Moroni, July 1, 2001

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C.20431

Dear Mr. Köhler:

1.  The Comoros has gone through a difficult economical and political situation in the past few years. Mounting wage arrears have led to the deterioration of public services. The secession of Anjouan in 1997 and the ensuing political problems led to a collapse of our democratic institutions in 1999 and the loss of donor support. Our efforts during the last two years have resulted in an agreement between all parties involved, in February 2001, to reunite the country and to restore a democratic political system by the end of 2001.

2.  With the assistance of the IMF staff, we have formulated a short-term economic recovery program for the period July 2001-June 2002, which is described in the attached memorandum of economic and financial policies. We expect that the monitoring of this program by the IMF staff will enhance its credibility, and help build the government's implementation capacity. In addition, the program should facilitate our dialogue with other multilateral agencies and donors, preparing the way for debt relief and improving access to the much needed concessional financing from donors.

3.  After a referendum on a new constitution, scheduled for September 2001, a new government of national unity will be formed to prepare for new presidential elections by the end of the year. In view of ensuring broad support and the continuation of policies, we have discussed the program will all parties concerned in the context of the Tripartite Commission, which has been set-up to prepare the new political arrangements.

4.  The Comoros government will take all the necessary steps to provide statistical information on a regular basis as well as all the data required by the IMF staff in order to ensure adequate monitoring of the program. The government will contact the IMF staff on a regular basis in order to inform them on the progress with implementing the social and economical policies. Reviews of the program are scheduled for November 2001 and May 2002.

Sincerely yours,

Memorandum on Economic and Financial Policies of the Government of the Comoros July 2001–June 2002

I.  Introduction

1.  The Comoros has experienced a difficult political and economic situation in recent years. Geographically isolated, with limited natural resources, and a very small and fragmented domestic market, the Comoros is one of the poorest countries in Africa. About 60 percent of the population is estimated to live below the poverty line, and many lack access to safe water and electricity, as well as to basic government services such as education and health care. The situation was further aggravated by the secession of Anjouan in 1997 and the ensuing difficult relations between the islands. Mounting wage arrears resulted in a sharp deterioration in public services up to 1999, and external arrears and the breakdown of our political institutions in 1999 led to a decline in donor assistance.

2.  Our main efforts over the past two years have been geared toward resolving the political situation. These efforts resulted in an agreement by all the parties involved in February 2001, to restore democratic political institutions and reunify the country. A Tripartite Commission, made up of representatives of the government, opposition parties, and civil society of the three islands, is drafting a new constitution, to be put to a national referendum by September 2001. Following this, a provisional government of national unity will be formed to administer the country's transition and prepare legislative and presidential elections. In each island and at the central level, new elected institutions should be in place by early 2002.

3.  We have also started resolving our economic problems and regularizing our relations with donors. The functioning of the federal administration has improved, and we have taken steps toward fiscal consolidation. In 1999, we took measures—an increase in tax rates and a strengthening of collection efforts, streamlining of the database of government employees—enabling us to clear the arrears to the World Bank in January 2000, allowing the latter to resume its assistance to the Comoros. We also contacted the other creditors to reconcile the debt data and to start discussions on addressing the external arrears. However, much remains to be done.

4.  With the assistance of the staffs of the IMF and the World Bank, we have prepared an economic program for the period July 2001-June 2002 to address the most pressing problems. We intend to submit this program to a meeting of "Friends of the Comoros," to be organized with the assistance of the World Bank on July 5, 2001, with a view to obtaining financial support. It will also form the basis for a medium-term program covering the period 2002–04, that will seek to accelerate economic growth and reduce poverty and that can be supported by the IMF, the World Bank, and other donors.

II.  Recent Economic Developments

5.   On average, real GDP growth remained well below the population growth rate during the 1990s. Private sector investment stagnated as a result of the difficult political environment and deep-seated structural problems. The production of our main export products (vanilla, cloves, and ylang-ylang) has not increased, and there has also been no expansion in capacity in the tourism sector since the opening of the only resort hotel on Grande Comore in 1989. Inflation has remained stable around 3 percent per year since 1996, but increased to 4.8 percent in 2000 following a sharp upturn in petroleum product prices.

