## _cr16248

## Source details

**Canonical URL:** [_cr16248](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16248.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16248.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16248.pdf.json)

---

### Growth outlook and drivers
- Real GDP (annual change in percent): 5.0 (2013); 6.0 (2014); 6.5 (2015); 6.5 (2016); 7.0 (2017); 7.0 (2018); 7.0 (2019); 6.0 (2020).
- Projected consumer prices (annual average): 2.4 (2013); 2.9 (2014); 2.7 (2015); 3.5 (2016); 3.5 (2017); 3.5 (2018); 3.0 (2019); 3.0 (2020).
- Investment as key driver:
  - Total fixed capital investment (percent of GDP): 40.5 (2013); 44.1 (2014); 60.1 (2015); 53.6 (2016); 33.4 (2017); 30.9 (2018); 27.0 (2019); 26.6 (2020).
  - Public investment (central government, percent of GDP): 13.7 (2013); 20.2 (2014); 30.1 (2015); 24.9 (2016); 13.2 (2017); 11.6 (2018); 9.2 (2019); 8.8 (2020).
  - Private investment (percent of GDP): 26.9 (2013); 24.0 (2014); 30.0 (2015); 28.7 (2016); 20.2 (2017); 19.3 (2018); 17.8 (2019); 17.8 (2020).
- Aggregate investment reached 44.1 percent of GDP in 2014; public investment spending was about 20 percent of GDP ($320 million) in 2014.
- Large projects cited: Djibouti-Addis Ababa railway (expected operational in 2016) and Ethiopia–Djibouti water pipeline.

### Fiscal position, public debt pressures, and projections
- Overall balance (commitment basis, incl. grants): -5.9 (2013); -12.2 (2014); -16.5 (2015); -11.4 (2016); -1.2 (2017); -3.0 (2018); -0.7 (2019); -0.1 (2020).
- Total revenue and grants (percent of GDP): 31.8 (2013); 30.9 (2014); 37.1 (2015); 36.2 (2016); 33.9 (2017); 29.4 (2018); 28.3 (2019); 27.2 (2020).
- Expenditure and net lending (percent of GDP): 37.7 (2013); 43.1 (2014); 53.6 (2015); 47.6 (2016); 35.1 (2017); 32.3 (2018); 29.0 (2019); 27.3 (2020).
- Domestic financing (percent of GDP): 5.9 (2013); 3.8 (2014); 2.6 (2015); -1.4 (2016); -2.3 (2017); 0.9 (2018); 2.1 (2019); 2.1 (2020).
- External financing (percent of GDP): 1.0 (2013); 8.9 (2014); 14.4 (2015); 13.3 (2016); 3.9 (2017); 2.5 (2018); -1.0 (2019); -1.9 (2020).
- Public debt pressures:
  - Total public and publicly guaranteed (PPG) debt: 60.5 percent of GDP in 2014; projected to peak at 80 percent in 2017.
  - Stock of external PPG debt (millions of U.S. dollars): 704 (2013); 833 (2014); 1,142 (2015); 1,506 (2016); 1,689 (2017); 1,838 (2018); 1,901 (2019); 1,937 (2020).
  - Stock of external PPG debt (percent of GDP): 48.4 (2013); 52.5 (2014); 65.7 (2015); 78.7 (2016); 79.6 (2017); 78.3 (2018); 73.5 (2019); 68.6 (2020).

### External sector dynamics and reserves
- Current account balance (percent of GDP): -23.3 (2013); -25.6 (2014); -31.0 (2015); -25.8 (2016); -14.8 (2017); -14.5 (2018); -12.6 (2019); -13.1 (2020).
- Exports of goods and services (millions of U.S. dollars): 485 (2013); 511 (2014); 601 (2015); 642 (2016); 684 (2017); 741 (2018); 800 (2019); 870 (2020).
- Imports of goods and services (millions of U.S. dollars): -913 (2013); -1,022 (2014); -1,318 (2015); -1,325 (2016); -1,173 (2017); -1,203 (2018); -1,249 (2019); -1,339 (2020).
- FDI (percent of GDP): 19.7 (2013); 9.1 (2014); 8.6 (2015); 8.5 (2016); 9.7 (2017); 9.8 (2018); 10.8 (2019); 10.8 (2020).
- Gross official reserves (millions of U.S. dollars): 411 (2013); 381 (2014); 350 (2015); 399 (2016); 476 (2017); 495 (2018); 479 (2019); 460 (2020).
- Gross official reserves (months of next year's imports): 4.8 (2013); 3.5 (2014); 3.2 (2015); 4.1 (2016); 4.7 (2017); 4.8 (2018); 4.3 (2019); 3.7 (2020).
- Staff projection: Central bank gross foreign assets projected to remain strong, permitting full currency board coverage over 2015–20.
- Financing of external deficit: financed by loans and foreign direct investment (FDI).

### Banking sector, financial inclusion, and stability
- Non-performing loans (NPLs) ratio: rose to more than 22 percent in June 2015; increased from 18 percent at end-2014 to 22.5 percent at end-June 2015.
- Provisions for NPLs: declined from 82 percent in 2012 to 52 percent in mid-2015.
- Commercial bank conditions:
  - One bank concentrated deterioration; recapitalization understanding reached.
  - Two small banks under liquidation.
  - All other banks, but one, have met the new minimum capital requirement.
  - A new investment bank authorized.
- Financial access:
  - Only 20 percent of the adult population has access to banking services.
  - Only 5 percent of formal-sector enterprises have access to bank financing.
- Currency board cover (percent): 107 (2013); 110 (2014); 109 (2015); 109 (2016); 109 (2017); 109 (2018); 109 (2019); 109 (2020).
- Gross foreign assets of commercial banks (millions of U.S. dollars): 835 (2013); 903 (2014); 958 (2015); 1,015 (2016); 1,076 (2017); 1,140 (2018); 1,209 (2019); 1,281 (2020).

### Poverty, employment, and structural constraints
- Per capita nominal GDP: $1,383 (2010).
- Poverty rate: 79 percent (2012).
- Unemployment rate: 48.4 percent (2012).
- Extreme poverty: about 22 percent of the population lives in extreme poverty.
- Underdeveloped employment-potential sectors: fishing and tourism.
- Constraint: Limited access to finance constrains small enterprise growth.

### Debt sustainability analysis (DSA) — findings and risks
- DSA confirms high risk of external debt distress.
- Baseline projections:
  - Total nominal PPG debt projected to reach 79.4 percent of GDP in 2017.
  - PV of debt-to-GDP peaking at 69 percent over the medium term (selected PV figures reported: 44.0 (2015 cell); 57.1; 69.1; 69.5; 68.3; 65.8; 63.2; 49.6; 30.4).
  - PV debt-to-exports ratios breach thresholds (examples: 136.9; 166.5; 205.6; 215.6; 215.7; 211.3; 203.6; 174.6; 123.2).
  - PV PPG external debt in percent of government revenues: 167.7; 200.2; 247.9; 263.6; 272.1; 273.2; 274.4; 280.5; 219.6.
  - Debt service (millions of U.S. dollars): 40.2; 33.5; 68.3; 68.5; 72.2; 89.6; 128.5; 161.9 (2013–20).
  - Debt service (percent of GDP): 2.8; 2.1; 3.9; 3.6; 3.4; 3.8; 5.0; 5.7 (2013–20).
  - Debt service (percent of exports of goods and services): 8.3; 6.6; 11.4; 10.7; 10.6; 12.1; 16.1; 18.6 (2013–20).
- Stress-test outcomes:
  - One-time 30 percent nominal depreciation in 2015 would raise PV of external debt-to-GDP close to 100 percent.
  - A combined shock could push PV of external debt-to-GDP close to 80 percent for at least a few years.
  - A shock of 200 basis points on new financing in 2015–2035 could increase PV debt-to-GDP to 74 percent in 2017.
  - Interest on the railway project expected to account for 40 percent of total interest payments in the next five years.
- Policy implications from DSA:
  - Extremely limited scope for additional borrowing.
  - Avoid borrowing that leads to additional service costs over the medium term.
  - Strengthen coordination among government entities in charge of contracting external debt.
  - Tighten monitoring and management of contingent liabilities.

### Public investment management and fiscal policy recommendations
- Strengthen public capacity to manage the investment program: evaluate and monitor projects; prioritize projects based on absorptive capacity and resource constraints; conduct cost-benefit analyses before undertaking projects.
- Expedite reform of public enterprises that manage large projects; run projects on a commercial basis to ensure commercial viability and reduce contingent liabilities.
- Be cautious with additional borrowing; limit non-concessional borrowing.
- Mainstream debt service capacity into the budget process and provide sufficient liquidity buffers for variable-interest-rate debt.
- Improve coordination among Ministry of Economy and Finance, Ministry of Budget, and other entities responsible for contracting and monitoring debt.
- Fiscal consolidation imperatives:
  - Given limited scope for cutting aggregate spending and authorities’ commitment to investment plans, broaden the tax base and revise investment incentives.
  - Implement tax conference recommendations: reduce tax exemptions for the free zone, repeal the investment code for new exemptions starting 2017, remove domestic consumption tax on investment goods, raise lump sum minimum tax from 1 percent to 1.5 percent, increase tax-on-wages threshold from DF 5,000 ($28) to DF 50,000 ($280), and set up electronic tax filing and payment.
- Energy pricing:
  - Introduce a price adjustment mechanism for full pass-through of international oil prices with safety nets for the poor and vulnerable.
  - Use recent fall in international oil prices as an opportunity to move to market-based pricing without increasing domestic prices.

