Djibouti and the IMF

Press Release: IMF Executive Board Reviews Djibouti's Poverty Reduction Strategy
June 4, 2004

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DjiboutiLetter of Intent and Memorandum of Economic and Financial Policies

Djibouti, February 29, 2004

The following item is a Letter of Intent and a Supplementary Memorandum on Economic Policies of the government of Djibouti. It is being made available on the IMF website by agreement with the member as a service to users of the IMF website. This memorandum describes the policies that Djibouti is implementing in the framework of a staff-monitored program. A member's staff-monitored program is an informal and flexible instrument for dialogue between the IMF staff and a member on its economic policies. A staff-monitored program is not supported by the use of the Fund's financial resources; nor is it subject to the endorsement of the Executive Board of the IMF.

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler:

1. The economy and the social situation in Djibouti are still weak, despite seven years of adjustment effort under the IMF-supported programs. The fiscal position has gradually been restored and progress has been made toward reforming public finances. The heavy domestic fiscal arrears have started to come down since 2001. However, the structural reform program, intended to remove the obstacles to growth, has not been completed. Economic growth has consequently remained insufficient to foster job creation and reduce poverty.

2. Last year, the government expressed interest in negotiating a second arrangement under the Poverty Reduction and Growth Facility (PRGF). However, the staff considered that because of substantial additional budgetary resources from military agreements with France and the United States, the Republic of Djibouti would not, for the time being, need a Fund program with drawings. Moreover, during its recent 2003 Article IV discussions, the Executive Board of the IMF expressed the wish that the authorities establish a strong track record of implementing their economic and financial policy, before concluding such an agreement. In particular, it wished for completion of the last program's structural reforms agenda to enhance growth, and for the adoption of a 2004 budget that would support growth and poverty reduction.

3. The attached Memorandum on Economic and Financial Policies (MEFP) describes the structural reform and macroeconomic adjustment program for 2004. The government believes that the policies described in the attached MEFP clearly reflect the authorities' commitment to economic reforms and lay a solid foundation for implementing their economic policy. These policies are also a good starting point for subsequently embarking on the negotiation of a second PRGF arrangement with the IMF. The government therefore requests that the Fund staff closely monitor execution of this program (as is usually done under Fund-supported programs) covering the period January-December 2004.

4. The government will provide Fund staff with all necessary information to assess policy implementation and fulfillment of the program targets. The authorities also intend to review with Fund staff the progress made under the program every three months.

5. The government appreciates the help that the IMF has provided in preparing the economic reform programs since 1996, and attaches considerable importance to continued collaboration with the IMF.

Accept, Sir, the assurance of our high consideration.


Yacin Elmi Bouh
Minister of Economy, Finance,
and Planning, in charge of Privatization


Djama M. Haïd
Central Bank of Djibouti

Memorandum of Economic and Financial Policies

I. Introduction

1. Over the past 15 years, Djibouti's economy has experienced severe domestic and external shocks, including a civil war during which the size of the armed forces jumped from 4,000 to 16,000 in a single year. In addition, our country has had to cope with flows of refugees from neighboring countries estimated at 120,000 in 1999 (i.e., approximately 20 percent of the population), lingering regional conflicts, and a reduction in French military presence.

2. Faced with this difficult situation, adjustment has become an unavoidable economic necessity for our country to return to a sound macroeconomic environment. This was the option chosen by the government in April 1996 when a stand-by program (1996-99) was put in place, followed by a Poverty Reduction and Growth Facility (PRGF) arrangement, from October 1999 to December 2002. During the six years of fiscal adjustment, the authorities have made considerable efforts to rehabilitate the macroeconomic framework.

3. After three years of implementation (1999-2002), this program has made it possible to: (a) stabilize tax revenues by enhancing the efficiency of revenue collection efforts through the adoption of a package of legislative and practical measures; (b) rationalize expenditure through implementation of a cash-flow management plan; (c) raise the expenditures allocated to the social sectors; and (d) stabilize the wage bill/budgetary revenue ratio.

4. However, while the goals of macroeconomic stabilization have been achieved, strong and sustainable economic growth has not yet been restored. The adverse effects of the adjustment measures have weighed most heavily upon the most vulnerable strata of Djibouti's population; this is illustrated by the results of the most recent household survey conducted in July 2002 (EDAM-2), indicating that 45.2 percent of the population is poor.

