## Executive Summary — _cr12197

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### Background and shocks
- Djibouti was hit by the Horn of Africa drought and a global commodity price shock:
  - Worsened water scarcity, reduced agricultural production and cattle stock, and accelerated refugee inflows.
  - Increased imports and, combined with higher food and fuel prices in 2011, widened the current account deficit from 6 percent of GDP in 2010 to 12 percent in 2011.
- Specific impacts and population figures:
  - Total population: 818,000.
  - About 120,000 citizens (mostly rural) and about 20,000 refugees from Somalia and Ethiopia are suffering from food insecurity.
  - Domestic agricultural production fell by about 40 percent.
  - More than half of the cattle stock is affected through weight loss or disease.
- International support and financing gaps:
  - Authorities requested an augmentation of access under the ECF by 60 percent of quota ($15 million), to be disbursed in two tranches.
  - The international community pledged $47 million over 2011–13 to help address the drought impact; $45 million expected over 2011–12 as $30 million in current transfers and $15 million in capital transfers.
  - Projected additional balance of payments needs for 2011–12 are about $18 million higher than in CR/12/169.
  - The requested ECF augmentation would cover about $15 million of the 2011–12 financing needs, with the remaining $3 million expected to come from lower accumulation of international reserves.

### Economic activity, inflation, and reserves
- Growth and inflation:
  - Real GDP growth: increased from 3½ percent in 2010 to almost 4½ percent in 2011 (Fourth Review projection was 4.8 percent; later revised to 4.4 percent).
  - Staff estimates project inflation rising from 4 percent in 2010 to 5 percent in 2011 and 2012; the text also uses 5 percent for 2011 and notes incomplete transmission of international food and oil prices.
- Sectoral drivers:
  - Growth supported by recovery of transshipment and trade to Ethiopia; two companies started operations in the Doraleh Container Terminal.
  - Impact of drought on overall growth expected to be limited because port business and trade are not directly affected.
- Reserves and competitiveness:
  - Gross international reserves fell from $231 million at end-2010 to $224 million in November 2011.
  - External competitiveness improved in 2011 due to the differential between inflation rates in Djibouti and Ethiopia.

### Recent developments and program performance (through mid-2011)
- Key revised macro indicators (selected):
  - Real GDP growth: 2008 5.8; 2009 5.0; 2010 3.5; 2011 4.4 (prel. est.); 2012 4.7 (proj.).
  - Inflation, average: 2008 12.0 percent; 2009 1.7 percent; 2010 4.0 percent; 2011 5.3 percent; 2012 5.0 percent.
  - Current account balance (percent of GDP): 2009 -24.3; 2010 -9.1; 2011 -5.8 (prel. est.) but projected -11.7 percent in other tables/text.
  - Gross official reserves (months of following year's imports): 2008 3.6; 2009 5.1; 2010 3.9; 2011 3.6; 2012 3.7.
- Monetary and financial developments:
  - Broad money fell in early 2011 due to a fall in domestic currency deposits related to election uncertainty and the sale of Banque Indosuez-Mer Rouge (BIS-MR) to the Bank of Africa group.
  - Private-sector credit contracted by 10 percent in the first three months of 2011 before gradually recovering by September.
  - By year-end 2011 money and credit expected to have posted positive growth.
- Fiscal performance under the ECF:
  - Performance was weak in early 2011:
    - End-June performance criteria on net credit to the government and on the government balance were missed (net credit missed by 0.6 percent of GDP; government balance missed by 0.2 percent of GDP).
    - Continuous performance criteria on domestic arrears and on external arrears were missed.
    - The indicative quantitative target on social spending was missed.
  - Causes: exogenous shocks and weak tax collection during the electoral period and government transition.
  - Budget execution: excise revenue lower than expected; diesel subsidy cost 0.8 percent of GDP higher than programmed; unprogrammed drought-related spending about 0.2 percent of GDP. Government broadly maintained spending discipline aside from these factors.

### Program response, waivers, and Fund support
- Authorities’ program focus for 2011–2012:
  - Achieve a deficit of 0.4 percent of GDP in 2011 by stepping up tax collection and maintaining spending discipline.
  - Aim at a balanced 2012 budget.
  - Take remedial actions for missed performance criteria, including strengthened debt management and program monitoring.
  - Continue reinforcing bank supervision and central bank governance.
- IMF staff recommendations and actions supported:
  - Staff supports completion of the fifth review under the ECF.
  - Staff supports waivers of nonobservance for:
    - The end-June performance criteria on the fiscal balance and net credit to the government.
    - The continuous performance criteria on the non-accumulation of domestic arrears and non-accumulation of external arrears.
  - Staff supports the augmentation of access by 60 percent of quota ($15 million) and the related rephasing (disbursed equally at the fifth and sixth reviews).

### Quantified changes to program financing and balances (comparisons to CR/12/169)
- Differences for 2011–12 (in millions of U.S. dollars unless otherwise indicated):
  - Current account: -292 → -306; Difference -14.
  - Exports of goods and services: 1,001 → 1,008; Difference 7.
  - Imports of goods and services: -1,435 → -1,482; Difference -46.
  - Capital account: 285 → 281; Difference -4.
  - FDI (component of capital account): 273 → 164; Difference -109.
  - Overall balance: -7 → -25; Difference -18.
  - Additional financing needs: ... → ...; Difference -18.
  - Financing: 7 → 25; Difference 18.
  - Change in CBD reserves: -29 → -26; Difference 3.
  - Exceptional financing: 36 → 51; Difference 15.
    - Of which: ECF: 12 → 26; Difference 15 (includes ECF augmentation of 15).
- Food and fuel import details (2011–12, memoranda):
  - Food imports: 202 → 256; Difference 54.
    - Due to price increase over 2010: 14 → 24; Difference 10.
    - Due to the drought: ... → 29; 29.
    - Due to other effects: ... → 15; 15.
  - Fuel imports: 332 → 356; Difference 24.
    - Due to price increase over 2010: 42 → 42; Difference 0.
    - Due to the drought: ... → 12; 12.
    - Due to other effects: ... → 12; 12.
  - Drought-related official financing: ... → 45; 45.
    - Current transfers: ... → 30; 30.
    - Capital transfers: ... → 15; 15.

### Fiscal policy measures and 2012 budget stance
- 2011 fiscal stance and adjustments:
  - Authorities targeted a deficit of 0.4 percent of GDP in 2011.
  - Revisions reflect poor early-year tax collection, diesel subsidy cost (1.2 percent of GDP higher than in the program), nonprogrammed drought spending (for 0.4 percent of GDP), and transfers to EDD (for 0.2 percent of GDP). Partially offset by lower equipment and investment spending.
  - Implied weakening: about 0.8 percent of GDP in fiscal stance for 2011 compared to the program (which envisaged a budget surplus of 0.4 percent of GDP).
  - Authorities committed to cutting further equipment and investment spending to meet targeted deficit.
- Exceptional revenue and pricing measures in 2011:
  - Stepped up tax collection by publishing a list of late tax payers and enforcing exemptions via ASYCUDA customs software.
  - Increased diesel prices in October, November, and December by a total of 4 percent (the increase was a prior action).
- 2012 budget stance:
  - The 2012 budget will be balanced (already approved by the National Assembly).
  - Objectives: maintain debt sustainability, strengthen financial position with the banking system, and repay domestic arrears as scheduled.
  - Tax revenues expected to increase slightly in percent of GDP due to ongoing tax measures.
  - Continued tight controls on current spending, freeze on public-sector hiring (excluding health and education), and freeze on public-sector wages except an increase in the lowest salary level in 2012:
    - Cabinet-approved increase: from about $96 to $169 a month in the lowest-level public sector salary, representing a potential full-year effect of DF 419 million or about 0.2 percent of GDP. Phased in 2012; translates into an additional increase in the wage bill of DF 137 million, or about 0.5 percent of the total wage bill and less than 0.1 percent of GDP.

### Debt dynamics and sustainability
- Public debt and arrears:
  - External public debt expected to decline slightly from 56 percent of GDP at end-2010 to 55 percent at end-2011; Djibouti remains at high risk of debt distress.
  - External arrears accumulated in the second half of 2011 reached about $7 million (about 0.6 percent of GDP) and were cleared in October-December.
- Debt Sustainability Analysis (key findings):
  - PV of the debt-to-GDP ratio projected to decrease from 51 percent in 2011 to 33 percent in 2031; remains above the threshold of 30 percent until 2013.
  - PV of the debt-to-exports ratio breaches its indicative threshold of 100 percent until 2025.
  - PV of the debt-to-revenue ratio and debt service ratios are below their indicative thresholds.
  - Vulnerabilities: most sensitive to a one-time devaluation; debt service-to-export and debt-to-export ratios most vulnerable to an export shock.
- Macroeconomic assumptions for 2011–31:
  - Real GDP growth rate in the long run: 5.8 percent.
  - Inflation expected to remain at 2.5 percent.
  - Current account deficit expected to stabilize at about 12 percent of GDP in the next few years, then gradually decrease to about 5 percent of GDP in the long run.
- Public-sector DSA:
  - PV of public debt-to-GDP projected to decrease from 61 percent in 2011 to 34 percent in 2031.
  - PV of debt-to-revenue projected to decrease from 174 percent to 103 percent in 2031.

### Financial sector, supervision, and CBD governance
- Banking sector indicators and vulnerabilities:
  - Nonperforming loans: about 6 percent of total loans (end-2010 indicator).
  - High profitability observed.
  - Risks: rapid credit growth, strong increase in number of banks, rising exposure to real estate, potential spillovers from a banking crisis in Europe, governance risks (excessive credit concentration, connected lending).
- Supervisory strengthening:
  - CBD created a unit dedicated to supervision, including AML/CFT supervision (structural benchmark for end-June 2011), and recruited two additional staff.
  - CBD approved a roadmap for implementation of the banking law (structural benchmark for end-September 2011) and began tightening licensing procedures.
  - Onsite inspections conducted for five banks and a micro-finance institution in 2011.
  - All banks now submit detailed monthly statements on credit, liquidity, and foreign exchange operations.
- Central Bank governance improvements:
  - CBD Board adopted official timetable for quarterly meetings (structural benchmark for end-June 2011).
  - CBD agreed to publish the full set of 2010 financial statements, including opinion letter and disclosure notes (modified structural benchmark for end-December 2011).
  - A safeguards assessment update, envisaged in the context of the augmentation of access, is ongoing.
- Supervisory policy recommendation (CBD priorities):
  - Continue implementing the banking law, develop a solid implementation framework, adequately train staff, tighten licensing, monitor high credit growth and sector risks, and incorporate stress scenarios (including European banking crisis) into supervision.

### Program monitoring, structural benchmarks, and data
- Structural benchmark revisions and prior actions:
  - Authorities request replacement of the end-June 2012 structural benchmark on preparing an estimate of tax expenditure with an end-March 2012 structural benchmark on preparing a list of beneficiary companies defaulting on the requirement to file tax returns.
  - Prior actions envisaged: increasing the diesel price at the pump and creating a macroeconomic unit in charge of program coordination at the ministry of finance (prior action).
- Reporting and data obligations (selected):
  - Monthly TOFE and fiscal data to be provided within 30 days of each month-end; central bank and banking sector data within four weeks (monthly or weekly as specified).
  - Delays in fiscal reporting prevented proposal of revised end-December 2011 performance criteria aligned with revised fiscal objectives; the Board can no longer modify the end-December 2011 performance criteria on the fiscal balance and net credit to the government.
- Structural benchmark implementation status (selected):
  - Met: recruitment of Budget Department staff; lowering VAT threshold included in 2012 budget; ASYCUDA installed for all external trade transactions; creation of supervision unit and staff recruitment at CBD; roadmap for banking law application.
  - Not met or delayed: publication of TOFE within two months (data for December through August 2011 published with delay); adoption of customs code was completed in June instead of March; publication of full 2010 audited CBD financial statements only partially completed.

### Program vulnerabilities and risks
- Program vulnerable to:
  - Wavering political commitment, administrative capacity constraints, shortfalls in technical assistance.
  - Unsustainable spending pressures from higher transfers to EDD, uncontrolled fuel and food subsidies, and higher-than-expected mission costs to Somalia.
  - Fall in international reserves threatening currency board coverage if capital inflows and official financing are insufficient.
  - Terrorist acts following increased involvement in Somalia, which could dent confidence and derail growth.

