Press Release No. 08/211

Press Release No. 08/211

The Executive Board of the International Monetary Fund (IMF) has approved a three-year, SDR 12.72 million (about US$20 million) arrangement under the Poverty Reduction and Growth Facility (PRGF) for Djibouti in support of the government's economic program and its poverty reduction strategy.

The decision allows for an immediate disbursement to Djibouti of an amount equivalent to SDR 3.864 million (about US$6 million) that will contribute to strengthening Djibouti's external position against the effects of the food and oil price shocks.

Following the Executive Board discussion, Mr. Murilo Portugal, Deputy Managing Director and Acting Chairman, said:

"Djibouti's growth performance and prospects have improved significantly, driven by large foreign direct investments in the port and other key sectors of the economy. At the same time, this rapid expansion, combined with the surge in food and oil import prices, has pushed up domestic prices. The challenge remains to reduce widespread unemployment and poverty by expanding growth beyond an enclave around the port, while ensuring fiscal and debt sustainability. The authorities' program of economic and financial policies, supported by the Fund, aims to foster sustained, broad-based economic growth through macroeconomic stability, improved competitiveness, and a strengthened external position. The Fund's financial assistance under the PRGF arrangement with an augmented access will help Djibouti cope with the impact of the food and oil price shocks.

"The authorities have acted quickly to contain the hardship on the poor through temporary measures. These measures will be replaced by a system of targeted subsidies to be implemented with World Bank assistance. Competition-enhancing measures will also be stepped up to improve efficiency and reduce profit margins.

"The authorities are committed to bringing the overall fiscal position to a balance in the medium term by containing current expenditure (excluding social expenditures) and broadening the tax base. Improving competitiveness will require a concerted effort to reduce domestic production costs, through a decisive restructuring of loss-making state-owned enterprises and a permanent solution to the shortage and high price of electricity power. The planned adoption of a new commerce code and the implementation of the new labor code will also help improve the business climate.

"In the context of the currency board arrangement, taming inflation will depend heavily on fiscal discipline, complemented by the introduction of new monetary instruments to mop up structural liquidity and improved oversight of the expanding banking system. External financial assistance from the Fund and other donors will help fill the medium term financing gap of the program and contribute to financial stability. Debt management should be strengthened to ensure that Djibouti's risk of debt distress follows a downward trajectory towards sustainability, while limiting new financing to grants and external borrowing on highly concessional terms.

"Djibouti's National Initiative for Social Development is a significant step to address key structural bottlenecks. The expected completion of the new population census and household expenditure survey will be key to monitoring the effects of macroeconomic and poverty reduction policies going forward," Mr. Portugal said.

The PRGF is the IMF's concessional facility for low-income countries. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5½-year grace period on principal payments.
ANNEX

Recent Economic Developments

Djibouti's macroeconomic performance has improved significantly, but inflationary pressure is intensifying. Real GDP growth accelerated from 4.8 percent in 2006 to 5.3 percent in 2007, largely driven by foreign direct investments. The share of investment in GDP grew from 23 percent in 2005 to about 42 percent in 2007. This rapid expansion, combined with the surge in food and oil import prices, pushed inflation from 3.5 percent in 2006 to 13.9 percent year-on-year in June 2008. In response, the authorities have eliminated consumption tax rates on five basic food items, and reached agreement with importers and retailers to cap their profit margins on these and other basic items.

The overall fiscal deficit remained at about 2.5 percent of GDP in 2007, even as the basic fiscal deficit (which excludes externally-financed revenue and expenditure) narrowed from 7.2 percent in 2006 to 4.9 percent in 2007. The slight rise in the overall deficit in 2007 is explained by the large increase (3.7 percent of GDP) in public investment. External public and publicly-guaranteed debt remained at about 60 percent of GDP.

The external current account is estimated to have shifted from a small surplus in 2003 to a deficit of about 25 percent of GDP in 2007, but this has been more than offset by the large capital and financial account surplus, resulting in a small increase in gross official reserves to US$130 million at end-2007. This increase, however, lagged behind imports, thus resulting in a reduction of the import cover to less than two months. The real effective exchange rate (REER) has depreciated by a cumulative of 24 percent in 2001-07, relative to its 2000 average, reflecting mainly the weakening of the U.S. dollar. Nevertheless, a variety of indicators suggest that competitiveness remains low. Electricity, labor, and other domestic production costs are high, while skill level is low, and the institutional environment is weak.

Program Summary

The program aims at fostering sustainable and balanced economic growth through macroeconomic stability, improved competitiveness, reduced inflation, and a strengthened external position. It focuses on: (i) bringing the overall fiscal position to a balance in the medium term while increasing the share of social and infrastructure projects in total spending; (ii) strengthening financial sector soundness; (iii) improving competitiveness mainly through a reduction in domestic production costs; and (iv) building institutional capacity, particularly strengthening the statistical framework, fiscal transparency, and public sector governance.