5. Poverty reduction in Djibouti must thus be the cornerstone of any efforts to promote development in our country. The Poverty Reduction Strategy Paper (PRSP) prepared by the government, using a participatory approach, is a response to this challenge. Our main goal is to build an enabling environment for growth and the accumulation of human capital in such a way as to achieve long-term reductions in poverty and unemployment while improving the living conditions of all our citizens. Such a strategy reflects a long-term vision aimed at harnessing Djibouti's strategic assets, its geographic location, and its port, and at developing its human resources, so as to achieve far-reaching improvements in the economy's competitiveness and to acquire an advantageous position in the world economy.

6. Against this backdrop, the government attaches the utmost importance to continuing its partnership with the IMF on the basis of a new program. The measures proposed in this memorandum reflect a political commitment to pursuing the reforms, having due regard for the importance of mobilizing additional external resources associated with the government's poverty reduction strategy.

II. National Economic Developments in 2003

7. Economic activity in 2003 presented encouraging results. The transportation system—the linchpin of the country's economic activity—made significant headway in comparison with the same period in 2002:

  • Port traffic experienced a sharp increase overall, in the amount of 40 percent (46 percent for imports, 21 percent for exports); and

  • Air transportation (commercial and noncommercial) made major strides with a 96 percent increase in aircraft movements.

8. Economic growth was also bolstered by electricity production, which grew by 5.2 percent between 2002 and 2003. Furthermore, public investment (including spending on additional social programs) through December 31, 2003 (DF 7.436 billion) was up by 58.4 percent compared to the same period in 2002. These investments focused on infrastructure and roads (32 percent), urban development and housing (35 percent), national education (13 percent), and government participation in two new enterprises.

9. Accordingly, based on the results outlined above, the growth in real GDP is estimated at 3.5 percent by end-2003. This level of growth will help improve the rate of growth in per capita GDP, which should turn positive for the first time in a decade (+0.7 percent), in spite of galloping population growth estimated at 2.8 percent, and inflation (largely imported) at 2.1 percent (up from 1.5 percent in 2002).

10. On the monetary side, at end-December 2003, M3 had grown by 17.8 percent over the same period in 2002. This increase chiefly reflects the accumulation of local currency deposits. Conversely, net foreign assets grew by 26.8 percent, particularly those of commercial banks (DF 46.172 billion), while credit to the economy (DF 26.226 billion) recorded a drop of -2.9 percent.

11. The government budget outturn as of December 31, 2003 reflects total revenues of DF 37.962 billion (up by 22.7 percent as a result of the additional revenues collected from foreign military forces and from domestic resources, which rose by 4.3 percent), and total expenditures in the amount of DF 40.490 billion—i.e., an upturn of 16.8 percent largely reflecting increases in public investment expenditure (+58.4 percent) and current expenditure (+10.3 percent). The largest element in this expenditure was the wage bill, which nonetheless remained stable in terms of the GDP and the slight increase was due in part to the inclusion in the budget of the costs involved in incorporating the FRUD fighters in the army in 2003, as a result of the peace accord signed in 1999 and 2001 with the FRUD and the FRUD army. This situation gave rise to an overall deficit on a payment order basis of DF 2.528 billion-i.e., 2.3 percent of GDP (compared to a deficit of 3.5 percent of GDP in 2002).

12. Thanks to additional revenues, arrears were settled more rapidly in 2003. Pension funds and civil servants were the principal beneficiaries. In addition, the Djibouti government has refrained from accumulating external arrears.

III. Medium-Term Macroeconomic Framework and Strategy (2004-06)

13. The reform program focuses on putting in place a favorable macroeconomic and structural environment with the following objectives:

  • The establishment of a viable macroeconomic framework. The policy pursued by the government is especially designed to control the budget deficit while allocating public expenditure to poverty reduction programs.

  • Private sector-led growth with the development of an environment conducive to investment. The chosen strategy focuses on four main themes: (a) putting in place a legal framework favorable to private investment; (b) improving the labor environment; (c) pursuing reforms to lower factor costs and to improve the management of public enterprises; and (d) strengthening good governance.

14. In this context, the macroeconomic objectives for the period 2004-06 are as follows:

  • Achieve an average real GDP growth rate of 4.6 percent. Investment is vital to the growth strategy, and public investment is expected to grow from a budgeted level of 5.9 percent of GDP in 2004 to 16.3 percent of GDP in 2006 (including financing to be secured);

  • Contain inflation, as measured by the CPI, to 2 percent;

  • Place fiscal management and supervision on sound foundations, through continued efforts to modernize taxation and strengthen government expenditure management; and

  • Maintain the debt service/GDP ratio at 1.05 percent.

