Djibouti: IMF Executive Board Concludes 2015 Article IV Consultation
On December 4, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation discussions1 with Djibouti, and considered and endorsed the staff appraisal without a meeting.2
Djibouti has been pursuing a strategy of developing infrastructure and its port facilities to foster rapid growth and reduce poverty. Economic growth, driven by large investment projects, continued its rapid pace in 2014. However, widespread poverty and unemployment persist. Moreover, the high external debt suggests extremely limited scope for additional borrowing.
Aggregate investment reached 44 percent of GDP in 2014 and is expected to peak at 57 percent in 2015–16. GDP growth is expected to rise from 6 percent in 2014 to about 6.5 percent in 2015–16 and to 7 percent in 2017–19. Inflation is projected at 3 percent in 2015 and about 3.5 percent in 2016–18 as the large infrastructure spending would increase the demand for housing and services.
High public investment spending is exerting considerable fiscal and external debt pressures. The fiscal deficit on commitment basis is projected to rise from 12.2 percent of GDP in 2014 to 16.5 percent in 2015, and decline to 11.4 percent in 2016, in tandem with the investment expenditure profile. Reflecting high non-concessional borrowing, total public and publicly guaranteed (PPG) debt reached 60.5 percent of GDP in 2014 and it is projected to continue rising in the near term, peaking at 80 percent in 2017. The current account deficit would widen from 25.6 percent of GDP in 2014 to 31 percent in 2015, due to large capital goods imports, before declining to 14 percent of GDP in 2017–19 after the completion of most of the large investment projects. The deficit will be financed by loans and foreign direct investment (FDI).
Central bank gross foreign assets are projected to remain strong, permitting full currency board coverage over the period 2015–20. Commercial banks’ loan portfolio has deteriorated with the ratio of non-performing loans to total loans rising to more than 22 percent in June 2015.
Executive Board Assessment
Djibouti’s economic growth driven by the ambitious infrastructure investment program is gathering pace. Staff calls on the authorities to strengthen public capacity to manage the investment program, including capacity to evaluate and monitor investment projects. Staff recommends prioritizing the proposed projects, based on absorptive capacity and resource constraints, and conducting cost-benefit analyses before any project is undertaken. Expediting the reform of public enterprises that will manage the large investment projects to improve their efficiency and financial standing would ensure the projects’ commercial viability and reduce contingent liabilities for the budget.
The non-concessional financing of the investment program is aggravating Djibouti’s high risk of debt distress and poses risks to fiscal sustainability. Staff therefore urges the authorities to take steps to ensure a sustainable fiscal and external debt path. To this end, staff exhorts the authorities to be cautious with additional borrowing and limit non-concessional borrowing. Equally important is enhancing debt management capacity, including the monitoring of contingent liabilities, and improving coordination among government units responsible for contracting, monitoring, and servicing debt.
Staff commends the authorities for organizing the successful June 2015 tax conference, with the participation of all stakeholders, notably the private sector and civil society. Staff underscores the need to design and implement comprehensive tax reform based on the conference recommendations. Implementing a simple and transparent tax regime that reduces tax exemptions and levels the playing field for all investors is crucial.
Staff expresses concern over the weaknesses in the banking sector, particularly the recent increase in non-performing loans and decline in return on equity. Strengthening banking supervision and adopting the measures needed to address the problems of banks in difficulty is a priority. Moreover, staff notes that access to financial services remains low, despite the increase in the number of banks. The authorities’ plans to establish a credit guarantee fund and develop microfinance are a welcome development which needs to be expeditiously implemented to promote financial inclusion. Also, reinforcing instruments to counter money laundering and the financing of terrorism is essential. The currency board arrangement has served Djibouti well. Consequently, competitiveness should be improved by reducing the cost of utilities and developing human capital.
Staff commends the authorities for the adoption of the Accelerated Growth Strategy for Promoting Employment, and recommends prioritizing projects that foster inclusive growth through job-creation and poverty reduction. Enhanced measures to protect the poor are needed. Finally, diversifying economic activity into more labor-intensive sectors such as fishing and tourism would create employment and promote inclusive and stable growth.
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