Press Release No. 96/16

Press Release: IMF Approves Stand-by Credit for Djibouti

April 15, 1996

The International Monetary Fund today approved a request by Djibouti for a stand-by credit equivalent to SDR 4.6 million (about $6.7 million) over the next 14 months to support the Government's 1996 economic reform program. This is the first use of IMF credit by Djibouti, which became a member on December 29, 1978. Djibouti's quota¹ in the IMF is SDR 11.5 million (about $16.7 million).

Background

In the past few years, Djibouti's economic and financial performance has been adversely affected by regional instability, an influx of refugees, a domestic armed conflict, and, more recently, a decline in foreign assistance and increased competition from the neighboring ports of Assab and Berbera. As a result, real GDP has declined, unemployment has soared, and budget deficits have grown larger. Indications are that the economic and financial situation deteriorated further in 1995, with economic activity declining by 3.1 percent, primarily because of depressed port activity and lower domestic demand. Although the budget deficit declined as a percentage of GDP, the Government had to undertake further borrowing from commercial banks and public enterprises, while the external position deteriorated, leading to a loss of gross international reserves.

The 1996 Program

The authorities initiated a reform process in October 1995. The key elements of the 1996 program, supported by the stand-by credit, are i) a substantial tightening of financial policy, emphasizing prompt budgetary adjustment and restructuring; ii) continued full adherence to the present currency board arrangement; iii) maintenance of a restriction-free exchange and trade regime and a prudent foreign debt policy; iv) comprehensive structural reforms to promote competitiveness and enhance the supply responsiveness of the economy; v) adequate concessional external financing; and vi) technical assistance to strengthen the macroeconomic database and administrative capacity.

The authorities recognize that fiscal adjustment holds the key to macroeconomic stability. Consequently, the 1996 program relies primarily on a significant, front-loaded, sustained reduction and restructuring of budgetary expenditures. This adjustment will be achieved primarily through measures to reduce permanently the wage bill, (which was equal to over 80 percent of government revenue in 1994), starting this year. To this end, the authorities intend to implement i) cutbacks in the nominal wage bill in 1996; ii) a demobilization program involving over 9,000 defense and security personnel starting in June 1996 (for which World Bank and other donor assistance has been requested); and iii) reform of the civil service over the medium term.

The 1996 program envisages a stabilization of real GDP, a reduction of the current account deficit, and an increase in the level of international reserves to the equivalent of 5.2 months of imports. To achieve these objectives, the consolidated budget deficit will be cut from 11.7 percent of GDP in 1995 to 6.1 percent by reducing expenditures, including the wage bill, and by increasing revenues through a number of tax-related measures. Despite the reduction in the deficit, however, the Government intends to increase budgetary allocations for education and health.

Structural Reforms

In addition to the fiscal measures adopted by the Government, there is also an urgent need to reform the public enterprises by making them more efficient, restoring their capacity for self-financing, and allowing private sector participation in their capital. These reforms will initially focus on the five largest enterprises-the port, the airport, the electricity company, the water company, and telecommunications-with particular emphasis on the port, which has been losing traffic because of generally higher tariffs, administrative obstacles, and the lack of efficient land transportation between Djibouti and Addis Ababa. As the labor market is handicapped by outdated legislation, the authorities will undertake a comprehensive revision of the labor code and will formulate a private sector development plan with assistance from the World Bank.

Addressing Social Costs

The authorities recognize the need for social safety net provisions to mitigate the impact of adjustment on the most vulnerable sectors of the population, particularly in view of the projected retrenchment of military and security personnel. Thus, allocations for health and education have been protected in the 1996 budget, and an evaluation of poverty will be conducted in order to identify the most vulnerable segments of the population and their needs in order better to target humanitarian aid.

The Challenge Ahead

The policy objectives and measures contained in the program are appropriate for reducing Djibouti's macroeconomic imbalances and making headway in addressing the deep-seated structural weaknesses. If fully implemented, the program provides the foundation for a comprehensive medium-term program that could eventually be supported by an ESAF² loan from the IMF.