units self-employed; 8.5 percent of units having employees.
  - 85.1 percent of informal units not registered with public bodies.
- Economic size of informal units (2015 survey estimates):
  - Total turnover DJF 89.9 billion (USD 510 million).
  - Total production DJF 69.7 billion (USD 390 million).
  - Value added DJF 60.9 billion (USD 340 million or 14 percent of 2015 GDP).
  - Gross operating surplus DJF 52.3 billion (USD 290 million).
- Barriers to formalization (survey shares):
  - Perceived non‑compulsoriness of registration: 52.3 percent.
  - Cost of registration: 23.5 percent.
  - Complexity of procedures: 17.2 percent.
  - Refusal to cooperate with the state: 4.3 percent.
- Policy measures to facilitate formalization:
  - Awareness campaigns on benefits of social security.
  - One-stop shop for business registry, social security, and single taxpayer number.
  - Simplified tax regimes for small businesses; efficient VAT “chains of compliance”; lowering the “net formalization cost” of labor; better enforcement.
  - Digitalization to improve identification, verification, promote digital payments, and reduce cash reliance.

### VAT, corporate tax performance and revenue potential
- VAT c-efficiency:
  - Djibouti: 0.37.
  - LMIC average: 0.52.
  - Potential revenue gain: Djibouti could increase revenues by as much as 0.9 percent of GDP by raising VAT c-efficiency to the LMIC average via legislative and administrative reforms.
- Corporate income tax:
  - Corporate income tax revenues ≈ 1.5 percent of GDP, low relative to sub‑Saharan Africa and LMIC averages (both around 3 percent of GDP).
  - Note: Djibouti’s corporate income tax applies to both natural and legal persons engaged in business activities.
- Tax policy priorities:
  - Medium-term agenda to gradually increase tax revenues towards 15 percent of GDP.
  - Combine incremental and structural reforms with political buy-in and technical advice.
  - Improve revenue quality: minimize distortions, prioritize fairness, neutrality, administrability, ease of compliance, and international competitiveness.
- Specific VAT and tax incentive recommendations:
  - Limit exemptions strictly to basic foodstuffs and margin‑based financial services.
  - Repeal VAT exemptions used as investment incentives (e.g., exemptions for imports by contractors and new suppliers).
  - Reconsider exemptions for agriculture and fishery that can undermine domestic suppliers.
  - Fix khat tax base value inconsistencies with excise levy objectives.
  - Favor cost‑based incentives (accelerated depreciation, investment allowances, tax credits) over profit‑based incentives (tax holidays).
  - Consolidate incentives within the general tax code rather than selective/discretionary grants.
  - Address TIC and patentes:
    - TIC and business license fees raise about 2.6 percent of GDP in revenue.
    - Recommendation: reduce TIC on capital goods (even to zero if possible).
    - Recommendation: set business license fee to a single low nominal amount and rely on corporate income tax for profit sharing.
  - Introduce a simplified presumptive income tax regime for small traders.

### Social security contributions, tax wedge, and base extension
- Social security and tax wedge:
  - Social security contributions add up to 21.7 percent to employment costs over a broad range of incomes.
  - Example at a monthly salary of 100,000 DJF:
    - Wage tax liability: 10,500 DJF.
    - Social contributions: 21,700 DJF.
  - Djibouti’s tax wedge reaches 34 percent at a monthly salary of 325,000 DJF.
  - Comparative: average tax wedge in the OECD in 2022 was 34.6 percent of GDP.
  - Observation: wage tax liability negligible for lower-income individuals while social contributions add considerable costs even at low earnings; link between contributions and benefits appears weak.
- Extending income tax base to capital income:
  - Interest income and dividends largely exempt from tax.
  - Concerns: exemptions reduce revenues, undermine progressivity, raise base erosion opportunities; interest expense deductibility compounds concerns.
  - Recommendation: tax interest and dividends at a moderate flat rate with participation exemption options to address double taxation.
  - Noted reform: Budget 2024 introduced a 5 percent tax on dividend distributions by Djiboutian corporations, with exemptions including for dividends below DJF 10 million and for dividends that will be reinvested in Djibouti.
- Corporate taxation and taxing rents:
  - Higher corporate rates may be justified in sectors with local economic rents to capture super-profits without distorting activity.
  - Administrative feasibility: few large formal businesses in sectors such as banking and telecommunications make mobilizing additional revenues administratively straightforward.

### Excises, free zones, property taxation, and incentives
- Excise guidance:
  - Limit excises to a small set of products generating externalities or with inelastic demand.
  - Goods currently subject to excises that appear justified: Tobacco, alcohol, gasoline, khat, plastics, sugar-sweetened beverages.
  - Potential new excises: motor vehicles (luxury tax), possibly telecommunication services (alongside a corporate income tax surcharge).
- Free Zone and tax holidays:
  - Concern: 50-year tax holiday appears excessive relative to peers (examples: Kenya and Ghana 10 years; Madagascar 2 to 5 years; Morocco 5 years).
  - Recommendations:
    - Limit eligible activities to internationally mobile export-focused activities.
    - Thoroughly review institutional arrangements and oversight of the Free Zone Authority and appropriateness of its royalty-based funding scheme.
- Real property and rental income taxation:
  - Current system combines holding and letting income in a single tax, creating opacity and complexity; exemptions distort outcomes.
  - Recommendations:
    - Create a new tax on rental income for individuals.
    - Repeal exemption of rental income from corporate income tax.
    - Apply a recurrent tax on immovable property irrespective of use.
    - Revisit merits of exempting newly-built properties.