### Staff appraisal and policy recommendations (priority actions)
- Overall assessment:
  - Despite weak performance in H1 2011, the program is broadly on track. Staff supports completion of the fifth review and the requested waivers given minor deviations and corrective actions.
- Immediate corrective measures recommended:
  - Catch up with tax collection to achieve fiscal targets for 2011 and 2012.
  - Regularly execute external debt service payments, including those taken in charge by public companies under agreements with the government.
  - Maintain spending discipline and protect quality of fiscal adjustment (avoid disproportionately decreasing capital and social spending).
  - Rigorously keep up with fiscal and debt data reporting and publication.
  - Create a macroeconomic unit at the ministry of finance to support program coordination.
- Fiscal sector and PFM reforms:
  - Deepen VAT administration reforms, reduce tax exemptions, strengthen budget process transparency, and track domestic arrears and public-sector cross debt.
- Energy and subsidy reforms:
  - Reform diesel fuel subsidy to allow diesel prices to adjust to international prices based on the automatic smoothing mechanism and better target the most vulnerable.
  - Develop a medium-term energy strategy and reform EDD to prevent further government transfers and allow pass-through of low-cost electricity imports.

### Key quantitative points (selected)
- Arrears accumulation: maximum amount of 0.2 percent of GDP (accumulated only in three months and eliminated by the third quarter).
- Augmentation of access requested: 60 percent of quota (SDR 9.54 million; $15 million noted).
- Immediate disbursement approved by the Board: SDR 6.246 million (about US$9.7 million); total disbursements under the program to SDR 16.014 million (US$24.75 million) as stated in APPENDIX III summary.
- Average obligations to the Fund over 2012–22 with augmentation: rise to 0.5 percent of government revenues (compared to 0.3 percent without augmentation); rise to 0.5 percent of exports (compared to 0.3 percent).
- Fiscal target for 2011: budget deficit of 0.4 percent of GDP.
- Fiscal target for 2012: balanced budget.
- Real GDP growth: "4.4 percent" in 2011 (estimate); "4.7 percent" projected for 2012.
- Inflation: "5.3 percent" in 2011 (estimate); "5 percent" projected for 2012.
- Current account deficit: "11.7 percent of GDP" in 2011; "11.8 percent of GDP" projected in 2012.
- External public debt: decline from "56 percent of GDP" at end-2010 to an estimated "55 percent" at end-2011.
- International reserves: "US$231 million" at end-2010; reserves estimated to have remained broadly stable at end-2011.

*Source: IMF staff report—Executive Summary and excerpts from _cr12197 (IMF staff report CR/12/197 and supporting texts).*

### Executive Summary ......................................................................................................

### _cr12197 - Executive Summary

### Background and shocks
- Djibouti was hit by the Horn of Africa drought and a global commodity price shock, which:
  - Worsened water scarcity, reduced agricultural production and cattle stock, and accelerated refugee inflows.
  - Increased imports and, combined with higher food and fuel prices in 2011, widened the current account deficit from 6 percent of GDP in 2010 to 12 percent in 2011.
- Specific drought impacts and population figures:
  - Total population: 818,000.
  - About 120,000 citizens (mostly rural) and about 20,000 refugees from Somalia and Ethiopia are suffering from food insecurity.
  - Domestic agricultural production fell by about 40 percent.
  - More than half of the cattle stock is affected through weight loss or disease.
- International support and financing gaps:
  - Authorities requested an augmentation of access under the ECF by 60 percent of quota ($15 million), to be disbursed in two tranches.
  - The international community pledged $47 million over 2011–13 to help address the drought impact; $45 million expected over 2011–12 as $30 million in current transfers and $15 million in capital transfers.
  - Financing needs for 2011–12 are higher than projected in the Fourth Review Staff Report (CR/12/169); projected additional balance of payments needs for 2011–12 are about $18 million higher than in CR/12/169.
  - The requested ECF augmentation would cover about $15 million of the 2011–12 financing needs, with the remaining $3 million expected to come from lower accumulation of international reserves.

### Economic activity, inflation, and reserves
- Growth and inflation:
  - Economic activity estimated to have increased from 3½ percent in 2010 to almost 4½ percent in 2011 (Fourth Review projection was 4.8 percent; later revised to 4.4 percent).
  - Staff estimates project inflation rising from 4 percent in 2010 to 5 percent in 2011 and 2012; the text also uses 5 percent for 2011 and notes incomplete transmission of international food and oil prices.
- Sectoral drivers:
  - Growth supported by recovery of transshipment and trade to Ethiopia; two companies started operations in the Doraleh Container Terminal.
  - Impact of drought on overall growth expected to be limited because port business and trade are not directly affected.
- Reserves and competitiveness:
  - Gross international reserves fell from $231 million at end-2010 to $224 million in November 2011.
  - External competitiveness improved in 2011 due to the differential between inflation rates in Djibouti and Ethiopia.

### Recent economic developments and program performance
- Revised macro indicators (selected):
  - Real GDP growth: 2008 5.8; 2009 5.0; 2010 3.5; 2011 4.4 (prel. est.); 2012 4.7 (proj.).
  - Inflation, average: 2008 12.0 percent; 2009 1.7 percent; 2010 4.0 percent; 2011 5.3 percent; 2012 5.0 percent.
  - Current account balance (percent of GDP): 2009 -24.3; 2010 -9.1; 2011 -5.8 (prel. est.) but projected -11.7 percent in 2011 in other tables/text.
  - Gross official reserves (months of following year's imports): 2008 3.6; 2009 5.1; 2010 3.9; 2011 3.6; 2012 3.7.
  - Ethiopia: Real GDP growth (for comparison) 2008 11.2; 2009 10.0; 2010 8.0; 2011 7.5; 2012 5.5.
- Monetary and financial developments:
  - Broad money fell in early 2011 due to a fall in domestic currency deposits related to election uncertainty and the sale of Banque Indosuez-Mer Rouge (BIS-MR) to the Bank of Africa group.
  - Private-sector credit contracted by 10 percent in the first three months of 2011 before gradually recovering by September.
  - By year-end 2011 money and credit expected to have posted positive growth.
- Fiscal performance and program targets:
  - Performance under the ECF program was weak in early 2011:
    - End-June performance criteria on net credit to the government and on the government balance were missed.
    - Continuous performance criteria on domestic arrears and on external arrears were missed.
    - The indicative quantitative target on social spending was missed.
  - Causes of weak fiscal performance included exogenous shocks and weak tax collection during the electoral period and government transition.
  - Budget execution in the first semester of 2011:
    - Excise revenue was lower than expected; the diesel subsidy cost was 0.8 percent of GDP higher than programmed.
    - Unprogrammed drought-related spending was about 0.2 percent of GDP.
    - Government broadly maintained spending discipline aside from these factors.

### Program response, policy priorities, and staff support
- Authorities’ program focus for 2011–2012:
  - Achieve a deficit of 0.4 percent of GDP in 2011 by stepping up tax collection and maintaining spending discipline.
  - Aim at a balanced 2012 budget.
  - Take remedial actions for missed performance criteria, including through strengthened debt management and program monitoring.
  - Continue reinforcing bank supervision and central bank governance.
- IMF staff recommendations and actions supported:
  - Staff supports completion of the fifth review under the ECF.
  - Staff supports waivers of nonobservance for:
    - The end-June performance criteria on the fiscal balance and net credit to the government.
    - The continuous performance criteria on the non-accumulation of domestic arrears and non-accumulation of external arrears.
  - Staff supports the augmentation of access by 60 percent of quota ($15 million) and the related rephasing.

### Quantified changes to program financing and balances (Text Table 1 comparisons to CR/12/169)
- Differences between CR/12/169 and revised program for 2011–12 (in millions of U.S. dollars unless otherwise indicated):
  - Current account: -292 (CR/12/169) → -306 (Rev. Program); Difference -14.
  - Exports of goods and services: 1,001 → 1,008; Difference 7.
  - Imports of goods and services: -1,435 → -1,482; Difference -46.
  - Capital account: 285 → 281; Difference -4.
  - FDI (component of capital account): 273 → 164; Difference -109.
  - Overall balance: -7 → -25; Difference -18.
  - Additional financing needs: ... → ...; -18 (difference).
  - Financing: 7 → 25; Difference 18.
  - Change in CBD reserves: -29 → -26; Difference 3.
  - Exceptional financing: 36 → 51; Difference 15.
    - Of which: ECF: 12 → 26; Difference 15 (includes ECF augmentation of 15).
- Food and fuel import details (2011–12, memoranda):
  - Food imports: 202 (CR/12/169) → 256 (Rev. Program); Difference 54.
    - Due to price increase over 2010: 14 → 24; Difference 10.
    - Due to the drought: ... → 29; 29.
    - Due to other effects: ... → 15; 15.
  - Fuel imports: 332 → 356; Difference 24.
    - Due to price increase over 2010: 42 → 42; Difference 0.
    - Due to the drought: ... → 12; 12.
    - Due to other effects: ... → 12; 12.
  - Additional financing needs excluding drought-related: ... → ...; -62.
  - Financing excluding drought: ... → ...; 62.
  - Reserves and Fund disbursements: ... → ...; 18.
  - Drought-related official financing: ... → 45; 45.
    - Current transfers: ... → 30; 30.
    - Capital transfers: ... → 15; 15.

*Source: IMF staff report—Executive Summary (CR/12/197).*

### 7.      Therefore, program performance was weak. The authorities missed the end-June

### _cr12197 - 7.      Therefore, program performance was weak. The authorities missed the end-June

### Program performance (summary of outcomes through mid-2011)
- The authorities missed the end-June performance criteria on net credit to the government (by 0.6 percent of GDP) and on the government balance (by 0.2 percent of GDP).
- Continuous criteria missed: domestic arrears (due to delays in social contribution payments) and external arrears (accumulated in the second half of 2011 for a total of about $7 million as government liquidity dried up and high oil prices reduced EDD’s capacity to pay debt service).
- Shortfall in revenues forced heavy expenditure cuts, disproportionately affecting social spending, resulting in missing the end-June indicative quantitative target (floor).
- Structural benchmarks: met 7 out of 13 due up to December, and met 3 more with delay.

### Authorities’ commitments to external debt service and remedial actions
- Commitments and actions to pay external debt service regularly:
  - The debt division of the ministry of finance will report to staff monthly debt obligations and repayments on public and publicly guaranteed debt.
  - The debt division will be strengthened by additional staff financed by UNDP.
  - If needed to avoid accumulation of external arrears, the treasury will pay the debt service due on debt contracts which should be serviced by public enterprises under an agreement between these enterprises and the government.
  - The ministry of finance will create a macroeconomic unit to help monitor the ECF arrangement (prior action), in close coordination with the debt division.

### Policy discussions: focus and risks (2011–12)
- Main discussion topics: economic impact of the drought and high food and fuel prices, program performance, and policies for 2011–12.
- Key sectoral concerns:
  - Real sector: impact of drought and high food and fuel prices on the poor.
  - Fiscal sector: catching up with tax collection and maintaining fiscal discipline despite subsidy costs, drought-related spending, and transfers to EDD.
  - Public debt: preventing new external arrears and resuming regular repayment of existing domestic arrears.
  - Monetary/financial sector: strengthening bank supervision.

### Real sector developments and projects
- Electricity:
  - Interconnection with the Ethiopian electricity grid meets about 50 percent of Djibouti’s electricity needs at very low cost; EDD electricity tariffs set for a breakeven at 70 dollars per barrel.
  - EDD’s planned thermal power station estimated cost: $130 million (about 9 percent of GDP) — temporarily suspended while interconnection impact and geothermal potential are evaluated.
  - Ongoing reforms: work with World Bank, European Union, and donors to streamline organization, revise fuel procurement, and develop a medium-term energy strategy.
- Water:
  - Desalinization plant: $100 million project funded by the European Union, to be completed in 2015, to address medium-term water needs.