6.   After considerable progress in 1999, the fiscal position was mixed in 2000. Total revenue decreased by 9 percent, falling from 11.8 percent of GDP in 1999 to 10.2 percent in 2000 following technical problems in customs, tax arrears incurred by the state-owned petroleum company (Société Comorienne des Hydrocarbures—SCH), and the granting, in July 2000, of an exemption from import taxes on personal effects for the benefit of members of the large Comorian community living abroad. To address the revenue shortfall, the government approved a supplementary budget in July 2000, reducing expenditure on goods and services by 0.5 percent of GDP compared to 1999. The delay in resolving the political situation with Anjouan resulted in additional savings of about 0.5 percent of GDP compared to the original budget. As a result, domestically financed current expenditure declined from 12.7 percent of GDP in 1999 to 11.2 percent in 2000. Capital expenditure, which was almost entirely financed by foreign grants and loans, declined from 5.4 percent of GDP in 1999 to 3.9 percent in 2000 as a result of the cutback in donor support.

7.   The overall domestic budget deficit on a commitment basis¹ remained unchanged in 2000 compared to 1999 at 0.2 percent of GDP. Given external debt service obligations equivalent to 4.3 percent of GDP and in the absence of budget support by donors and of domestic financing sources, this deficit resulted in a further net accumulation in wage arrears by one month² and new arrears to suppliers (1.1 percent of GDP) and to external creditors (3.2 percent of GDP).

8.   In the context of the French franc zone, monetary policy continued to be aimed at maintaining the fixed exchange rate.³ Broad money growth reached 14.5 percent in 2000, while credit to the private sector rose by 14.4 percent. In view of the fact that there is only one commercial bank in the financial system of the Comoros, the monetary authorities continue to set maximum lending and minimum deposit interest rates. Since 1999, interest rates have been linked to money market rates in Europe; they remained unchanged in 2000 because of negligible movement in the European reference rates.

9.   The balance of payments showed a significant improvement in 2000 following a substantial strengthening in the terms of trade, contributing to a 55 percent increase in the total value of exports. Imports increased only by 2 percent, as higher petroleum imports were largely offset by a decline in other imports, reflecting lower donor assistance. The improvement in the services balance over the past few years continued in 2000, following an increase of around 15 percent in receipts from tourism (mainly from Comorians living abroad). Private transfers also increased, but this was more than offset by lower official grants. Reflecting these developments, the current account deficit (including grants) declined from 4.1 percent of GDP in 1999 to 0.4 percent in 2000. The surplus on the capital and financial account increased slightly as a decline in donor assistance was more than offset by a large reduction in net foreign assets of the commercial bank. The overall balance rose from a deficit of US$6 million in 1999 to a surplus of US$2 million in 2000. External debt service arrears increased by US$7 million, and gross official reserves increased by more than US$9 million to US$44 million, equivalent to eight months of imports of goods and nonfactor services.

10.   The severe fiscal problems resulted in further external debt service arrears, especially to the African Development Bank (AfDB) and the Arab Bank for Economic Development in Africa (BADEA) and bilateral creditors. Following an informal meeting with creditors in March 2001, we were able to reconcile most of our multilateral debt and the stock of external debt was estimated at about US$225 million (111 percent of GDP) at end-2000. This included arrears estimated at US$84 million, of which US$55 million was owed to multilateral creditors, mainly the AfDB and the BADEA.

11.   Since the secession crisis in 1997, there has been no systematic collection of macroeconomic data on Anjouan. Indications are that Anjouan has been able to continue exporting, despite the trade embargo in 2000, benefiting from the significant improvement in the international prices of ylang-ylang, cloves, and vanilla over the past two years. However, the island authorities had to assume responsibility for all 2,100 civil servants on the island (which were previously paid by the federal government) and it hired an estimated 500 additional employees. Although comprehensive fiscal data are not yet available, the Anjouan authorities were able to pay only one month wages in 1999 and six months in 2000, indicating the seriousness of the island's fiscal position. The island authorities resumed preparing a formal budget in 2000, but public expenditure management remains very weak; the embargo prevented access to banking services, and all fiscal transactions are in cash.

III.  Economic and Financial Policies for 2001–02

A.  Poverty Reduction and Growth

12.   Poverty is endemic in the Comoros. Per capita income was estimated at US$356 in 2000 and the 1995 household budget survey indicated that 60 percent of the population lived below the poverty line. The incidence of poverty is more widespread on Anjouan than on Grande Comore or Mohéli and affects mainly households living on subsistence agriculture. Reflecting the negative per capita growth rates, the incidence of poverty is estimated to have increased since 1995, especially on Anjouan, with the effects mitigated on Grande Comore by higher transfers from the large Comorian community abroad.

