Djibouti—Letter of Intent and Memorandum of Economic and Financial Policies

Djibouti, December 4, 2002

Use the free Adobe Acrobat Reader to view Tables 1-2 (113kb).

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

Dear Mr. Köhler:

1. The attached memorandum of economic and financial policies describes the structural reform and macroeconomic adjustment program for 2002. It updates the memorandum of economic and financial policies attached to the letter that we sent to you on November 14, 2001, which covered the period 2001-2002. The government's objective is to pursue and intensify its reform program so as to put the Djiboutian economy on the path of higher economic growth, raise per capita income, reduce unemployment, make headway in the fight againts poverty, and ensure external and domestic financial viability. In support of this program, Djibouti requests waivers of all the performance criteria that could not be met, and completion of the third review under the Poverty Reduction and Growth Facility (PRGF) arrangement approved by the IMF Executive Board on October 18, 1999, and extended recently until January 17, 2003.

2. The government believes that the policies set out in the attached memorandum will achieve the objectives of the program. However, it stands ready to take any additional measures appropriate for this purpose, and will consult periodically with the Fund-in accordance with the Fund's policies on such consultations-about the progress being made in implementation of the program and about any policy adaptations considered appropriate for the achievement of its objectives. The government will also provide the Fund with all information needed to assess progress in implementing policies and in achieving the objectives of the program.

3. The government's assessment is that its reform program will require external financial support in order to ensure its success.

4. The government appreciates the assistance provided by the IMF in formulating the economic reform program and looks forward to continued collaboration with the Fund in its reform endeavors.

Sincerely yours,

MEMORANDUM OF ECONOMIC AND FINANCIAL POLICIES

I. Economic and Institutional Developments in 2001 and 2002
and Performance under the Program

A. Macroeconomic Performance in 2001 and the First Half of 2002

1. Real gross domestic product (GDP) growth in 2001 is estimated at about 1.9 percent, which—though in line with program objectives—is resulting nonetheless in a further deterioration of per capita incomes. Growth has continued to be underpinned by considerable port activity, sharply rising energy production, and the recovery of the construction sector. ¹ The consumer price index reflected a price increase of 1.4 percent between December 2000 and December 2001 (1.8 percent on annual average), approximately one point below the level of the previous year and the program target. The drop in the price of food and petroleum products is largely responsible for the slowdown in inflation.

2. The budgetary domestic balance for 2001 shows a deficit of 0.3 percent of GDP while the program targeted a surplus of 0.9 percent of GDP. The revenue level is estimated at 23.3 percent of GDP compared with a target of 24.4 percent. Domestically financed expenditure amounted to 23.5 percent of GDP, in line with the program target.

3. The shortfall in revenue (1.1 percent of GDP) resulted from a lower-than-envisaged collection of direct taxes (0.5 percent of GDP), indirect taxes (0.4 percent of GDP), and nontax revenue (0.2 percent of GDP). In the area of direct taxes, property taxes, collection of tax arrears, and taxes on provision of services (TPS) did not meet program objectives. Explanatory factors include the late setup of the real property database and new procedures for collecting tax arrears, as well as the lag in TPS redeposits by the telecommunications company. Furthermore, a tax dispute with one of the public enterprises delayed collection of the profit tax due from that enterprise until 2002. With respect to indirect taxes, the shortfall stemmed from lower intake for the domestic consumption tax (reduced volumes of imported merchandise), surtaxes on khat (smaller volumes taxed), petroleum products (reduced consumption of fuel oil), and alcohol (as a result of difficulties in curtailing contraband). Lastly, no dividends were paid by the central bank, contrary to expectations.

4. Expenditure was kept in line with program objectives through a strict implementation of a cash management plan which helped rein in spending on material and transfers. The introduction of the cash management plan at the beginning of April 2001 contributed not only to halt the accumulation of new domestic payments arrears in 2001 but also to the reduction in the outstanding stock.

