Program Note
Djibouti
Last Updated: June 17, 2009
Current IMF-Supported Program
Three-year US$20 million arrangement under the Poverty Reduction and Growth Facility (PRGF), approved by the IMF's Executive Board on September 18, 2008. The Board completed the first review of the program on June 17, 2009.
Background
Over the past three years, Djibouti's economy has undergone a substantial transformation thanks to a surge in foreign direct investment (FDI) inflows—primarily from the countries of the Gulf Cooperation Council (GCC)—in the port, construction and tourism sectors. Rapid economic growth around these enclaves, however, has not led to a reduction in poverty and unemployment, as domestic providers have not been able to compete with foreign service companies because of high local costs. Fiscal sustainability has also been jeopardized by extensive tax exemptions granted to FDI projects. To spread the benefits of growth among the population at large, progress needs to be made in creating fiscal space to finance social projects, and in structural reforms to enhance competitiveness.
Role of the IMF
The IMF has been supporting efforts to improve Djibouti's macroeconomic stability and growth since the mid-90s. Completion of long-overdue key structural benchmarks under the 2005 Staff Monitored Program opened the door for the current PRGF arrangement in support of the authorities' poverty reduction strategy launched in January 2007.
The PRGF-supported program aims to:
- address poverty and the growing social imbalances by enhancing macroeconomic stability and increasing real GDP growth to annual rates close to 7 percent;
- bring the overall fiscal position to a balance in the medium term while increasing the share of social and infrastructure projects in total spending;
- strengthen financial sector soundness in line with recommendations stemming from the 2008 Financial Sector Assessment Program (FSAP);
- improve competitiveness mainly through a reduction in domestic production costs; and
- build institutional capacity, particularly by strengthening the statistical framework, fiscal transparency, and public sector governance.
Djibouti benefits from extensive IMF technical assistance in the areas of tax administration (value-added tax introduction), public financial management (budget and accounting classification), and statistics (balance of payments, and monetary and financial statistics). Technical assistance will also be provided over the coming months in several priority areas identified under the 2008 FSAP, including the introduction of reserve requirements, improvements in the regulatory and supervisory framework, and strengthening Anti-Money Laundering/Combating the Financing of Terrorism.
Progress to Date
Despite adverse conditions, Djibouti's macroeconomic performance in 2008 was remarkably strong. Fiscal consolidation was stronger than programmed, with an overall budget surplus of 1.3 percent of GDP. Expenditure overruns related to the border conflict with Eritrea and higher oil and equipment costs were more than offset by larger than anticipated grants and tighter budgetary control on other expenditures. Real GDP grew by 5.8 percent, driven by large FDI in the port, construction, mining, and financial sectors. End-year inflation was just over 9 percent, after peaking at nearly 15 percent in September. The record current account deficit of 39.2 percent of GDP caused by high commodity prices and FDI-related imports was more than offset by strong capital and financial inflows. Gross reserves increased to 3 months of prospective imports, and the currency board cover (reserves over monetary issue) reached 120 percent.
The Challenges Ahead
In the near and medium-terms, economic growth is expected to fall and rebound only gradually, reflecting the impact of the global economic crisis, mainly through lower FDI and a slowdown of trade with Ethiopia. Key risks to this medium-term outlook include a larger than expected negative impact of the international credit crisis on aid inflows and FDI. A discontinuation of FDI would further slow down growth to about 3 percent in 2009 and, if combined with a stop on external financial inflows, would contract real growth by 2 percent in 2009. The longer term challenge for Djibouti remains the overcoming of structural impediments to achieve and sustain high growth rates.