### Revenue administration, digitalization, and implementation sequencing
- Revenue administration reforms and potential gains:
  - Comprehensive approach (compliance risk management, transparency, LTO, improved filing) can significantly mobilize revenues.
  - Potential to increase tax revenue by at least 1.6 percent of GDP cumulatively over five years from reforms including e-filing, automated risk profiling, automated third‑party data use, and expanding tax register.
- Actions to broaden taxpayer base:
  - Use third‑party data systematically: banks, Social Security Administration, National Statistics Department, telecommunications, electricity, and import data.
  - Develop and maintain a reliable taxpayer register.
- Improve taxpayer compliance:
  - Simplify filing, reporting, payment procedures; proactive taxpayer engagement and education; strengthen enforcement and penalty regimes.
- Digitalization priorities:
  - Continue ASYCUDA World deployment at all entry points.
  - Move DGI from manual systems to electronic systems (e-filing and e-payment) and automated non‑compliance detection.
  - Accelerate implementation of SIGTAS at DGI.
- Focus on high-revenue taxpayers:
  - Concentrate DGI’s limited resources on the largest 300 taxpayers.
  - Establish a pilot LTO focusing on 200 to 300 largest taxpayers to deploy new systems (e.g., SIGTAS) and provide single point-of-contact services.
- Customs reforms to consider:
  1. Facilitate e-payments.
  2. Strengthen valuation control through ASYCUDA valuation module.
  3. Strengthen management of exemptions, free zones, suspensive regimes and disputes.
  4. Improve excise management (khat, hydrocarbons, cigarettes, alcohol).
  5. Introduce post‑clearance control programs per international standards.
  6. Enhance capacity to check customs declarations.

### Institutional capacity for reform implementation (DGI and DGD)
- Major findings:
  - Strong institutional capacity and adequate resources needed to implement reforms.
  - Success fostered by more autonomy; flexibility in resource allocation; modernization of human resources management; enhanced skills and competencies; implementation of governance and accountability frameworks.
- Recommendations:
  - Strengthen institutional capacity within DGI and DGD to support reform implementation and revenue mobilization.
  - Increase operational autonomy and flexibility in resource allocation.
  - Modernize HR management to attract, retain, and develop needed skills.
  - Implement and reinforce governance and accountability frameworks to ensure effective, transparent, and sustainable outcomes.

*Source: IMF staff chapter “2.   Growth Has Not Translated Into Corresponding Labor Markets Gains”*

### 2.   Growth Has Not Translated Into Corresponding Labor Markets Gains  ___________________ 4

### 2.   Growth Has Not Translated Into Corresponding Labor Markets Gains

### A. Introduction — Growth pattern and labor market disconnect
- The economy expanded strongly from the beginning of the 2000s on the back of political stability and a surge in foreign-financed investment aimed at developing ports and railways infrastructure; the level of real GDP grew by 50 percent between 2013 and 2021.
- Average growth rate of 5.5 percent since 2005 did not translate into formal labor market gains:
  - 2017 unemployment rate using national definitions: 47 percent (higher than 1996 level of 44 percent).
  - Labor force participation: 45 percent (32 percent among women).
  - Labor informality: 50 percent.
  - Caisse Nationale de Sécurité Sociale reported around 67,600 registered workers in 2021, corresponding to about 10 percent of the working age population.
  - 2017 extreme poverty rate: 21 percent (rural regions: 45 percent).
- The capital-intensive nature of the investment-led expansion and growing skill mismatches have increased structural unemployment and limited job creation.

### B. The Okun’s Law Has Changed — empirical findings
- Methodological approach: Okun’s Law estimated allowing for potential fluctuations in coefficients during the period of heightened investment.
- Structural break and key parameter changes:
  - During 1999–2012, the estimated impact of a 1 percent output gap on unemployment was 0.32 percent; during the investment boom it declined to 0.05 percent.
  - The natural level of unemployment (ILO definition) increased by about 2.4 percent, from 24.4 percent to 26.8 percent.
- Interpretation:
  - Job creation became less sensitive to economic growth during the investment boom.
  - The slope of Okun’s Law declined and the relationship shifted up, indicating both lower job intensity of growth and a higher structural unemployment level.