5. As far as external support (excluding IMF) is concerned, only France and the European Union (EU) disbursed grants—amounting to DF 243 million and DF 633 million, respectively ² —while assistance from the World Bank (DF 889 million), the African Development Bank (AfDB) (DF 195 million), and the Arab Monetary Fund (AMF) (DF 142 million) were delayed. The combined effect of the shortfalls in revenue (DF 1.3 billion) and external financing (DF 1.2 billion) resulted in the clearing of a lower level of domestic arrears (DF 0.7 billion, compared with a program target of DF 2.8 billion). In addition, external arrears could not be cleared as anticipated.³

6. Broad money increased by 7.5 percent from December 2000 to December 2001, compared with a program target of 4.1 percent, reflecting a marked increase in deposits with the commercial banks.⁴ The relative share of deposits in Djibouti francs increased as a result of a decline in international interest rates. At the same time, domestic credit to the private sector declined sharply by 14.3 percent (following an increase of the same magnitude in 2000) owing to: (a) prudence on the part of local banks arising from a level of uncertainty about the economic situation and disturbing trends in nonperforming loans; ⁵ (b) the fact that a large share of documentary credits were gradually being captured by other markets, particularly Dubai, after the Somali border was closed;⁶ and (c) repayment of some large loans that had been extended the year before. These various developments led to a significant accumulation of net foreign assets of the commercial banks, which rose by more than US$47 million, from their end-2000 level. The ratio of coverage of the monetary base and government deposits with the Central Bank of Djibouti (BCD) increased by 0.9 percent from 115 percent at end-2000 to 116 percent at end-2001.

7. The trade balance deficit was narrowed to US$179 million (31.2 percent of GDP) as a result of a decline in imports from the 2000 level, due to lower investment levels and the absence of exceptional imports. This deficit was largely covered by a surplus in the balance of services and income estimated at US$123 million. With transfers amounting to US$31 million, the current account balance registered a deficit of US$25 million. As a result of external project financing and direct investment, as well as marked unidentified capital inflows (errors and omissions), the overall balance of payments surplus reached US$40 million, compared with a program target of US$15 million. This positive result is reflected in a marked accumulation of foreign assets of commercial banks. At the same time, the government accumulated external payments arrears in the amount of US$2.2 million, including obligations to multilateral and bilateral lenders whose claims are not in dispute.

8. Following an agreement reached in June 2002, the government of Djibouti has settled the dispute with France on the hospital debt (Paris hospital public assistance). In line with this agreement, the outstanding stock of payments arrears on this hospital debt was cleared by end-June 2002. Negotiations with creditors' members of the Paris Club are currently under way and are expected to lead to signature of bilateral agreements in the coming weeks. However, negotiations with other creditor countries on the reschedulable external debt have not yet led to the signature of bilateral agreements.

9. Four performance criteria for end-December 2001 were observed, in particular those related to the wage bill, net credit from the central bank to the government, government borrowing from public enterprises, and the nonconcessional external debt. However, five were not observed, namely those pertaining to the stock of domestic and external arrears, ⁷ net credit to the government by the commercial banks, total budgetary revenue, and net international reserves. The structural performance criterion on the retirement of 850 persons was not formally observed within the agreed time frame, even though the decision was taken at end-2001; its implementation was staggered over the first quarter of 2002 to enable the 850 departing civil servants to take all their remaining leave. Furthermore, the continuous performance criteria on reporting quarterly external trade data to the IMF staff (within six weeks from the end of the observation period) and on the non-accumulation of new external arrears were not observed either.⁸ In view of the corrective measures, which were implemented before completion of the third review, the government requests waivers for all of the quantitative and structural performance criteria at end-December 2001, as well as the continuous performance criteria that were not observed.

10. During the first half of 2002, economic growth continued to be driven by activity in the services sector, which benefited from the sizeable foreign military contingents stationed in Djibouti as part of the fight against international terrorism and by a rebound in the construction sector. Inflation also reached historically low levels, with price rises of 0.1 percent between June 2001 and June 2002.⁹ Based on preliminary data at end-June 2002, the budgetary domestic balance reached a surplus of DF 454 million, compared with a programmed deficit of a little less than DF 300 million. Fiscal revenue totaling DF 12.4 billion exceeded the program target. This good performance reflects steady direct taxes and oil revenue; a better control of excises on tobacco and alcohol (through strengthened border checks); and a sustained tax collection effort by the tax administration. Expenditure was broadly contained within the framework of the cash management plan. As a result, the stock of domestic arrears was reduced by DF 200 million during this period.

11. Broad money increased by 8 percent between June 2001 and June 2002, reflecting a marked growth in demand deposits with the commercial banks. At the same time, domestic credit to the private sector continued to decline by 12 percent. Consequently, the net foreign assets of the commercial banks rose considerably by US$48 million above the June 2001 level.

