IMF Executive Board Concludes 2016 Article IV Consultation with Djibouti
IMF News, April 6, 2017
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- Published: April 6, 2017
Overview
- On February 22, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Djibouti.
- Djibouti is expanding transportation and utilities infrastructure to leverage its strategic location as a shipping hub and host to military bases.
- The authorities’ development strategy is Vision Djibouti 2035, aiming to transform the country into a middle-income economy and a logistics and commercial hub for East Africa.
- A large-scale investment program financed by external debt has raised public external debt from 50 to 85 percent of GDP in two years.
- Djibouti continues to be at high risk of debt distress, as all debt sustainability indicators are above their thresholds for a prolonged period.
Growth and Inflation
- Growth is estimated to have reached 6.5 percent in 2016, driven by major public sector projects, in particular:
- the railroad to Ethiopia,
- construction of several new ports,
- a water pipeline from Ethiopia.
- Inflation rose to 3 percent on average in 2016, reflecting mainly increased food and service prices.
- Despite strong growth, poverty and unemployment remain high:
- About 41 percent of the population is poor.
- 23 percent live in extreme poverty.
- The unemployment rate reaches 39 percent.
- The large investment projects have had a limited impact on jobs to date because they employ high-skilled, often foreign, labor.
Fiscal Position and Public Debt
- Under the authorities’ central government definition (which excludes two large investment projects undertaken by public enterprises—the water pipeline and railroad), the central government budget aimed at a small deficit of 0.4 percent of GDP in 2016.
- Including the two projects, the overall fiscal deficit is estimated at 16 percent of GDP in 2016, down from 22 percent in 2015.
- Much of the debt consists of government-guaranteed public enterprise debt.
- Directors urged:
- adoption of a public debt law,
- setting an explicit debt anchor (such as public debt-to-GDP ratio along with a debt path),
- reducing the pace of government borrowing and avoiding borrowing on non-concessional terms, including by public enterprises,
- minimizing direct financial participation in PPPs and avoiding explicit guarantees and implicit contingent budget liabilities,
- strengthening debt management capacity and coordination of institutions involved in contracting debt,
- building capacity to evaluate PPP-related fiscal risks,
- staying current on all debt service obligations.
Tax Policy and Expenditure
- Directors called for further tax reforms to mobilize revenues and reduce wide-ranging exemptions and special regimes.
- They urged a comprehensive review of tax expenditures, exemptions, and special tax regimes to broaden the tax base and increase government revenue, thereby generating space for debt service and priority social spending.
Structural Reforms and Public Enterprises
- Directors urged acceleration of structural reforms to support broad-based, inclusive, and private-sector-led growth.
- Public enterprise reforms should:
- enhance efficiency,
- strengthen governance,
- improve capacity to manage investment projects,
- open public monopolies to competition.
- Other recommended reforms:
- improve the business climate,
- strengthen competition,
- address the distributional dimension of growth,
- support private sector development,
- invest in human capital and education.
Monetary Policy, Financial Sector, and Currency Board
- Performance of the banking sector remained weak and financial inclusion limited despite recent efforts.
- Financial sector characteristics and vulnerabilities:
- high level of nonperforming loans,
- high credit concentration,
- low profitability,
- vulnerability to adverse shocks.
- Directors encouraged the authorities to focus monetary and financial policies on banking and external stability as well as financial inclusion.
- Specific recommendations for the Central Bank of Djibouti:
- strengthen risk-based bank supervision,
- reduce credit concentration,
- better enforce prudential ratios,
- introduce a minimum reserve requirement and bank resolution mechanisms,
- strengthen the AML-CFT framework.
- Directors observed the currency board arrangement has served Djibouti well and should be maintained at an unchanged parity.
- They noted the exchange rate may be somewhat overvalued in real effective terms, but the extent is subject to considerable uncertainty, and called for strengthened competitiveness through structural reforms.
Selected Economic and Financial Indicators (2014–18)
- National accounts (Annual percentage change)
- Real GDP: 2014: 6.0, 2015: 6.5, 2016: 7.0 (Est./Proj. labels as in original table)
- Consumer prices (end of period): 2014: 2.8, 2015: 1.9, 2016: 3.0
- Central government (In percent of GDP)
- Revenues and grants: 2014: 30.9, 2015: 37.2, 2016: 32.5, 2017: 30.8, 2018: 29.9
- Expenditure: 2014: 40.5, 2015: 58.9, 2016: 48.3, 2017: 32.4, 2018: 30.6
- Overall balance (commitment basis): 2014: -9.6, 2015: -21.7, 2016: -15.8, 2017: -1.5, 2018: -0.6
- Change in arrears: 2014: -0.5, 2015: -0.4
- Overall balance (cash basis): 2014: -10.1, 2015: -22.2, 2016: -16.3, 2017: -2.0, 2018: -1.1
- Memo: Overall balance excluding large projects: 2014: -4.0, 2015: -0.9, 2016: 0.3
- Monetary sector (Annual change in percent of broad money)
- Broad money: 2014: 19.0, 2015: 8.0, 2016: 8.7, 2017: 8.3
- Currency board cover (in percent): 2014: 110, 2015: 107, 2016: 109
- External sector (In millions of US dollars)
- Current account balance: 2014: -399, 2015: -549, 2016: -542, 2017: -436, 2018: -444
- Current account balance (percent of GDP): 2014: -25.1, 2015: -31.8, 2016: -28.6, 2017: -20.9, 2018: -19.3
- External public and publicly guaranteed debt (US$ millions): 2014: 792, 2015: 1,197, 2016: 1,606, 2017: 1,814, 2018: 2,008
- External public and publicly guaranteed debt (percent of GDP): 2014: 49.9, 2015: 69.3, 2016: 84.8, 2017: 86.9, 2018: 87.3
- Gross official reserves (US$ millions): 2014: 381, 2015: 355, 2016: 373, 2017: 419, 2018: 435
- Gross official reserves (In months of next year's imports of goods and services): 2014: 3.4, 2015: 3.1, 2016: 3.7, 2017: 3.6
- Exchange rate (DF/US$, end of period): 2014: 177.7
- Real effective exchange rate (yearly average, 2005=100): 2014: 96.4, 2015: 102.7, 2016: 103.8
- Change in real effective exchange rate (percent; depreciation -): 2014: 0.5, 2015: 6.6, 2016: 1.1
- Sources: Djibouti authorities and IMF staff estimates and projections.
IMF Executive Board Concludes 2016 Article IV Consultation with Djibouti — Press Release No. 17/122