### C. Reliance on capital‑intensive sectors and employment generation
- Sectoral drivers and employment outcomes:
  - During 2010–2021 about 80 percent of the variation in GDP growth is explained by growth in port activity.
  - Modern port facilities use large amounts of automation and do not generate large employment.
  - During 2015–2021 the transport sector generated less than 7 thousand new jobs, against a cumulated real GDP growth of more than 35 percent.
  - The economic boom of the last decade directly benefitted only about 1 percent of Djiboutians of working age.
- Mechanisms:
  - Shift toward capital-intensive projects and job-scarce service activities (e.g., transit trade) reduced the job intensity of growth.
  - Informality is high but appears to be a historical fact; the structural break in Okun’s elasticity coincides with port infrastructure development, which does not employ informal workers.

### D. Mismatches between human and physical capital
- Evidence on capital-skill gaps:
  - By 2017 Djibouti’s capital stock per capita reached $5.5 thousands per capita, about 60 percent higher than the average for low-income countries (LICs).
  - 62 percent of the labor force had no schooling (against about 30 percent on average for other LICs).
  - In 2017, unemployment among individuals with advanced education was less than half that of those with basic education.
- Okun’s Law implication:
  - Since 2013, the relationship between output gap and unemployment shifted up, increasing the structural level of unemployment from around 24 percent (1999–2012) to almost 27 percent (2013–2021).
  - Higher structural unemployment signals a growing skill-mismatch between labor demand and supply driven by rapid capital accumulation not matched by human capital improvements.

### E. The education system: progress and remaining gaps
- Achievements:
  - Gross primary enrollment ratio increased from 51.5 percent in 2004 to close to 100 percent in 2022.
  - Number of primary schools almost doubled from 122 in 2005 to 224 in 2022.
  - Gender parity improved: 47 percent of female students in primary education in 2022, compared to around 32 percent in 2008.
- Remaining challenges:
  - Low access to preschool in rural areas and high dropouts in transition to lower secondary; gross enrollment in secondary schools remains around 50 percent.
  - Quality concerns: pupil teacher ratio (PTR) for primary and lower secondary remains below the average for lower middle income countries, while average students per class is high.
    - PTR in 2022-2023: primary 33, lower secondary 25.
    - Lower Middle-Income countries averages in 2018: primary 27, lower secondary 20.
    - Students per class (Divisions Pédagogique): between 45 to 50 on average across primary and secondary.
  - Vocational training programs underdeveloped; private higher education investment lags.
  - Adult learning programs (ALP) are important as almost 90 percent of individuals found to have no formal education in the 2017 household and labor force survey are expected to remain in the labor force at least until 2027.
- Evidence from other countries:
  - ALP promote employability and skills development (UNESCO, 2022); participants in developing-country ALP show greater propensity to transition to self-employment (Bluch, 2017).

### F. Policy directions to translate growth into jobs
- Education and skills:
  - Substantial education investment and reforms to improve employability and reduce capital-skill mismatch.
  - Expand vocational training and adult learning programs to upskill current workforce and accommodate sectoral diversification needs.
  - Improve quality indicators (reduce PTR where feasible; address high students-per-class).
- Diversification and labor‑intensive sectors:
  - Promote alternative economic activities beyond transit trade and FTZs to improve job creation.
  - Priority sectors with employment potential:
    - Construction: authorities project growth of near 40 percent by 2027; training programs can increase domestic participation and reduce reliance on foreign workers.
    - Tourism, primary sector (fisheries, agriculture, livestock breeding), and mining.
  - Primary sector and tourism can offer opportunities for lower-skilled workers; fisheries and livestock may help reduce food dependency.
- Enabling sectors and infrastructure:
  - Development of alternative sectors requires significant investments in production facilities, distribution networks, hotel capacity, and domestic transport connectivity.
  - Reforming enabling sectors that remain state monopolies (IT and energy) could:
    - Increase connectivity, improve quality, and lower service prices.
    - Reduce electricity costs (electricity bills account for approximately 25 percent of business expenses, World Bank, 2014).
    - Raise energy self-sufficiency and reduce carbon footprint if new capacity is renewable.
    - Improve telecommunication accessibility and prices; in 2017 Djibouti ranked 158 out of 175 in the ITU ICT Development Index.
  - A more competitive IT and utilities sector could particularly benefit non-food manufacturing, which was 1.6 percent of value added in 2021.
- Private sector engagement and fiscal constraints:
  - Significant investment needs for diversification are unlikely to be met by public sources given limited fiscal space; a larger role for private sector investment is required.
  - Liberalization in key sectors (IT, utilities) could attract competition and private infrastructure investment, possibly via international partnerships.
  - Targeted SOE reforms to improve efficiency and mobilize SOE dividends, and tax reforms to enhance revenue mobilization, can support public investment where appropriate.

*Source: IMF staff chapter “2.   Growth Has Not Translated Into Corresponding Labor Markets Gains”*

### 13.      The timely collection of labor market statistics remains a key constraint for supporting

### 13. The timely collection of labor market statistics remains a key constraint for supporting decision making and job creation

### Timely labor market data: constraint and recommendation
- The design and implementation of adequate policy frameworks to foster job creation requires complete and timely labor market data.
- The frequent collection of basic labor market data, such the unemployment rate, remains a priority for policy design and implementation.
- Recommendation: Strengthen the capacity of the Djibouti national statical office to carry out regular labor market surveys, including within the framework of targeted technical assistance programs by the IMF or other international partners.