### Structural reform, competitiveness, and social policy
- Competitiveness: Maintain currency board parity; pursue competitiveness via lowering utility costs (electricity, telecommunications, water) and improving human capital.
- Structural priorities:
  - Improve business environment (Djibouti ranked 171st out of 189 in Doing Business 2016).
  - Reform judicial system, strengthen contract enforcement, and tackle corruption.
  - Re-orient education and training toward labor-market skills.
  - Promote diversification into labor-intensive sectors (fishing and tourism) to create jobs and reduce reliance on ports.
- Social protection and inclusion:
  - Cash transfer program: 16,400 low-income households scheduled to receive allowances of DF 18,000 ($101) per quarter over twelve months.
  - Universal health insurance scheme extended beyond public sector; free vaccination for children from poor households; allowances to university students from outside the capital.
- Financial inclusion measures:
  - Expedite credit guarantee scheme for SMEs; establish a credit guarantee fund; develop microfinance; modernize payment and credit information systems; leverage mobile telephony for low-cost financial services.
  - Remove or reduce taxes on registration and release of collateral (2 percent each) to improve mortgage access.

### Monetary, reserves, and exchange arrangements
- Currency board arrangement maintained; Djibouti franc pegged at DF 177.721 = US$1.
- Staff view: currency board has served Djibouti well; recommendation to maintain arrangement.
- Reserve adequacy:
  - Optimal reserves estimated at about 2.2 months of imports at end-2015 (assumes cost-of-holding-reserves of 6.15 percent).
  - Currency board requires at least 100 percent reserve cover, equivalent to three months of imports.

### Staff appraisal, prioritized actions, and consultation timing
- Overall assessment: Debt-financed investment boom will boost growth but aggravates high risk of debt distress and raises fiscal sustainability concerns.
- Prioritized policy recommendations:
  - Reduce and manage external debt urgently; limit non-concessional public and publicly guaranteed borrowing.
  - Strengthen public investment and debt management capacity; prioritize and evaluate projects.
  - Rapidly implement comprehensive tax reform from the June 2015 Tax Conference to broaden the tax base and reduce exemptions.
  - Accelerate public enterprise reform and improve utility cost structures.
  - Reinforce banking supervision, adopt bank resolution mechanisms, and implement measures to promote financial inclusion.
  - Maintain currency board and pursue competitiveness through cost reductions and skills training.
- Consultation cycle recommendation: Staff recommends the next Article IV consultation with Djibouti be held on the standard 12-month consultation cycle.

*Source: IMF staff report content provided in the supplied document.*

### 3.5 percent in 2016–18 as the large infrastructure spending would increase the demand for

### _cr16248 - 3.5 percent in 2016–18 as the large infrastructure spending would increase the demand for

### Growth outlook and drivers
- Real GDP (annual change in percent): 5.0 (2013); 6.0 (2014); 6.5 (2015); 6.5 (2016); 7.0 (2017); 7.0 (2018); 7.0 (2019); 6.0 (2020).
- Projected consumer prices (annual average): 2.4 (2013); 2.9 (2014); 2.7 (2015); 3.5 (2016); 3.5 (2017); 3.5 (2018); 3.0 (2019); 3.0 (2020).
- Investment is the key growth driver: Total fixed capital investment as percent of GDP: 40.5 (2013); 44.1 (2014); 60.1 (2015); 53.6 (2016); 33.4 (2017); 30.9 (2018); 27.0 (2019); 26.6 (2020).
- Public investment (percent of GDP, central government only): 13.7 (2013); 20.2 (2014); 30.1 (2015); 24.9 (2016); 13.2 (2017); 11.6 (2018); 9.2 (2019); 8.8 (2020).
- Private investment (percent of GDP): 26.9 (2013); 24.0 (2014); 30.0 (2015); 28.7 (2016); 20.2 (2017); 19.3 (2018); 17.8 (2019); 17.8 (2020).
- Aggregate investment reached 44.1 percent of GDP in 2014; public investment spending was about 20 percent of GDP ($320 million) in 2014.
- Large projects cited: Djibouti-Addis Ababa railway (expected operational in 2016) and Ethiopia–Djibouti water pipeline.

### Fiscal position and public debt pressures
- Overall balance (commitment basis, incl. grants): -5.9 (2013); -12.2 (2014); -16.5 (2015); -11.4 (2016); -1.2 (2017); -3.0 (2018); -0.7 (2019); -0.1 (2020).
- Overall balance (cash basis, incl grants): -6.9 (2013); -12.7 (2014); -17.0 (2015); -11.9 (2016); -1.6 (2017); -3.4 (2018); -1.1 (2019); -0.1 (2020).
- Total revenue and grants (percent of GDP): 31.8 (2013); 30.9 (2014); 37.1 (2015); 36.2 (2016); 33.9 (2017); 29.4 (2018); 28.3 (2019); 27.2 (2020).
- Tax revenue (percent of GDP): 19.8 (2013); 18.6 (2014); 19.3 (2015); 18.7 (2016); 18.1 (2017); 17.6 (2018); 17.3 (2019); 17.3 (2020).
- Expenditure and net lending (percent of GDP): 37.7 (2013); 43.1 (2014); 53.6 (2015); 47.6 (2016); 35.1 (2017); 32.3 (2018); 29.0 (2019); 27.3 (2020).
- Domestic financing (percent of GDP): 5.9 (2013); 3.8 (2014); 2.6 (2015); -1.4 (2016); -2.3 (2017); 0.9 (2018); 2.1 (2019); 2.1 (2020).
- External financing (percent of GDP): 1.0 (2013); 8.9 (2014); 14.4 (2015); 13.3 (2016); 3.9 (2017); 2.5 (2018); -1.0 (2019); -1.9 (2020).
- Public sector debt pressures: total public and publicly guaranteed (PPG) debt reached 60.5 percent of GDP in 2014 and is projected to peak at 80 percent in 2017.
- Stock of external public and publicly guaranteed debt (in millions of U.S. dollars): 704 (2013); 833 (2014); 1,142 (2015); 1,506 (2016); 1,689 (2017); 1,838 (2018); 1,901 (2019); 1,937 (2020).
- Stock of external public and publicly guaranteed debt (percent of GDP): 48.4 (2013); 52.5 (2014); 65.7 (2015); 78.7 (2016); 79.6 (2017); 78.3 (2018); 73.5 (2019); 68.6 (2020).

### External sector dynamics
- Current account balance (in percent of GDP): -23.3 (2013); -25.6 (2014); -31.0 (2015); -25.8 (2016); -14.8 (2017); -14.5 (2018); -12.6 (2019); -13.1 (2020).
- Exports of goods and services (in millions of U.S. dollars): 485 (2013); 511 (2014); 601 (2015); 642 (2016); 684 (2017); 741 (2018); 800 (2019); 870 (2020).
- Imports of goods and services (in millions of U.S. dollars): -913 (2013); -1,022 (2014); -1,318 (2015); -1,325 (2016); -1,173 (2017); -1,203 (2018); -1,249 (2019); -1,339 (2020).
- Balance of goods and services (in millions of U.S. dollars): -428 (2013); -511 (2014); -718 (2015); -683 (2016); -489 (2017); -462 (2018); -449 (2019); -468 (2020).
- Financing of external deficit: financed by loans and foreign direct investment (FDI).
- FDI (in percent of GDP): 19.7 (2013); 9.1 (2014); 8.6 (2015); 8.5 (2016); 9.7 (2017); 9.8 (2018); 10.8 (2019); 10.8 (2020).
- Gross official reserves (in millions of U.S. dollars): 411 (2013); 381 (2014); 350 (2015); 399 (2016); 476 (2017); 495 (2018); 479 (2019); 460 (2020).
- Gross official reserves (in months of next year's imports): 4.8 (2013); 3.5 (2014); 3.2 (2015); 4.1 (2016); 4.7 (2017); 4.8 (2018); 4.3 (2019); 3.7 (2020).
- Central bank gross foreign assets projected to remain strong, permitting full currency board coverage over the period 2015–20.
- Current account deficit evolution highlighted: widen from 25.6 percent of GDP in 2014 to 31 percent in 2015, then decline to 14 percent of GDP in 2017–19 after completion of major investment projects.