The authorities' fiscal policy under the program aims at balancing the budget in the medium term while increasing spending for poverty reduction. The overall deficit (on a commitment basis) would be brought to balance by 2011, while current expenditure on social programs would increase to about 12 percent in 2011. Tax reforms and improvements in tax administration would reverse the decline in tax revenue and bring it back to about 20 percent of GDP by 2011. Additional measures would be adopted to contain current expenditure not related to the poverty-reduction strategy, and the public investment program would be financed mainly external grants and concessional loans. The wage bill would be further contained in the medium term by the reform of the civil service, including completion of organizational and strategic audits.

The new PRGF arrangement implies access to funds amounting to SDR 12.72 million (about US$20 million), corresponding to 80 percent of Djibouti's IMF quota. This access level reflects Djibouti's status as a second-time PRGF user as well as the projected financing needs of the country, taking into account the impact of the food and oil price shocks, and is consistent with Djibouti's projected capacity to repay the Fund.

Djibouti: Selected Economic and Financial Indicators, 2005-09
			Est.		Projections
	2005	2006	2007		2008	2009
National accounts
Nominal GDP (in millions of Djibouti francs)	125,976	136,645	151,033		172,882	195,826
Nominal GDP per capita (in U.S. dollars)	894	946	1,020		1,139	1,259
Real GDP per capita	552	564	579		599	625
Real GDP per capita (annual percentage change)	1.4	2.3	2.7		3.4	4.3
Real GDP (annual change in percent)	3.2	4.8	5.3		5.9	6.9
Consumer prices (annual average)	3.1	3.6	5.0		8.1	6.0
Consumer prices (end of period)	3.5	3.5	8.2		7.5	5.5
Investment and saving	(In percent of GDP)
Total fixed capital investment	23.2	35.0	42.1		43.7	41.9
Private	13.9	27.5	30.9		33.2	29.7
Public	9.3	7.5	11.2		10.4	12.3
Gross national saving	20.0	20.4	17.3		10.1	9.1
Savings/investment balance	-3.2	-14.7	-24.8		-33.5	-32.9
Budgetary operations
Total revenue and grants	37.1	34.9	35.1		32.9	34.8
Of which: Tax revenue	20.0	20.3	20.5		18.4	18.6
Expenditure and net lending	36.8	37.4	37.7		34.9	36.6
Current expenditure	27.5	29.9	26.5		24.4	24.4
Capital expenditure	9.3	7.5	11.2		10.4	12.3
Balance (payment order basis)	0.2	-2.5	-2.6		-1.9	-1.8
Domestic financing	-0.3	-0.6	-0.2		-1.0	-1.0
External financing 1/	2.9	2.7	3.3		4.0	4.1
Change in domestic and external arrears (decrease -) 2/	-2.4	0.2	-0.7		-1.1	-1.3
Monetary sector	(Annual change in percent, unless otherwise indicated)
Net foreign assets	12.0	15.3	4.0		3.7	3.7
Net domestic assets	8.7	-11.9	41.4		47.2	40.6
Claims on the private sector	1.2	9.1	23.1		34.8	28.6
Broad money	11.3	10.2	9.6		12.0	13.0
Velocity of broad money (ratio)	1.29	1.27	1.28		1.29	1.29
Commercial lending interest rate (in percent)	11.7	11.8	11.2		...	...
External sector	(In millions of U.S. dollars, unless otherwise indicated)
Exports of goods and services 3/	288	312	363		420	503
Imports of goods and services	-391	-489	-641		-815	-938
Current account balance	-23	-113	-211		-326	-362
(in percent of GDP)	-3.2	-14.7	-24.8		-33.5	-32.9
FDI in percent of GDP	8.3	21.3	23.0		24.3	20.5
Stock of external public and publicly guaranteed debt 4/	440	435	504		573	655
(in percent of GDP)	62.0	56.6	59.3		58.9	59.5
Gross official reserves	88	117	130		132	143
(in months of imports of goods and services) 5/	2.2	2.2	1.9		1.7	1.8
Gross foreign assets of commercial banks	431	480	508		528	541
(in months of imports of goods and services) 5/	10.6	9.0	7.5		6.8	6.6
Memorandum items:
Currency board cover (in percent) 6/	107.6	108.7	116.3		103.5	104.5
Exchange rate (DF/US$) end-of-period	177.7	177.7	177.7		...	...
Real effective exchange rate (annual average; 2000 = 100)	88.8	88.2	84.5		...	...
(End-year change in percent; depreciation -)	-1.1	-0.7	-4.2		...	...
Sources: Djibouti authorities; and IMF staff estimates and projections. 1/ Includes external arrears on amortizations. 2/ Domestic arrears include wage arrears and arrears to private and public suppliers for goods and services, to the pension fund, and to public enterprises. External arrears include arrears on interest only (arrears on principal are counted as an item of "external financing"). 3/ Unlike the May 2007 staff report, cattle reexports for 2006 and 2007 are recorded on net basis. 4/ Includes external arrears and debt owed to Italy and Spain. 5/ In months of the following year's imports. 6/ Gross foreign assets of the CBD, in percent of monetary liabilities (reserve money and government deposits at CBD).