### Context: labor market weaknesses and human capital
- Djibouti’s growth has been high but capital-intensive and has not created enough jobs for the local population.
- Last unemployment survey (2017, ILO definition) estimated:
  - unemployment rate: 27.5 percent
  - unemployment rate for 15–34 year olds: 65.1 percent
  - unemployment rate for 15–24 year olds: 86.2 percent
- Building a more inclusive and resilient growth model requires substantial increases in health and education spending:
  - Health expenditure to GDP: around 3 percent from 2010 to 2015; 2 percent in 2019 and 2020.
  - Education expenditure to GDP: 6.4 percent in 2012; 3.8 percent in 2018.
- As of 2023, Djibouti ranked 150 out of 166 in progress towards the Sustainable Development Goals; 21 percent of SDGs achieved or on track, 58 percent limited progress, 21 percent indicators worsened.

### Okun’s Law estimation: purpose and method
- Purpose: Estimating Okun's Law sheds light on Djibouti’s main labor market weaknesses by relating cyclical variations in output to the unemployment rate.
- Gap version of Okun’s Law (notation preserved from source):
  - u_t^c = β y_t^c + ε_t  (Equation (1)), where u_t^c = u_t − u_t^*, y_t^c = (y_t − y_t^*)/y_t^*, β measures change in cyclical unemployment associated with a 1% increase in the output gap.
  - Rewritten: u_t = u_t^* + β y_t^c + ε_t  (Equation (2)).
- Data limitations:
  - Complete time series for the unemployment rate is not available; past surveys were conducted at low frequencies.
  - Annual ILO unemployment series available for 2013–2023 (10 years).
  - A regression extension technique was used to extend the unemployment series back to 1999 using:
    - log of registered job seekers with the social security administration (흁_t)
    - log of working age population (n_t, ages 15–64)
  - Model for extension (Equation (3)): u_t = α + δ 흁_t + γ n_t + η_t
  - The extension model was estimated over 2013–2022 and used to produce backward forecasts for 1999–2012.
  - Output potential for output gap estimates inferred using the Hodrick-Prescott (HP) filter.
- Caveat: Use of an estimated regressand in Equation (2) is expected to increase model variance but not to generate estimation bias.

### Regression extension model (Table 1): exact estimates
- Model estimated over 2013–2022; fit to ILO unemployment series with share of model-explained variance around 65 percent.
- Estimates (coefficients and standard errors in parentheses):
  - Registered unemployed: 3.208** (1.309)
  - Working age population: 4.939+ (2.940)
  - Constant: -66.199 (38.495)
  - Observations: 9
  - R2: 0.650
- Note: The unemployment rate refers to the ILO definition. Standard errors in parentheses; + p < 0.14, * p < 0.10, ** p < 0.05.

### Okun’s Law results (Table 2): exact coefficients by specification
- Sample period for Okun’s estimations: 1999–2012 and 2013–2021 (Observations: 23 in each specification).
- Three specifications reported; robust standard errors in parentheses; significance indicators preserved.
- Column (1): time-invariant structural unemployment
  - Output gap: -0.169+ (0.144)
  - Constant: 25.32** (0.296)
  - Observations: 23
  - Adjusted R2: 0.01
- Column (2): structural level of unemployment allowed to vary across 1999–2012 and 2013–2021 (Post 2012 dummy)
  - Output gap: -0.243** (0.0659)
  - Post 2012: 2.386** (0.334)
  - Constant: 24.39** (0.219)
  - Observations: 23
  - Adjusted R2: 0.71
- Column (3): augmented with interaction between Post 2012 dummy and output gap
  - Output gap: -0.323** (0.0472)
  - Post 2012: 2.341** (0.317)
  - Output gap X post 2012: 0.270** (0.126)
  - Constant: 24.37** (0.220)
  - Observations: 23
  - Adjusted R2: 0.728
- Note: The unemployment rate refers to the ILO definition. Robust Standard errors in parentheses; + p < 0.14, * p < 0.10, ** p < 0.05.

### Interpretation of Okun’s estimates and labor market implications
- Estimates indicate a negative relationship between the output gap and cyclical unemployment, with greater sensitivity post-2012:
  - The magnitude of the output gap coefficient is larger (more negative) in specifications allowing for a post-2012 structural shift (e.g., -0.243** and -0.323**), suggesting stronger labor market responsiveness to output during the later period.
  - The positive and significant Post 2012 dummy (2.386** and 2.341**) indicates a higher structural level of unemployment in the post-2012 period.
  - The positive and significant interaction term (0.270**) in column (3) modifies the interpretation of the output gap effect during the post-2012 period.
- Policy implication: Given limited job creation under the capital-intensive port-driven growth model and higher structural unemployment in the post-2012 period, policies should aim to stimulate labor-intensive growth and invest in human capital to improve labor market outcomes.