### Banking sector and financial inclusion
- Non-performing loans (NPLs) ratio: rose to more than 22 percent in June 2015; increased from 18 percent at end-2014 to 22.5 percent at end-June 2015.
- Provisions for NPLs: declined from 82 percent in 2012 to 52 percent in mid-2015.
- Commercial banks: one bank concentrated deterioration; understanding reached to recapitalize that bank; two small banks under liquidation; all other banks, but one, have met the new minimum capital requirement; a new investment bank authorized.
- Financial access: Only 20 percent of the adult population has access to banking services; only 5 percent of formal-sector enterprises have access to bank financing.
- Policy actions recommended: strengthen banking supervision; ensure adequate provisioning for nonperforming loans; expedite credit guarantee scheme for SMEs; establish credit guarantee fund and develop microfinance to promote financial inclusion.
- Currency board arrangement maintained; currency board cover (in percent): 107 (2013); 110 (2014); 109 (2015); 109 (2016); 109 (2017); 109 (2018); 109 (2019); 109 (2020).
- Gross foreign assets of commercial banks (in millions of U.S. dollars): 835 (2013); 903 (2014); 958 (2015); 1,015 (2016); 1,076 (2017); 1,140 (2018); 1,209 (2019); 1,281 (2020).
- Gross foreign assets of commercial banks (in months of imports): 9.8 (2013); 8.2 (2014); 8.7 (2015); 10.4 (2016); 10.7 (2017); 11.0 (2018); 10.8 (2019); 10.2 (2020).

### Poverty, employment, and structural challenges
- Poverty and unemployment indicators: Per capita nominal GDP: $1,383 (2010); Poverty rate: 79 percent (2012); Unemployment rate: 48.4 percent (2012).
- Extreme poverty: about 22 percent of the population lives in extreme poverty.
- Unemployment high and many jobs taken by expatriates; youth and total unemployment emphasized.
- Sectors underdeveloped with employment potential: fishing and tourism.
- Access to finance low, constraining small enterprise growth.

### Staff analysis, risks, and policy recommendations
- Key vulnerabilities identified: high non-concessional financing raising external debt and high risk of debt distress; fiscal deficits driven by investment spending; deteriorating banking sector with rising NPLs; limited absorptive capacity.
- Staff calls and recommendations:
  - Strengthen public capacity to manage the investment program, including capacity to evaluate and monitor investment projects.
  - Prioritize proposed projects based on absorptive capacity and resource constraints; conduct cost-benefit analyses before undertaking projects.
  - Expedite reform of public enterprises that will manage large investment projects to improve efficiency and financial standing; manage projects on a commercial basis to ensure commercial viability and reduce contingent liabilities.
  - Be cautious with additional borrowing; limit non-concessional borrowing.
  - Enhance debt management capacity, including monitoring contingent liabilities; improve coordination among government units responsible for contracting, monitoring, and servicing debt.
  - Develop a timetable to reform the investment incentive framework and the overall tax regime, drawing on proposals from the government-sponsored June 2015 tax conference.
  - Design and implement comprehensive tax reform to implement a simple and transparent tax regime that reduces tax exemptions and levels the playing field for all investors.
  - Finalize with the Ethiopian authorities the arrangement for jointly managing the Djibouti-Addis Ababa railway project.
  - Lower the cost of utilities, improve the business environment, and re-orient educational curricula towards skills in demand to promote diversification, job creation, and poverty reduction.
  - Prioritize projects that foster inclusive growth through job-creation and poverty reduction; enhance measures to protect the poor; diversify into labor-intensive sectors such as fishing and tourism.
  - Reinforce instruments to counter money laundering and the financing of terrorism.
  - Monitor commercial banks’ loan portfolio and ensure adequate provisioning; expedite the credit guarantee scheme for SMEs and establish a credit guarantee fund; develop microfinance to promote financial inclusion.
- Commendations and notes:
  - Staff commends authorities for organizing the June 2015 tax conference and for adopting the Accelerated Growth Strategy for Promoting Employment.
  - Staff notes the currency board arrangement has served Djibouti well and recommends improving competitiveness by reducing the cost of utilities and developing human capital.

*Source: IMF staff report content provided in the supplied document.*

### 7.      Several recommendations of the 2014 Article IV consultation remain valid. These

### 7.      Several recommendations of the 2014 Article IV consultation remain valid. These

### Key recommendations carried forward
- Pursue fiscal consolidation to enhance fiscal sustainability.
- Reform the investment incentive system to increase revenues and level the playing field for enterprises.
- Avoid non-concessional financing to improve fiscal and debt sustainability.
- Develop a strategy to manage and reduce the external debt burden.
- Strengthen public investment and debt management capacity.
- Promote economic diversification and structural transformation by:
  - reducing utility costs, especially the high electricity tariffs;
  - providing training in the skills needed in the labor market;
  - strengthening contract enforcement.

### Economic outlook and headline projections
- GDP growth:
  - 6.5 percent in 2015 and 2016.
  - 7 percent in 2017–19.
- Aggregate investment:
  - Projected to peak at about 57 percent of GDP in 2015–16.
  - Decline to 30 percent in 2017–19.
- Fiscal balance and public investment:
  - Fiscal deficit peaked at 16.8 percent in 2015.
  - Fiscal deficit projected to drop to less than 1 percent by 2019.
  - Public investment spending projected to fall from 27.5 percent of GDP in 2015–16 to 11.3 percent in 2017–19.
- Public debt:
  - Debt stock expected to peak at about 80 percent of GDP in 2017, then decline thereafter.
- Inflation:
  - Projected to stabilize at 3.5 percent in 2016–18.
- Current account:
  - Projected to peak at about 31 percent of GDP in 2015.
  - Decline to 14 percent of GDP in 2017–19.
- Currency board cover:
  - Projected at 109 percent throughout 2015–19.
- Monetary aggregates:
  - Broad money expected to grow at about 10 percent a year in 2015–19.
  - Domestic credit expected to grow at about 16 percent a year in 2015–19.
- Revenues from military base agreement:
  - Rents of $20 million a year to government revenue (agreement signed June 2015).

### Major risks to the baseline
- Dependence on Ethiopia:
  - A growth slowdown or recession in Ethiopia could reduce port use, affecting growth and fiscal revenues.
  - A shock to food production in Ethiopia would directly impact Djibouti (bulk of primary food imports from Ethiopia).
- External financing risk:
  - A sharp slowdown in China could affect financing and execution of large public investment projects.
- Political and security risks:
  - Risk of political instability in the run-up to the 2016 presidential elections.
  - Risk of further terrorist attacks (spillovers from Somalia) would undermine business confidence, investment, and activity.
- Implementation delays:
  - Delays in investment project implementation could increase fiscal costs for projects with disbursed loans.

### Investment boom and financing structure (high-level)
- Staff assumption: investment drives economic growth by inducing demand for goods and services; related job creation and business opportunities generate further income and boost economic activity.
- Large share of investment financed by foreign loans in the period of the boom (figures and project lists provided by authorities and IMF staff estimates).

### Public investment management and debt sustainability (policy findings)
- Public management capacity:
  - Scaling-up to unprecedented investment levels strains limited public management capacity.
  - Staff urged strengthening capacity to evaluate and monitor projects and recommended cost-benefit analysis before undertaking projects.
  - Authorities encouraged to prioritize execution of proposed projects considering absorptive capacity and resource constraints.
  - Speed up establishment of a committee to assess macroeconomic implications of large public investment projects.
  - Expedite institutional arrangements for managing the joint Addis Ababa–Djibouti railway project, including cost and revenue-sharing mechanisms.
  - Adopt swiftly a comprehensive public enterprise strategy, in particular reform water and electricity supply companies to ensure commercial viability.
- Public debt management:
  - Responsibility for planning, monitoring, and negotiating external debt is spread across Ministry of Economy and Finance, Ministry of Budget, and other entities with overlap and unclear subordination.
  - Limited coordination undermines debt management and has partly accounted for repeated arrears accumulation.
  - Staff urged urgent improvement in coordination among government entities involved in debt management.
- Debt sustainability analysis (DSA) findings:
  - DSA reaffirms high risk of external debt distress.
  - Present value of debt-to-GDP and debt-to-export ratios and other solvency and liquidity ratios breach relevant thresholds.
  - Borrowing space is extremely limited; further non-concessional borrowing would exacerbate high risk of debt distress.
- Staff policy recommendations on borrowing and project financing:
  - Limit any public or publicly guaranteed borrowing to projects with high rates of return.
  - Run projects on a commercial basis so they can be profitable and generate revenues to service their debt.
  - Remain current on all debt service obligations.
  - Integrate debt service capacity into the budget planning process.
  - Provide sufficient liquidity buffers in the budget to cover volatile debt service costs on variable-interest-rate debt and avoid accumulating arrears.
  - Tighten monitoring and management of government contingent liabilities, including debt contracted by public enterprises without government guarantees.
- Authorities’ stance:
  - Acknowledge need to strengthen public capacity and high risk of debt distress but view investment projects as vital for development.
  - Consider external borrowing justified in absence of other financing options and expect projects to be profitable and generate revenues to service loans.
  - Have approached creditors to renegotiate terms of loans contracted for certain projects.