### Fiscal issues and policy measures
- 2011 fiscal stance and targets:
  - Authorities targeted a deficit of 0.4 percent of GDP in 2011.
  - Revisions reflect poor early-year tax collection, diesel subsidy cost (1.2 percent of GDP higher than in the program), nonprogrammed drought spending (for 0.4 percent of GDP), and transfers to EDD (for 0.2 percent of GDP). Partially offset by lower equipment and investment spending.
  - Implied weakening: about 0.8 percent of GDP in fiscal stance for 2011 compared to the program (which envisaged a budget surplus of 0.4 percent of GDP).
  - Additional deficit financing would come from a weaker improvement in the government financial position vis-à-vis the CBD.
  - Authorities committed to cutting further equipment and investment spending to meet targeted deficit.
- Exceptional revenue and pricing measures in 2011:
  - Stepped up tax collection by publishing a list of late tax payers and enforcing exemptions via ASYCUDA customs software.
  - Increased diesel prices in October, November, and December by a total of 4 percent (the increase was a prior action).
- Fuel subsidy reform intentions:
  - Plan to develop, with Fund technical assistance, a reform strategy to allow diesel prices to adjust to international prices based on the automatic smoothing mechanism (currently applied for all fuel products except diesel and kerosene) and to target more efficiently the most vulnerable.
- 2012 budget stance:
  - The 2012 budget will be balanced (already approved by the National Assembly).
  - Objectives: maintain debt sustainability, strengthen financial position with the banking system, and repay domestic arrears as scheduled.
  - Tax revenues expected to increase slightly in percent of GDP due to ongoing tax measures.
  - Continued tight controls on current spending, freeze on public-sector hiring (excluding health and education), and freeze on public-sector wages except an increase in the lowest salary level in 2012 as a poverty measure.
    - Cabinet-approved increase: from about $96 to $169 a month in the lowest-level public sector salary, representing a potential full-year effect of DF 419 million or about 0.2 percent of GDP. Phased in 2012; translates into an additional increase in the wage bill of DF 137 million, or about 0.5 percent of the total wage bill and less than 0.1 percent of GDP.

### Fiscal sector reforms (structural measures)
- Tax revenues:
  - Increased staffing in the VAT unit; VAT threshold raised in the 2012 budget (structural benchmark for end-December 2011).
  - Ministry of finance to enforce obligation to fill tax returns by companies benefitting from tax exemptions (new structural benchmark for end-March 2012).
  - ASYCUDA introduced to all external trade in 2011 (structural benchmark for end-December 2011).
- Public financial management:
  - Resumed bimonthly treasury planning meetings.
  - Financing secured from African Development Bank for software for budget reclassification consistent with GFS 2001 (structural benchmark for end-December 2011).
  - Review of food subsidy program based on farms in Ethiopia and Sudan.
- Program monitoring:
  - Fiscal reporting to the Fund was systematically late in first three quarters of 2011; web posting of fiscal tables beyond the agreed two-month lag.
  - Ministry of finance will create a unit to coordinate program measures and reporting, including fiscal tables, and carry out macroeconomic analysis in support of budget planning (prior action).

### Public debt developments and risks
- Debt levels and projections:
  - External public debt expected to decline slightly from 56 percent of GDP at end-2010 to 55 percent at end-2011, but Djibouti remains at high risk of debt distress.
  - Debt sustainability to be affected by ambitious investment plan focusing on energy, water, and infrastructure, being revised with the new national strategy (INDS).
- External arrears in 2011:
  - Arrears to Paris Club creditors in second quarter amounted to less than 0.1 percent of GDP (waived at approval of fourth review).
  - From May, arrears accumulated to Arab Fund for Economic and Social Development, Arab Monetary Fund, Islamic Development Bank, Kuwait Fund for Arab Economic Development, OPEC Fund, World Bank, and Paris Club creditors (Germany, France, and Spain), reaching $7 million in second half of the year, or about 0.6 percent of GDP.
  - Some arrears were on debt service payments taken in charge by public companies (including EDD). All external arrears were cleared in October-December.
- Actions to prevent recurrence:
  - Monthly debt reporting by debt division; strengthening debt division with UNDP-financed staff; treasury to pay debt service of public-enterprise contracts if needed; macroeconomic unit to coordinate with debt division.
  - Interconnection with Ethiopia expected to support EDD’s financial position and allow resuming regular debt service payments.
- Debt rescheduling:
  - Authorities are negotiating with remaining official bilateral creditors; signed agreements with Saudi Arabia and negotiating with Kuwait and the United Arab Emirates to meet comparability of treatment under Paris Club requirements.
- Domestic arrears:
  - Authorities committed to repay arrears scheduled for 2011 (including arrears accumulated to public utilities in 2009), remaining domestic arrears previously scheduled for 2010, and the government’s 2009 dividend advance from Banque Commerce et Industrie.
  - Stock-taking agreements concluded with EDD and Djibouti Telecom in September, and with water company ONEAD in November (structural benchmark for end-September 2011).

### Debt Sustainability Analysis (Box 2 key findings)
- Country risk: Djibouti remains at a high risk of debt distress.
- External DSA baseline projections:
  - PV of the debt-to-GDP ratio projected to decrease from 51 percent in 2011 to 33 percent in 2031; remains above the threshold of 30 percent until 2013.
  - PV of the debt-to-exports ratio breaches its indicative threshold of 100 percent until 2025.
  - PV of the debt-to-revenue ratio and debt service ratios are below their indicative thresholds.
- Vulnerabilities:
  - External debt sustainability most vulnerable to a one-time devaluation of the currency (Djibouti operates a currency board arrangement pegged to the US dollar).
  - Debt service-to-export ratio and debt-to-export ratio most vulnerable to an export shock, highlighting vulnerability to port services.
- Macroeconomic assumptions for 2011–31:
  - Real GDP growth rate in the long run: 5.8 percent.
  - Inflation expected to remain at 2.5 percent.
  - Current account deficit expected to stabilize at about 12 percent of GDP in the next few years, mostly due to large assumed FDI inflows, then gradually decrease to about 5 percent of GDP in the long run.
- Public-sector DSA:
  - PV of public debt-to-GDP projected to decrease from 61 percent in 2011 to 34 percent in 2031.
  - PV of debt-to-revenue projected to decrease from 174 percent to 103 percent in 2031.

### Financial sector policies and supervision
- Banking sector indicators (end-2010):
  - Nonperforming loans: about 6 percent of total loans.
  - High profitability observed.
- Vulnerabilities and concerns:
  - Rapid credit growth, strong increase in number of banks, rising exposure to real estate increase risks of credit quality deterioration.
  - Increase in minimum capital under new banking law may pressure smaller banks.
  - Potential spillovers from a banking crisis in Europe given large share of liquid assets placed with counterparts in France by the two largest banks.
  - Governance risks: excessive credit concentration, connected lending, and weak internal governance structures linked to prudential/regulatory weaknesses.
- Strengthening supervision:
  - CBD created a unit dedicated to supervision, including AML/CFT supervision (structural benchmark for end-June 2011), and recruited two additional staff (structural benchmark for end-June 2011).
  - July: CBD approved a roadmap for implementation of the banking law (new structural benchmark for end-September 2011) and began tightening licensing procedures.
  - Onsite inspections conducted for five banks and a micro-finance institution in 2011.
  - All banks now submit detailed monthly statements on credit, liquidity, and foreign exchange operations.
- Central bank governance improvements:
  - September 2011: CBD Board adopted official timetable for quarterly meetings (structural benchmark for end-June 2011).
  - CBD agreed to publish the full set of 2010 financial statements, including opinion letter and disclosure notes (modified structural benchmark for end-December 2011), and intends to adopt an audit committee charter.
  - A safeguards assessment update, envisaged in the context of the augmentation of access, is ongoing.

### Program issues, data delays, and review implications
- Data delays prevented proposal of revised end-December 2011 performance criteria aligned with revised fiscal objectives; staff report could not be issued before end-December 2011 due to delays in obtaining data on a presidential airplane acquired in 2010.
- The Board can no longer modify the end-December 2011 performance criteria on the fiscal balance and net credit to the government.
- The revised macroeconomic framework implies a relaxation of about 0.8 percentage of GDP compared to the target set in the Fourth Review Staff Report (CR/12/169); the two performance criteria in question are likely to be missed (fiscal and financing data for end-December 2011 not yet available).
- Because the program is supported by an ECF arrangement, waivers for end-December performance criteria are not needed for completion of the 5th review, but waivers of nonobservance might be needed for the 6th review.
- Staff view: broader goals of the program are within reach provided the end-December 2011 outcome aligns with the revised targets (Text table 3).

*Source: IMF staff report excerpt (file: _cr12197 - 7.      Therefore, program performance was weak. The authorities missed the end-June).*

### 25.      The authorities request a revision of the structural benchmarks set in the Fouth

### 25. The authorities request a revision of the structural benchmarks set in the Fourth Review Staff Report (CR/12/169)

### Structural benchmark revisions
- Authorities request replacement of the end-June 2012 structural benchmark on the preparation of an estimate of tax expenditure with an end-March 2012 structural benchmark on the preparation of a list of beneficiary companies defaulting on the requirement to file tax returns.
  - Rationale: Macrocritical—tax returns from companies benefitting from exemptions are essential to calculate total tax expenditures.
- Clarification (following discussions with FIN in the safeguards update) of the end-December structural benchmark on the publication of the 2010 audited accounts of the CBD.
- Program envisages prior actions on:
  - Increasing the diesel price at the pump.
  - Creating a macroeconomic unit in charge of program coordination at the ministry of finance.

### Waivers requested for nonobservance of performance criteria
- Four waivers requested:
  - Waiver for the end-June performance criterion on net credit to the government.
  - Waiver for the end-June performance criterion on the government balance.
    - Justification: Temporary nature of deviations and remedial actions on strengthening tax administration and raising diesel prices.
  - Waiver for the continuous criterion on non-accumulation of domestic arrears.
    - Justification: Temporary and minor deviation—arrears were accumulated only in three months, for a maximum amount of 0.2 percent of GDP, and were eliminated by the third quarter.
  - Waiver for the continuous criterion on non-accumulation of external arrears.
    - Justification: Temporary deviation and remedial measures on improving debt service reporting, debt management, and coordination between the treasury, the debt division, and public enterprises.

### Financing, augmentation of access, and disbursement
- With the augmentation of access, the program will be fully financed.
  - Authorities expected to mobilize sufficient exceptional financing from multilateral and bilateral creditors on concessional terms, which include financing for drought-related spending.
  - Donors will continue to support Djibouti mainly through grant and loan project financing, while expected budget support is relatively limited.
- Augmentation details:
  - Staff supports the request for augmentation of access by 60 percent of quota to meet the additional external financing needs resulting from exogenous shocks.
  - The augmentation will be disbursed at the fifth and sixth reviews.
    - Disbursement: Augmentation will be disbursed equally following the approval of the fifth and sixth reviews of the ECF arrangement.
  - Expected impact on average obligations to the Fund over 2012–22:
    - Rise to 0.5 percent of government revenues (compared to 0.3 percent without augmentation).
    - Rise to 0.5 percent of exports (compared to 0.3 percent).
- Remedial actions taken by the authorities are expected to strengthen the ECF and support the requested access increase.

### Program vulnerabilities and risks
- Program vulnerable to:
  - Wavering political commitment (vested interests, domestic social unrest).
  - Administrative capacity constraints and shortfalls in technical assistance from donors, affecting reform implementation.
  - Unsustainable spending pressures from:
    - Higher transfers to EDD due to continued financial losses.
    - Uncontrolled spending on the fuel and food subsidy program.
    - Higher-than-expected cost of the mission to Somalia.
  - Fall in international reserves to unsustainable levels—threatening currency board coverage—if capital inflows and official financing are insufficient to finance the rising current account deficit.
  - Terrorist acts following increased involvement in Somalia, which could dent confidence and derail growth.

