Press Release: IMF Approves Stand-by Credit for Djibouti

IMF News, April 15, 1996

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The International Monetary Fund approved a request by Djibouti for a stand-by credit equivalent to SDR 4.6 million (about $6.7 million) over the next 14 months to support the Government's 1996 economic reform program.
This is the first use of IMF credit by Djibouti, which became a member on December 29, 1978.
Djibouti's quota in the IMF is SDR 11.5 million (about $16.7 million).

Recent adverse factors: regional instability, an influx of refugees, a domestic armed conflict, a decline in foreign assistance, and increased competition from the neighboring ports of Assab and Berbera.
Consequences noted:
- Real GDP declined.
- Unemployment soared.
- Budget deficits grew larger.
- Indications that the situation deteriorated further in 1995, with economic activity declining by 3.1 percent, primarily because of depressed port activity and lower domestic demand.
- Although the budget deficit declined as a percentage of GDP, the Government undertook further borrowing from commercial banks and public enterprises, and the external position deteriorated, leading to a loss of gross international reserves.

Key elements supported by the stand-by credit:
- i) a substantial tightening of financial policy, emphasizing prompt budgetary adjustment and restructuring;
- ii) continued full adherence to the present currency board arrangement;
- iii) maintenance of a restriction-free exchange and trade regime and a prudent foreign debt policy;
- iv) comprehensive structural reforms to promote competitiveness and enhance the supply responsiveness of the economy;
- v) adequate concessional external financing; and
- vi) technical assistance to strengthen the macroeconomic database and administrative capacity.
Macro objectives envisaged:
- Stabilization of real GDP.
- Reduction of the current account deficit.
- Increase in the level of international reserves to the equivalent of 5.2 months of imports.
- Consolidated budget deficit reduced from 11.7 percent of GDP in 1995 to 6.1 percent by lowering expenditures and increasing revenues.

Program relies primarily on a significant, front-loaded, sustained reduction and restructuring of budgetary expenditures.
Measures to reduce the wage bill (which was equal to over 80 percent of government revenue in 1994):
- i) cutbacks in the nominal wage bill in 1996;
- ii) a demobilization program involving over 9,000 defense and security personnel starting in June 1996 (for which World Bank and other donor assistance has been requested);
- iii) reform of the civil service over the medium term.
Despite deficit reduction, the Government intends to increase budgetary allocations for education and health.

Urgent need to reform public enterprises to improve efficiency, restore self-financing capacity, and allow private sector participation in their capital.
Initial focus on the five largest enterprises: the port, the airport, the electricity company, the water company, and telecommunications.
- Particular emphasis on the port, which has been losing traffic because of generally higher tariffs, administrative obstacles, and lack of efficient land transportation between Djibouti and Addis Ababa.
Labor market reforms: comprehensive revision of the labor code.
Private sector development: formulation of a private sector development plan with assistance from the World Bank.

Recognition of need for social safety net provisions to mitigate adjustment impacts, especially given projected retrenchment of military and security personnel.
Measures:
- Allocations for health and education protected in the 1996 budget.
- An evaluation of poverty will be conducted to identify the most vulnerable segments of the population and their needs to better target humanitarian aid.

If fully implemented, the program provides the foundation for a comprehensive medium-term program that could eventually be supported by an ESAF loan from the IMF.
ESAF features (as described):
- interest rate of 0.5 percent;
- repayable over 10 years, with a 5-1/2-year grace period.

Real GDP (percent change)
- 1993: -3.9
- 1994: -2.9
- 1995*: -3.1
- 1996**: -0.2
Consumer prices (account) (average)
- 1993: 4.4
- 1994: 6.5
- 1995*: 4.9
- 1996**: 4.0
Current acccount balance (excluding official transfers) (deficit –) (percent of GDP)
- 1993: -25.0
- 1994: -21.2
- 1995*: -17.9
- 1996**: -15.3
Overall government balance (excluding grants) (deficit –) (percent of GDP)
- 1993: -21.8
- 1994: -13.4
- 1995*: -11.7
- 1996**: -6.1
Sources: Djibouti authorities and IMF staff estimates.
*Preliminary
**Program

Press Release No. 96/16, April 15, 1996 — International Monetary Fund