### Fiscal and tax context relevant to labor and job creation
- Tax regime and thresholds:
  - Monthly wages in excess of DJF 50,000 (USD 281) are taxed progressively, with the top marginal rate of 40 percent applying to incomes of DJF 2 million (USD 11,238) or more.
  - Business profits of natural and legal persons taxed at a flat 25 percent rate.
  - Djibouti does not tax rental income and most property income (dividends and interest); pensions are tax exempt.
- Indirect taxes:
  - VAT applies at a standard rate of 10 percent to businesses with turnover exceeding DJF 20 million (USD 112,381) or DJF 10 million (USD 56,191) for services.
  - Standard VAT rate of 10 percent is noticeably lower than Africa average of 16 percent (figure referenced).
- Special regimes and exemptions:
  - Free Zone Code and Investment Code offer generous tax preferences, including income tax holidays of up to 50 years.
  - Taxpayer-specific agreements may confer additional preferences.
- Taxpayer base and compliance:
  - Number of registered taxpayers for core taxes is low compared to countries of comparable population.
  - In 2021, less than 60 percent of registered business profit tax and VAT payers complied with filing and payment obligations.
- Revenue trend and key statistics (exact figures from Table 3):
  - Revenues and grants: 26.5 (2013) → 18.6 (2022) (Percent of GDP)
  - Revenues: 23.3 (2013) → 17.6 (2022)
  - Tax revenues: 13.7 (2013) → 11.2 (2022)
    - Direct taxes: 6.3 (2013) → 5.0 (2022)
    - Business license fees: 1.0 (2013) → 0.6 (2022)
    - Wage tax: 3.1 (2013) → 2.3 (2022)
    - Corporate Income Tax: 1.4 (2013) → 1.3 (2022)
    - Indirect taxes: 6.6 (2013) → 5.7 (2022)
      - TIC: 3.0 (2013) → 2.0 (2022)
      - VAT: 2.3 (2013) → 2.4 (2022)
    - Other taxes: 0.8 (2013) → 0.4 (2022)
  - Non-tax revenues: 9.6 (2013) → 6.5 (2022)
    - SOE dividends: 5.1 (2013) → 1.5 (2022)
    - Tax on Domestic Fuel: 0.6 (2013) → 0.1 (2022)
  - Grants: 3.2 (2013) → 1.0 (2022)
- Comparative tax performance:
  - Djibouti’s tax-to-GDP ratio: 11.2 percent (2022)
  - Comparators: LMICs average 16 percent; non-oil MENA countries 15.9 percent; SSA countries 15.1 percent.

### Fiscal policy recommendations linked to labor market outcomes
- Increase fiscal space to invest in health and education, thereby building human capital needed for inclusive and resilient, job-creating growth.
- Reforms discussed (areas to undertake):
  - Improve SOE governance to mobilize dividends from profitable SOEs and reduce subsidy needs.
  - Facilitate formalization to broaden the tax base.
  - Undertake a deep tax reform anchored on medium-term goals.
  - Strengthen the tax and customs administrations (modernize processes, fully implement IT systems such as SIGTAS and ASYCUDA World, and reduce manual procedures).
- Rationale: A concerted and sustained effort to mobilize domestic revenue is key to invest in health and education, create more jobs for the local population, and lower exposure to external shocks.

*Source: IMF staff chapter content (as provided).*

### 16. Djibouti’s tax ratio is also below the 12.75 percent of GDP tipping point identified by

### 1djiea2024002 - 16. Djibouti’s tax ratio is also below the 12.75 percent of GDP tipping point identified by

### Tax ratio, revenue targets, and context
- Djibouti’s tax ratio is below the 12.75 percent of GDP tipping point identified by empirical literature as the point above which countries experience significantly better outcomes in terms of economic growth and development.
- Given volatility of tax-to-GDP ratios, it is generally recommended for countries with low tax-to-GDP ratios like Djibouti to aim for levels of about 15 percent over the medium-term.
- The bulk of tax revenues originate from: VAT (about 2.3 percent of GDP), the wage tax (about 2.3 percent of GDP), and customs duties (about 2 percent of GDP); together these three taxes account for close to two-thirds of total tax revenues.
- Remaining tax revenue composition: corporate income tax (1.5 percent of GDP), excise taxes (1.4 percent of GDP), and business license fees (0.6 percent of GDP).