### Staff appraisal and policy recommendations
- Overall assessment:
  - Despite weak performance in the first half of 2011, the program is broadly on track.
  - Performance affected by commodity price shock, drought, and weakened attention around the elections and government transition.
  - Authorities have maintained spending discipline, progressed on structural reforms, and committed to adequate policies for 2011 and 2012.
  - Staff expects 2011 program outcome to deviate from the end-December 2011 performance criteria for the fiscal balance and net credit to the government set in the Fourth Review Staff Report (CR/12/169).
  - Staff supports completion of the fifth review and the requested waivers in light of minor deviations and corrective actions.
- Macroeconomic framework and fiscal targets:
  - Under the currency board regime, macroeconomic stability hinges on sound fiscal policy.
  - Authorities committed to:
    - Targeting a budget deficit of 0.4 percent of GDP for 2011.
    - Targeting a balanced budget in 2012.
  - To achieve targets, authorities must:
    - Increase efforts in tax collection.
    - Remain vigilant about spending pressures.
    - Keep under strict control the financial impact of the increase in the base salary.
    - If spending cuts are necessary in 2012 due to lower-than-programmed revenues, focus on quality of fiscal adjustment and refrain from disproportionately decreasing capital and social spending.
- Immediate corrective measures recommended:
  - Catch up with tax collection to achieve fiscal targets for 2011 and 2012.
  - Regularly execute external debt service payments, including those taken in charge by public companies under agreements with the government.
  - Maintain spending discipline.
  - Rigorously keep up with fiscal and debt data reporting and publication.
  - Creation of a macroeconomic unit at the ministry of finance to support program coordination.
- Fiscal sector and public financial management reforms:
  - Deepen tax revenue reforms, notably in VAT administration and reduction of tax exemptions, to increase revenue potential.
  - Continue progress in public financial management, with emphasis on:
    - Strengthening the budget process (including increased transparency of budget planning and execution).
    - Tracking domestic arrears and public-sector cross debt.
- Fuel subsidy and energy sector reforms:
  - Reform of the fuel subsidy will help contain budgetary cost and better target the poor.
    - Staff welcomes recent increases in diesel prices and the authorities’ intention to develop, with the help of the Fund, a reform strategy to phase out the universal diesel price subsidy and reinstate the automatic smoothing mechanism.
  - Lowering energy costs requires a medium-term strategy centered on reform of EDD.
    - Only a coherent energy strategy, including reform of EDD, can prevent further government transfers to EDD and allow pass-through to customers of the low cost of electricity imported from Ethiopia.

### Key quantitative points (as presented)
- Arrears accumulation: maximum amount of 0.2 percent of GDP (accumulated only in three months and eliminated by the third quarter).
- Augmentation of access requested: 60 percent of quota.
- Average obligations to the Fund over 2012–22 with augmentation: 0.5 percent of government revenues (compared to 0.3 percent without augmentation).
- Average obligations to the Fund over 2012–22 with augmentation: 0.5 percent of exports (compared to 0.3 percent without augmentation).
- Fiscal target for 2011: budget deficit of 0.4 percent of GDP.
- Fiscal target for 2012: balanced budget.

*Source: Excerpt from IMF staff report (Fourth Review Staff Report discussion).*

### 37.      The CBD should continue focusing on the implementation of the banking law

### _cr12197 - 37.      The CBD should continue focusing on the implementation of the banking law

### Implementation priorities and policy recommendation
- The CBD should continue focusing on the implementation of the banking law and possible governance issues in the banking sector.
- The CBD should develop a solid implementation framework and adequately train its staff.
- The tightening of bank licensing is an important step to address governance concerns.
- Authorities should carefully monitor banking sector developments and be vigilant toward the increase in risks, both systemic and to individual banks, given:
  - high credit growth,
  - the increase in the number of banks in recent years,
  - possible shocks from a financial crisis in Europe.

### Banking-sector risks and monitoring indicators
- Claims on the private sector (annual percent change): 27.3 26.6 21.4 4.8 10.3 15.2 14.6 14.7 13.7
- Credit to the private sector, 12-month percent change (Table 5 memorandum): 27.3 26.6 21.4 12.4 4.8 10.3
- Key financial soundness indicator — Nonperforming loans to gross loans: 19.7 26.9 30.6 29.2 28.8 27.8 15.6 10.9 8.6 6.7 6.1
- Tier I capital to risk-weighted assets (selected years): 17.3 18.5 21.7 19.1 15.0 15.7 17.4 8.1 8.5 9.5 10.1
- Reported return on assets (ROA): 4.8 4.2 2.1 2.8 2.1 1.9 1.8 1.8 1.6 1.4 3.3

### Macro-financial context relevant to banking supervision
- Real GDP (annual change in percent): 5.8 5.0 3.5 4.4 4.7 5.0 5.5 5.8 5.8
- Consumer prices (annual average): 12.0 1.7 4.0 5.3 5.0 2.5 2.5 2.5 2.5
- Broad money (annual percent change): 20.6 17.5 12.2 4.0 9.9 7.5 8.1 8.4 8.4
- Net foreign assets (as part of monetary sector): 23.1 12.1 5.1 3.1 6.7 6.9 7.0 6.9 7.0
- Claims on the private sector (monetary sector table): 27.3 26.6 21.4 4.8 10.3 15.2 14.6 14.7 13.7
- Average commercial lending interest rate (in percent): 11.4 11.7 10.1 ... ... ... ... ... ...
- Current account balance (in percent of GDP): -24.3 -9.1 -5.8 -11.7 -11.8 -11.9 -11.7 -12.5 -12.3
- FDI in percent of GDP: 23.8 9.5 2.4 5.8 6.7 12.3 12.0 12.2 12.3
- Gross official reserves (in millions): 174 218 231 230 254 277 302 329 358
- Gross official reserves (in months of next year's imports of goods and services): 3.6 5.1 3.9 3.6 3.7 3.8 4.0 4.0 3.8
- Nominal GDP (in millions of Djibouti francs): 174,617 186,447 200,578 220,440 242,370 260,628 281,650 305,411 331,119
- Currency board cover (in percent): 120.9 135.4 122.4 120.7 114.5 112.8 111.3 109.6 108.9

### Supervisory implications and operational actions for the CBD
- Strengthen implementation capacity:
  - Develop a structured implementation framework for the banking law.
  - Provide focused training to CBD staff to execute supervisory responsibilities effectively.
- Enhance risk monitoring:
  - Monitor high credit growth and lending quality closely (see NPL and credit growth indicators).
  - Track bank licensing applications and enforce tightened licensing standards to address governance risks.
- Prepare for external shocks:
  - Incorporate scenarios reflecting a financial crisis in Europe into stress-testing frameworks.
  - Monitor cross-border exposures and liquidity buffers given reserve and foreign asset positions (gross official reserves: 174 218 231 230 254 277 302 329 358).
- Governance oversight:
  - Pursue measures to detect and address governance weaknesses in banks, leveraging recent tightening of licensing as a tool.

*Source: _cr12197 - 37.      The CBD should continue focusing on the implementation of the banking law*

### APPENDIX I.

### APPENDIX I.

### Program objectives and context
- The Letter of Intent informs on progress in 2011 under the Extended Credit Facility (ECF) arrangement and sets out economic policy and reforms envisaged for 2012.
- ECF-supported program objectives remain unchanged and are aligned with the National Social Development Initiative (INDS).
- Program implementation suffered significant disruption from Q2 2011 due to exceptional drought conditions.

### Humanitarian and external assistance related to the drought
- The Horn of Africa drought affected "more than 12 million people (11 percent of the population)"; Djibouti was among the most affected countries.
- Djibouti-specific impacts:
  - "some 120,000 people in rural areas, that is, 50 percent of the rural population, and 15 percent of the total population" affected.
  - "around 20,000 refugees".
  - "14.5 percent of the urban population (Djibouti city and the five regional capitals) living in food insecurity".
  - "more than 12,000 children under five years old suffering from malnutrition" (national nutrition survey of March 2011).
  - "around 33 percent of Djiboutians live in high-risk areas".
  - "35.3 percent of the economy is vulnerable to natural risks".
- Appeal for emergency aid yielded partner commitments totalling "US$ 47 million" (confirmed amounts at end-October 2011); disbursements partially made since July 2011 with remainder expected over next two years and concentration in 2012. Most aid expected in-kind through the World Food Program.
- To meet additional balance-of-payments financing needs in 2011–12 from the drought and import price shocks, authorities seek an augmentation of access to ECF resources of "60 percent of quota (SDR 9.54 million)", to be disbursed in two tranches upon approval of the fifth and sixth reviews.

### Macroeconomic developments (2011) and outlook (2012)
- 2011 outcomes (estimates):
  - Real GDP growth: "4.4 percent" in 2011 (compared to "3.5 percent" in 2010).
  - Inflation: "5.3 percent" in 2011.
  - Current account deficit: "11.7 percent of GDP" in 2011 (up from "5.8 percent of GDP" in 2010).
  - International reserves: "US$231 million" at end-2010; reserves estimated to have remained broadly stable at end-2011.
  - External debt stock: decline from "56 percent of GDP" at end-2010 to an estimated "55 percent" at end-2011.
- 2012 projections:
  - Real GDP growth: "4.7 percent".
  - Inflation: "5 percent".
  - Current account deficit: "11.8 percent of GDP".
  - Outlook drivers: speeding up of port and services activity; continued subdued FDI.

### Fiscal performance and financing (2011)
- Revised fiscal balance target for 2011: deficit of "0.4 percent of GDP".
  - To achieve this, capital expenditure deferred by amount equal to "around 1 percent of GDP".
  - Commitment: no extrabudgetary spending in 2011 and commitment not to engage in such spending in the future.
- Revenue and expenditures:
  - Weak collection of tax and nontax revenues in first half of 2011 due to election period, government transition, revenue administration reorganization, drought-induced household transfers, and private solidarity contributions.
  - Forgone diesel excises of "around DF 2,800 million" relative to the budget law to stabilize diesel price starting January 2011.
  - Kerosene subsidy of "around DF 60 million" for 2011.
  - Cereal production sold at subsidized prices at budgetary cost of "around DF 103 million" (cereal production figures: "around 8,000 metric tons in 2010 and 9,000 metric tons in 2011").
- Cash flow and arrears:
  - Nonobservance of performance criteria on the fiscal balance and on net banking system credit to the government.
  - Continuous performance criterion on non-accumulation of external arrears not observed in the second semester.
  - Continuous performance criterion on accumulation of new domestic arrears (delays in payment of salaries and pensions) not observed in Q3.
  - Other performance criteria and quantitative indicative targets for end-June 2011 were observed except social spending, which was slightly below target.
  - No contracting of non-concessional debt in 2010 or during 2011.
- Financing emphasis:
  - Financing will be provided mainly from external resources to enable replenishment of deposits with the domestic banking system, in particular the Central Bank of Djibouti (CBD), which dropped significantly in early 2011.

### Subsidy policy and energy pricing measures
- Diesel price policy:
  - Diesel price at the pump increased by "DF 3" in October and by an additional total of "DF 8" in November and December (prior action), despite a fall in FOB prices.
  - Target petroleum tax revenues for 2012: "DF 800 million". If social constraints prevent reaching this target, authorities undertake to delay domestically-financed investments equivalent to the shortfall.
  - Plan to undertake a study (with IMF assistance) on introducing social protection for vulnerable sectors (public transportation, taxis, bakeries) while gradually increasing diesel price toward targeted tax revenue levels.
- Food subsidy transparency:
  - Plan to prepare a summary balance sheet of the food security program for FY 2010 by end-2011 and regularly disclose operating accounts of the food security company.

### 2012 Budget priorities and labor market measures
- 2012 budget law approved by Cabinet in December and remains consistent with INDS and Millennium Development Goals programs.
- Revenue stance:
  - Intention to maintain tax revenue to GDP ratio constant at the 2011 level through VAT and exemptions reforms and strengthened tax collection.
- Expenditure stance:
  - Seek to raise capital expenditure in sectors with growth potential while maintaining fiscal restraint.
  - Maintain hiring freeze in public service, except for social sectors (education and health).
  - Maintain freeze on wages in public sector but plan to increase the lowest level of public sector salary scale to catch up with cumulative loss of purchasing power of the lowest paid public employees.
- Youth employment and vocational training:
  - Vocational training brought under National Education Ministry.
  - Opened a logistics training center.
  - Established a youth employment promotion fund and financing of a loan initiative for business creation; seven start-up projects approved and operating.
  - Established a guarantee fund for loans under that framework.