15. However, higher growth rates can only be achieved if the private sector responds favorably to the reforms. These key structural reforms will focus on the following main areas:

  • In the tax reform area, the objective is to improve revenue collection and thereby ease the tax burden without adversely affecting the overall fiscal position;

  • For government expenditure, the objective is to improve management by enhancing the performance of productive public and social services (education, including training; and health, including prevention and sanitation);

  • For structural reforms, the objective is to improve external competitiveness and strengthen good governance, particularly by restoring the external competitiveness of the economy through the adoption of reforms of the labor, commerce, and investment codes and the establishment of an operational "one-stop shop"; and

  • The banking system will be improved through strengthened supervision.

  • Aware of the fact that building an environment conducive to private investment will require lowering factor costs, the government will build, in 2004, upon the progress in the reforms of public enterprises (Electricité de Djibouti, l'Office Nationale des Eaux de Djibouti, and Djib-Télécom), while enhancing their financial viability. The completion of these reforms will require financial assistance from donors, and, in particular, the World Bank. To achieve these objectives, the government will set up a body in the ministry in charge of privatization to monitor implementation of their terms and conditions.

IV. The Program for 2004

A. Macroeconomic Coordination

16. The policies in 2004 and beyond will focus on: (a) achieving sustainable increases in the growth rate; and (b) strengthening economic competitiveness. The government must address these two issues head-on if it is to ensure the successful implementation of the national poverty reduction strategy.

17. The macroeconomic goals envisaged for 2004 are to:

  • Raise the rate of real GDP growth to 4.1 percent, which should make it possible to achieve a real per capita GDP growth of +1.3 percent, given a population growth rate estimated at 2.8 percent per year;

  • Contain the inflation rate to a level not exceeding 2 percent; and

  • Pursue fiscal consolidation through improvements in tax revenues coupled with intensified collection efforts, and expenditure control, enhancing their efficiency and reallocating them to priority sectors, in addition to the gradual settlement of the government's domestic debt.

16. Economic growth in 2004 will be supported by the gradual emergence of a new and dynamic environment in the services sector, thanks to the planned construction of the Doraleh port complex (Oil Terminal, Container Terminal, and the industrial and commercial free zone). The Doraleh project, which began in June 2003, will in the near term create 500 new jobs as work progresses.

17. Public investment in the transport and telecommunications sectors (new road for the Djibouti-Galafi corridor, construction of urban bypass roads for the RN1 highway, and installation of a fiber-optic telecommunications network) coupled with further construction of low-cost housing and school and public health infrastructure, as well as productive investment in fisheries, agriculture (Special Food Security project (PSSA) and rural well-drilling), and livestock (future center for the re-exportation of cattle) will help boost the growth rate in 2004.

18. The main economic policy measures envisaged in the program are highlighted below.

B. Fiscal Policy

19. The budget for FY 2004, adopted by Parliament on December 29, 2003 and promulgated by the President of the Republic, looks as follows compared to estimates results for 2003: total revenues up by 1.29 percent, despite the 12.3 percent reduction in additional resources from France and the United States. Own domestic resources are up by 4.3 percent. Government expenditure is down by 0.93 percent from 2003 with a slight increase of 0.29 percent in current expenditure, and a 6.37 percent decline in investment expenditure.

20. With respect to revenues, the measures planned for meeting the 2004 budget goals are as follows:

  • To address the revenue shortfall resulting from the reform of the business license tax, tax supervision will be strengthened by revitalizing the general audit office through providing the units in charge of supervising taxpayers with enough physical and human resources to conduct supervision of the large enterprises;

  • To improve the property tax collection rate, the government will continue to publish the list of defaulting taxpayers in the official journal and will confiscate movable and fixed assets;

  • To address a possible decline in revenues from the domestic consumption tax (following a reduction in the tax rates on some products), the tax administration will step up its efforts to audit imported goods;

  • In August 2004, to unify and simplify the tax exemptions system the government will merge the various preferential tax regimes and include exemptions in the general tax code; and

  • The government will strengthen border inspections to combat smuggling and increase the collection of the surtax on alcohol and cigarettes.

In addition, the computerization of the tax administration, which will be completed by December 2004, will facilitate efforts to administer taxes more efficiently.