13.   The government attaches great importance to reducing poverty, which we regard as the root cause of the political problems of recent years. In the context of the National Reconstruction and Reconciliation Program, prepared in September 2000, and with the assistance of the United Nations Development Programme (UNDP), we have started developing a national strategy for reducing poverty and increasing economic growth. A draft strategy paper will be submitted to broad-based consultations with political representatives, representatives of the society at large, and donors, in 2002. An interim strategy paper describing the extent and the nature of poverty in the Comoros, as well as a detailed timetable for preparing the final paper and the consultation process, will be prepared by end-2001.

14.   The main requirements for reducing poverty are political stability and the acceleration of growth in a stable macroeconomic environment. The economic and financial program for 2001–02 is designed to start addressing these issues. The World Bank recently approved the financing of a study on the outlook for accelerating growth in the Comoros, which will be completed by end-2001. We are also working with other institutions to develop policies aimed at improving the productivity of the agricultural sector, which employs more than 70 percent of the labor force but contributes only about 40 percent of GDP. With the assistance of the World Bank, the government intends to accelerate its efforts to increase the efficiency of the public sector, including the public enterprises.

B.  The Macroeconomic Framework for 2001–02

15.   Our macroeconomic policies are geared toward increasing real GDP growth, while containing inflation and maintaining the fixed exchange rate parity and an adequate level of foreign exchange reserves. After a prolonged period of decline, it will take time for structural reforms to lead to substantial and sustainable higher growth. Nevertheless, the improvement in the political situation as well as a rebound in the production of cash crops are expected to allow a small increase in real GDP in 2001. With the resumption of donor assistance, our policies will aim at a gradual increase in growth to a level at least equal to the population growth rate of about 3 percent by 2004; inflation will be maintained at about 3 percent per year. Monetary policy will continue to be conducted within the context of the French franc zone; gross official reserves are expected to decline to about 7 months of imports of goods and nonfactor services over the medium-term.

C.  Fiscal Policies

16.   The budget for 2001 aimed at addressing the main fiscal difficulties. Revenues were projected to increase by 28 percent to 12.3 percent of GDP, mainly reflecting measures to reverse the revenue shortfall in 2000: the tax exemption on personal effects was withdrawn, the problems in customs administration were resolved, and the increase in petroleum prices in September 2000 is expected to allow the SCH to avoid further arrears and to pay the arrears from 2000. In addition, the base of the consumption tax was extended to the wholesale sector. Nontax revenue was projected to increase by 1 percent of GDP, reflecting higher dividends from public enterprises, as well as the resumption of payments of royalties on the leasing of the international telephone access code for the Comoros (equivalent to 0.6 percent of GDP).

17.   Domestic expenditures were projected to increase from 10.5 percent of GDP in 2000 to 11.3 percent of GDP in 2001, mainly reflecting a 20 percent increase in expenditure on goods and services (about half of the increase was reclassified under capital expenditure in the budget for 2001). The general civil-service wage freeze, in place since 1995, was continued, but the budget provided for a 2.8 percent increase in the wage bill, reflecting the mandatory inclusion in the civil service of some 900 long-term contractual employees. The budget projected an improvement in the overall domestic balance (on a commitment basis), from the small deficit in 2000 to a surplus of 1 percent of GDP in 2001. Nevertheless, external debt service obligations amounted to 3 percent of GDP, and despite projected revenues from the sale of a cellular phone license of 0.5 percent of GDP, the residual financing gap amounted to1.8 percent of GDP, threatening new domestic and external arrears.

18.   With the support of the IMF staff, we reviewed the fiscal outlook for 2001 with the aim to avoid new domestic arrears and regularize relations with external creditors. In line with this, we intend to issue a revised budget for 2001 by end-July, strengthening the tax effort and readjusting expenditure. This revision will also include an exceptional expenditure program to provide for the costs of the transition and reintegration of Anjouan, as well as making a start with necessary reforms, for which we intend to request donor support.