### Fiscal reforms and tax administration measures (2011–2012)
- Urgent revenue-strengthening measures:
  - Strengthen controls by revenue collection agencies, particularly off-site inspections (for customs and taxes) and sampling, continued into 2012.
  - Publish list of property owners in default of property taxes, with possible seizure and sale for persistent nonpayment.
  - Issue reminders and enforcement measures against companies in payment default; seizure of accounts in persistent default.
  - Stepped-up tax audits of local companies, especially those with tax-exempt projects or foreign military bases.
  - Recovery of outstanding tax claims from previous years and amounts due from public entities for the current year.
  - Commission established for FY 2012 to recommend new tax measures to strengthen revenues and simplify the business environment.
- Direct and indirect tax measures:
  - Modernized customs code adopted in June to align with COMESA (structural benchmark for end-March 2011).
  - 2012 budget includes lowering VAT threshold from "DF 80 million" to "DF 50 million" (structural benchmark for end-December 2011); awareness campaign launched.
  - Strengthened VAT unit with competent human resources (structural benchmark for end-December 2011).
  - Introduced ASYCUDA software for managing customs revenue on all external trade transactions (structural benchmark for end-December 2011).
  - Extend single taxpayer identification number (NIF) to enterprises subject to declaration of direct taxes and other taxpayers; ASYCUDA to interface with tax directorate to incorporate NIF.
  - Strengthen coordination between VAT and direct tax management and decentralize tax services (tax center in Balbala; regional treasuries of Ali Sabieh and Tadjourah to become operational).
- Exemptions policy:
  - Resume work of commission (tax/customs/ANPI) to review conditions for granting exemptions for new investments, produce list of beneficiaries, without modifying incentives already granted.
  - Require all enterprises granted exemptions to file tax returns or face nonrenewal; information campaign launched.
  - Assign personnel to estimate tax expenditure and draft a tax expenditure report to be annexed to 2012 supplementary budget.
  - Intend to publish list of enterprises whose tax-exempt status has been revoked for failure to file returns (structural benchmark for end-March 2012).
  - Not renew exemptions of enterprises that fail to comply with the code.

### Expenditure control and public financial management measures
- Strengthened expenditure control and PFM in response to fiscal slippages at end-2009:
  - Created a sub-directorate responsible for auditing and monitoring accounts of public institutions within the Treasury Directorate and a central accounting agency for hospital facilities; enhanced status of government accounting staff at public institutions (2010).
  - Implemented preventive expenditure controls including sustained surprise audits at five ministries in 2011 to update and monitor the single register of civil servants and government asset inventories.
  - Prepared bi-monthly cash programming exercises on a commitment basis, expanded to include Ministries of Education and Health (except for a brief summer period).
  - Restructured Treasury Directorate by creating a separate government accounting directorate to improve transparency in treasury operations.
  - Replaced most government accounting staff in ministries and public enterprises to ensure greater transparency and rigor.
  - Annexed budgets of the Water Fund and Youth Fund to the 2011 budget law.

### Structural benchmarks and implementation status (high level)
- Most 2011 structural benchmarks met with exceptions:
  - Not met (examples):
    - Regular production and publication of TOFE on Ministry of Finance website up to August 2011 due to delays in fiscal data preparation (continuous structural benchmark).
    - Adoption by Cabinet of new customs code by end-March 2011 was completed in June.
    - Adoption of official timetable of quarterly meetings by CBD Board by end-June 2011 completed in September.
    - Conclusion of cross-debt agreements finalized in September with EDD and Djibouti Telecom, and in November with ONEAD.
    - Acquisition of software to introduce budget classification (structural benchmark for end-December 2011): financing committed by African Development Bank.
    - Publication of 2010 audited financial statements of CBD (structural benchmark for end-December 2011): 2010 accounts posted on CBD website; full audit report to be posted soon.

*Letter of Intent and Memorandum of Economic and Financial Policies, Djibouti, January 25, 2012.*

### 24.      In 2011 and 2012, we plan to continue these efforts by pursuing: (i) a policy of

### _cr12197 - 24.      In 2011 and 2012, we plan to continue these efforts by pursuing: (i) a policy of

### Fiscal management and budget framework
- Planned actions for 2011–2012:
  - (i) Transfer balances of government accounts and of donor-financed project accounts to the single treasury account.
  - (ii) Prepare establishment of a medium-term budget framework (MTBF) for the 2013 budget law by:
    - Recruiting qualified staff for the Budget Directorate (structural benchmark for end-June 2011).
    - Amending, if necessary, the organic and budget laws for the 2013 budget with support from partners, in particular the IMF and UNDP.
  - (iii) Publish the monthly fiscal reporting table (TOFE) on the Ministry of Finance website within a maximum of two months (continuous structural benchmark).
  - (iv) Apply the new budget classification in the context of the 2013 budget, with adequate software financed by the African Development Bank and expected to be acquired by June 2012 (structural benchmark for end-December 2011).

### Arrears and cross debt
- Objectives and commitments:
  - Reduce the stock of domestic arrears, including those accumulated in 1995–2001, with possible donor assistance, and prevent further accumulation.
  - Undertake to:
    - (i) Strengthen controls on the public expenditure chain to avoid further arrears, except arrears attributable to the one-month lag in the payment of civil servants’ wages and the three-month lag in pension fund contributions, which will be reduced as resource availability allows.
    - (ii) Monitor regularly the situation regarding domestic arrears and execution of payments to public utilities, reporting to IMF staff on a quarterly basis in the context of bi-monthly cash programming exercises.
    - (iii) Exercise prudence in budget appropriations for current expenditure and social spending, and in external financing for which agreements have not yet been signed.
- Cross-debt consolidation:
  - November 2011: prepared a summary table on cross debts among public enterprises and pursued debt consolidation, signing all relevant agreements (structural benchmark for end-September 2011).
  - Intend to repay outstanding payment arrears accumulated in 2009 over the 2011–2012 period by drawing on specific budget line items under expenditure on goods and services.

### External debt
- Paris Club and bilateral creditors:
  - Progress in relations with Paris Club creditors facilitated conclusion of bilateral agreements and entry into force of the second phase of the October 2008 agreement.
  - Under comparability of treatment clause, signed bilateral agreements with Saudi Arabia; contacted the United Arab Emirates and Kuwait to begin negotiations for comparable treatment.
- External arrears developments:
  - Strained cash-flow in H1 2011 led to accumulation of external arrears since May 2011 by the government and some public enterprises (EDD and Société Immobilière) vis-à-vis multilateral and bilateral creditors, including Paris Club creditors; arrears were settled in October, November, and December 2011.
  - Undertake to avoid future accumulation of external arrears, including those arising from public enterprises.
  - Intend to strengthen monitoring of debt service payments by:
    - Systematic verification with creditors of actual execution of payments.
    - Ensuring regular transmission of monthly debt service reports to the IMF.
- Debt contracting policy:
  - Continue to contract only concessional loans and prioritize projects to be funded under the INDS.
  - Improve coordination among ministerial departments under the Ministry of Finance for government financing programs and related policies.
  - Extend the requirement to refrain from contracting nonconcessional debt to public enterprises, with option to exclude enterprises managed on a purely commercial basis.

### Monetary and financial policies
- Currency board arrangement and coverage:
  - Monetary policy underpinned by the currency board arrangement to ensure price stability.
  - Undertake to continue covering all foreign currency-denominated liabilities and maintain a rate of coverage higher than 105 percent of reserve money and government deposits with the CBD.
  - External position supported by absence of encumbrances on foreign currency reserves.
- Banking sector developments:
  - Recent high growth of credit and deposits driven by arrival of new banks and sustained private sector credit demand.
  - Q1 2011 reversal due to reduction in current account overdrafts (which account for 57 percent of loans to the private sector), election-period uncertainty, and one bank changing ownership.
  - Credit to private sector recovered in Q2 2011; deposits continued to decline.
  - Financial sector remains healthy with a relatively low level of nonperforming loans and disputed loans (mostly historical).
  - Expansion in financial products and internet banking activity.

#### A. Banking supervision
- Reform program and supervision strengthening:
  - Implementing reform program following Financial System Assessment Program guidelines.
  - Reorganized supervisory structure and set up a dedicated supervision unit (structural benchmark for end-June 2011).
  - Recruited two officers (structural benchmark for end-June 2011), in addition to a senior official already hired.
  - Begun staff training in core skills for off-site and on-site supervision.
  - Conducted on-site inspection of five banks and one microfinance institution in 2011; plan to inspect another bank before year-end and continue off-site supervision.
  - Revising charter of foreign exchange bureaus to comply with the new banking law.
  - Developed a road map with timetable for bringing various banking sector laws into effect (structural benchmark for end-September 2011); preparation of enabling texts and supervision instruments completed and new instructions adopted in December 2011.

#### B. Financial sector development
- Planned initiatives with development partners (World Bank, African Development Bank, Islamic Development Bank, UNDP):
  - (i) Improve access to microfinance for individuals and SMEs by setting up a dedicated unit at the CBD.
  - (ii) Improve management of existing structures (central credit register) and prepare transition to a credit bureau.
  - (iii) Facilitate mobile banking transactions.
  - (iv) Strengthen the payment system.
  - Implementation of banking law provisions with IMF technical assistance.

#### C. Governance of the CBD
- Safeguards and reporting:
  - Implementing recommendations of the safeguards assessment mission; hosted another mission in November in context of augmentation of access under the ECF.
  - Starting with the 2011 financial year, financial reports to be completed within six months from end of exercise, as will the audit opinion.
  - Publication of full set of financial statements for 2010 on the CBD website, including audit opinion and disclosure notes, is in progress and will soon be completed (structural benchmark for end-December 2011).
  - Strengthened internal control by updating procedures.
  - September 2011: Board of Directors adopted official timetable of quarterly Board meetings and expanded Board prerogatives (structural benchmark for end-June 2011).
  - Board decided to consider creating an audit committee; an audit charter is under preparation.

#### D. Combating money laundering and financing of terrorism
- Legal and capacity measures:
  - Remedying weaknesses in combating money laundering and financing of terrorism.
  - May 2011: National Assembly adopted an amendment of the law on combating money laundering and two separate draft laws on prevention of terrorism and financing of terrorism, respectively, submitted by the CBD with the Ministry of Justice.
  - CBD considering long-term technical assistance in this area, to be financed by donors.

### Competitiveness and structural reforms
- Overview:
  - Currency board arrangement makes competitiveness crucial; competitiveness hampered by high costs of principal factors of production and weaknesses in business climate.
  - Committed to structural reforms to reduce energy and water costs, restructure public enterprises, and improve legal and regulatory framework.
- Progress on legal/business environment:
  - Considerable progress on Investment and Commercial codes and law on industrial property.
  - Labor Code now being enforced, including collective bargaining arrangements.
  - Final components of the new Commercial Code (company and bankruptcy laws) finalized end-2010 and Commercial Code adopted in full by the National Assembly in October 2011.
- Energy and water sector reforms:
  - Interconnection with Ethiopia’s electricity grid completed; on average covers over 50 percent of current consumption in Djibouti at very favorable negotiated rates, expected to reduce energy costs.
  - Will update the energy master plan with donors.
  - World Bank-supported study launched November 2011 to assess options for developing thermal energy potential.
  - Continued implementation of recommendations from the final study on restructuring and human resources adjustment for the EDD (carried out by IDEA Consulting).
  - ONEAD considering a sizeable seawater desalination investment program to be financed by donors, with significant support from the European Union.

### Data
- Statistical system improvements:
  - Low quality of statistical database hampers policy formulation and monitoring.
  - Seeking to improve quality, coverage, and timeliness of economic data with development partners, especially national accounts, balance of payments, and government finance.
  - June 2011: National Assembly approved legal framework by ratifying draft law on organization of statistical activity and structure of the National Statistics System.
  - 2009: Completed general population census.
  - With partner support, expect survey of economic activities (to be included in national accounts estimation) to be completed in 2012.
  - A harmonized consumer price index being finalized within COMESA and will be applied as of January 2012, following household consumption-budget survey set to begin in January 2012.

### Program monitoring
- Quantitative performance criteria and benchmarks:
  - Delay in concluding program discussions prevents requesting modification of end-December 2011 quantitative performance criteria on fiscal balance and net credit to the government (related to sixth review) to reflect macro scenario changes; existing end-December performance criteria remain in place.
  - Consistent with understanding with Fund staff, expect fiscal policies to be considered in relation to revised fiscal objective of a deficit of 0.4 percent of GDP in 2011.
  - Some program reforms will be subject to structural benchmarks.
- Compensatory and organizational measures:
  - Diesel prices increased at the pump in October, November, and December (prior action) to compensate for losses in fuel revenues.
  - Establish a macroeconomic unit under the supervision of the Secretary General to take on functions of the committee responsible for monitoring the program and to be entrusted with macroeconomic analysis (prior action).
  - The unit will continue preparation of promised documents within agreed timeframes, monitor targeted program variables, and prepare a reference macroeconomic framework for the Ministry of Finance.
  - Each directorate to designate a contact person responsible for preparing and communicating data on actual and projected revenues and expenditures.