### Fiscal sustainability assessment and vulnerabilities
- Primary balance and debt service:
  - Over 2015–34, primary balances based on current policy assumptions are almost always negative and lie well below debt service requirements.
  - Starting in 2021, the shortfall in the primary balance relative to debt service requirements exceeds, on average, 6 percentage points of GDP a year.
  - Given limited scope for domestic borrowing, debt service requirements would have to be met through continued foreign borrowing, raising the prospect of abrupt large spending adjustments or large tax hikes.
- Fiscal revenue outlook:
  - Projections suggest fiscal revenues would decline as a percent of GDP over the medium term (partly driven by declining ratio to GDP of rents from military bases which accounted for 13 percent of total revenues in 2012–14).
- Fiscal risks and contingent liabilities:
  - About 10 percent of government expenditure was financed through grants in 2014, and a further 23 percent through loans.
  - Delays in implementing public investment projects for which loans have been contracted generate budget costs (example: water pipeline project carries a 0.5 percent commitment fee on the undisbursed loan amount).
  - Large-scale external borrowing by public enterprises poses contingent liabilities to the budget.
  - An increase in global oil prices could generate fiscal costs if domestic prices are not adjusted.

### Fiscal reform and June 2015 tax conference — objectives and selected recommendations
- Conference guiding themes:
  - Simplifying the fiscal regime.
  - Enhancing fiscal equity.
  - Improving tax efficiency.
  - Securing fiscal revenues.
- Staff urged authorities to expedite initiation of reform measures with stronger revenue prospects; some modest-revenue measures could be introduced in the 2016 budget.
- Main recommendations synthesized by FAD expert:
  - Reduce tax exemptions for the free zone:
    - New companies: exempt from income tax in the first ten years of operation; subject to income tax of 15 percent starting in the 11th year.
    - Existing companies: exempt from income tax in the first ten years of operation; subject to income tax of 5 percent starting in the 11th year, 10 percent starting in the 15th year, and 15 percent after 20 years.
    - Enhance efforts to ensure companies meet tax obligations including submission of income statements and payment of the 5 percent dividend tax introduced in 2015.
  - Repeal the investment code (one of three channels for tax concessions). Recommendation: honor existing exemptions and, starting in 2017, issue no new exemptions under the investment code.
  - Remove the domestic consumption tax on investment goods (and raw materials) because it is due at time of investing before returns are realized and without refund in event of loss.
  - Raise the lump sum minimum tax from 1 percent to 1.5 percent (applies to all enterprises including those benefiting from exemptions, based on business turnover).
  - Increase the threshold for the tax on wages and salaries from DF 5,000 ($28) a month to DF 50,000 ($280).
  - Set up a system of electronic tax filing and payment.

*IMF staff summary based on the provided chapter content.*

### 17.      Fiscal consolidation is imperative to return the economy to a sustainable fiscal and

### Fiscal consolidation is imperative to return the economy to a sustainable fiscal and debt path

### Fiscal consolidation and public spending
- Key finding: Fiscal consolidation is imperative to return the economy to a sustainable fiscal and debt path.
- Constraint: Given restraint already imposed on current spending and authorities’ determination to pursue investment plans, there is little scope for cutting aggregate spending over the medium term.
- Revenue prospects from new investment projects: Information is insufficient for a full assessment; much of the prospective additional revenues are expected over the longer term, so medium-term revenue prospects from this source are limited.
- Scope for revenue mobilization:
  - Broaden the tax base.
  - Revise the investment incentive framework.
  - Strengthen tax administration by reinforcing human resources and modernizing tax collection processes.
  - Improve performance of public enterprises to enhance fiscal contribution.
  - Opening up the monopoly telecommunications sector could generate revenue and improve efficiency.
- Trade-off: Ultimately, cutting investment spending may be necessary to return to a sustainable fiscal and external debt path.

### Energy pricing and subsidies
- Background: Implicit subsidies on kerosene, gasoline and diesel (via reduction of pre-existing tax rates) were introduced after the 2007–08 global financial crisis to cushion consumers.
- Cost: The forgone revenues were estimated at about 2 percent of GDP in 2011.
- Recent development: Domestic prices largely unchanged while international oil prices dropped by over 50 percent since the end of 2014, resulting in a de facto elimination of the implicit subsidies.
- Staff advice and opportunity:
  - Introduce a price adjustment mechanism that allows full pass-through of international prices together with safety nets for the poor and vulnerable.
  - The fall in international oil prices offers an opportunity to introduce a market-based pricing mechanism without increasing domestic prices.
- Authorities’ view: Willingness to revise the pricing formula for energy products to eliminate implicit subsidies, but require a registry of the poor and vulnerable for safety net implementation.

### Fiscal and public financial management
- Priority: Strengthening fiscal and public financial management remains a priority.
- Outstanding recommendations to implement:
  - Transition to a medium-term budget framework.
  - Merge VAT administration and that of other taxes into a large taxpayers’ unit to administer VAT, income tax, etc., for large taxpayers.
- Progress: Authorities indicated work with the large taxpayers’ unit is progressing; new staff recruited and unit expected to be operational in 2016.
- Authorities’ measures: Hiring freeze in the public service outside of health and education sectors; intention to start implementing tax conference recommendations in the 2016 budget.

### Promoting inclusive growth, job creation, and poverty reduction
- Fundamental challenge: Eradicating widespread poverty and unemployment.
- Critical reforms listed:
  - Improving the business environment; Djibouti ranked 171st out of 189 on the World Bank Doing Business Index 2016.
  - Reform the judicial system to improve contract enforcement and property rights protection and strengthen anti-corruption efforts.
  - Lower the cost of utilities and improve quality of service delivery; electricity tariffs are among the highest in the region; telecommunications costs are high and service quality relatively poor.
  - Invest in human capital: education and professional training to match labor market needs.
  - Economic diversification into labor-intensive sectors like fishing and tourism to reduce risks from reliance on ports and create jobs and fiscal revenues.
  - Social safety nets to protect the poor and vulnerable.
  - Encourage small businesses: address disadvantages from tax concessions for foreign investment and limited access to credit.
- Accelerated Growth Strategy for Promoting Employment (SCAPE):
  - Launched in 2015; translates "Vision Djibouti 2035" into five-year rolling plans; Vision 2035 aims to triple per capita income by 2035.
  - SCAPE projects with funding secured include: (i) port and transportation (Addis-Ababa Djibouti railway, new and expanded ports), (ii) energy (second electricity supply line with Ethiopia, geothermal project with consortium of seven donors, new power plant near Djibouti-ville), (iii) water supply (pipeline between Djibouti and Ethiopia and a desalination plant funded with an EU grant). Funding for some other projects is yet to be secured.
- Social protection initiatives:
  - Cash transfer program: 16,400 low-income households scheduled to receive allowances of DF 18,000 ($101) per quarter over twelve months (program drew on 2013 household consumption survey).
  - Universal health insurance scheme extended beyond public sector.
  - Free vaccination for children from poor households; allowances to university students from outside the capital city.
- Authorities’ view: Authorities concurred with staff on reform priorities and expect ongoing investment projects to foster inclusive growth by generating jobs and meeting basic needs.

### Financial inclusion and stability
- Access statistics and constraints:
  - Less than 20 percent of the adult population possesses a bank account.
  - Only 4 percent of adults could obtain a loan from a formal-sector financial institution in 2011.
  - 18 percent of adults had obtained credit from their circles of family or friends.
  - Credit to small and medium enterprises represents only 12 percent of total bank credit to enterprises.
  - Lending-deposit rate differentials exceed 10 percentage points.
  - Banks require collateralization of 228 percent of the loan amount, compared with 190 percent in other MENA countries and 179 percent in Sub-Saharan Africa.
  - Certain requirements constrain access to credit: 2 percent tax for registration of collateral for mortgage loans and another 2 percent tax for release of collateral.
- Microfinance:
  - The leading microfinance institution, Caisse populaire d'Epargne et de Crédit, under central bank receivership from 2012 to 2015 due to management problems.
  - Membership over 14,000 (about less than 3 percent of the adult population); accounted for less than 0.12 percent of bank credit.
  - Its lending interest rate was 26.8 percent a year, which is almost 10 percentage points higher than the average of commercial banks’ rates.
  - The microfinance institution did not pay interest on deposits.
- Central bank initiatives:
  - Set up a guarantee fund to facilitate access to finance for small companies.
  - Established a Sharia Board for Islamic banking.
  - Plans to modernize the payment system, develop electronic payments, and modernize the credit information system with World Bank support.
- Financial infrastructure priorities:
  - Strengthen and develop the credit information system to enable real-time access to credit application information.
  - Accelerate implementation of the credit guarantee fund for SMEs to enable partial risk sharing.
  - Leverage mobile telephony (more than half of adult population are subscribers) to offer low-cost financial services.
- Financial stability risks and recommendations:
  - Rising NPLs, declining provisions, and banks’ profitability suggest deeper problems; strengthened banking supervision required.
  - Persistently high NPLs could undermine financial and economic stability via reduced bank profitability and tightened credit.
  - Staff urges swift adoption/implementation of corrective measures for banks in difficulty, reinforcement of banking supervision, and establishment of appropriate bank resolution mechanisms.
  - September 2015 reserves management TA mission proposed writing an investment policy, drafting a risk management framework, implementing a decision-making process for reserves management, and strengthening institutional capacity through training to enhance central bank income and independence.
- Mortgage procedures: Review warranted; consider reducing or eliminating the 2 percent tax for registration of collateral and the 2 percent tax for release of collateral.
- Authorities’ view: Authorities expect the reformed Caisse populaire d'Epargne et de Crédit and modernization of credit information and payment systems to promote financial inclusion.