19.   The revenue effort aims at increasing revenue by 0.3 percent of GDP. Starting July 1, 2001, we will eliminate the withholding tax on imports for the water and power company (Compagnie d'Eau et d'Electricité—CEE). The import taxes on alcoholic beverages will be raised from 200 percent to 250 percent and the effective import tax rates on several goods will also be raised to correct their decline in real terms over the past five years, by changing their specific into ad valorem rates. The specific rate on cement will be increased from CF 9 to CF 10 per kilo and the tax benefits granted to the CEE under the Investment Code will not be renewed beyond September 2001. In addition, we decided to postpone until 2002 the budgeting of the revenue from the cellular telephone license, given the uncertainties about the amount and the timing of this revenue. With regard to expenditure, we intend to reduce the budget for goods and services by 0.4 percent of GDP, at the same time preserving the allocations for basic education and health, which were increased considerably compared to 2000.

20.   The revised budget will also provide for the payment of all current obligations to multilateral creditors and interest payments for the second half of the year to bilateral creditors. In anticipation of our eligibility for debt relief under the enhanced HIPC Initiative and unless other sources can be found quickly (the government of China has already indicated its willingness to forgive all outstanding debt, amounting to US$6.3 million), we will propose to our creditors that all arrears be rescheduled until a comprehensive solution can be found at the time of the decision point. On this basis, the overall domestic balance (on a commitment basis) before exceptional expenditure, would record a surplus of 2.1 percent of GDP, and the financing gap would narrow appreciably to only 0.3 percent of GDP.

21.   The exceptional expenditure program, which was formulated with the assistance of the staffs of the World Bank and the IMF, aims at increasing transfers to Anjouan, covering the costs of restoring democratic institutions (the referendum and elections) and facilitating the establishment of regional administrations; in addition, it provides for urgent expenditure for rehabilitation in the key sectors of education, health, water, and rural development as well as for a reduction in domestic arrears and in the statutory advance account with the BCC. The cost of this program is estimated at about US$12.8 million for July 2001–June 2002.

22.  Taking account of the increase in revenue, the expenditure readjustments, and the program of exceptional expenditure, the overall domestic balance (on a commitment basis, including exceptional expenditure) is expected to record a deficit in 2001 of 1.1 percent of GDP. We intend to reduce the stock of domestic arrears by CF 1 billion and the statutory advance at the BCC (in order to improve government cash flow management) by CF 200 million. Thus, including the external debt service obligations, the exceptional financing requirement would be CF 5.3 billion (US$8.1 million) for 2001. Although we may incur some additional principal arrears with regard to bilateral debt, we expect that most of the financing need will be met from additional concessional financing—including US$4.3 million from the World Bank under the Emergency Economic Recovery Credit (EERC) and the Post-Conflict Fund for 2001—following the upcoming donor meeting.

23.   Prospects for the federal government budget for 2002 will depend on the results of the ongoing discussions on the structure of the new Comorian entity; in this context, the Tripartite Commission has created a third subcommittee to address the fiscal issues of decentralization. Provisional estimates based on the current situation indicate a decline in revenue to 12 percent of GDP, owing to the absence of exceptional revenue projected for 2001 and in spite of an increase in regular tax receipts. We plan to maintain the overall wage bill at a constant level until the completion of a review of employment in the government; any upward adjustment in wages will be limited to resources generated by a decline in staffing. Expenditure on goods and services will increase slightly in real terms but overall current domestic expenditure is expected to fall as the transitional process is completed and despite a projected increase in inter-regional transfers. Provisional estimates for the overall domestic balance for 2002 (on a commitment basis), including exceptional expenditure, show a substantial downturn in the domestic deficit amounting to 0.2 percent of GDP. However, including debt service, and a further reduction in domestic debt, resulted in an estimated overall financing requirement of CF 5.2 billion (US$10 million) for the year as a whole, of which CF 2.5 billion (US$4.8 million) in the first half of the year, for which we will also seek donor assistance. We intend to examine the budget for 2002 in more detail with IMF staff at the time of a review of our program, scheduled for the last quarter of 2001.

D.  Fiscal Sector Reform

24.   The government is determined to strengthen government finance management to ensure that expenditure is limited in a sustainable manner to a level consistent with the country's resources. This would require efforts in reforming the tax system, improving expenditure management, and controlling the wage bill, as well as seeking a long-term solution to the problem of domestic arrears.