12. Reflecting these developments, four quantitative performance criteria at end-June 2002 (out of a total of nine) were observed. In particular, those relating to net credit to the government from the central bank, nonconcessional external debt, government borrowing from public enterprises, and domestic budgetary revenue were observed. On the other hand, five criteria were not observed, namely those concerning the wage bill, the accumulation of domestic¹⁰ and external arrears, net credit to the government from the commercial banks, and net international reserves.¹¹ The two structural performance criteria pertaining to the reduction in the number of government employees since June 2001 and the simplification and streamlining of tax incentives granted under the investment code were not observed. Furthermore, the reporting of quarterly data on external trade to the IMF exceeds the six-week lag from the end of the observation period.

B. Structural Reforms in 2001 and the First Half of 2002

13. In the structural area, a very important social and financial reform was completed, namely the pension fund reform. Progress in other areas was, however, slower. The reform of pension funds, whose management and operational parameters did not ensure the long-term viability of the system, will also help streamline civil service staffing. In that context, more than 850 civil servants were retired during the first quarter of 2002, thereby lowering the wage bill in the budget. This reform will also and above all make it possible to stabilize the financial position of the pension funds and ensure that retirees are regularly paid their pensions in the medium term. This reform, adopted by the National Assembly in January 2002, seeks to improve the management capacity of the pension funds and guarantee lasting financial stability. Changes in the parameters of pension rights and contributions became effective with the first quarterly payment of pensions in 2002.¹² In order to cushion the negative impact in terms of the loss of purchasing power for low-income retirees, a minimum pension was established. The Government also created the National Social Security Council (CNSS), an institution acting as an executive board responsible for implementation of the reform and management of pension funds. The creation of this institution is an initial step toward merging all the funds. The director of the CNSS was appointed in July 2002, and the agency is starting up operations. The government also benefits from external technical assistance to audit and update the database on contributors and beneficiaries, and conduct a study which will lead to the adoption of an action plan on fund reserves management.

14. The management of the Djibouti international airport (AID) was privatized and entrusted in June 2002 to Dubai Port International (DPI), which is already managing the Djibouti port.¹³ The determination of specific action plans for privatizing other public enterprises had to be postponed, thereby also delaying the launching of financial audits of the enterprises targeted for privatization (Electricité de Djibouti (EDD), Djib-Télécom, and Office National des Eaux de Djibouti (ONED)).¹⁴ The work on redrafting the labor, investment, and commercial codes has not yet been completed. Work on redrafting the labor code, which dates back to 1952, based on the guidelines of the reform texts adopted in 1997, is continuing but has run up against the reluctance of one labor union to provide comments on the draft revised code submitted to them. With respect to the Commerce Code, the redrafting was expected to reflect the government's strategy to joining the Treaty for the Harmonization of Business Law in Africa (OHADA). After more in-depth analysis, this strategy was finally discarded and it was deemed more appropriate to draft a country-specific commercial code.¹⁵ A technical committee was set up in June 2002 to frame the project. In the context of the reform on streamlining and rationalizing tax exemptions for new investment, the authorities have drafted an Investment Chart which is expected to be finalized by the end of the year. In that connection, the ministry of finance and the new authority in charge of promoting private investment, the National Agency for the Promotion of Private Investment (ANPI),¹⁶ are working closely on a preliminary draft for reviewing the general tax code in order to be harmonized with the new investment charter.

15. The government of Djibouti is currently implementing a comprehensive program of budgetary reforms. In the tax area, the units in charge of tax collection were reorganized, income tax was unified and simplified, and new coercive legal instruments for collecting taxes were established.¹⁷ On the public expenditure side, a new budgetary nomenclature has been implemented since the beginning of 2002, together with a new nomenclature for classification of accounting documents. In line with its strategy to deconcentrate public spending, a key step in reforming public expenditure management, the government has adopted in September 2002 a comprehensive plan to reorganize the ministry of finance. In addition, the Audit and Fiscal Discipline Office has been set up and endowed with all the resources necessary to function properly. It has started a program of audits in the various government agencies and administrations, thereby contributing to greater transparency in public resource management.

C. Institutional Developments

16. In order to better coordinate and monitor efforts in all areas of reform, the authorities had put in place in September 2002 a new institutional framework comprising two units, the Interministerial Government Action Steering Committee (CI) and the Technical Committee to Monitor and Coordinate (CT). The CI, chaired by the prime minister, is a decision-making body with the mission of coordinating government action, defining broad economic and social guidelines, and promoting macroeconomic reform. The Technical Committee (CT) works under the authority of an executive office chaired by the minister of economy, finance, and planning; its mission is to coordinate and monitor adequate implementation of the reforms stated in the program.¹⁸ The CT is organized into four technical subcommittees in charge of, respectively: (a) implementing macroeconomic reforms; (b) monitoring the privatization and structural reforms; (c) monitoring budgetary reforms; and (d) monetary programming and reforms of the financial sector.