### SOE governance and mobilizing dividends
- SOEs are central in Djibouti’s economy; a vast majority of economic activity is undertaken by companies fully or partially state-owned, including ports, utilities, telecommunications, and the Société Djiboutienne de Chemins de Fer.
- Key ownership structure and mapping:
  - As of February 2024, the Executive Secretariat in charge of the State Portfolio (SEPE) had mapped 77 SOEs by sector and legal status.
  - SEPE had received financial accounts from only 14 SOEs out of the 77 it had listed, sometimes from 2018 to 2022, sometimes only for 2021 or 2022.
- Governance and oversight weaknesses:
  - Djibouti scored 3 out of 6 on the 2022 Country Policy and Institutional Assessment indicator for transparency and accountability in the public sector.
  - In the 2023 PEFA, Djibouti received the score D+ for the management of its assets.
  - Drivers of the PEFA subscore C for management of financial assets include: lack of a report on performance of shares in SOEs and dividends perceived; no comprehensive monitoring of financial relationships between the state and SOEs (subsidies, transfers, parafiscal taxes, taxes, dividends, etc); lack of the notion of financial performance.
- Institutional fragmentation and recent developments:
  - Oversight of SOEs is dispersed across ministries and auditing bodies (IGE, IGF, DGCP); SEPE lacks resources to adequately fulfill its mandate.
  - Creation of the Sovereign Wealth Fund (SWF) in 2020 placed profitable SOEs (Great Horn Investment Holdings, Djibouti Télécom, planned Electricité de Djibouti) under the Presidency and outside the Code of Good Governance of SOEs; SWF is stipulated to receive 20 percent of revenues from military base leases.
- Policy implications and priorities:
  - Improve information and monitoring of SOEs; introduce penalties for non‑submission of financial statements; empower SEPE with political buy-in and adequate resources.
  - Accelerate implementation of the 2016 Code of Good Governance of SOEs (which defined roles, board autonomy, performance contracts, and control mechanisms) and pursue rationalization/consolidation of the SOE landscape.

### Formalization and broadening the tax base
- Labor and informality statistics:
  - 2017 employment survey: working age population ≈ 628,000 (population around 950,000).
  - Active population estimated at 44.7 percent of the working age population (~280,000 people).
  - 23.7 percent of the working age population had a job (~149,000 people).
  - 67,659 people were registered with social security (Caisse Nationale de Sécurité Sociale - CNSS) as employed (salariés).
- Informal sector survey (2016 DISED):
  - 20 percent of the active population was in informal employment; three quarters of which in Djibouti ville.
  - 73.7 percent of informal units would be led by a woman.
  - Sectoral activity: commercial sector 64.7 percent, services 20.1 percent, industrial activities 11.5 percent, primary sector 3.7 percent.
  - 90 percent of informal units self-employed; 8.5 percent of units having employees (generally family members).
  - 85.1 percent of informal units were not registered with public bodies (business registry, NIF, or social security).
- Economic size of informal units (2015, survey estimates):
  - Total turnover DJF 89.9 billion (USD 510 million).
  - Total production DJF 69.7 billion (USD 390 million).
  - Value added DJF 60.9 billion (USD 340 million or 14 percent of 2015 GDP).
  - Gross operating surplus DJF 52.3 billion (USD 290 million).
- Barriers to formalization: perceived non‑compulsoriness of registration (52.3 percent), cost of registration (23.5 percent), complexity of procedures (17.2 percent), refusal to cooperate with the state (4.3 percent); majority did not see benefits to formalizing.
- Policy measures to facilitate formalization:
  - Awareness campaigns on benefits of social security.
  - Simplify procedures via a one-stop shop for business registry, social security, and single taxpayer number.
  - Tax policy/tax administration measures: simplified tax regimes for small businesses, more efficient VAT “chains of compliance” for formal firms, lowering the “net formalization cost” of labor, and better enforcement.
  - Digitalization to improve identification, verification, simplify requirements, promote digital payments, and reduce reliance on cash.

### Revenue productivity, VAT and corporate income tax performance
- VAT performance:
  - C-efficiency ratio for VAT in Djibouti: 0.37.
  - Average c-efficiency for lower middle-income countries: 0.52.
  - Djibouti could increase revenues by as much as 0.9 percent of GDP by implementing legislative and administrative reforms to raise VAT c-efficiency to the LMIC average.
- Corporate income tax:
  - Corporate income tax revenues about 1.5 percent of GDP, low relative to sub-Saharan Africa and LMIC averages (both around 3 percent of GDP).
  - Note: Djibouti’s corporate income tax applies to both natural and legal persons engaged in business activities and is thus slightly broader in scope than a typical corporate income tax.
- Policy priorities for tax policy reform:
  - Anchor tax policy reforms in a medium-term agenda with clear political leadership and commitment to gradually increase tax revenues towards 15 percent of GDP.
  - Combine incremental reforms and structural reforms; ensure strong political buy-in and technical advice.
  - Improve the “quality” of revenue: minimize distortions, prioritize fairness, neutrality, administrability, ease of compliance, and international competitiveness.
- Specific VAT recommendations:
  - Limit exemptions strictly to basic foodstuffs and margin‑based financial services.
  - Repeal VAT exemptions used as investment incentives (e.g., exemptions for imports by contractors and new suppliers) as they add administrative burden, raise revenue leakage risks, and sustain informality; prerequisite is efficient processing and prompt repayment of excess credits.
  - Reconsider exemptions such as those offered for agriculture and fishery which can undermine competitiveness of domestic suppliers.
  - Fixed tax base value for khat set artificially low is inconsistent with excise levy objectives.
- Wage tax considerations:
  - Review wage tax to assess redistributional outcomes and potential distortionary effects on labor market decisions.
  - Investigate distribution of wages across public and private sectors to evaluate whether current brackets and rates are appropriate.
  - Revisit exemptions for pension income given only 10 percent of the working age population is formally registered.