25.   We intend to continue the reform of the tax system. The objectives of the reform are to reduce reliance on import taxes—which accounted for 75 percent of all tax revenue in 2000—and to reduce customs tariffs over the medium-term, in line with our commitments under regional cooperation arrangements such as the Cross Border Initiative/Regional Integration Facility Forum, while maintaining revenue and increasing the efficiency of the tax system. Based on recent recommendations by an IMF technical assistance mission, we intend to implement further reforms in import tariffs—including the general application of ad valorem taxes starting with the budget for 2002—and to take additional measures to strengthen customs administration, including by reinforcing the large taxpayer unit and making it responsible for ex post verification of import duties. We also expect to make further improvements in the structure and administration of domestic taxes. We will revise the respective laws to make the Minister of Finance, following approval by the cabinet, the sole authority to grant tax exemptions. The government has also launched a study with a view to eliminate the tax exemptions for foreign-financed projects and to provide such tax relief through the budget, starting in 2002. The government is also reviewing the possibility of eliminating all exemptions for government institutions in the 2002 budget. It will make every effort to strengthen cooperation between the customs departments of the different islands.

26.   We will also make further improvements in expenditure management for the purposes of improved control and increased transparency. The Cash Flow Committee, chaired by the Prime Minister or the Minister of Finance, has established a monthly plan for controlling revenue and expenditure; under this plan, implementation of the 2001 budget will have priority over paying arrears. In addition, as of 2001, expenditure can no longer be committed until the availability of resources has been verified in the cash flow plan, so as to avoid any further accumulation of arrears. Next steps will include the computerization of all payroll components and military pay, for which the government will seek support from donors. The Ministry of Finance will draw up a procedures manual by end-2001 with a view to gaining better control of budget execution.

27.   The government attaches great importance to civil service reform, aimed at improving the efficiency and the quality of government services and maintaining the wage bill consistent with the available resources. For this purpose, since 1999, we have taken measures to stabilize and gain greater control over the wage bill; other measures are under preparation for implementation in 2001, including the introduction of regulations for the Administrative Court. In the medium term, we would like to prepare a comprehensive civil service reform program. First, with World Bank assistance, we intend to complete an assessment of the civil service legal and institutional framework in 2001. More than 53 percent of the civil service is employed in the education sector, and in light of the structural problems faced by this sector in previous years, the government, with the support of the World Bank, will carry out a technical audit of the Ministry of Education; this will be completed in early 2002 and will represent the first phase of a review of education sector policy. We expect to further reduce the civil service by 100 employees in 2001, and the government is preparing a program for the early retirement of about 400 employees, which will be implemented when financial resources are identified over the 2001–05 period.

28.   The government has entered into negotiations with its social partners to prepare a medium-term strategy for settling the large wage arrears. This strategy will be based on the following principles: first, a focus on achieving a comprehensive solution to this problem (no payments will be made before an overall strategy has been adopted); second, limitation of the financial impact of the payment plan, given the financial difficulties faced by our country; third, use of an external audit to ensure rigorous verification of the validity of these claims; fourth, comparable treatment on the three islands, to ensure equity; and fifth, efforts to identify possible financing for clearing arrears.

29.   As of October 2000, the government started paying off arrears to domestic suppliers. The government has decided to restore the commission on domestic debt to prepare a complete inventory and audit of all budgetary arrears, following which a payment plan will be finalized by end-June 2002. The government will call on donors for support in financing and selecting the audit firm and discuss with the authorities of Anjouan on providing them with support in starting a similar process during 2002.

30.   Considerable effort is necessary to re-establish a basic administration and efficient expenditure management in Anjouan. With the assistance of the central government and donors, the Anjouan authorities expect to make quick progress in this area, with a view to establishing a basic budget and expenditure management system by end-2001. The Anjouan authorities opened an account at the central bank in June 2001, and all major transactions will be carried out through this account, improving control. Since end-May 2001, Anjouan has been preparing monthly reports on its revenue, expenditure, and financing sources; these reports are submitted to the central government to allow monitoring of fiscal developments in the Comoros on a consolidated basis. Since June 1, 2001 all revenues in Anjouan are paid to the Treasury, an audit commission was also created to verify all the expenditures and revenues of the island.