21. As for personnel expenditure, the government undertakes to:

  • Ensure the operational implementation of the single registry for civil servants by September 2004 by integrating both the separate civil service and finance programs;

  • Continue the demobilization of personnel from the army and the security forces (500 in the first half of 2004);

  • Retire 68 civil servants and 140 government-affiliated persons (conventionnés);

  • Continue the staffing freeze in the civil service, except for education, health, and the judiciary; and

  • Limit the gross impact on the budget in 2004 of the recruitment of new staff in education, health, and the judiciary to DF 550 million.

22. Spending on goods and services has increased significantly in recent years as a result of higher expenditure on power, water, and telephone services. The government is committed to:

  • Lowering these expenditures by further educating the technical ministries and controlling the billing process more effectively; and

  • Making the Radio and Television of Djibouti (RTD), the Palais du Peuple, and the Hassan Gouled Stadium, whose water and electricity bills are paid by the government, participate in efforts to reduce utility outlays.

25. To improve the management of government expenditure and of the institutions responsible for preparing and monitoring the budget, the government intends to:

  • Limit pre-payment order expenditures to such outlays as are stipulated by law and settle such expenses quarterly, such as the Office of the President of the Republic, embassies, etc.;

  • Continue the strict enforcement of the cash-flow management plan and limit check-exchanging arrangements to the following public enterprises: EDD and ONED;

  • Make fully effective the reorganization of the ministry of finance to strengthen the budget preparation and execution process;

  • Restrain the growth in expenditures on goods, services, and transfers unrelated to poverty;

  • Establish an adequate framework for monitoring the implementation of the public investment program underpinning the PRSP and the progress made in redirecting expenditure toward the poor. Thus, in view of the uncertainties surrounding a portion of the fiscal revenues, such as grants, public expenditure programming will be undertaken in a medium-term framework, with publication of semiannual reports on priority social spending developments;

  • Start preparations for implementing a social safety net for the most vulnerable members of society with assistance from the World Bank;

  • Include in the budget all types of external financing (grants and loans), including all assistance in the form of military aid; and

  • Avoid all kinds of extrabudgetary expenditure (including military expenditure).

C. Financial Sector Reform

23. In the area of financial sector reforms, the authorities have continued their efforts to ensure the integrity and efficiency of the banking and financial system. For that purpose, the authorities adopted a new anti-money laundering law at end-2002 and have proposed amendments to the Central Bank of Djibouti (BCD) Charter and the banking law. The revised texts are to be submitted to the Council of Ministers for approval and are expected to be adopted by Parliament by end-June 2004.

24. With regard to the financial system supervision program, in December 2003, the BCD undertook an on-site inspection of a commercial bank with technical assistance from an IMF advisor. The BCD also carried out on-site inspections of three exchange bureaus during the second half of 2003. The BCD will inspect the main exchange bureaus in 2004, and will continue to strengthen its capacity to oversee the banking system with on-site audits of at least one bank per year.

25. As in the three preceding years, the external audit for the BCD's 2002 accounts was performed by an international audit firm at end-2003. The BCD will continue to have its accounts audited by external auditors in 2004, and will publish its financial statements together with the auditors' opinion.

26. Regarding the liquidation of two banks (BDMO and Albaraka), the efforts to recover their claims and the gradual repayment of depositors continued in 2003. However, the authorities intend to wrap up the liquidation process before end-2004, notwithstanding the slow pace of legal proceedings and the risks arising from certain debtors' insolvency.

27. The authorities intend to put in place an appropriate regulatory framework for microfinance and to subject those institutions engaged in this activity to regular supervision by the BCD.

28. To give depositors access to a broader range of financial products, the authorities have been considering developing new financial products in Djibouti.

29. Finally, in the area of technical assistance, in 2004, the authorities intend to enlist the services of the IMF to support BCD staff in regard to new financial products (financial leasing, young entrepreneur loans, risk capital, and financial engineering), monetary statistics, and anti-money laundering, by strengthening financial investigation techniques as part of the continuous training program for supervisors.

D. External Sector Policy

30. Debt management and monitoring are one of the government's priorities. After establishing in 2001 an agency with sole responsibility for the State's external resources, the Djibouti authorities acquired and installed a debt-management and analysis system in 2003. The establishment of this database enabled an exhaustive classification of loan agreements, recording the terms of those loans, as well as past and present drawings and payments.

31. In 2004, the government will pursue its cautious debt management policy, and will refrain from contracting or backing nonconcessional loans. Furthermore, the government will include, in the external debt service, those outlays related to new external loans, while refraining from accumulating new external and domestic payments arrears. The government will respect the order of priority between the various creditors in the plan for settling domestic payments arrears (private creditors, salaried government employees, social public entities, and public enterprises). Furthermore, effective July 2004, the government will resume contact with Paris Club creditors, particularly with Spain and Italy, in order to restart negotiations.