### Conclusion and requests
- Waiver and review requests:
  - Request waivers for nonobservance of criteria at end-June 2011 relating to net banking system credit to the government, the fiscal balance, and the continuous criteria on non-accumulation of new external arrears and accumulation of new domestic arrears.
  - On that basis, request conclusion of the fifth review of the ECF arrangement, with disbursement of SDR 1.476 million and the first tranche of the augmentation of access under the ECF for the amount of SDR 4.77 million, the augmentation of access of SDR 9.54 million, and the rephasing of disbursements.
- Government commitments:
  - Government believes stated policies and measures are sufficient to achieve ECF objectives and will take additional measures as necessary.
  - Will consult with IMF staff before adopting measures or changes to policies specified in the attached MEFP and will provide IMF with requested information regarding implementation progress.

*Source: Djibouti authorities’ letter and supporting text as provided in the content unit.*

### 2. Create a macroeconomic unit in charge of program coordination at the

### 2. Create a macroeconomic unit in charge of program coordination at the Ministry of Finance

### Structural benchmarks, deadlines, and implementation status
- Strengthening of budget transparency and program monitoring
  - 1. Monthly publication of the TOFE on the Ministry of Finance website with a maximum lag of two months (Continuous) — Fiscal transparency — Not met. The data for December through August 2011 were published with a delay.
  - 2. Adoption by the Cabinet of a customs code consistent with the COMESA zone code (March 2011) — Regional trade integration — Not met. The bill was adopted in June 2011.
  - 3. Recruitment of qualified staff in the Budget Department for the preparation of the MTBF (June 2011) — PFM-Budget Process — Met. One jurist and three economists were recruited in June 2011 and started work in July 2011.
  - 4. Sign cross-debt agreements with EDD, ONEAD, Djibouti Telecom (September 2011) — Financial management — Not met. The agreements were finalized with EDD and Djibouti Telecom in September, and with ONEAD in November.
  - 5. Acquisition of the software for the introduction of the new budget classification (December 2011) — PFM-Budget Process — Not met. The AfDB has agreed to fund the acquisition of the software. The authorities have started consultations with countries in North Africa for the acquisition of the software.
  - 6. Inclusion in the 2012 budget of the lowering of the VAT basis from 80 to 50 million FD (December 2011) — Strengthening of tax revenue — Met. The lowering of the VAT basis was included in the 2012 budget.
  - 7. Increase of human resources in the unit in charge of VAT (December 2011) — Strengthening of tax revenue — Met. The required staff have been recruited in June 2011.
  - 8. Set up the customs revenue management software ASYCUDA for all external trade transactions in Djibouti (December 2011) — Strengthening of tax revenue — Met. The software has been installed for all external trade transactions.
  - 9. Prepare a list of enterprises whose tax exempt status has been revoked for failure to file tax returns (March 2012) — Strengthening of tax revenue — (Status not reported in supplied content.)
  - 10. Prepare a report estimating fiscal expenditures due to exemptions (June 2012) — Strengthening of tax revenue — Removed.
- Strengthening of supervision and regulation
  - 11. Creation of a unit dedicated to supervision, including AML/CFT supervision (June 2011) — Strengthening bank supervision and AML/CFT — Met. The unit was created in May 2011 as part of the reorganization of the CBD.
  - 12. Recruitment of two staff for the unit dedicated to supervision (June 2011) — Strengthening bank supervision and AML/CFT — Met. The two staff were recruited in May 2011 and three other staff have been redeployed to the unit.
  - 13. Develop a roadmap with a precise timetable for the application of the banking laws (September 2011) — Strengthening bank supervision — Met.
- Strengthening of the safeguard framework
  - 14. Adoption of an official timetable for biannual meetings of the Board of Directors and extension of its rights to oversee internal control (June 2011) — Strengthening central bank governance — Not met. The timetable was approved with a delay in September 2011.
  - 15. Publication of the full set of 2010 audited financial statements of the CBD on the CBD website, including the audit opinion and disclosure notes (changed from "Approval of audit reports and publishing the audit opinion on the CBD website six months after the end of the fiscal year") (December 2011) — Strengthening central bank governance — Not met. The audited 2010 accounts have been published on the CBD website, but with only part of the audit report.

### Quantitative performance criteria and indicative target definitions
- Test dates
  - Quantitative performance criteria are set for June 30, 2011 and December 31, 2011, and must be met at the end of each period, unless otherwise specified.
- Government
  - For the purposes of the program, "government" is defined as the central government, excluding the social security system.
- Quantitative Performance Criterion 1: Continuous ceiling on accumulation of new domestic arrears
  - Definition: New domestic arrears are payments which are authorized (ordonnancé) and are past due date on the wage bill and to private suppliers, public enterprises, and pension funds, incurred as of January 1 of the year and up to the end of the complementary period.
  - The ceiling applies to the total unpaid amount subject to the technical lag (reported in the TOFE as "new arrears"), which must not exceed the sum of one month’s wages or three months’ pension fund contributions.
  - The ceiling, set for each quarter in Table 1, should be respected on a continuous basis and will be monitored on a monthly basis.
- Quantitative Performance Criterion 2: Continuous ceiling on accumulation of new external arrears
  - Definition: External arrears are overdue payments (principal and interest) on external debt contracted or guaranteed by the central government or the Central Bank of Djibouti (CBD), excluding debt subject to rescheduling or cancellation.
  - Technical arrears (as defined in the loan contract) are not considered external arrears for program monitoring purposes. The ceiling should be respected on a continuous basis.
- Quantitative Performance Criterion 3: Ceiling on net banking system credit to the government
  - Definition: Net banking system credit to the government is defined as the sum of net bank financing, namely, claims on the government minus government deposits with the financial system.
- Quantitative Performance Criterion 4: Floor government budget balance on the commitment-basis (ordonnancement)
  - Definition: The government budget balance on a commitment-basis is defined as the overall balance (on a commitment basis, including grants) shown in the fiscal reporting table (TOFE), representing the difference between total revenue (including grants) and total expenditure, including extra-budgetary expenditure.
- Quantitative Performance Criterion 5: Continuous ceiling on contracting or guaranteeing new medium- and long-term nonconcessional external debt by the government, the CBD, and public enterprises
  - Definition: Medium- and long-term nonconcessional external debt contracted or guaranteed by the government, the CBD, and public enterprises, is defined as foreign debt defined by the residency of the creditor, maturing in at least one year, contracted or guaranteed by the government, the CBD, and public enterprises, with a grant component (Net Present Value, NPV, compared with the nominal value) of at least 35 percent, based on the currency- and maturity-specific discount rates announced by the OECD (benchmark commercial interest reference rates - CIRR).
  - The ten-year CIRR is applied to debt maturing in at least 15 years; the six-month CIRR is applied to debt maturing in less than 15 years.
  - For program purposes, the definition of debt is set out in Executive board No. 6230-(79/140), as amended by Decision No. 14416(09/91), including commitments contracted or guaranteed for which value has not been received. The ceiling should be respected on a continuous basis.
- Quantitative Performance Criterion 6: Continuous floor on currency board coverage
  - Definition: Currency board coverage is defined as the gross foreign assets of the CBD, divided by the sum of government deposits at the CBD and reserve money.
  - The gross foreign assets of the CBD represent the value of the external assets of the CBD, consisting of: (a) monetary gold; (b) SDR holdings; (c) the IMF reserve position; (d) foreign currency holdings; and (e) claims on nonresidents, such as deposits abroad.
  - The foreign assets of the CBD exclude assets that are committed or otherwise encumbered, including but not limited to assets used as collateral or guarantees for foreign liabilities of third parties (assets not immediately available). The floor should be respected on a continuous basis.
- Indicative Target 1: Floor on social spending
  - Definition: Social spending is defined as subsidies and transfers to public entities, including health organizations, sports clubs, non-profit entities; and transfers to households in the form of scholarships.

### Program adjustors (how quantitative criteria are adjusted)
- Adjustor 1: French, U.S. and Japanese payments related to the use of military bases
  - The ceiling on net banking system credit to the government will be lowered (raised) by the amount of any excess (shortfall) compared with the projected French, U.S. and Japanese payments for 2011 related to the use of military bases (as reported in Table 1 of LOI).
  - The floor on the government budget balance on a commitment-basis will be lowered (raised) by the amount of any shortfall (excess) compared with the expected French, U.S. and Japanese payments for 2011 related to the use of military bases (as reported in Table 1 of LOI).
- Adjustor 2: Foreign budgetary grants and loans
  - The ceiling on net banking system credit to the government will be lowered (raised) by one-half of any excess (shortfall) in the total amount of the foreign budgetary grants and loans actually disbursed, compared with the program projections (as reported in Table 1 of LOI).
  - The floor on the government budget balance on a commitment basis will be lowered (raised) by one-half of any shortfall (excess) in the total amount of the foreign budgetary grants actually disbursed, compared with the program projections (as reported in Table 1 of LOI).
- Adjustor 3: Foreign project loans
  - The floor on government budget balance on a commitment basis will be lowered (raised) by any excess (shortfall) in the total amount of the foreign project loans actually disbursed, compared with the pertinent program projections (as reported in Table 1 of LOI).

### Reporting obligations and data frequency
- Real, monetary, and financial sectors
  - The balance sheet of the central bank, the consolidated balance sheet of the commercial banks, and the monetary survey, within four weeks of the end of the reporting period (the end of each month).
  - The consumer price index, within four weeks of each month-end.
- Fiscal sector, including social spending
  - Monthly TOFE data on operations, revenue, expenditure, and budget financing items, including data on capital budget execution, with details on the externally financed portion and the counterpart funds of the central government for which donor terms apply.
  - The extra-budgetary expenditure recorded at least quarterly in the TOFE.
  - Execution of FSN expenditure, on, at least, a quarterly basis, shown as a separate line in TOFE.
  - Repayment of the domestic arrears accumulated in 2009, on at least quarterly basis, shown as a separate line in TOFE.
  - Committed expenditure for which payment authorizations (ordonnancement) have not been issued (on a quarterly basis).
  - Total payments to the public utilities for services executed in the current year, both in DF and as a percentage of the total budgeted for the year, on a quarterly basis.
  - These data will be provided within 30 days of each month-end.
- Arrears
  - Data on domestic arrears (ordonnancement basis) related to: (1) the current year (monthly flows of new accumulations of arrears in all categories); and (2) the stock at the end of the previous year. Consolidated data for (1) and (2) will be reported monthly, within no more than four weeks.
  - External arrears data related to: (1) the current year, and (2) the stock at the end of the previous year; consolidated data for (1) and (2) will be reported monthly, within no more than four weeks.
- External sector, external assistance and debt
  - The quarterly balance of payments statistics, end of each quarter with a two quarter lag.
  - The monthly data on foreign grants and loans received by the government and by public enterprises, by creditor and by disbursement currency, within four weeks of each month-end.
  - The monthly data on the evolution of external debt, including arrears and rescheduling operations, within six weeks of each month-end.
  - The monthly list of medium- and long-term external loans contracted and guaranteed by the government for each month, with the following details on each loan: the creditor, the borrower, the amount, the currency, the maturity, the grace period, and the interest rate arrangements. These data will be reported within four weeks of each month-end.
  - The quarterly data on the balance of the external debt stock, by creditor, debtor, and currency, within six weeks of the end of each quarter.