E.  Monetary and Financial Sector Policies

31.   The restrictions imposed by our membership in the French franc zone have enabled us to maintain low inflation, a stable exchange rate, and an adequate level of foreign exchange reserves, despite severe fiscal imbalances. While we intend to remain within this system, we realize that it limits the monetary policy options, which are also hampered by the shallowness of our financial system. Monetary policy will pursue its principal objective of maintaining the fixed exchange rate. It will also seek to improve the efficiency of the financial system and strengthen banking supervision, including by providing further training for staff. A proposal to amend the banking legislation to allow for the regulation of the microfinance institutions will be submitted to the government by end-2001. The government is also drafting a regulation to establish a minimum liquidity ratio for the savings bank and to separate it physically and financially from the national post and telecommunications company (SNPT). It also expects to recruit a consultant before end-2001 to start searching for a strategic partner for the national development bank.

F.  External Sector

32.   The deficit on the current account of the balance of payments (excluding grants) is projected to increase to 9.2 percent of GDP in 2001. This reflects a decline in export prices from their exceptionally high level in 2000, and a sharp increase in imports because of the government's exceptional expenditure program. However, this higher deficit is expected to be offset to a large extent by higher foreign assistance and a decline in scheduled debt repayments. Consequently, gross official reserves of the BCC are projected to slightly increase to US$45 million, although, in terms of imports of goods and nonfactor services, they are projected to decline to 7.3 months. Over the medium-term, the current account deficit, excluding grants, is projected to remain at about 7 percent of GDP, and gross official reserves at about 7 months of imports of goods and nonfactor services.

33.   The weaknesses in our external debt management system have contributed to the external debt problems. To improve this situation, all government and government guaranteed external borrowing will be made subject to the prior authorization of the Minister of Finance, as of end-July 2001. In addition, the Ministry of Finance will request donor assistance in setting up a computerized external debt management system and in building up human resource skills devoted to this important function. Finally, throughout the period of the SMP, the government will not contract or guarantee any new external borrowing on nonconcessional terms.

G.  Structural Reforms and Governance

34.   The government also intends to continue making progress in the area of structural reforms. With the assistance of the World Bank and other donors, we intend to pursue the program of government divestiture of public enterprises. Before end-2002, the government intends to complete the privatization of the port and maritime transport company SOCOPOTRAM, restructure the SNPT, and place the SCH in concession; the national airline has been reconstituted, so that it will not require budget financing. The government also plans to review the mechanism used to set domestic prices of petroleum products, with a view to facilitating more automatic adjustments to world market prices, in particular to avoid further arrears in payments of taxes on petroleum products. The improvements expected from the privatization of the water and power sector in 1998 have not yet materialized. The government therefore intends to seek the support of donors to carry out a review of water and power sector policy and identify measures that can improve the efficiency of the sector. To this end, the government will give any support necessary to the CEE to reduce electricity theft and improve collection.

35.   The government attaches great importance to improving governance. We will relaunch the regular publication of the official journal by end-2001. With World Bank assistance, the government is currently strengthening the courts and the Ministry of Justice. In addition, with a view to improving transparency in government finance, we will resume publishing the budgets, starting with the supplementary budget for 2001, in July 2001. We also intend, as of 2001, to publish the annual reports of public enterprises.

36.   We realize that a major effort will be needed to improve our macroeconomic and sociodemographic statistical database. Accordingly, we have decided to strengthen the Planning Directorate by attaching it to the Office of the Head of State and providing it with new structures and experienced staff from other administrations. We plan to ask donors for assistance to finance our contribution to AFRISTAT, and we have requested technical assistance from the IMF to carry out a broad-based review of our statistics system; this review will be used as the basis for a medium-term action plan.

IV.  Program Monitoring

37.  To monitor progress in the implementation of the program, quarterly quantitative benchmarks were established on: (a) net foreign assets of the BCC; (b) domestic bank financing of the government; (c) government revenue; (d) the wage bill; (e) nonconcessional external public borrowing; and (f) public sector accumulation of external payment arrears to multilateral institutions (Table 1). Structural benchmarks have been established to serve as a guide in the implementation of basic reforms (Table 2). Implementation of the program will be reviewed in November 2001 and May 2002.

COMOROS

Technical Memorandum of Understanding for the Staff-Monitored Program (SMP)

July 2001–June 2002

1.  This technical memorandum of understanding (TMU) contains the definitions of the quantitative benchmarks of the Comoros staff-monitored program for the period July 2001-June 2002 and describes the reporting requirements under that program. The TMU is an integral part of the documents that govern the IMF's monitoring of the Comoros program.