E. Structural Reforms: Improving Competitiveness and Poverty Reduction

32. The government attaches the utmost importance to the promotion of private investment, which is the driving force behind economic growth. In order to achieve this objective, it is planned to adopt a new investment code designed to attract foreign capital in 2004. This code will enable the exemptions system to be simplified and rationalized.

33. Also, to enhance labor market flexibility, the government will adopt by June 2004 the draft labor code prepared by the committee established for this purpose by the ministry of labor and national solidarity, which has had the benefit of input from the International Labor Office (ILO).

34. The authorities intend to promote the expansion of private enterprise by implementing a strategy and mechanisms supported by small- and medium-scale enterprises. The purpose of the approved management centers will be to facilitate and to promote small- and medium-scale enterprises' competitiveness. The authorities will also promote the expansion of microfinance in particular by preparing a national microfinance strategy.

35. The authorities will encourage private sector initiatives by putting in place a plan to restructure the power and water sectors.

36. To promote good governance, the government intends to strengthen the management of public expenditure and to enhance its efficiency. The general aim will be to build upon results already achieved in accordance with the following criteria:

  • Effective implementation of the new measures to improve budget preparation and control and monitoring of expenditure; and

  • Enhanced control of government finances through publication of the 2002 Report of the Chamber of Accounts and Fiscal Discipline.

F. Statistical System

37. To be able to have a statistical system that meets international standards in terms of quality, frequency, and dissemination, the government has decided to participate in the IMF's General Data Dissemination System (GDDS). The government will actively seek to implement the IMF technical assistance missions' recommendations in the fiscal and national accounts areas.

V. Program Monitoring

38. Program performance will be monitored through quarterly indicative targets, structural benchmarks, and quarterly progress assessments by IMF staff. The indicative targets for end-March, end-June, end-September, and end-December 2004, as described in Table 1, will focus on: (a) a ceiling on the wage bill; (b) a floor on fiscal revenues (tax and non-tax); (c) a ceiling on spending on goods and services and transfers (excluding foreign-financed military expenditure); (d) a ceiling on net outstanding domestic arrears; (e) a ceiling on net central bank credit to the government; and (f) a floor on net international reserves. The program also includes a zero ceiling on: new external arrears; nonconcessional external debt (except for commercial credit) contracted or backed by the government or a public enterprise; and government borrowings from public enterprises or commercial banks. The principal economic policy measures contemplated by the program are listed in Annex I, including those that are structural benchmarks.

39. The approval by IMF management of the letter of intent and the memorandum on economic and financial policies and their submission to the Executive Board are subject to execution of the following prior measures: (a) completion of the demobilization of 250 former combatants; (b) accounting for the use of the US $4.75 million disbursed by the United States in October 2002; (c) retirement of the entitled government employees; and (d) publication of the 2002 Report of the Chamber of Accounts and Fiscal Discipline. Djibouti will regularly consult the IMF, in accordance with the IMF's policies on the matter, about progress in implementing the policies and measures prescribed in the staff-monitored program.

Table 2. Djibouti: Prior Actions, Indicative Targets,
and Structural Benchmarks for the 2004 Program

I. Prior actions for the approval by Fund management of the letter of intent and memorandum on economic and financial policies
Completion of the demobilization of 250 ex-combatants.
Accounting for the use of the $4.75 million disbursed by the United States in October 2002.
Retirement of government employees entitled to retire (done).
Publication of the 2002 Report of the Chamber of Accounts and Fiscal Discipline.
II. Indicative Targets
See Table 1, Annex I.
III. Structural Benchmarks
End-March 2004
Make fully effective the reorganization, adopted end-2002, of the ministry of finance (adoption of the implementing decree).
End-June 2004
Complete the demobilization of 250 former combatants.
Finalize the projected unification and simplification of the tax exemption regime by merging the various preferential tax regimes and by including remaining exemptions in the general tax code.
Have the National Assembly adopt the revisions to the banking legislation and the central bank charter.
Enforce the decree revising the banking legislation.
Adopt the new labor code.
Adopt a new investment code and revise the legislation on free zones.
Publish a detailed report on priority social expenditure during the first six months of 2004.
End-September 2004
Adopt the projected unification and simplification of the tax exemption regime by incorporating it into the revised finance law.
With World Bank assistance, draw up a plan to restructure the power and water sectors.
Implement the unified registry of civil servants.
End-December 2004
Complete the computerization of the tax administration
Draft and adopt a commercial code.
Publish a detailed report on priority social spending during the last six months of 2004.
Put in place an appropriate regulatory framework for microfinance and subject institutions engaged in this activity to regular supervision by the central bank.
IV. Continuous Structural Benchmarks
Rigorously enforce the monthly cash-flow management plan.
Limit pre-payment order expenditure to such outlays stipulated by law.
The government will report to the Fund each quarter, with a lag of four weeks, its data on foreign trade and foreign debt, and each month, with a lag of four weeks, its data on revenues, expenditures, and domestic and external arrears.