### Other issues, balance of payments, and exchange arrangements
- Currency board: The currency board arrangement has served Djibouti well and should be maintained at an unchanged parity; it has helped instill confidence and improve predictability in international transactions.
- Competitiveness: Because the currency board precludes exchange rate adjustment, competitiveness should be pursued by reducing high cost of utilities (electricity, telecommunications, water) and improving human resource productivity through skills training.
- Balance of payments outlook: Depends on commodity prices and performance of the Ethiopian economy; high dependence on imports of food and fuel makes changes in commodity prices significant for the balance of payments, household welfare, and government finances.
- Military base rents: No major changes expected; current contracts with main countries using the bases are valid for the coming years.
- Exchange system: Authorities informed staff there had been no changes in Djibouti’s exchange system and related legal framework since the last Article IV consultation; no exchange measures imposed for security concerns since last notification to the Fund pursuant to Decision No. 144.

### Staff appraisal and prioritized policy recommendations
- Overall assessment: Ongoing debt-financed investment boom will boost economic growth but aggravates Djibouti’s high risk of debt distress, raising concerns for fiscal sustainability.
- Public capacity and investment management:
  - Strengthen public capacity to evaluate and monitor investment projects, prioritize projects based on absorptive capacity and resource constraints, and conduct cost-benefit analysis before projects are undertaken.
  - Improve coordination among government entities involved in debt management.
  - Reform public enterprises managing large investment projects to ensure commercial viability and reduce contingent liabilities.
  - Finalize well-defined arrangement for managing the Djibouti-Addis Ababa railway, including agreement on the company that will manage the railway.
- Debt management:
  - Reduce and manage growing external debt as an urgent priority.
  - With Djibouti at high risk of debt distress, borrowing space is extremely limited; limit public and publicly guaranteed non-concessional borrowing.
  - Mainstream debt service capacity into the budget process and tighten monitoring and management of government contingent liabilities.
- Fiscal reform:
  - Rapidly implement a comprehensive tax reform based on recommendations of the June 2015 Tax Conference.
  - Aim for a simple and transparent tax regime that reduces tax exemptions and levels the playing field between onshore and offshore companies to promote investment, growth, and job creation.
- Public enterprise reform: Accelerate reform to improve financial situation and efficiency, boost capacity to manage large investment projects, and reduce production costs for water and energy.
- Structural reforms for poverty reduction and job creation:
  - Improve business environment, lower cost of utilities, enhance service quality, and equip nationals with skills to take jobs from the investment boom.
- Financial sector measures:
  - Reinforce banking supervision, implement bank resolution mechanisms, and strengthen central bank income position per Fund TA recommendations to safeguard independence.
  - Establish envisaged guarantee fund, develop microfinance, financial infrastructure, and innovative technology (mobile banking) to foster financial inclusion.
- Exchange rate policy: Maintain the currency board arrangement at unchanged parity despite indications of real exchange rate overvaluation; pursue competitiveness through cost reductions and skills training.

*Source: IMF staff report excerpt*

### 46.      Staff recommends that the next Article IV consultation with Djibouti be held on the

### _cr16248 - 46. Staff recommends that the next Article IV consultation with Djibouti be held on the standard 12-month consultation cycle.

### Recommendation
- Staff recommends that the next Article IV consultation with Djibouti be held on the standard 12-month consultation cycle.

### Selected Economic and Financial Indicators (2013–20) — National Accounts and Prices
- Real GDP (annual change in percent): 5.0; 6.0; 6.5; 6.5; 7.0; 7.0; 7.0; 6.0 (2013–20)
- Consumer prices (annual average): 2.4; 2.9; 2.7; 3.5; 3.5; 3.5; 3.0; 3.0 (2013–20)
- Consumer prices (end of period): 2.5; 2.8; 2.7; 3.0; 3.0; 3.0; 3.0; 3.0 (2013–20)

### Investment and Savings (percent of GDP)
- Total fixed capital investment: 40.5; 44.1; 60.1; 53.6; 33.4; 30.9; 27.0; 26.6 (2013–20)
- Private: 26.9; 24.0; 30.0; 28.7; 20.2; 19.3; 17.8; 17.8 (2013–20)
- Public 1/: 13.7; 20.2; 30.1; 24.9; 13.2; 11.6; 9.2; 8.8 (2013–20)
- Gross national savings: 17.3; 18.5; 29.1; 27.8; 18.6; 16.4; 14.4; 13.6 (2013–20)
- Savings/investment balance: -23.3; -25.6; -31.0; -25.8; -14.8; -14.5; -12.6; -13.1 (2013–20)

### Public Finances (percent of GDP and levels)
- Total revenue and grants: 31.8; 30.9; 37.1; 36.2; 33.9; 29.4; 28.3; 27.2 (2013–20)
- Tax revenue: 19.8; 18.6; 19.3; 18.7; 18.1; 17.6; 17.3; 17.3 (2013–20)
- Expenditure and net lending: 37.7; 43.1; 53.6; 47.6; 35.1; 32.3; 29.0; 27.3 (2013–20)
- Current expenditure: 24.0; 22.9; 23.5; 22.8; 21.9; 20.8; 19.8; 18.5 (2013–20)
- Investment expenditure: 13.7; 20.2; 30.1; 24.9; 13.2; 11.6; 9.2; 8.8 (2013–20)
- Overall balance (commitment basis, incl. grants): -5.9; -12.2; -16.5; -11.4; -1.2; -3.0; -0.7; -0.1 (2013–20)
- Overall balance (cash basis, incl. grants): -6.9; -12.7; -17.0; -11.9; -1.6; -3.4; -1.1; -0.1 (2013–20)
- Domestic financing: 5.9; 3.8; 2.6; -1.4; -2.3; 0.9; 2.1; 2.1 (2013–20)
- External financing: 1.0; 8.9; 14.4; 13.3; 3.9; 2.5; -1.0; -1.9 (2013–20)
- Change in domestic arrears (decrease -): -1.0; -0.5; -0.6; -0.5; -0.5; -0.4; -0.4; 0.0 (2013–20)
- Overall balance (excluding grants): -10.3; -16.8; -24.2; -19.7; -8.6; -7.2; -4.8; -3.9 (2013–20)

### Central Government Fiscal Operations (levels, 2014–20, in millions of Djibouti francs)
- Revenues and grants: 82,258; 87,325; 114,668; 123,130; 127,713; 122,484; 130,105; 136,548 (2014–20)
- Tax revenues: 51,222; 52,600; 59,455; 63,539; 68,090; 73,385; 79,465; 86,826 (2014–20)
- Nontax external revenues 1/: 10,330; 12,843; 20,644; 20,644; 20,644; 20,644; 20,644; 20,644 (2014–20)
- Grants: 11,452; 13,199; 23,775; 27,948; 27,948; 17,405; 18,926; 18,926 (2014–20)
- Total expenditure: 97,425; 121,624; 165,558; 162,063; 132,225; 134,934; 133,405; 137,248 (2014–20)
- Investment expenditure (total): 35,387; 56,870; 93,038; 84,623; 49,853; 48,297; 42,380; 44,136 (2014–20)
  - Domestically financed: 20,700; 19,368; 30,296; 17,770; 14,224; 14,560; 16,700; 17,540 (2014–20)
  - Foreign-financed: 14,687; 37,502; 62,742; 66,853; 35,629; 33,737; 25,680; 26,596 (2014–20)
- Overall balance (commitment basis, incl. grants): -15,167; -34,298; -50,891; -38,932; -4,512; -12,450; -3,299; -700 (2014–20)
- Overall balance (cash basis, incl. grants): -17,866; -35,844; -52,591; -40,632; -6,212; -14,150; -4,999; -700 (2014–20)
- Financing: 17,866; 35,844; 52,591; 40,632; 6,212; 14,150; 4,999; 700 (2014–20)
  - Domestic financing (net): 15,264; 10,842; 8,068; -4,750; -8,508; 3,674; 9,742; 10,307 (2014–20)
  - External financing (net): 2,602; 25,002; 44,523; 45,382; 14,720; 10,477; -4,742; -9,607 (2014–20)

### Central Government Fiscal Operations (percent of GDP, 2014–20)
- Revenues and grants: 31.8; 30.9; 37.0; 36.2; 33.9; 29.4; 28.3; 27.2 (2014–20)
- Total expenditure: 37.7; 43.1; 53.6; 47.6; 35.1; 32.3; 29.0; 27.3 (2014–20)
- Investment expenditure: 13.7; 20.2; 30.1; 24.9; 13.2; 11.6; 9.2; 8.8 (2014–20)
- Overall balance (commitment basis, incl. grants): -5.9; -12.2; -16.5; -11.4; -1.2; -3.0; -0.7; -0.1 (2014–20)
- Overall balance (cash basis, incl. grants): -6.9; -12.7; -17.0; -11.9; -1.6; -3.4; -1.1; -0.1 (2014–20)
- Financing — Domestic financing (net): 5.9; 3.8; 2.6; -1.4; -2.3; 0.9; 2.1; 2.1 (2014–20)
- External financing (net): 1.0; 8.9; 14.4; 13.3; 3.9; 2.5; -1.0; -1.9 (2014–20)