I.  Quantitative Benchmarks¹

A.  Ceiling on Net Domestic Financing of the Government

2.  Net domestic financing of the government (NDF) is defined as the sum of (a) the variation in the stock of federal government domestic debt to the Central Bank of the Comoros (BCC) and the commercial bank (BIC) minus its deposits held with those institutions; (b) privatization receipts; and (c) new budgetary arrears. New budgetary arrears are defined as arrears accumulated during the fiscal year on wages, domestic interest, and goods and services. Payments on salaries, wages, and pensions are deemed in arrears when they remain unpaid more than 30 days beyond the due payment date. Interest payments are in arrears when the payment is not made on the due date. Payments to suppliers are deemed to be in arrears if they have not been made within the normal grace period of 30 days or such other period as has been contractually agreed after the verified delivery of the concerned goods or services, unless the amount or the timing of the payment is subject to good faith negotiations between the government and the creditor. Domestic payment arrears include the amount to be recommitted and net payments delays (clearings, items in process of payment, expenditure committed but with no payment order issued), as defined in the table on federal government operations (TOFE).

B.  Ceiling on the Wage Bill

3.  The wage bill includes all wages and salaries, premiums for social insurance and pensions, indemnities, bonuses and other payments directly related to rewarding employment. Included in the wage bill are the wage expenditures of the civil service, gouvernorats, military, and Caisse de Retraite des Comores (CRC). Under the program, the ceiling on the wage bill in the budgets for 2001 and 2002 amounts to CF 6,267 million in each year.

C.  Floor on Total Revenues

4.  Total revenue consists of all tax and nontax revenue included in the TOFE. Under the program, total revenue for 2001 amounts to CF 14,323 million and in 2002 to CF 8,032 million for the period January-June 2002.

D.  Floor on Net Foreign Assets of the BCC

5.  For the purpose of the program, net foreign assets of the BCC (NFA) is defined as its usable foreign assets minus its foreign liabilities, converted in Comorian francs at the end-period exchange rates. NFA is defined consistent with the definition of the Operational Guidelines on the Data Template on International Reserves and Foreign Currency Liquidity template as external assets readily available to, or controlled by, the BCC. It includes the reserve position with the Fund net of outstanding use of Fund credit, but excludes any pledged or otherwise encumbered reserve assets, including, but not limited to, reserve assets used as collateral or guarantee for third-party external liabilities.

E.  Ceiling on Nonconcessional External Borrowing

6.  Under the program, the avoidance of nonconcessional external debt contracted or guaranteed by the government or the BCC is a continuous benchmark. Nonconcessional external debt is all debt with a concessionality level of less than 35 percent. For loans with a maturity of at least 15 years, the 10-year average "commercial interest rate reference rate" (CIRR), published by the OECD, should be used to calculate the level of concessionality. For loans with shorter maturities, the 6-month average CIRR should be used. For the purposes of the program through December 31, 2001, the 6-month and 10-year CIRRs published by the OECD in December 2000 will be used. To both the 10-year and 6-month averages, the following margins for differing repayment periods should be added: 0.75 percent for repayment periods of less than 15 years; 1 percent for 15-19 years; 1.15 percent for 20-29 years; and 1.25 percent for 30 years or more.

7.  This performance criterion applies not only to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt adopted on August 24, 2000 (Executive Board Decision No. 12274 (00/85)) but also to commitments contracted or guaranteed for which value has not been received. The definition of debt set forth in No. 9 of the guidelines is as follows:

"(a) For the purpose of this guideline, the term "debt" will be understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows: (i) loans, i.e., advances of money to obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers' credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements); (ii) suppliers' credits, i.e., contracts where the supplier permits the obligor to defer payments until some time after the date on which the goods are delivered or services are provided; and (iii) leases, i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purpose of the guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair or maintenance of the property. (b) Under the definition of debt set out in point 9(a) above, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt."

8.  Excluded from this benchmark are (i) debt contracted in the context of rescheduling agreements; and (ii) leases of office space, equipment and housing contracted by representatives of the Comoros abroad.

F.  Ceiling on External Payments Arrears to Multilateral Creditors

9.  Under the program, the program, the government will not incur new payment arrears to multilateral creditors, starting from January 1, 2001. External payment arrears are defined as nonpayment in full of interest and principal obligations due to each multilateral creditor, excluding arrears resulting from nonpayment of debt service for which rescheduling negotiations are under way. Thus, the stock of arrears to each multilateral creditor should not exceed the stock outstanding as of December 2000, minus any payment of arrears existing before January 1, 2001 minus any arrears resulting from nonpayment of debt service for which rescheduling negotiations are under.