II. Program for 2002

17. The government will continue and intensify its reform program in 2002 so as to put the economy of Djibouti on the path of higher growth, boost per capita income, reduce unemployment, roll back poverty, and ensure domestic and external financial viability. To that end, the macroeconomic objectives for 2002 are, in particular: (a) to ensure real GDP growth of about 2.5 percent; and (b) to contain inflation as measured by the consumer price index to 1.5 percent. Economic growth should be sustained by major investment by the government and public enterprises and services activities, some of which are expected to benefit from the presence of large military contingents stationed in Djibouti in the context of the fight against international terrorism. In order to strengthen management and control of public resources, efforts to modernize taxes and strengthen public expenditure management will be pursued. Efforts will also be stepped up in the structural area with a view to achieving the medium-term objectives set out in the Interim Poverty Reduction Strategy Paper (PRSP).

D. Fiscal Policy

18. The initial budget for 2002, adopted in December 2001, targeted an overall deficit on a payments order basis of 2.1 percent of GDP and a domestic budget surplus of 1.6 percent of GDP.¹⁹ The revenue target was 24 percent of GDP, in line with the program. The level of total expenditure was projected at 32.9 percent of GDP (compared with a program target of 33.2 percent), of which 22.4 percent representing domestically financed expenditure (the program target was 23.7 percent). In particular, current expenditure was budgeted to amount to 26.2 percent of GDP, whereas the program envisaged 27.9 percent of GDP, with the gap resulting mainly from a much lower level of additional social expenditure (0.2 percent of GDP in the budget, compared with 1.5 percent in the program). With respect to capital spending, the budget targeted the equivalent of 6.6 percent of GDP, whereas the program planned for 5.3 percent, reflecting mainly higher external assistance.

19. To achieve the revenue objective of 24 percent of GDP, the 2002 budget incorporated a number of discretionary as well as administrative measures. The discretionary measures in the 2002 budget included an increase in the rates of oil taxes, an extension of the consumption tax (TIC) to the tires sold in the port area, a new method of computing the khat tax base, and the introduction of a stamp tax on all public enterprise invoices. The administrative measures in the budget included an intensification of efforts to collect arrears (by relying more on the new arsenal of legal instruments introduced in the context of the revised finance law for 2001) and improving the yield of the land tax thanks to a better use of the updated database on new property owners. These discretionary and administrative measures were expected to generate about DF 900 million in additional revenue. Similarly, the income tax reform introduced in the 2001 supplementary budget with effect from January 2002 should be at least neutral with respect to revenue. However, the census campaign for taxpayers by the tax authorities should make it possible to expand the tax base by increasing the number of taxpayers subject to taxation.

20. On the expenditure side, the 2002 budget envisaged retiring 850 civil servants by end-2001 and demobilizing 2000 soldiers and security officers in January 2002. These measures were expected to reduce the wage bill by 1.5 percentage points to 13 percent of GDP in 2002, taking into account the 170 new civil service workers in the health, education, and justice sectors.

21. Data on budget execution in the first half of 2002 showed revenue levels in line with the program objective, mainly as a result of the good performance of oil taxes, income tax, and consumption tax. However, the wage bill was not lowered as expected, owing to slight delays in the retirement of 850 civil servants, which became effective only at end-March 2002 and the demobilization of only 200 soldiers and security officers in early 2002, compared with the projected 2000.²⁰

22. As a result of all these new developments, the authorities adopted in October 2002 a supplementary budget for 2002—in line with the revised fiscal program prepared with IMF staff—and targeting, in particular, a domestic budget surplus of 0.6 percent of GDP. This revised budget for 2002 maintains the revenue objective set in the initial budget law and seeks to shift public expenditure toward the priority sectors identified in the poverty reduction strategy paper.

23. The revenue target of 24 percent of GDP is maintained, and the measures included in the initial budget law are maintained without changes. The taxation mechanism for oil products, which includes higher specific taxes since January 2002, will not be changed, regardless of developments in the international oil markets. Moreover, the authorities reviewed implementation of the new income tax provisions and will ensure that the impact on revenue is at least neutral, as originally projected.