*Extracted from the supplied content of the Technical Memorandum of Understanding and Table 2: Structural Benchmarks Under the Extended Credit Facility (ECF).*

### APPENDIX III. DEBT SUSTAINABILITY ANALYSIS CHARTS AND TABLES

### APPENDIX III. DEBT SUSTAINABILITY ANALYSIS CHARTS AND TABLES

### Indicators of Public and Publicly Guaranteed External Debt (Figures 1–2)
- Time horizon covered in charts and tables: 2011-2031.
- Scenarios shown: Baseline; Historical scenario; Most extreme shock (defined as the test that yields the highest ratio in 2021).
- Most extreme stress tests by figure:
  - Figure b: One-time depreciation shock.
  - Figure c: Exports shock.
  - Figure d: One-time depreciation shock.
  - Figure e: Terms shock.
  - Figure f: Terms shock.
- Chart metrics presented (selected):
  - Debt Accumulation (rate scale 0–12 shown).
  - Grant-equivalent financing (% of GDP).
  - Grant element of new borrowing (% right scale).
  - PV of debt-to-GDP ratio (scale 0–80).
  - PV of debt-to-exports ratio (scale 0–250/300).
  - PV of debt-to-revenue ratio (scale 0–250).
  - Debt service-to-exports ratio (scale 0–16).
  - Debt service-to-revenue ratio (scale 0–45).

### Public Sector Debt Dynamics and Key Statistics (Table 1a and summary rows)
- Public sector debt (percent of GDP) by period/average samples shown in row:
  - Sequence: 76.5 73.7 68.8 64.9 65.9 67.6 68.4 68.8 68.7 71.0 46.6
- Share foreign-currency denominated (percent of GDP):
  - Sequence: 60.2 59.8 56.1 54.9 57.7 60.2 61.6 62.5 63.0 68.1 45.2
- Change in public sector debt (percent of GDP):
  - Sequence: -9.4 -2.8 -5.0 -3.9 1.0 1.7 0.8 0.3 -0.1 -0.5 -2.8
- Identified debt-creating flows (percent of GDP):
  - Sequence: -13.0 -0.3 -4.7 -5.8 -6.1 -5.1 -5.2 -5.3 -5.3 -4.7 -3.3
- Primary deficit (percent of GDP) and related:
  - Values include: -2.4 3.3 -0.6 0.7 1.7 -1.6 -1.7 -1.8 -1.6 -1.4 -1.3 -1.6 -1.2 -0.6 -1.0 (presented across rows).
- Revenue and grants (percent of GDP):
  - Sequence includes: 41.9 37.0 35.5 35.1 34.6 34.8 34.9 35.0 35.1 31.9 33.0
  - Grants component (percent of GDP): 13.1 6.4 5.3 5.9 6.2 4.8 4.4 4.0 3.7 0.6 0.3
- Primary (noninterest) expenditure (percent of GDP):
  - Sequence: 39.5 40.3 34.9 33.4 32.9 33.1 33.3 33.6 33.8 30.7 32.5
- Automatic debt dynamics (percent of GDP):
  - Sequence: -10.6 -3.6 -4.1 -4.1 -4.4 -3.3 -3.6 -3.9 -4.1 -3.5 -2.7
- Contributions to automatic dynamics:
  - From interest rate/growth differential: -7.3 -4.4 -3.3 -2.2 -2.8 -3.0 -3.3 -3.6 -3.7 -4.0 -3.0
  - Of which: average real interest rate contribution: -2.5 -0.8 -0.9 0.7 0.3 0.6 0.4 0.2 0.0 0.0 -0.3
  - Of which: real GDP growth contribution: -4.7 -3.7 -2.5 -2.9 -3.2 -3.6 -3.7 -3.8 -3.8 -3.9 -2.7
  - Contribution from real exchange rate depreciation: -3.4 0.8 -0.8 -1.9 -1.6 -0.3 -0.3 -0.3 -0.3 ......
- Residual including asset changes (percent of GDP):
  - Sequence: 3.6 -2.5 -0.3 1.9 7.1 6.8 6.1 5.7 5.2 4.2 0.4

### Other Sustainability Indicators (Table 1a continuation)
- PV of public sector debt (percent of GDP) by period:
  - Sequence (selected): ...... 66.3 61.2 59.1 58.5 57.6 56.6 55.5 54.0 34.1
- PV of public sector debt, foreign-currency denominated (percent of GDP):
  - Sequence: ...... 53.7 51.1 50.9 51.1 50.7 50.3 49.9 51.1 32.6
- Gross financing need (percent of GDP):
  - Sequence: 0.3 6.4 2.3 2.2 2.6 2.2 2.3 2.1 2.1 1.4 2.4
- PV of public sector debt-to-revenue and grants ratio (percent): ...... 187.1 174.4 170.7 168.1 164.8 161.5 158.4 169.1 103.1
- PV of public sector debt-to-revenue ratio (percent): ...... 220.2 209.9 207.7 194.9 188.5 182.6 177.2 172.1 104.0
- Debt service-to-revenue and grants ratio (percent): 6.4 8.3 8.0 11.0 12.4 11.4 11.2 10.1 9.5 8.1 9.0
- Debt service-to-revenue ratio (percent): 9.3 10.0 9.5 13.2 15.1 13.2 12.8 11.4 10.6 8.3 9.1
- Primary deficit that stabilizes the debt-to-GDP ratio (percent of GDP): 7.1 6.1 4.4 2.2 -2.7 -3.5 -2.4 -1.7 -1.2 -0.8 2.3

### Key Macroeconomic and Fiscal Assumptions (selected rows)
- Real GDP growth (in percent): 5.8 5.0 3.5 3.8 1.3 4.4 5.1 5.8 5.8 5.8 5.8 5.5 5.8 5.8 5.8
- Average nominal interest rate on forex debt (in percent): 1.5 1.4 1.3 1.4 0.1 3.1 2.4 2.4 2.1 1.8 1.6 2.2 1.9 1.2 1.7
- Average real interest rate on domestic debt (in percent): -7.2 1.1 -1.0 -1.6 2.3 -1.1 0.7 3.7 3.8 3.7 3.5 2.4 -0.6 -0.3 -0.4
- Real exchange rate depreciation (in percent, + indicates depreciation): -5.7 1.5 -1.3 -1.1 2.0 -3.5 ...........................
- Inflation rate (GDP deflator, in percent): 9.5 1.7 4.0 3.4 2.5 5.3 5.0 2.5 2.5 2.5 2.5 3.4 1.2 1.2 1.0
- Growth of real primary spending (deflated by GDP deflator, in percent): 0.1 0.1 -0.1 0.1 0.1 0.0 0.0 0.1 0.1 0.1 0.1 0.0 0.1 0.1 0.1
- Grant element of new external borrowing (in percent): ............... 34.5 37.8 37.6 38.3 38.3 38.1 37.5 36.2 30.0 ...

### Sensitivity Analysis for Key Indicators of Public Debt (Table 2a)
- Time snapshots: 2011, 2012, 2013, 2014, 2015, 2016, 2021, 2031.
- PV of Debt-to-GDP Ratio (baseline and scenarios; sample entries):
  - Baseline: 61 59 59 58 57 56 54 34
  - A1 (Real GDP growth and primary balance at historical averages): 61 61 63 65 66 68 77 70
  - A2 (Primary balance unchanged from 2011): 61 59 59 58 57 55 52 29
  - A3 (Permanently lower GDP growth): 61 59 59 58 58 57 58 45
  - B1–B5 bound tests include values such as B4 (One-time 30 percent real depreciation in 2012): 61 78 75 72 69 66 59 36
- PV of Debt-to-Revenue Ratio 2/ (baseline and scenarios; sample entries):
  - Baseline: 174 171 168 165 162 158 169 103
  - A1: 174 177 181 185 188 191 241 211
  - A2: 174 171 168 165 165 161 164 87
  - B4: 174 225 215 205 195 186 186 109
- Debt Service-to-Revenue Ratio 2/ (baseline and scenarios; sample entries):
  - Baseline: 11 12 11 11 10 9 8 6
  - A1: 11 13 12 12 12 11 10 16
  - B4: 11 15 16 16 14 13 12 14

(Note: 2/ Revenues are defined inclusive of grants.)

### External Debt Sustainability Framework and External Sector Indicators (Table 3a and continuation)
- External debt (nominal) — total and PPG (percent of GDP):
  - Sequence: 60.2 59.8 56.2 54.9 57.7 60.2 61.6 62.5 63.0 68.1 45.2
- Change in external debt (percent of GDP):
  - Sequence: -3.5 -0.4 -3.6 -1.3 2.8 2.5 1.4 0.9 0.5 -0.3 -2.7
- Identified net debt-creating flows (percent of GDP):
  - Sequence: -8.2 -4.3 -1.8 3.4 3.1 -1.0 -1.6 -1.0 -1.3 -3.9 -2.9
- Non-interest current account deficit (percent of GDP): 2.3 5.8 8.3 4.1 6.1 9.7 9.8 11.1 12.9 12.2 13.3 13.3 3.4 4.2 4.1
- Exports and imports (percent of GDP):
  - Exports: 37.6 38.1 31.8 36.3 36.5 36.6 36.0 35.5 36.3 40.7 52.7
  - Imports: 71.6 55.1 44.1 55.0 57.2 55.8 53.7 52.0 51.8 57.9 57.9
- Net FDI (negative = inflow, percent of GDP): -23.8 -9.5 -2.4 -9.8 9.5 -5.8 -6.7 -12.1 -11.8 -12.0 -12.2 -4.9 -5.1 -5.1
- Endogenous debt dynamics (percent of GDP): -7.9 -3.0 -3.5 -0.7 -1.3 -1.8 -2.0 -2.3 -2.4 -2.5 -2.1
  - Contribution from nominal interest rate: 0.8 0.8 0.7 1.6 1.2 1.3 1.2 1.0 0.9 1.2 0.5
  - Contribution from real GDP growth: -3.2 -2.8 -1.9 -2.3 -2.5 -3.1 -3.2 -3.3 -3.3 -3.7 -2.6
  - Contribution from price and exchange rate changes: -5.5 -1.0 -2.3 ........................
- Residual (including exceptional financing) (percent of GDP): 4.7 3.9 -1.8 -4.7 -0.2 3.5 3.0 2.0 1.8 3.7 0.2
  - Exceptional financing component sequence: -6.3 -1.8 -0.7 -2.5 -1.4 0.0 0.0 0.0 0.0 0.0 0.0
- PV of external debt (percent of GDP): ...... 53.7 51.1 50.9 51.1 50.7 50.3 49.9 51.1 32.6
  - In percent of exports: ...... 168.8 141.0 139.5 139.7 140.8 141.8 137.3 125.6 61.9
- Debt service indicators:
  - Debt service-to-exports ratio (percent): 6.3 6.9 7.8 9.3 10.3 9.5 9.7 8.8 8.2 6.3 5.6
  - PPG debt service-to-revenue ratio (percent): 8.2 8.6 8.2 11.6 13.3 11.6 11.4 10.1 9.5 8.2 9.0
- Total gross financing need (Millions of U.S. dollars): 20.4 14.6 47.1 91.7 111.9 62.7 62.7 77.2 77.2 78.2 30.3 106.9
- Non-interest current account deficit that stabilizes debt ratio (percent of GDP): 27.0 8.7 7.7 11.1 8.3 10.4 10.8 12.4 12.8 3.7 6.9

### External Sector Key Assumptions and Memoranda
- Real GDP growth (percent): 5.8 5.0 3.5 3.8 1.3 4.4 5.1 5.8 5.8 5.8 5.8 5.5 5.8 5.8 5.8
- GDP deflator in US dollar terms (change in percent): 9.5 1.7 4.0 3.4 2.5 5.3 5.0 2.5 2.5 2.5 2.5 3.4 1.2 1.2 1.0
- Effective interest rate (percent): 1.5 1.4 1.3 1.4 0.1 3.1 2.4 2.4 2.1 1.8 1.6 2.2 1.9 1.2 1.7
- Growth of exports of G&S (US$ terms, percent): 14.9 8.2 -10.1 6.7 7.8 25.2 11.2 8.5 6.8 6.9 11.0 11.6 10.3 7.0 9.6
- Growth of imports of G&S (US$ terms, percent): 18.5 -17.8 -14.0 7.2 15.7 37.2 14.7 5.9 4.2 5.0 8.1 12.5 6.9 6.6 7.7
- Grant element of new public sector borrowing (percent): ............... 34.5 37.8 37.6 38.3 38.3 38.1 37.5 36.2 30.0 34.6
- Government revenues (excluding grants, percent of GDP): 28.8 30.6 30.1 29.1 28.5 30.0 30.0 31.0 31.3 31.4 32.8 31.8
- Aid flows (Millions of US$) 7/: 246.4 116.4 81.7 99.4 156.5 137.5 141.2 145.0 144.5 86.0 69.3
  - of which Grants (Millions of US$): 128.5 67.2 60.2 73.4 84.7 71.2 70.6 70.6 70.6 14.6 14.6
  - of which Concessional loans (Millions of US$): 117.9 49.2 21.5 26.0 71.8 66.4 70.6 74.4 73.9 71.4 54.7
- Grant-equivalent financing (percent of GDP): ........... 7.8 10.2 8.2 7.6 7.1 6.6 2.6 1.1 2.2
- Grant-equivalent financing (percent of external financing): ....... 68.3 60.8 59.1 59.5 59.5 58.8 42.0 36.4 40.4