### Balance of Payments (2013–20, in millions of U.S. dollars unless indicated)
- Current account (including grants): -339; -407; -538; -495; -315; -341; -327; -369 (2013–20)
- Current account (in percent of GDP): -23.3; -25.6; -31.0; -25.8; -14.8; -14.5; -12.6; -13.1 (2013–20)
- Exports of goods and services (credit): 485; 511; 601; 642; 684; 741; 800; 870 (2013–20)
  - Exports of goods, f.o.b.: 120; 129; 131; 139; 151; 162; 175; 188 (2013–20)
  - Exports of services: 366; 382; 470; 503; 533; 579; 626; 683 (2013–20)
- Imports of goods and services (debit): -913; -1,022; -1,318; -1,325; -1,173; -1,203; -1,249; -1,339 (2013–20)
  - Imports of goods, f.o.b.: -719; -803; -1,052; -1,052; -960; -976; -1,007; -1,076 (2013–20)
  - Imports of services: -194; -218; -267; -273; -214; -227; -242; -263 (2013–20)
- Net income from abroad 1/: 84; 94; 126; 126; 113; 119; 120; 98 (2013–20)
  - Of which: income related to the lease of military bases: 58; 72; 116; 116; 116; 116; 116; 116 (2013–20)
- Net current transfers from abroad: 4; 11; 54; 63; 62; 63; 64; 65 (2013–20)
- Capital and financial account 2/: 337; 361; 512; 552; 396; 360; 311; 350 (2013–20)
  - Foreign direct investment: 286; 144; 150; 162; 206; 230; 279; 305 (2013–20)
  - Public sector (net): 34; 186; 313; 372; 187; 155; 68; 41 (2013–20)
    - Disbursements: 65; 212; 358; 407; 217; 196; 142; 147 (2013–20)
    - Repayments: -31; -26; -44; -35; -29; -41; -74; -107 (2013–20)
- Overall balance (deficit -): 174; -31; -25; 57; 82; 20; -16; -19 (2013–20)
- Central bank gross foreign assets (memorandum): 411; 381; 350; 399; 476; 495; 479; 460 (2013–20)
- Official external debt (including public and publicly guaranteed debt) in millions of U.S. dollars: 704; 833; 1,142; 1,506; 1,689; 1,838; 1,901; 1,937 (2013–20)
- Official external debt (in percent of GDP): 48.4; 52; 66; 79; 80; 78; 73; 69 (2013–20)
- Debt service (in millions of U.S. dollars): 40.2; 33.5; 68.3; 68.5; 72.2; 89.6; 128.5; 161.9 (2013–20)
- Debt service (in percent of GDP): 2.8; 2.1; 3.9; 3.6; 3.4; 3.8; 5.0; 5.7 (2013–20)
- Debt service (in percent of exports of goods and services): 8.3; 6.6; 11.4; 10.7; 10.6; 12.1; 16.1; 18.6 (2013–20)

### Monetary Survey and Banking Sector Indicators (end-of-period, in millions of Djibouti francs, 2013–20)
- Broad money (end-period): 220,397; 234,774; 256,785; 283,048; 313,462; 347,143; 383,264; 418,448 (2013–20)
- Currency in circulation: 24,752; 27,295; 27,521; 28,565; 30,985; 33,594; 35,225; 35,605 (2013–20)
- Deposits: 195,644; 207,479; 229,264; 254,483; 282,476; 313,549; 348,039; 382,843 (2013–20)
  - Demand deposits: 131,116; 143,928; 159,041; 176,535; 195,954; 217,509; 241,435; 265,578 (2013–20)
  - Time deposits: 64,528; 63,551; 70,224; 77,948; 86,522; 96,040; 106,604; 117,265 (2013–20)
- Net foreign assets: 179,096; 175,893; 175,890; 189,985; 209,604; 218,229; 220,581; 223,087 (2013–20)
  - Central bank: 62,363; 57,633; 52,436; 61,459; 75,958; 79,441; 76,660; 73,367 (2013–20)
  - Commercial banks: 116,733; 118,260; 123,454; 128,526; 133,646; 138,788; 143,921; 149,720 (2013–20)
- Net domestic assets: 41,289; 58,881; 80,895; 93,063; 103,857; 128,914; 162,684; 195,361 (2013–20)
- Claims on nongovernment sector: 83,729; 92,765; 105,133; 118,883; 136,782; 160,125; 187,661; 214,739 (2013–20)
  - Private sector: 80,467; 87,365; 97,849; 111,548; 129,396; 152,687; 180,171; 207,196 (2013–20)
- Broad money (annual change percent): 6.9; 6.5; 9.4; 10.2; 10.7; 10.7; 10.4; 9.2 (2013–20)
- Credit to the private sector, 12-month percent change (memorandum): 15.6; 8.6; 12.0; 14.0; 16.0; 18.0; 18.0; 15.0 (2013–20)
- Money velocity: 1.2; 1.2; 1.2; 1.2; 1.2; 1.2; 1.2; 1.2 (2013–20)

### Financial Soundness Indicators (selected, 2001–Mar 2015)
- Tier I capital to risk-weighted assets (selected years): 18.5 (2001); 21.7 (2002); 19.1 (2003); 15.0 (2004); 15.7 (2005); 17.4 (2006); 14.1 (2007); 8.9 (2008); 11.0 (2009); 12.2 (2010); 9.4 (2011); 10.7 (2012); 10.4 (2013); 10.6 (2014); 10.4 (Mar-15)
- Nonperforming loans to gross loans (selected years): 26.9 (2001); 30.6 (2002); 29.2 (2003); 28.8 (2004); 27.8 (2005); 15.6 (2006); 16.0 (2007); 12.4 (2008); 9.3 (2009); 8.3 (2010); 9.4 (2011); 11.4 (2012); 14.5 (2013); 18.0 (2014); 20.3 (Mar-15)
- Reported return on assets (ROA) (selected years): 4.2 (2001); 2.1 (2002); 2.8 (2003); 2.1 (2004); 1.9 (2005); 1.8 (2006); 1.8 (2007); 1.7 (2008); 1.8 (2009); 1.1 (2010); 1.0 (2011); 1.3 (2012); 1.2 (2013); 0.7 (2014); 0.2 (Mar-15)
- Liquid assets to total assets (selected years): 58.5 (2001); 64.9 (2002); 70.5 (2003); 74.3 (2004); 76.6 (2005); 75.4 (2006); 72.4 (2007); 69.5 (2008); 65.8 (2009); 65.1 (2010); 61.2 (2011); 64.0 (2012); 64.6 (2013); 60.4 (2014); 60.4 (Mar-15)

### Equilibrium and External Sustainability (EBA-lite estimates)
- REER (underlying): 96
- REER norm: 65
- REER gap (percent): 39; 45 (two entries shown)
- CA Norm: -6.5
- Underlying CA (2019): -14.9
- CA Gap: -8.4

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

### Appendix I. External Sector Assessment for Djibouti

### Appendix I. External Sector Assessment for Djibouti

### Exchange-rate regime and policy stance
- Djibouti maintains a currency board arrangement.
- The Djibouti franc is pegged to the U.S. dollar at the rate of DF 177.721 = US$1.
- The currency board arrangement is judged to have helped instill confidence in the economy and improve predictability in managing international transactions; staff recommends maintaining the arrangement.

### Current account dynamics and drivers
- The economy has been undergoing rapid change, including an ongoing investment boom characterized by exceptionally high imports and investment.
- Current account deficit trajectory:
  - 13.7 percent of GDP in 2011
  - 25.6 percent of GDP in 2014
  - Projected to peak at 31.4 percent of GDP in 2015
  - Projected to fall to 14.9 percent of GDP in 2019
- The large current account deficit is driven mainly by capital goods imports associated with mega investment projects; these have been financed directly by the associated project loans.

### External Balance Assessment (EBA-lite) findings
- The EBA-lite comprises three methods: EBA-lite CA, EBA-lite REER (regression-based norms and gaps), and an external sustainability method.
- Data limitations preclude application of the EBA-lite current account method to Djibouti.
- Results:
  - EBA-lite REER suggests the real effective exchange rate is overvalued by 39 percent.
  - The external sustainability approach suggests the real effective exchange rate is overvalued by 45 percent.

### Sensitivity of external position to real exchange rate changes
- Staff view: sensitivity of the current account to real exchange rate fluctuations is likely to be low because:
  - Domestic production of food or manufactured goods in Djibouti is minimal.
  - Fuel is entirely imported.
  - Over 90 percent of food consumed domestically is imported.
  - Main sources of foreign exchange have little or no relation with real exchange rate movements: port services (catering mainly to neighboring Ethiopia) and rents from military bases (determined by mutual agreement).

### External competitiveness and structural constraints
- Production costs are high; electricity tariffs have been among the highest in the world.
- Djibouti’s ranking on the World Bank Doing Business Index was 171st out of 189 countries in 2016.
- Selected Doing Business indicators (Rank out of 189 countries):
  - Ease of doing business (overall): 171
  - Starting a business: 171
  - Getting electricity: 172
  - Getting credit: 181
  - Enforcing contracts: 183
- Policy implication: External competitiveness should be pursued by reducing the high cost of utilities and improving the regulatory environment for business.
- Limited export diversification underscores the importance of maintaining adequate reserves to cope with potential large-scale shocks.