24. With respect to expenditure, the savings expected from retirements and demobilization will amount to DF 490 million and DF 130 million, respectively.²¹ Consequently, in the revised budget, domestically financed expenditure is projected to amount to 23.3 percent of GDP in comparison with 22.4 percent of GDP in the initial budget but would be in line with the program. This amount includes the additional expenditure for the priority sectors, representing 0.7 percent of GDP. This additional expenditure, which is expected to benefit priority sectors identified in the PRSP, particularly to rehabilitate social infrastructure in the regions affected by the domestic conflict, is distributed as follows: (a) DF 430 million on education; (b) DF 190 million in the health sector; and (c) DF 80 million in the water sector. This expenditure will be subject to specific monitoring, which will be facilitated by the new classification of expenditure adopted by the authorities as part of their overall program to reform public expenditure management.

25. The authorities will pursue a strict implementation of the cash management plan to keep spending in line with available revenue.

26. The authorities will continue their prudent fiscal stance in 2003. The draft budget presently under discussion at the National Assembly aims at attaining a domestic budgetary surplus of 1.3 percent of GDP. With unchanged policies, total revenue is expected to be at 24 percent of GDP, a level comparable to the level in 2002. Domestically financed expenditure is projected to fall by 0.8 percent of GDP, to reach 22.7 percent of GDP, reflecting mainly a lower wage bill. Under these circumstances, the authorities intend to allocate more resources for priority social sectors (expected to reach 1.3 percent of GDP). The share of investment outlays in GDP will reach 4.6 percent of GDP, down from 6.1 percent of GDP in 2002, essentially on account of lower external financing. In case of revenue shortfalls, and to achieve the budgeted domestic balance surplus, the first line of defense would be to identify additional discretionary tax measures. Should this prove insufficient, cuts will be made in expenditure of nonpriority sectors (excluding all social sectors).

E. Domestic Budgetary Arrears

27. The completion of the two audits of domestic arrears has enabled the authorities to validate an overall stock of DF 29 billion in domestic arrears, of which: (a) DF 1.7 billion on the private sector; (b) DF 7.7 billion in arrears on wages for FY 1995, FY 1997, and FY 2002; and (c) DF 19.5 billion in arrears on government agencies (including pension funds) and public enterprises. An overall plan to clear these validated claims was adopted by the government in early November 2002. As a first step, the authorities will issue debt instruments to each creditor whose claims were validated. In the case of government employees, the issuance of such instruments is predicated on the decision to resume payment of salaries for the current period. The settlement of these validated arrears will take place over a period of 10 years, implying annual installments amounting to DF 2.5 billion. Priority in clearing arrears was established in light of the financial situation of the creditors, their propensity to reinject the cash they will receive into the domestic economic system, and their capacity to engage in poverty-reduction activities. In line with these principles, priority was established as follows: private suppliers, civil servants, pension funds, and public enterprises. For government employees, the plan calls for the repayment of an amount equivalent to one full month per year. Regarding pension funds, repayments will take into account their need for cash to settle pensions in due time. The same approach will be taken regarding public enterprises; repayments of arrears will be consistent with their real treasury needs which will be identified after conclusion of financial audits for each enterprise.

F. Fiscal Reforms

28. The authorities intend to pursue their budgetary reform efforts to on the one hand improve revenue collection and modernize taxation and, on the other, to reinforce transparency through greater control of the public expenditure chain. The authorities intend to address two challenges simultaneously, namely, to continue implementing the remaining measures in the revenue and expenditure reform plans while ensuring that all the recommendations already introduced in recent months are effectively operational, so as to derive maximum benefit from these reform efforts.

29. On the expenditure side, following the adoption of the new nomenclature of budgetary documentation, the national accounting plan, and procedures for specific expenditure at the beginning of the year,²² the authorities intend to complete the reform of the spending process by introducing deconcentration of spending management in favor of line ministries. In that context, in September 2002 the authorities adopted a comprehensive plan to reorganize the ministry of finance with a view to simplifying and improving the process of budget preparation. To accompany this plan, the authorities will sign an executive decree to implement the reorganization of the ministry and a presidential decision to update the general procedures for government spending. At the same time, the authorities will make efficient use of the reforms already in place, in particular the new budgetary nomenclature.