Memorandum items:
- Nominal GDP (Millions of US$): 982.5 1,049.1 1,128.6 1,240.4 1,369.4 1,484.3 1,608.8 1,744.9 1,891.3 2,601.5 5,136.5
- Nominal dollar GDP growth (percent): 15.9 6.8 7.6 9.9 10.4 8.4 8.4 8.5 8.4 9.0 7.0 7.0 7.0 6.9
- PV of PPG external debt (Millions of US$): 606.2 634.1 697.6 758.2 815.6 878.0 943.8 1,330.0 1,675.2
- (PVt-PVt-1)/GDPt-1 (percent): 2.5 5.1 4.4 4.3 3.9 3.8 3.9 3.1 0.3 2.0
- Gross workers' remittances (Millions of US$): -6.0 -6.0 -6.6 -6.9 -7.1 -7.4 -7.7 -8.0 -8.4 -10.2 -15.0
- PV of PPG external debt (percent of GDP + remittances): ...... 54.0 51.4 51.2 51.3 50.9 50.6 50.1 51.3 32.7
- PV of PPG external debt (percent of exports + remittances): ...... 171.9 143.2 141.5 141.7 142.7 143.7 139.0 126.8 62.2
- Debt service of PPG external debt (percent of exports + remittances): ...... 7.9 9.4 10.5 9.7 9.8 8.9 8.3 6.4 5.6

### Sensitivity Analysis for Public and PPG External Debt (Table 3b)
- Several indicators analyzed for scenarios and bound tests across 2011–2031, including:
  - PV of debt-to-GDP ratio
  - PV of debt-to-exports ratio
  - Debt service-to-exports ratio
  - Debt service-to-revenue ratio
- Representative baseline and scenario values (selected):
  - Baseline trajectories (various panels): e.g., Baseline PV of debt-to-GDP: 51 51 51 51 50 50 51 33
  - A1 (key variables at historical averages): e.g., 51 47 45 42 40 37 30 9
  - A2 (new public sector loans on less favorable terms): e.g., 25 15 45 65 85 95 60 68 54
  - B4 and B6 bound tests include large movements (e.g., B6 one-time 30 percent nominal depreciation relative to the baseline in 2012: entries such as 51 71 72 71 70 72 46).
- Memorandum item: grant element assumed on residual financing: 35 35 35 35 35 35 35 35 35 35

### IMF Executive Board Decision and Program Context (Press Release No.12/38 — February 6, 2012)
- IMF Executive Board completed fifth review under Djibouti's Extended Credit Facility (ECF) arrangement and approved request for augmentation of access and a US$ 9.7 million disbursement.
- Augmentation approved: SDR 9.54 million (US$14.7 million, 60 percent of quota) to meet additional external financing needs created by the increase in global commodity prices and the drought in the Horn of Africa.
  - Augmentation to be disbursed in equal parts upon completion of the fifth and sixth reviews.
- Immediate disbursement approved: SDR 6.246 million (about US$9.7 million), bringing total disbursements under the program to SDR 16.014 million (US$24.75 million).
- Waivers granted by the Board:
  - Two waivers for nonobservance of end-June 2011 performance criteria on the fiscal balance and on net banking system credit to the government.
  - Waivers for continuous performance criteria on non-accumulation of external arrears and accumulation of new domestic arrears (related to delays in payment of salaries and pensions).
  - Waiver for non-observance of external payments arrears performance criterion following minor data revision after completion of the fourth review.
- ECF background:
  - ECF approved September 17, 2008 for SDR 12.72 million (about US$19.66 million, or 80 percent of quota). On January 7, 2011 the ECF was extended by 9 months through June 16, 2012.
  - Financing under the ECF currently carries a zero interest rate, with a grace period of 5½ years, and a final maturity of 10 years (contextual note in source).
- IMF Deputy Managing Director and Acting Chair Ms. Nemat Shafik emphasized:
  - Shocks (commodity prices spike and drought) increased imports (food and fuel), current account and external financing needs, and pressured fiscal space through lower tax revenues and higher fuel subsidies.
  - Augmentation of access (60 percent of quota) will help meet additional financing needs from these shocks.
  - Policy recommendations:
    - Strong commitment to the ECF-supported program to maintain macroeconomic stability and reduce poverty.
    - Fiscal policy focus: increase revenues and control expenditure while protecting priority social expenditure and capital investment.
    - Further progress on public financial management to strengthen the budget process.
    - Pursue prudent debt policies, including avoiding non-concessional borrowing, to maintain debt sustainability.
    - Strengthen bank supervision and regulation to address rapid financial sector development.
    - Structural reforms to improve competitiveness and foster private sector development.
    - Reform the state-owned energy company to lower energy costs and reduce government transfers.

*Italic: Source — APPENDIX III. DEBT SUSTAINABILITY ANALYSIS CHARTS AND TABLES (IMF staff estimates and projections, figures and tables as provided in the source PDF).*

### Introduction

### Introduction

### Program status and authorities’ requests
- Authorities thank IMF management and staff for continued support to implement the economic and financial program under the ECF arrangement.
- Djibouti faced capacity constraints and a difficult environment characterized by elevated commodity prices, insecurity in the Horn of Africa, and a severe drought that heavily affected the region.
- These shocks affected program implementation—particularly fiscal performance—and widened financing needs for 2011-12 despite donor pledges.
- Some performance criteria, quantitative indicative targets and structural benchmarks were missed for end-June 2011.
- Authorities remain committed to the objectives of the program and intend to pursue implementation aligned with the National Social Development Initiative (INDS).
- Authorities request:
  - Directors’ support for completion of the fifth review under the ECF-supported arrangement.
  - Waivers of nonobservance of the end-June 2011-performance criteria on the fiscal balance and net credit to the government.
  - Waivers of the continuous performance criteria on the non-accumulation of domestic arrears and external arrears.
  - An augmentation of access and related rephasing to complement multilateral and bilateral donor financing.

### Recent economic developments: impact of the drought
- Macroeconomic outcomes and shocks:
  - Real GDP is estimated to have grown by 4.4 percent in 2011 against 3.5 percent in 2010.
  - Inflation rose to 5.3 percent in 2011 from 4.0 percent in 2010.
  - Gross international reserves stood at US$231 million at end-2010 and remained broadly stable at end-2011 despite strains.
- Causes and channels:
  - Severe drought in the Horn of Africa, regional insecurity, and increases in global food and fuel prices.
  - Higher imports to address drought effects and less vigorous than expected resumption of FDI widened the current account deficit.
  - Tax collection was lower than expected mainly due to the drought.
  - Authorities reduced expenditures heavily, including social spending, in view of revenue shortfalls.
  - Diesel prices were increased in October, November and December 2011 by a cumulative total of 4 percent, helping reduce the subsidy and the budgetary impact.
- Humanitarian and social impact:
  - Djibouti is one of the most affected countries: 50 percent of the rural population or 15 percent of the total population were hit by drought.
  - Around 20,000 refugees were present.
  - 14.5 percent of the urban population were living in food insecurity.
  - Authorities launched an appeal for emergency aid and established an inter-ministerial drought committee including donor representatives.
  - Authorities request an augmentation of access to ECF resources of 60 percent of quota to meet additional balance of payments financing needs in 2011-12.

### Macroeconomic policies and structural reforms for 2012

#### Fiscal policy
- Objectives and fiscal stance:
  - Pursue fiscal consolidation to maintain debt sustainability and non-monetary financing of fiscal deficit.
  - Safeguard fiscal space for social expenditure and modernize fiscal management.
- 2012 Budget and revenue/expenditure policy:
  - The 2012 Budget law approved in December 2011 is aligned with the ECF-arrangement and INDS framework.
  - Authorities aim at maintaining the tax revenue-to-GDP ratio constant at the 2011 level with reforms of the VAT and exemptions, and further tax collection efforts.
  - Plan to raise capital expenditure in sectors with growth potential while pursuing fiscal restraint given revenue constraints.
  - Maintain the hiring freeze in the public sector with the exception of health and education sectors.
- Administrative and reform measures:
  - Intensify fiscal reforms to enhance capacities for tax collection, expenditure control, and fiscal management.
  - A commission established in FY 2012 will recommend new tax measures to strengthen fiscal revenues and simplify the business environment.
  - Coordination between entities managing the VAT and direct tax will be strengthened based on the single taxpayer identification number.

#### Debt management and sustainability
- Domestic debt and arrears:
  - Aim to reduce the stock of domestic arrears with possible donor assistance and prevent further accumulation.
  - Strengthen controls on the expenditure chain to avoid further arrears.
  - Pursue prudence in budget appropriations for current expenditure and social spending.
- External debt policy:
  - Commit to avoid any future accumulation of arrears including those arising from public enterprises.
  - Strengthen capacities to monitor debt service payments in collaboration with external partners, including the IMF.
  - Contract only concessional loans and prioritize projects funded under the INDS.
  - Public enterprises are required to refrain from contracting non-concessional debt excluding enterprises managed on a purely commercial basis.
  - Progress made on debt rescheduling with agreements signed under the Paris Club with remaining official bilateral creditors.

#### Monetary and financial issues
- Monetary framework:
  - Monetary policy will continue underpinned by the currency board arrangement to meet economy needs and ensure price stability.
  - Authorities are committed to maintain a rate of coverage higher than 105 percent of reserve money and government deposits with the Central Bank of Djibouti.
- Financial sector governance and development:
  - Banking supervision reform efforts underway in line with Financial System Assessment Program guidelines and in collaboration with the Fund and other partners.
  - Charter of foreign exchange bureaus to be reviewed to comply with the new banking law.
  - Efforts to develop the financial sector and access to finance will be intensified with support from development partners including the World Bank and UNDP.
- Central Bank governance and safeguards:
  - Commit to implement recommendations of the safeguards assessment to enhance governance and integrity of Central Bank operations.
  - Financial reports to be completed and published within six months from the end of the financial year starting with 2011.
  - Creation of an audit committee is underway to provide oversight and prepare an audit charter.
  - After amending laws on combating money laundering and financing terrorism, authorities are seeking long-term technical assistance from development partners.

#### Structural reforms and competitiveness
- Investment climate and infrastructure:
  - Introduced attractive investment and commercial codes and approved the law on industrial property.
  - Addressed high costs of electricity, water and labor; interconnection with Ethiopia’s electricity grid is completed and covers over 50 percent of current consumption at favorable rates.
  - Donor-funded seawater desalination project with significant EU support will address medium-term water needs (completion noted elsewhere as 2015).
- Labor market and enterprise reform:
  - Opened a center to provide training for skills needed in high-technology sectors.
  - Established an employment promotion fund for youth and a loan initiative for business creation with its guarantee fund.
  - Continue restructuring public enterprises and improving legal and regulatory frameworks with technical assistance from development partners.
- Subsidy reform:
  - Authorities commit to continue reform of fuel subsidy to contain budgetary cost, reinstate the automatic smoothing mechanism, and better target vulnerable populations.
  - They will seek Fund technical assistance for subsidy reform.

### Conclusion
- Authorities’ strong commitment to prudent policies and reforms under the program helped Djibouti weather the 2011 drought and other exogenous shocks.
- Determination to achieve program objectives: sustaining fiscal and debt stability, enhancing resource mobilization, increasing competitiveness and growth to fight poverty and youth unemployment.
- Based on continued good policy performance in a challenging environment, authorities seek Directors’ support for completion of the fifth review and the proposed decisions.

*Source: _cr12197 - Introduction*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12197.pdf_