### Reserve adequacy assessment
- Staff analysis (reserve adequacy methodology accounting for costs and benefits) indicates:
  - The optimal level of reserves for Djibouti averages about 2.2 months of imports at end-2015.
  - The analysis assumes a cost of holding reserves of 6.15 percent (consistent with the marginal product of capital for Djibouti).
  - This implies actual reserve coverage in Djibouti is above the optimal level.
- Constraint under the currency board:
  - Djibouti must maintain at least 100 percent reserve cover under the currency board arrangement, which is equivalent to three months of imports.

### Medium-term outlook and key risks
- The medium-term balance of payments outlook depends on commodity prices and the performance of the Ethiopian economy.
- Given high dependence on imported food and fuel, changes in commodity prices could have significant implications for the balance of payments, household welfare, and government finances (fuel was subsidized until the recent decline in international prices).
- Military rent example:
  - China paid $20 million as rent for its military base for 2015.
  - No other major changes are expected to rents from military bases, as current contracts with the main countries using the bases are valid for the coming years.
- The demand for port services (Djibouti’s principal foreign-exchange source) is driven by the performance of the Ethiopian economy.

*Source: Appendix I. External Sector Assessment for Djibouti (IMF staff report).*

### 3. Joint Bank/Fund Program Participation in Post-Disaster Needs

### 3. Joint Bank/Fund Program Participation in Post-Disaster Needs Assessment

### Statistical issues
- General:
  - Data provided to the Fund are broadly adequate for surveillance.
  - Serious shortcomings especially in national accounts and the balance of payments (BOP), and to a lesser extent in external debt and recently in fiscal data.
  - Djibouti began participating in the General Data Dissemination System (GDDS) in February 2012.
- National accounts:
  - Authorities do not compile national accounts data, mostly due to low implementation capacity.
  - Initiative launched to compile national accounts data: first phase generated GDP estimates for 2008–12; second phase to establish a system of national accounts.
  - Population census completed in 2009; poverty survey in 2012–13; poverty profile developed.
  - Budget-consumption survey undertaken; expected revision of CPI basket weights from January 2016.
- External sector:
  - Substantial progress in improving BOP statistics, but significant issues remain (trade statistics, coverage of direct investment transactions, estimating workers’ remittances).
  - Improvements needed for freight transportation, investment income, transactions related to foreign military bases, and other investment of private sector (use of IBS data).
  - Despite a new external debt management system in 2002, debt statistics continue to be provided irregularly and with delay.
  - Technical assistance mission on external sector BOP visited in November 2011 to assist transition from BPM5 to BPM6.
- Government finance:
  - Fiscal data available monthly with a 2 month lag; do not cover a number of extra-budgetary accounts, including three pension funds.
  - Foreign-financed capital expenditure reported regularly.
  - Additional efforts needed to improve compilation and coverage of fiscal data, particularly at the institutional level, to fulfill recommendations from a 2001 government finance statistics mission.
  - Ministry of Finance (MOF) is not reporting annual data for the GFS Yearbook nor high-frequency data for publication in the International Finance Statistics (IFS).
  - A macroeconomic unit has been set up in the MOF to improve data collection and reporting.
- Monetary accounts:
  - Monetary statistics generally adequate; cover central bank and aggregated balance sheet of all commercial banks.
  - Monetary and financial statistics TA mission in July 2015 on compiling statistics per the Fund’s Monetary and Financial Statistics Manual (MFSM).
  - Central Bank of Djibouti (CBD) implemented some recommendations (sectorization); remaining recommendations not implemented mainly due to staffing constraints at the CBD.

### Debt sustainability analysis — Background and drivers
- Current DSA Update confirms the high risk of external debt distress assigned by the 2014 DSA exercise.
- Acute solvency and liquidity risks are due to recently contracted and expected external borrowing to fund public investment projects.
- Baseline projections of all solvency indicators are significantly above the policy-dependent thresholds for the majority of the projection period.
- Liquidity ratios also breach their thresholds in the medium term as debt servicing for investments come due.
- External debt ratios are most sensitive to:
  - a combined shock to GDP growth and non-debt creating flows;
  - tightening of financing terms.
- Depreciation of the franc vis-à-vis the US dollar is considered a tail risk given currency board stability, but bilateral movements of the US dollar vis-à-vis other currencies (Kuwait dinar, euro, renminbi) could cause sizeable valuation effects.
- Growing share of US dollar-denominated debt expected to mitigate valuation effects going forward.
- Tighter financing conditions pose a risk due to significant share of debt with variable interest rate and potential need for debt roll-over.
- Recommendation: Extremely limited scope for additional borrowing; avoid any borrowing leading to additional service costs over the medium term.
- Authorities should adjust fiscal strategy to reduce and manage the external debt burden, including strengthening coordination among government entities in charge of contracting external debt.
- Note on classification and thresholds: Djibouti is classified as a ‘weak’ performer based on average CPIA score in 2012–14 of 3.08. Indicative thresholds: 30 percent for PV of PPG external debt-to-GDP, 100 percent for PV of PPG external debt-to-exports, 200 percent for PV of PPG external debt-to revenue. Liquidity thresholds: 15 percent and 18 percent for debt service-to-exports and debt service-to-revenue ratios, respectively.

### Background: recent debt developments and projections
- Total public and publicly guaranteed (PPG) debt increased to 60.5 percent by the end of 2014, from 58.1 percent in 2013.
- Increase driven by higher external borrowing to finance large public expenditures related to infrastructure investments.
- External public debt increased by US$65 million; ratio to GDP reached 52.5 percent by end-2014.
- Domestic debt contracted to 8 percent of GDP.
- Pace of debt accumulation expected to accelerate over next three years due to large disbursements under existing and new external loans.
- In 2013 the government contracted two large loans for Addis Ababa—Djibouti railway and an Ethiopia water pipeline amounting to US$860 million.
- In 2013–18, loan disbursements expected to reach cumulative US$1.5-1.6 billion.
- Average grant element of new public sector borrowing expected to be around 9 percent in 2015, mainly due to non-concessional terms on the railway loan.
- Once railway disbursement ends in 2016, grant element of new borrowing will pick up to 28 percent temporarily; by 2025 grant element projected to decline to 12 percent.
- Assumptions noted: 6 month USD LIBOR assumed to gradually increase to 3.85 percent by 2019.

### Projected public and external debt composition (selected project loans and totals)
- Table of projects (Total amount, US$ million / Grant element, percent / Disbursement period / Creditor / Currency):
  - Ethiopia-Djibouti railway: 538 / -9.9 / 2014-16 / China EximBank / USD
  - Ethiopia waterpipeline: 322 / 29.7 / 2015-17 / China EximBank / USD
  - Water infrastructure renovation: 56 / 25.4 / 2013-18 / FADES / KWD
  - Geothermic energy: 13 / 44.5 / 2015-18 / OPEC, IDA / USD, SDR
  - Jabanhas power plant: 30 / 27.7 / 2015-18 / KFAED / KWD
  - Port de Goubet: 70 / 26.3 / 2013-16 / China EximBank / CNY
  - Port de Tadjourah: 90 / 23.4 / 2013-18 / OPEC, FADES, FSD / USD, KWD, SAR
  - Road Tadjourah Balho: 76 / 30.5 / 2013-18 / KFAED / KWD
  - Telecom cable under sea: 17 / 4.4 / 2016-18 / BID / USD
  - Social housing Djibouti: 50 / 43.9 / 2015-18 / FADES / KWD, SAR
  - Ali Sabieh cement plant: 39 / 49.2 / 2013-18 / India / USD
  - Other: 273
  - Total: 1,573
  - Percent of 2014 GDP: 99.1
- Note: For the railroad project the 6 month USD LIBOR is assumed to gradually increase to 3.85 percent by 2019.

### Projections and macroeconomic assumptions
- Public investment-driven growth:
  - GDP growth projected at 6.5 percent in 2015; expected to accelerate to 7 percent in the medium term; assume stabilization at 6 percent in the long term.
  - Current account gap projected to exceed 25 percent of GDP in 2015 due to large capital goods imports; current account expected to stabilize below 15 percent from 2017 onwards.
  - Non-interest current account deficit projected at 11 percent in the long-run.
  - Net FDI inflow projected to fluctuate around 10 percent of GDP per annum, almost fully covering the non-interest current account deficit beyond 2020.
  - Consumer price inflation anticipated to accelerate to 3.5 percent till 2018, and stabilize at 3 percent in the longer run.
  - Effective interest rates on external debt projected to remain around 2.5 percent in 2015-18; expected to pick up to 3.9 percent by 2035.
  - Variable LIBOR rate assumed to increase to 3.85 percent by 2019.
  - Grant element of new public borrowings projected to jump from 10 percent to close to 30 percent as disbursement of variable-rate railway loan ends; grant element projected to gradually decline to 12 percent by 2025.