### Implementation and sequencing priorities
- Strengthen SOE transparency and monitoring as a first step to mobilize dividends and reduce subsidies.
- Empower SEPE with resources and political authority; introduce penalties for late/non-submission of SOE financials.
- Consolidate SOEs and clarify ownership and dividend policies; align SWF oversight with good-governance practices or ensure appropriate transparency for its holdings.
- Pursue a medium-term tax reform agenda combining VAT efficiency improvements, corporate tax performance enhancement, formalization facilitation, digitalization, and administrative modernization.

*Source: IMF staff analysis and authorities' data as presented in the chapter.*

### 42. Social security contributions can influence work incentives and labor market outcomes,

### 42. Social security contributions can influence work incentives and labor market outcomes

### Social security contributions and the tax wedge
- Social security contributions add up to 21.7 percent to employment costs over a broad range of incomes.
- Example at a monthly salary of 100,000 DJF:
  - Wage tax liability: 10,500 DJF
  - Social contributions: 21,700 DJF
- Djibouti’s tax wedge reaches 34 percent at a monthly salary of 325,000 DJF.
- Comparative note:
  - In 2022, the average tax wedge in the OECD was 34.6 percent of GDP.
- Observations:
  - Wage tax liability appears negligible for lower-income individuals, while social security contributions add considerable costs to formal employment even at low earnings.
  - It appears unlikely that Djibouti’s social programs provide comparable benefits to those observed on average across OECD countries.
- Policy implication:
  - If the link between contributions and benefits is weak, social security contributions largely act as additional taxes on labor for which revenues are earmarked toward specific expenditure programs.

### Extending the income tax base to capital income
- Current situation:
  - Interest income and dividends are largely exempt from tax, whether received by an individual, an entity, or a non-resident.
- Concerns:
  - These exemptions reduce revenues, undermine progressivity, and raise opportunities for tax base erosion.
  - The exemption for interest income is particularly concerning because it is a deductible expense for the payor if incurred in the context of a business undertaking.
- Recommendation:
  - Taxation at a moderate flat rate on interest and dividends would alleviate base erosion concerns while raising revenues in a progressive manner.
  - Double taxation concerns could be alleviated through a participation exemption and reliance on a moderate rate.
- Noted reform:
  - Budget 2024 introduced a 5 percent tax on dividends distributions by Djiboutian corporations, with exemptions including for dividends below DJF 10 million and for dividends received that will be reinvested in Djibouti.

### Corporate taxation and taxing economic rents
- A higher corporate income tax rate may be justified for some sectors if local economic rents are involved.
- Rationale:
  - Taxing above-normal profits (super-profits) increases revenues without distorting economic activities when market conditions allow such profits.
- Administrative note:
  - Given the presence of very few large formal businesses in sectors such as banking and telecommunications, it would appear administratively straightforward to mobilize additional revenues from these firms if they generate super-profits.

### Tax avoidance and base protection
- Threats to the income tax base include:
  - Base erosion and profit shifting through excessive leveraging, transfer mispricing, treaty abuse, or other sophisticated techniques.
- Impacts:
  - Revenue leakage and competitive disadvantages for smaller local businesses.
- Recommendation:
  - Ensure base protection measures are sufficiently robust and well-targeted to minimize risks while avoiding undue burden on legitimate businesses.

### Excise taxes and potential new excises
- Best practice:
  - Limit excises to a small set of products that generate externalities or have relatively inelastic demand.
- Goods currently subject to excises that appear justified in Djibouti:
  - Tobacco, alcohol, gasoline, khat, plastics and sugar-sweetened beverages.
- Potential new excises to consider:
  - Motor vehicles (primarily as a luxury tax).
  - Possibly telecommunication services (to be considered alongside a potential corporate income tax surcharge).

### Reforming tax incentives and profit-insensitive taxes
- Fundamental overhaul of tax incentives recommended to create a modern, competitive framework:
  - Favor cost-based incentives (accelerated depreciation, investment allowances, tax credits, more generous loss carryforward) over profit-based incentives (tax holidays, reduced tax rates).
  - Consolidate tax incentives within the general tax code rather than granting selective or discretionary incentives through the Investment Code or ministerial decrees.
- Profit-insensitive taxes that raise effective taxation and merit reconsideration:
  - Custom duties (taxe intérieure de consommation - TIC) and business license fees (patentes) together raise about 2.6 percent of GDP in revenue.
  - Issues with TIC:
    - Rates can reach 23 percent on some capital goods, discouraging investment.
    - Recommendation: reduce the TIC on all capital goods, even to zero if possible.
  - Issues with patentes:
    - Arbitrary, excessively complex, and distortionary.
    - Recommendation: set the business license fee to a single low nominal amount for all businesses and rely on the corporate income tax to share in profits.
  - To tackle informality:
    - Introduce a new simplified presumptive income tax regime for small traders.