Table 3. Djibouti: Policy Matrix Under the 2004 Staff-Monitored Program

Strategy and Measures

Government Finances

Put in place a viable macroeconomic framework

  • Continue the reform of fiscal management

  • Continue to rehabilitate government finances by stepping up collections and by improving expenditure control while, at the same time, improving their efficiency and redirecting expenditure toward priority sectors

- Start preparatory work on the adoption of the VAT by 2006;

- Unify and simplify the tax exemptions regime by merging the various preferential tax regimes and incorporate all remaining exemptions in the general tax code (structural benchmark);

- Improve tax collection by revitalizing the general audit office and by reinforcing oversight of the collection of consumer taxes on imports;

- Complete the computerization of tax administration (structural benchmark);

- Implement the unified registry of civil servants (structural benchmark);

- Maintain the hiring freeze, except in education, health, and the judiciary;

- Increase the proportion of priority social spending in the budget;

- Restrain non-poverty-related expenditure growth of goods, services, and transfers;

- Make the Radio and Television of Djibouti, the Palais du Peuple, and the Hassan Gouled Stadium, whose water and electricity bills are paid by the government, join in the effort to cut utility outlays;

- Reduce the wage bill through the demobilization program and by retiring those government employees who are entitled to retire (structural benchmark);

- Rigorously enforce the monthly cash-flow management plan (permanent structural benchmark);

- Start preparations for implementing a social safety net for the most vulnerable members of society, with assistance from the World Bank;

- Limit pre-payment order expenditure to such outlays stipulated by law (permanent structural benchmark);

- Make fully effective the reorganization of the ministry of finance, adopted end-2002, (passage of the implementing decree) (structural benchmark);

- Establish an appropriate framework for monitoring execution of the public investment program; and

- Given the uncertainty surrounding part of fiscal revenues, such as grants, programming government expenditure should be undertaken in a medium-term perspective.

Financial Sector
  • Preserve the integrity of the currency board arrangement

  • Consolidate the banking system

- Continue reinforcing surveillance and controls over banks and exchange bureaus;

- Complete the audit of a commercial bank and of the main exchange bureaus;

- Have the National Assembly adopt the revisions to the banking legislation and the Central Bank Charter, and incorporate the supervision of financial institutions (structural benchmark);

- Enforce the decree revising banking legislation (structural benchmark);

- Put in place an appropriate regulatory framework for microfinance and subject institutions engaged in this activity to regular supervision by the central bank (structural benchmark);

- Complete the liquidation of the two commercial banks; and

- Continue to have the central bank's accounts audited by internationally recognized external auditors.

Official Debt and Domestic and Foreign Arrears
  • Continue prudent debt management

- Refrain the government from contracting or guaranteeing nonconcessional loans;

- Not accumulate new external payments arrears;

- Resume contact with Paris Club members;

- Progressively reduce the stock of domestic payments arrears; and

- Respect the order of priority between the various creditors in the plan for settling domestic payments arrears (private creditors, salaried government employees, social public entities, and public enterprises), approved by presidential decree in September 2003.

Structural Reforms
  • Strengthen competitiveness by lowering the costs of the factors of production

  • Foster a favorable legal environment for foreign investment

  • Improve the operation of the labor market

- Build upon progress in reforming the public enterprises (EDD, ONED) and improve their financial profitability;

- Draw up a plan to restructure the power and water sector, with World Bank assistance (structural benchmark);

- Draft and adopt a commercial code;

- Adopt a new investment code and revise legislation on free zones (structural benchmark); and

- Adopt the new labor code (structural benchmark).

Governance and Transparency
  • Strengthen good governance

  • Improve transparency

- Avoid all extrabudgetary expenditure;

- Include in the budget all types of external financing, including all military related receipts;

- Publish the 2002 Report of the Chamber of Accounts and Fiscal Discipline; and

- Publish semiannual reports on priority social spending as detailed as possible.