30. On the revenue side, the authorities intend to pursue their efforts in three major areas. First, after assessing the impact on revenue of the income tax reform (introduced in the revised 2001 budget and in force since January 1, 2002), the authorities have taken steps to ensure its proper operation for the rest of FY 2002. Second, the authorities will continue to seek optimal functionality of the various measures put in place so far for improving tax administration and to ensure that they are truly operational. In the same vein, in their efforts to modernize tax administration, the authorities are implementing the recommendations of the April 2002 Fiscal Affairs Department technical assistance mission to strengthen fiscal control and reduce the number of delinquent taxpayers. A general verification unit was set up in the revenue directorate and will be in charge of a tax monitoring program covering the entire fiscal net; this program will be reviewed periodically. This unit will be backed by two specialized control and investigation brigades. In addition, a campaign of communication and taxpayer education will be launched to encourage taxpayers to comply with their fiscal obligations. Third, another area of the work program on reforms for 2002 covers the simplification and streamlining of the tax base through a modification of the business license tax and the property tax, which will be introduced in the 2003 finance law.

G. Demobilization Program and Civil Service Reform

31. In 2002, the government plans to continue the program of demobilizing military personnel recruited in the early 1990s. The program was audited in the context of a project funded by the EU. The audit recommended updating the list of persons already demobilized and to be demobilized, drafting an action plan for further demobilization, and increasing spending in the social sectors for 2002 by an amount at least equivalent to the savings generated by the demobilization. The implementation of these recommendations will facilitate disbursement of an EU grant, which will cover the cost of severance pay for another demobilization tranche. Reflecting mainly social concerns, this tranche, which will become operational in October 2002, will cover only the departure of 800 persons, thereby bringing the total demobilized in 2002 to about 1,000. The authorities intend to demobilize the remaining staff over the next 10 years through incorporation into regular army ranks to substitute for departing military into retirement, so as to keep constant the payroll of the regular military forces.

32. Reductions in civil service staffing levels, together with strict controls over wages and benefits, will continue to be the primary means of lowering the wage bill and controlling public expenditure. In this context, the authorities will be reviewing all the organizational charts of the ministries to streamline job profiles as part of a civil service reform project. As a first step, a complete census of government employees was completed in December 2001, and a central single data file of the civil service was finalized in October 2002, merging the payroll and administrative management data files.

H. Other Structural Reforms

33. In its continuing efforts to create an environment conducive to development of the private sector, the Djibouti government is pressing ahead with the labor code reform with a view to consolidating and deepening the labor market liberalization measures taken in recent years, and modernizing the current legislation. Following the recent normalization of relations between the government and the labor organizations, the government plans to organize tripartite consultations (government-employers-unions) in December 2002, to gather comments and observations from all social partners on the draft labor code. These consultations will follow the election of labor union representatives, which were organized with support from the International Labor Organization in August 2002 and October 2002, respectively.

34. The Djibouti authorities are currently revising the policy of promoting private investment to make Djibouti a better place for investors in the future, in the context of COMESA integration. In that connection, the government intends to: (a) redraft the investment code to transform it into an investment charter, which will include only institutional and legal provisions to encourage private investment (fiscal incentives will be included in the general tax code; (b) introduce the one-stop shop to facilitate the establishment of new entrepreneurs; (c) promote the concept of portfolio investment and free zones and free points; (d) provide adequate resources to the private investment promotion agency so that it could become operational as quickly as possible; and (e) establish a program for collecting and transmitting updated economic data to foreign businessmen through diplomatic missions and the chamber of commerce.

35. At the same time, the tax provisions concerning private investment promotion will be revised with a view to reducing the scope of application of tax exemptions and establishing the institutional set-up for controlling and monitoring the tax incentives granted for private investment. The 2003 budget law will include the new provisions aimed at streamlining and limiting exemptions, and simplifying the various preferential systems by allowing the tax administration to exercise oversight.

36. Regarding the revision of the commercial code, work started with the collection of all existing standards regulating commercial legislation and is expected to be completed by December 2002. Next, theme-oriented workshops will be organized with professionals in the field, with a view to analyzing these texts and drafting new commercial legislation. A national technical committee, which was formed in June 2002, will spearhead all these tasks.

37. After privatizing management of the airport, the government will continue to implement its overall public enterprise privatization strategy. An international expert financed by the World Bank will supervise the organization of financial and technical audits of the three enterprises slated for privatization (Djib-Télécom, EDD, and ONED) and, on that basis, will set out the details of the specific privatization strategies for each enterprise in the last quarter of 2002. The government will adopt these strategies during the first quarter of 2003 and implement them soon afterward.

I. External Sector Policies

38. Restoring the competitiveness of the Djibouti economy is a fundamental objective of the authorities. To do so, they are relying on the relaunching and intensification of a structural reform program to lower factor costs and facilitate the conditions of access for foreign investors. As part of a strategy for economic growth and poverty reduction, the authorities initiated discussions about the issue of improving external competitiveness.