10.  The stock of external debt service arrears to multilateral creditors as of end-December 2000 (in millions of U.S. dollars) was: US$0.0 million to the IDA, US$0.0 million to the IMF, US$15.5 million to the African Development Bank (of which US$3.9 million to the African Development Fund), US$0.0 million to the European Union/European Development Fund, US$24.4 million to the Arab Bank for Economic Development in Africa (BADEA), US$0.0 million to the International Fund for Agricultural Development (IFAD), US$3.4 million to the OPEC Fund, and US$11.2 million to the Islamic Development Bank.

G.  Periods Covered by the Benchmarks

11.  The benchmark concerning the contracting or guaranteeing of external debt is continuous during the program period. The other quantitative benchmarks pertain to end-September 2001, end-December 2001, end-March 2002, and end-June-2002. The ceilings on net domestic financing of the government, net foreign assets of the BCC, and the contracting or guaranteeing of external debt on nonconcessional terms are defined in cumulative changes from end-June 2001. The ceilings on the wage bill and on total revenues are defined in cumulative changes from the start of the fiscal year. The benchmark on no accumulation of debt service arrears toward multilateral creditors is cumulative from January 1, 2000.

II.  Monitoring of The Structural Benchmarks

Governance

12.  The authorities will provide the Fund a copy of the published supplementary budget for 2001 and the published 2002 budget.

Fiscal

13.  The authorities will provide the Fund a statement by the Ministry of Finance indicating that the exemption for the withholding tax (Accompte sur Impôts et Taxes AIT) for the water and electricity operating company (CEE) has been eliminated, and rates of specific taxes on cement and alcoholic beverages have been raised. The authorities will also provide the Fund a copy of the published expenditure management procedures manual.

Domestic Debt

14.  The authorities will provide the Fund a statement by the Ministry of Finance indicating that the domestic debt committee has been reactivated, and a copy of the request to donors for financing of audit of all domestic supplier arrears, including on Anjouan.

External Debt

15.  The authorities will provide the Fund an Excel file with an updated external debt database.

Financial Sector

16.  The authorities will provide the Fund a copy of the amendments to legislation for the regulation of the micro-finance institutions.

III.  Adjusters

A.  Adjuster to the Benchmarks for NFA of the BCC and NDFof the Government for a Shortfall in Budget Support

17.  For the purposes of the program, the benchmarks for NFA and NDF of the government will be adjusted for a shortfall in budget support compared with the projected level. The benchmark for NFA will be adjusted downward and the benchmark for NDF will be adjusted upward for the full amount of the shortfall. Budget support is defined as foreign assistance for the general financing of the federal budget that is provided unconditionally or conditional upon policy actions only, without predetermined additional current of capital expenditure counterpart.

18.  Budget support for July 2001–June 2002 is projected (cumulative since July 2001) at CF 0 million by end-September 2001, CF 296 million by end-December 2001; CF 1,109 million at end-March 2002; and CF1,109 million at end-June 2002.

IV.  Information and data to be provided to the IMF

19.  The Comorian authorities will provide Fund staff with the following information and data according to the schedule provided, either directly (e-mail or facsimile) or my airmail. The monetary data, external debt data, the consumer price index, and any information on important legislative and /or other developments (see paragraph 15) will be provided not later than one month after the date to which they pertain. The fiscal data will be provided not later than two months after the date to which they pertain.

Monthly:

• The monetary survey, and the monthly balance sheets of the BCC and the commercial bank;

• Classification of commercial bank loans by economic sector;

• Interest rates;

• TOFE data on a cash and commitment basis and the related detailed tables on revenue;

• External public debt operations (debt contracted and publicly guaranteed, settlement of external payments arrears, and debt service paid;

• Consumer price index; and

• Imports and exports, production of electricity, tourist arrivals, and any other indicators of economic activity that may be available on a monthly basis.

When available:

• National accounts data

• Balance of payments

• Quarterly production of major products (vanilla, cloves, ylang-ylang)

20.  Moreover, information on important measures adopted by the government in the economic and social areas that would have an impact on program development, changes in legislation, and any other pertinent legislation will be reported to Fund staff on a timely basis for consultation or information, as appropriate.