### Free Zone and tax holidays
- Concerns:
  - Ensure that positive economic spillovers from the Free Zone justify revenue foregone and that institutional arrangements are sustainable.
  - The 50-year tax holiday appears excessive compared with examples cited (e.g., Kenya and Ghana 10 years; Madagascar 2 to 5 years; Morocco 5 years).
- Recommendations:
  - Limit the scope of eligible activities to internationally mobile activities focused on exports.
  - Thoroughly review institutional elements including government oversight over the Free Zone Authority and the appropriateness of its royalty-based funding scheme.

### Real property and rental income taxation
- Current system combines holding of real property and income from letting in a single tax, creating opacity and complexity.
- Problematic outcomes:
  - Exemption from property tax where rental payments are involved.
  - Use of a distinct progressive schedule even if rental income is earned by a corporation subject to corporate income tax.
- Recommendations:
  - Create a new tax on rental income for individuals.
  - Repeal the exemption of rental income from the corporate income tax.
  - Apply a recurrent tax on immovable property irrespective of whether the property is rented, temporarily vacant, or owner-occupied.
  - Revisit merits of exempting newly-built properties given revenue needs and potential regressivity.

### Institutional reforms: Tax Policy Unit (TPU) and analytical capacity
- Rationale:
  - A dedicated TPU would provide critical support to ensure tax reform proposals are carefully assessed, quantitatively analyzed, and openly debated.
- TPU design notes:
  - Even a small TPU—comprised predominantly of economists and a few lawyers—can provide valuable support.
  - Stylized structure for a mid-size TPU could include anywhere from 10-15 individuals.
- Capacity-building actions:
  - Prioritize internal or external training on tax policy.
  - Secure availability of good taxpayer data for quantitative analyses.
  - Publish tax expenditures reports over time and move from reactive to proactive assessment of reform options.

### Revenue administration reforms and revenue potential
- Evidence and potential gains:
  - A comprehensive approach—strengthening compliance risk management, accountability, transparency, establishing a large taxpayer office (LTO), and improving on-time filing—can significantly impact tax revenue mobilization.
  - Using a tool calibrated on Malawi and other inputs, there is potential to increase tax revenue by at least 1.6 percent of GDP cumulatively over five years from reforms including e-filing, automated risk profiling, automated third-party data use, and expanding the tax register.
- Actions to broaden the taxpayer base:
  - Systematically use data from third parties: banks, Social Security Administration, National Statistics Department, telecommunications, electricity companies, and import data.
  - Develop and maintain a reliable and accurate taxpayer register.
- Improving taxpayer compliance:
  - Simplify administrative procedures for return filing, reporting, and payment.
  - Implement proactive taxpayer engagement and education.
  - Enhance taxpayer services to reduce compliance costs.
  - Strengthen enforcement: early detection of non-compliance, sound risk-based audit programs, effective penalty regimes.
- Digitalization:
  - Continue deployment of ASYCUDA World at all entry points to realize customs digitalization benefits.
  - Move the DGI from manual systems to electronic systems (e-filing and e-payment) and automated detection of non-compliance.
  - Accelerate implementation of SIGTAS at DGI.
- Focus on high-revenue taxpayers:
  - Concentrate DGI’s limited resources on the largest 300 taxpayers to manage compliance risks and achieve higher revenue intakes.
  - Dedicated units for large and medium taxpayers should administer all core taxes and carry out all tax administration functions.
- Large Taxpayer Office (LTO):
  - Establishing a pilot full-fledged LTO could facilitate reform implementation and modernization of organization, systems, and procedures.
  - Pilot size and scope:
    - Focus on 200 to 300 largest taxpayers.
    - Use LTO as a controlled environment to deploy new systems (e.g., SIGTAS), introduce modern filing/payment procedures, and provide a single point of contact to reduce compliance costs for large enterprises and foreign investors.
- Other customs administration reforms to consider:
  1. Accelerate efforts to facilitate e-payments.
  2. Strengthen valuation control through ASYCUDA valuation module.
  3. Strengthen management of exemptions, free zones, other suspensive regimes and disputes.
  4. Improve management of excises (khat, hydrocarbons, cigarettes, alcohol, etc.).
  5. Introduce post-clearance control programs according to international standards.
  6. Enhance capacity to check customs declarations.

*DJIBOUTI — INTERNATIONAL MONETARY FUND.*

### 61. DGI and DGD would benefit from developing their capacity to implement reforms and

### DGI and DGD would benefit from developing their capacity to implement reforms and improve revenue mobilization

### Major findings
- Strong institutional capacity and adequate resources are needed to implement the reforms.
- Success is likely to be fostered by:
  - more autonomy;
  - flexibility in resources allocation;
  - modernization of the management of human resources;
  - enhancing skills and competencies of staff;
  - implementation of a sound governance and accountability framework.

### Policy recommendations
- Strengthen institutional capacity within DGI and DGD to support reform implementation and revenue mobilization.
- Increase operational autonomy to enable timely decision-making and reform execution.
- Introduce flexibility in the allocation of resources to align funding with reform priorities.
- Modernize human resources management to attract, retain, and develop necessary skills and competencies.
- Implement and reinforce governance and accountability frameworks to ensure effective, transparent, and sustainable reform outcomes.

*Excerpt from the provided IMF content unit.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1djiea2024002.pdf_