39. The government will continue to pursue a prudent external debt management, resorting only to concessional financing. Moreover, the authorities will pursue their efforts to normalize the external debt situation in the coming months. The first measure was to settle all arrears due on the government external debt vis-à-vis the multilateral creditors at end-September 2002. In addition, all arrears to multilateral creditors on government-guaranteed debt will be cleared in December 2002 before the completion of the third review under the Poverty Reduction and Growth Facility (PRGF). With respect to external payments arrears on nonreschedulable debt vis-à-vis a bilateral creditor, the government has initiated discussions to reach an understanding on a new repayment schedule. In addition, the government sought from the Secretariat of the Paris Club an extension of the consolidation period of the rescheduling agreement until the expiration of the PRGF-supported program.²³ Thirdly, the government is reviewing some bilateral rescheduled agreements proposed by bilateral creditors; these are expected to be concluded as soon as possible. The authorities are also exploring the possibilities for debt rescheduling vis-à-vis non-Paris Club members on the same terms as those offered by the Paris Club.

40. With financial support from the World Bank, the finance ministry launched a project, in cooperation with UNCTAD, to improve the database on the external debt. The project will provide support to the authorities in external debt management by installing the updated version of the Debt Management and Financial Analysis System (DMFAS) system and training staff in its use. This project will contribute to improving the institutional framework for debt management. The hardware was acquired and set up in August 2002, and the new software DMFAS was installed in September 2002. A series of staff training sessions began in 2002 and will continue through the end of the first quarter of 2003, at which time the system should be fully operational.

41. In the context of Djibouti's joining COMESA and the installation of the automated system for custom data (ASYCUDA) system, the United Nations Development Program provided funding for an UNCTAD expert who visited Djibouti at the beginning of 2002 to evaluate the available infrastructure as well as the process for compiling external trade data. The authorities are also in the process of requesting financial assistance from foreign donors and lenders to pursue their efforts to accelerate the installation of the ASYCUDA system, which will help shorten the lag time for disseminating external trade data.

J. Financial Sector Policy and Reform

42. The authorities will continue their efforts to ensure the integrity and effectiveness of the banking system in Djibouti. To that end, they proceeded, in particular, with: (a) the revision of banking law texts and the BCD statutes;²⁴ and (b) the preparation of a legal framework for combating money laundering operations (law on money laundering, confiscation, and international cooperation with regard to the proceeds of crime).²⁵ This law is part of an action plan to combat terrorism, which the authorities adopted in December 2001.

43. In August 2002, the authorities hired the BCD external auditors selected in July; these auditors began their work in October 2002, auditing the accounts for 1999, 2000, and 2001. Their work should, in principle, be completed by end-November 2002. Starting in 2003, the BCD will have its annual accounts audited every year.

44. The BCD also strengthened its banking supervision capabilities, including through on-site inspections. In that connection, all money changers were audited by the BCD in early 2002. A second commercial bank operating in Djibouti will be subject to an on-site inspection in December 2002, another bank having been audited in 2000. Starting in 2003, the BCD aims to audit all the banks and the principal money changers once a year. To reach this objective, the authorities established, with the support of the Bank of France Institute, a plan to train BCD staff, including recent recruits. The training of BCD staff began in June 2002 and will continue through December 2002. In support of the BCD efforts, the IMF will contribute to the training program by sending an expert in December 2002 to provide more specific training in on-site supervision practices. Furthermore, to fully grasp changes in the financial system, the BCD is putting together a regular staff training program on various banking issues.

45. Two commercial banks, the Al Baraka Bank and the Banque de Djibouti et du Moyen-Orient (BDMO), were placed in liquidation in 1998 and end-1999, respectively. The collection of these banks' debts and the gradual reimbursement of depositors are proceeding satisfactorily, albeit more slowly than anticipated owing to a number of judicial delays and other constraints. Conclusion of the liquidation process for the BDMO will be announced by end-2002, while the process for the Al Baraka Bank should be completed in 2003.

46. Continuing with its efforts to achieve greater transparency in government accounts, in August 2002, the government repatriated the accounts of government institutions held with the commercial banks, and they will give the treasury exclusive rights over the activity of these accounts, as required by the regulations in force.