Use the free Adobe Acrobat Reader to view Table 1 (6 Kb PDF file)


Technical Memorandum of Understanding

This Technical Memorandum of Understanding (TMU) contains further information regarding: (a) the indicative targets detailed in the table and Annexes to the Memorandum on Economic and Financial Policies (MEFP); (b) basic information to be conveyed to the Fund through its resident mission; and (c) the authorities' plan for monitoring program execution.

I. Indicative Targets

The definition of aggregates on which ceilings are imposed are given below:

  • Domestic fiscal revenue includes all receipts from direct and indirect taxes, other taxes, and nontax revenues, as well as all other receipts from foreign military forces located in Djibouti.

  • The wage bill includes, in particular, all wages, salaries, fees, compensation, remuneration, benefits, and allowances that the government pays to civilian, military, or security personnel that it employs (permanently or temporarily), as well as all other general government employees, regardless of the method of payment (cash, check, transfer, or any other type of payment) or the type of agency making such payments (treasury or any other agency acting on behalf of the government). The ceilings and targets include savings linked to projected retirements and net savings arising from the demobilization program for security and military personnel.

  • Expenditure on goods and services and transfers include all operating costs (apart from payroll and maintenance costs) of the central government and municipalities (including energy costs), as well as government subsidies to private, public, or autonomous agencies. Transfers operations also include scholarships, grants, contributions to paying rent, subsistence, annuities, contributions to government agencies as well as consolidating peace agreements and the youth training program. Foreign-financed military spending is excluded.

  • Social expenditure includes all spending on poverty reduction by providing access to training, on health care, on improving the legal system, for greater equity among citizens, as well as improving the standard of living, including, among other things, access to drinking water and treatment of sewage.

  • Domestic arrears include, among other things, payroll arrears, payments to private suppliers, and payments into retirement funds.

  • Net central bank credit to the government is defined as all claims that the central bank holds on government agencies less government agencies' deposits in the central bank. These deposits include, inter alia: the reserve fund, treasury cash holdings, and miscellaneous deposits. Miscellaneous deposits consist mainly of: deposits to blocked accounts, deposits for payment of exceptional grants, current accounts, deposits to special accounts, and counterpart funds for loans and grants by way of external budgetary support. These deposits do not include counterpart funds arising from foreign loans and grants that are not intended for budgetary support.

  • Net bank credit to the government consists of all commercial bank claims on the government (including overdrafts, and bonds and securities issued by government agencies, held by commercial banks), less all deposits by government agencies to these banks. These deposits consist mainly of: deposits to blocked accounts, deposits for payment of exceptional grants, current accounts, deposits to special accounts, and counterpart funds for loans and grants by way of external budgetary support. These deposits do not include counterpart funds arising from foreign loans and grants that are not intended for budgetary support. The commercial banks consist of the three presently operating banks in Djibouti.

  • Borrowings from public enterprises are defined as the total amount received by the government constituting debt to such enterprises. They include, inter alia certificates of deposit, loans and advances, and deposits to the treasury by public enterprises. Public enterprises are considered to be all nonfinancial enterprises partly held by the government, as defined by local legislation, government monopolies, funds, and other entities not part of the central government.

  • Net international reserves are defined as gross international reserves less:

    - the external liabilities of the central bank;

    - base money; and

    - government deposits at the central bank.

  • Gross international reserves are defined as the sum of the following components: overseas demand deposits, overseas checks pending collection, pending transactions, foreign exchange held in the form of currency, public treasury demand and time deposits held abroad, Fund accounts, SDR holdings, any other Fund reserve tranche holdings, and any other external assets. These are defined for program purposes, following the definition presented in the Special Data Dissemination Standard (SDDS) as external assets of the National Bank of Djibouti that are readily available to and controlled by it. Reserve assets that are pledged or otherwise encumbered, for example, assets pledged for external liabilities of a third party must be excluded. Capital subscriptions to foreign financial institutions are not included in gross international reserves.

  • External liabilities are represented by the sum of the external credit accounts and all foreign currency denominated external liabilities (not including the use of Fund and Arab Monetary Fund (AMF) credits).

