Press Release No. 17/122

On February 22, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Djibouti.

Djibouti is expanding its transportation and utilities infrastructure to leverage its strategic location as a shipping hub and host to military bases. A small state in the arid Horn of Africa, neighboring land-locked Ethiopia, Djibouti largely depends on its deep-water harbor. The authorities’ development strategy, Vision Djibouti 2035, aims at transforming the country into a middle-income economy and a logistics and commercial hub for the whole of East Africa.

To achieve their development goals, the authorities have launched a large-scale investment program financed by external debt, which has raised public external debt from 50 to 85 percent of GDP in two years. Much of the debt consists of government-guaranteed public enterprise debt. Djibouti continues to be at high risk of debt distress, as all debt sustainability indicators are above their thresholds for a prolonged period.

Growth is estimated to have reached 6.5 percent in 2016, driven by major public sector projects, in particular the railroad to Ethiopia, the construction of several new ports and a water pipeline from Ethiopia. Inflation rose to 3 percent on average in 2016, reflecting mainly increased food and service prices.

Despite remarkable growth, poverty and unemployment remain high and widespread. About 41 percent of the population is poor, 23 percent live in extreme poverty, and the unemployment rate reaches 39 percent. Thus far, the large investment projects have had a limited impact on jobs as they employ high-skilled, often foreign, labor.

The central government budget—which under the authorities’ definition does not include two large investment projects, the water pipeline and railroad, undertaken by public enterprises—aimed at a small deficit of 0.4 percent of GDP in 2016. Including the two projects, the overall fiscal deficit is estimated at 16 percent of GDP, down from 22 percent in 2015. The current account deficit remained large at 29 percent of GDP, financed mainly by borrowing and foreign direct investment. The currency board’s coverage is comfortable, with the ratio of reserves-to-base money estimated at 109 percent in 2016 while official international reserves reached 3.4 months of imports.

Performance of the banking sector remained weak and financial inclusion limited despite recent efforts. The financial sector is characterized by a high level of nonperforming loans, high credit concentration, and low profitability, and remains vulnerable to adverse shocks.

Executive Board Assessment [2]

Executive Directors noted that while the ambitious increase in infrastructure investment, mostly debt-financed, contributes to a broadly favorable outlook for Djibouti, it also elevates fiscal and debt vulnerabilities. Directors encouraged the authorities to press ahead with critical reforms aimed at translating this investment into strong, inclusive, and job-creating growth and returning debt to a sustainable trajectory. Key policy priorities include strengthened debt policy and management, tax reform, and structural reforms to improve the efficiency and governance of public enterprises, and to strengthen the business climate.

Directors emphasized the importance of developing a coordinated strategy aimed at establishing debt sustainability, given Djibouti’s high risk of debt distress. They encouraged the authorities to adopt a public debt law and set an explicit debt anchor, such as public debt-to-GDP ratio along with a debt path, to ensure sustainability. Directors underscored the need to reduce the pace of government borrowing and avoid borrowing on non-concessional terms, including by public enterprises. They encouraged the authorities to minimize their direct financial participation in PPPs and avoid explicit guarantees and implicit contingent budget liabilities. Directors called for strengthening debt management capacity, coordination of institutions involved in contracting debt, and capacity to evaluate PPP-related fiscal risks, as well as staying current on all debt service obligations.

Directors called for further tax reforms to mobilize revenues and reduce wide-ranging exemptions and special regimes. They urged the authorities to launch a comprehensive review of tax expenditures, exemptions, and special tax regimes with a view to reducing them. This would help broaden the tax base and increase government revenue while generating space for debt service and priority social spending.

Directors urged the authorities to accelerate the implementation of structural reforms to support broad-based, inclusive, and private-sector-led growth. Reforms of public enterprises should seek to enhance their efficiency, strengthen governance, improve their capacity to manage investment projects, and open public monopolies to competition. Directors also called for reforms to improve the business climate, strengthen competition, address the distributional dimension of growth, and support private sector development. Investments in human capital and education were also encouraged.

Directors encouraged the authorities to continue focusing monetary and financial policies on banking and external stability as well as financial inclusion. They called on the Central Bank of Djibouti to strengthen risk-based bank supervision, reduce credit concentration, better enforce prudential ratios, introduce a minimum reserve requirement and bank resolution mechanisms, and strengthen the AML-CFT framework.

Directors observed that the currency board arrangement has served Djibouti well, including by instilling confidence and improving predictability in international transactions, and should be maintained at an unchanged parity. They noted that while the exchange rate may be somewhat overvalued in real effective terms, the extent is subject to considerable uncertainty. They called on the authorities to strengthen competitiveness through structural reforms.