K. Poverty Reduction Strategy Paper

47. The national commission on the PRSP continues to organize work to complete the final document. Broad-based consultations were organized in February 2002 in the form of a seminar on government action, with participation by government, elected officials, and representatives of the private sector and the associative sector; the seminar was broadcast nationwide. These consultations were complemented by a visit by the president of the republic to districts in the interior of the country. The seminar's minutes were disseminated, and the commission has been validating the findings of the thematic studies with the population. Moreover, a survey of household income and consumption (EDAM-II) was conducted in July 2002 and served as a basis for updating the indicators of poverty. Furthermore, a foreign consultant visited Djibouti in June 2002 to help the authorities prepare a coherent blueprint for the PRSP, propose a system of indicators for monitoring consistent with the strategies and policies defined by the government, and identify tasks to be accomplished as well as the projected timetable for finalizing the PRSP. On the basis of this timetable, the authorities intend to finalize the PRSP by end-March 2003. The permanent secretariat of the PRSP, which was established in July 2002, will ensure that the process of completing the document proceeds properly.

L. Improvement of the Statistical System

48. The government is committed to make every effort to address the weaknesses of the current statistical information system. The government has made significant headway in ensuring the regular production, with a relatively short lag, of the consumer price index, the statistical yearbook, and the external trade yearbook. It also intends to continue to intensify its efforts to successfully produce more comprehensive and consistent statistics that are in perfect harmony with international standards. The government's medium-term strategy for improving the statistical system is aimed at harmonizing and standardizing Djibouti's statistical tools, including the basic concepts used. The shared use of interadministration files, of the standards, codes, and concepts used internationally, and of computerization should guarantee the production of reliable statistical information rapidly and at a reduced cost.

49. In keeping with this strategy, the government has applied for membership in the Economic and Statistical Observatory for sub-Saharan Africa (AFRISTAT), which will take effect once Djibouti's subscription payment can be financed. In the context of reforming the tax system and Djibouti's membership in COMESA, efforts are now under way to introduce the UN's automated system for managing foreign trade data (ASYCUDA), which will have a direct and positive impact on the production of foreign trade data. The government is also continuing to work actively to implement the recommendations of the technical assistance missions in the monetary, tax, balance of payments, and national accounts areas. It has also recently requested technical assistance in balance of payments statistics and national accounts from the IMF.

50. The authorities are also committed to implementing the recommendations of the technical assistance missions. Regarding balance of payments statistics, the BCD has made the technical changes suggested by the IMF expert and will soon compile a balance of payments in compliance with the fifth edition of the balance of payments manual. In the area of national accounts, the authorities recruited two specialists in July 2002, as suggested by the IMF expert, and are determined to improve these statistics in accordance with the work program prepared in collaboration with the IMF mission. Concerning government finance statistics, the authorities intend to implement the recommendations of the Statistics Department's technical assistance mission of May 2001 aimed at setting up an institutional framework for the compilation of data on central government operations.

M. Program Monitoring

51. Completion of the third review of the program supported by the PRGF is conditional on implementation of the following prior actions: (a) adoption by the ministry of economy, finance, and planning of an overall plan for settling domestic budgetary arrears on the basis of the complete audit of such arrears; and (b) selection and hiring of external auditors by the BCD. In addition, all payments arrears on the nonreschedulable and not-in-dispute debt, government external debt, and government-guaranteed external debt will be cleared before the conclusion of the third review.

52. Performance criteria had been set at the time of the second review under the PRGF for end-December 2001 and end-June 2002 as well as benchmarks for end-March 2002. Additional benchmarks were set for end-September and end-December 2002 (Table 2). The performance criteria include ceilings on the wage bill, the stock of domestic and external arrears, net credit to the government from the BCD and the commercial banks, government borrowing from public enterprises, and nonconcessional foreign borrowing contracted or guaranteed by the government or public enterprises at terms of more than one year. Quantitative floors will apply to domestic fiscal revenue and the net international reserves of the BCD. A certain number of structural performances had also been proposed for end-December 2001 and end-June 2002 at the time of the second review under the PRGF.

53. The other performance criteria include an undertaking by the authorities not to impose or intensify restrictions on payments and transfers for current international transactions, not to adopt multiple currency practices or modify the multiple currency practices in effect, not to conclude bilateral payments agreements that conflict with Article VIII of the IMF's Articles of Agreement, and not to impose or intensify import restrictions for balance of payments reasons. Moreover, ongoing performance criterion will apply to the accumulation of new domestic and external arrears (not including external payments arrears currently being rescheduled), payments due from December 2001 on all contributions to pension plans, and reporting of data on external trade, budgetary revenue, expenditure, and arrears with a six-week lag.