### External DSA results and risks
- Baseline projections:
  - Total nominal PPG debt projected to reach 79.4 percent of GDP in 2017.
  - Present value (PV) of the debt-to-GDP ratio peaking at 69 percent over the medium term.
  - All solvency indicators (PV of external debt-to-GDP, PV debt-to-exports, PV debt-to-revenues) remain above respective thresholds for entire projection period.
  - Debt service ratios breach thresholds temporarily; during 2020-2030 debt service will amount to almost one-fifth of export revenues or one-quarter of fiscal revenues.
- Stress tests:
  - A one-time 30 percent nominal depreciation in 2015 would raise the PV of external debt-to-GDP ratio close to 100 percent and lead to prolonged breaches of the relative threshold.
  - A combined shock may push the PV of external debt-to-GDP ratio close to 80 percent for at least a few years.
  - Exchange rate stress scenario considered a tail risk given DF/USD exchange rate unchanged at 177.721 since 1973.
  - Valuation effects expected to be mitigated by increasing share of US dollar-denominated debt (expected to reach 60 percent in 2017 and remain above 50 percent till 2025).
  - Shock to new public sector financing on less favorable terms (200 basis points on all new financing in 2015-2035) could increase PV debt-to-GDP ratio to 74 percent in 2017.
  - Interest on the railway project expected to account for 40 percent of total interest payments in the next five years.

### Public DSA results
- Overall public debt projections:
  - Public debt projected to increase from 60 percent of GDP in 2014 to 83 percent in 2016.
  - Projected to remain well above the 38 percent benchmark for the next 10 years.
  - Baseline scenario shows significantly lower debt levels compared to fixed primary balance and historical scenarios due to projected acceleration of economic growth and expected fiscal improvement from unwinding of large infrastructure projects.
- Vulnerabilities:
  - Public debt indicators most vulnerable to exchange rate shock: one-time 30 percent depreciation in 2014 leads to major increase in all key ratios and most significant impact on debt service-to-revenue ratio.

### Conclusion and policy implications
- Djibouti remains at high risk of debt distress; both solvency and liquidity risks increased significantly since the previous DSA.
- Significant and protracted breaches of thresholds for solvency ratios (PV of external debt-to-GDP, debt-to-exports, debt-to-revenue) under the baseline scenario.
- DSA indicates liquidity pressures in the near future.
- Solvency and debt service indicators are sensitive to standardized stress tests, including combined shock to GDP growth and non-debt creating flows and higher cost of financing.
- Policy recommendations implied by the analysis:
  - Extremely limited scope for additional borrowing.
  - Avoid borrowing that leads to additional service costs over the medium term.
  - Adjust fiscal strategy to reduce and manage external debt burden.
  - Strengthen coordination among government entities in charge of contracting external debt.

*Prepared by the International Monetary Fund and the International Development Association — November 17, 2015*

### 13.      The debt sustainability analysis suggests that the fiscal space is extremely limited.

### _cr16248 - 13.      The debt sustainability analysis suggests that the fiscal space is extremely limited.

### Debt sustainability findings
- Fiscal space is described as "extremely limited."
- External debt (nominal) reported: 65.6, 78.3, 79.4, 78.2, 73.5, 68.6 for 2015–2020 (table sequence shown) and an average indicated as 51.8 and 32.2 in specific table cells.
- PV of external debt (selected years/projections): 44.0 (2015 historical cell), 57.1, 69.1, 69.5, 68.3, 65.8, 63.2, 49.6, 30.4 (as reported in the baseline table).
- PV of PPG external debt (same series as PV of external debt): 44.0, 57.1, 69.1, 69.5, 68.3, 65.8, 63.2, 49.6, 30.4.
- PV of debt-to-exports ratio (selected values): 136.9, 166.5, 205.6, 215.6, 215.7, 211.3, 203.6, 174.6, 123.2 (as reported).
- PV of PPG external debt in percent of government revenues (selected values): 167.7, 200.2, 247.9, 263.6, 272.1, 273.2, 274.4, 280.5, 219.6.
- Debt service-to-exports ratio (in percent) reported: 11.3, 10.5, 10.5, 12.2, 12.7, 14.5, 16.6, 11.0 (selected years).
- PPG debt service-to-revenue ratio (in percent): 13.6, 12.7, 12.9, 15.4, 16.5, 19.6, 26.7, 19.6 (selected years).
- Total gross financing need (Billions of U.S. dollars) series includes: 0.4, 0.4, 0.1, 0.2, 0.2, 0.2, 0.3, 0.2 (cells shown).
- Grant-equivalent financing (in percent of GDP) series (selected): 10.5, 10.8, 10.4, 6.6, 5.0, 4.9, 5.7, 2.5, 4.3.
- Nominal GDP (Billions of US dollars) reported: 1.7, 1.9, 2.1, 2.3, 2.6, 2.8, 4.4, 10.5 (selected cells).

### Policy recommendations (staff advice)
- Minimize issuance of government debt guarantees.
- Encourage private participation in financing of investment projects.
- Run projects on a commercial basis so they can be profitable and generate revenues to service their debt.
- Limit any PPG borrowing that could lead to additional debt service costs over the medium term.
- Develop a strategy to reduce and manage the external debt burden, including strengthening coordination among government entities in charge of contracting external debt.
- Deepen domestic debt markets to help alleviate risks associated with the high level of external indebtedness.

### Authorities' position and capacity needs
- Authorities acknowledge the high risk attached to the current financing strategy.
- Authorities contend investment projects are critical for Djibouti’s development and that the strategy will be viable if it generates growth and crowds in sufficient FDI.
- In the absence of other financing options, authorities consider external borrowing to finance the projects justified.
- Authorities acknowledge the need to strengthen public capacity to manage the investment scaling-up and underscore the importance of technical assistance.
- Noted existing capacity-building efforts: The World Bank and UNCTAD have provided training on developing a medium-term debt management strategy, focusing on capacity building and quantification of costs and risks of alternative borrowing strategies.

### Key macroeconomic and fiscal assumptions (selected)
- Real GDP growth (in percent) series includes: 4.8, 5.0, 6.0, 4.8, 1.6, 6.5, 6.5, 7.0, 7.0, 7.0, 6.0, 6.7, 6.0, 6.0, 6.0 (cells shown).
- GDP deflator in US dollar terms (change in percent) series includes: 4.1, 2.2, 2.7, 3.5, 3.5, 3.5, 3.0, 3.0, 3.2, 3.0, 3.0, 3.0 (cells shown).
- Effective interest rate (percent) series (selected): 1.4, 0.2, 2.2, 2.3, 2.4, 2.5, 1.3, 0.9, 1.9, 3.0, 3.9, 3.6 (cells shown).
- Growth of exports of G&S (US dollar terms, in percent) series (selected): 7.5, 4.8, 16.6, 8.0, 6.3, 8.7, 8.5, 8.9, 9.5, 7.3, 9.1, 7.5.
- Growth of imports of G&S (US dollar terms, in percent) series (selected): 13.0, 17.3, 24.2, 5.2, -12.1, 3.7, 5.9, 7.8, 5.8, 8.1, 9.1, 8.1.
- Government revenues (excluding grants, in percent of GDP) series (selected): 37.1, 36.2, 33.9, 29.4, 28.3, 27.2, 22.8, 16.0, 13.8, 16.6 (cells shown).

### Sensitivity analysis and stress tests (high-level summary)
- Stress tests and alternative scenarios presented for PV of debt-to-GDP, PV of debt-to-exports, PV of debt-to-revenue, debt service-to-revenue, and debt service-to-exports across 2015–35.
- Examples of stress outcomes (selected):
  - PV of debt-to-GDP ratio under baseline and shocks: baseline values reported as 57, 69, 70, 68, 66, 63, 50, 30 (table header series) with alternative scenarios and bound tests producing higher ratios (table entries show values such as 79, 98, 103, 120, up to 398 in extreme cells for some scenarios).
  - PV of debt-to-exports ratio baseline/projections: baseline series 166, 206, 216, 216, 211, 204, 175, 123; bound tests and shocks raise ratios with entries showing values such as 248, 264, 272, 280, 350, 373, 385, 387, 388, 398 in some scenarios.
  - Debt service-to-revenue ratio baseline/projections: baseline series 14, 13, 13, 15, 16, 20, 27, 20; stress scenarios increase ratios with entries such as 29, 31, 38 in selected scenarios.
- Specific bound test highlighted in text: "The most extreme stress test is the test that yields the highest ratio on or before 2025." Corresponding extreme shocks include "One-time depreciation shock", "Non-debt flows shock", and "Exports shock" depending on the indicator.

### Risks and implications
- High external indebtedness raises substantial risks: elevated PV of external debt relative to GDP, exports, and revenues; rising debt service ratios in some projection years; and potentially large increases under adverse shocks.
- Staff advice focuses on constraining contingent liabilities (e.g., guarantees), prioritizing commercial viability of projects, limiting PPG borrowing that increases medium-term debt service, strengthening debt-management coordination, and developing domestic debt market depth.

*Source: IMF staff report excerpt titled "13.      The debt sustainability analysis suggests that the fiscal space is extremely limited."*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16248.pdf_