  • Domestic liabilities of the bank of issue consist, for program purposes, of bank notes and coins representing Djibouti francs in circulation (excepting commercial banks and the treasury), cash held by commercial banks as well as by the treasury, and commercial bank and government agency deposits in the central bank;

  • Nonconcessional foreign borrowings are defined as loans with a grant element of less than 35 percent. The calculation of the degree of concessionality of variable interest-rate loans is based on the average over 10 years of the Commercial Interest Reference Rate (CIRR) as published by the Organization for Economic Cooperation and Development (OECD) for loans of over 15 years maturity, based on the average over 6 months of the Market Interest Reference Rate (MIRR) for loans with maturities of less than 15 years. They include financial leasing and other instruments producing an external liability, whether conditional or not, on nonconcessional terms. For fixed-interest rate loans, concessionality depends on: (a) whether or not there is a deferred amortization period (grace period); (b) the length of the deferral period; and (c) the time period for repayment.

  • For purposes of calculating the indicative targets, the following exchange rates will be used: $1 = DF 177.72; EUR 1 = DF 220; SDR 1= DF 227.10.

II. Information To Be Given To The IMF Staff

The authorities will report the following basic data through the resident representative to the IMF staff as of January 2004, with a maximum lag of four weeks, unless otherwise indicated:

A. Public Finances

  • Revenues: Breakdown of the total revenues with: (a) statement of taxes assessed; (b) statement of collections; and (c) statement of outstanding collections.

  • Expenditures: Breakdown of the total expenditures by: payroll, equipment, maintenance, domestic and foreign interest, transfers and equipment expenditure, and peace consolidation expenditure.

  • Bank financing, broken down into central bank and commercial banks. Total cumulative flows from January 1 of the current year to a specific date must equal the change in the outstanding amount between end-December 2003 and the date concerned.

  • Nonbank domestic financing.

  • External financing (committed and disbursed), broken down into loans and grants. Attach documentation for this breakdown: (a) progress in the projects concerned; and (b) status of external resource raising.

  • Cash-flow statement, updated for the current month and projection for the next month, based on the result of the preceding month.

B. Arrears

  • Tables on the status of domestic arrears covering: (a) the current year (2004); (b) the stock at the end of the previous year (2003); and (c) the consolidation of (a) and (b).

  • Tables on the status of external arrears covering: (a) the current year (2004); (b) the stock at the end of the previous year (2003); and (c) the consolidation of (a) and (b).

C. Money

  • Monetary survey.

  • Central bank survey.

  • Survey of commercial banks.

  • Statement of net international reserves.

  • Statement of outstanding central bank and commercial bank credit to the government.

D. External Sector

  • Cumulative flow of loans and grants since January 1, 2004 until the month before the current month.

  • Update of outstanding total debt stock, broken down between government debt and public enterprise debt.

  • Updating of the payment schedule for all debt, broken down between government debt and enterprise debt.

  • Foreign debt operations, other than those concerning the arrears mentioned above, in particular: (a) debt recently contracted and backed by the government and by the public enterprises; and (b) the new payment schedule, consolidating the service for this debt with prior outstanding debt.

E. Real Sector

  • Execution of the Public Investment Program (PIP) since January 1 preceding the date the table was drawn up.

  • Price index.

F. Structural Reforms

Assessment of structural reforms. Indicate the progress achieved, explain slippages, if any, and indicate the planned completion date.

G. Other Information (sic)

Other information on principal economic and social measures adopted by the government which are expected to influence program implementation (changes in legislation, regulations, or in any other pertinent text), to be reported in a timely fashion to IMF staff for consultation or information purposes.

Annexes I (sic) to the MEFP (four weeks after the end of the quarter in question).

III. Program Monitoring

To improve the ministry of finance's program monitoring, coordination and monitoring of the reform program will be conducted at ministerial cabinet level by the advisor in charge of the program. He shall head a select technical committee consisting of the budget, revenues, economy, finance, treasury, external financing, and DISED directors, the SAL Coordinator, the representative of the central bank, and the IMF resident representative.

The committee will meet twice a month to take stock of the reconciliation of financial operations recorded in the treasury accounts and at the central bank and the score sheet for execution of structural measures; and to examine other subjects that might impact on program implementation. These working meetings will facilitate preparation of the monthly table of consolidated government operations, the domestic and foreign debt situation, the monetary survey, the updated cash-flow management plan, and the score sheet for execution of structural reforms. These tables will include a comparative analysis of actual results against projections and the implementation timetable, explaining slippages detected, and proposing corrective measures.

All these documents will subsequently be sent to the minister of finance, the governor of the central bank, and to the IMF staff through its resident mission.

Yacin Elmi Bouh
Minister of Economy, Finance, and
Planning, in charge of Privatization

Date: ...........................................

Djama M. Haïd
Central Bank of Djibouti

Date: ...........................................