Public Information Notice No. 01/76

Public Information Notice: IMF Concludes 2001 Article IV Consultation with Comoros

July 31, 2001

On July 18, 2001, the Executive Board concluded the Article IV consultation with Comoros.¹

Background

Macroeconomic performance has been poor in recent years. Large fiscal imbalances led to serious disruptions in government services in 1997-98, which were further exacerbated by the political instability. Against this background, real GDP, which grew by less than the population during much of the 1990s, declined by 1.1 percent in 2000 on account of a slowdown in donor support, mounting disruptions in electricity supply, and the lack of investment in the main agricultural export products (vanilla, cloves, and the natural essence ylang-ylang). The Comoros is a member of the French Franc Zone and under its fixed exchange rate regime inflation was kept at around 3 percent per year since 1996, but it is estimated to have accelerated to close to 5 percent, year-on-year, by end-December 2000, mainly because of increases in prices of petroleum products.

The fiscal performance of the federal government was mixed in 2000 (data on fiscal developments on Anjouan are not yet available). Revenue fell from 11.8 percent of GDP in 1999 to 10.2 percent in 2000, owing to the granting of tax exemptions for the import of personal effects. In response, the authorities sharply reduced expenditures on goods and services and transfers, and improved management of the payroll generated a 5 percent reduction in the wage bill compared to 1999. As a result, the overall domestic deficit (excluding foreign financed expenditure and on a commitment basis) remained at a low level of 0.2 percent of GDP. However, external debt-service obligations amounted to 4.3 percent of GDP and the resulting large financing need was mainly met by new wage arrears (of about one month, bringing the total outstanding stock of wage arrears accumulated by the federal government since 1995 to CF 8.7 billion (8.1 percent of GDP)), and by new arrears to suppliers (1.1 percent of GDP) and to external creditors (3.2 percent of GDP).

Reflecting a sharp increase in export prices, broad money and credit to the economy increased by about 14 percent in 2000. Interest rates for the single commercial bank are set by the central bank; they did not change in 2000, reflecting the stability in rates in the Euro zone, to which they are linked.

The current balance of payments account (including grants) moved, from a deficit of 4 percent of GDP in 1999 to virtual balance in 2000 as a result of a sharp increase in export prices and stagnating imports, which more than offset an almost 50 percent decline in official grants. Gross official reserves increased from 6.1 months of imports of goods and services in 1999 to 8.0 months at end-2000.

Executive Board Assessment

Executive Directors noted that unstable political conditions and weak macroeconomic and structural policies in recent years had resulted in persistent low economic growth, large fiscal imbalances, and mounting domestic and external public sector payments arrears. Directors considered that tackling these problems, as well as the widespread poverty in the country, should be the main priorities of economic policy. Accordingly, they welcomed the recent progress toward political reconciliation and the formulation of a comprehensive staff-monitored program (SMP) for the period July 2001-June 2002 to begin the process of economic rehabilitation.

Directors stressed the need for the authorities to implement the SMP vigorously, as a strong record of policy implementation will be essential to rebuild confidence and mobilize much needed external financial support, including support under the Fund's Poverty Reduction and Growth Facility and the HIPC Initiative. They welcomed the government's intention to begin preparing a comprehensive poverty reduction strategy, with the assistance of the United Nations Development Program.

Directors welcomed the SMP's emphasis on improving fiscal sustainability. They strongly supported a continuation of the tight public sector wage policy, and endorsed the authorities' plans to reduce employment in the public sector as part of a civil service reform program. They encouraged the authorities to complete expenditure reviews in the education and other sectors as soon as possible to determine optimal staffing levels and rebuild critical government services. While divestiture of public assets could contribute to improved public sector financing, Directors recommended that the timing of such sales should be considered carefully, in view of the uncertain outlook for the global economy. Noting the revenue shortfall in 2000, Directors welcomed the recent reduction in import tax exemptions, stressing the need for further progress in this area, and the planned strengthening of tax and customs administration with a view to improving revenues. Directors stressed, however, that these public sector reforms should be executed in a manner that does not adversely affect social services and the poor.

Directors noted that large domestic and external arrears had been a major factor in the deterioration in government services and the decline in foreign assistance in recent years. They stressed the importance of ensuring that the planned revised budget for 2001 is realistic, avoids new domestic arrears, and includes provisions for resuming debt service payments to external creditors. They strongly recommended that the authorities seek a comprehensive agreement with the trade unions on the stock of wage arrears, taking into account the available resources and the need to adequately provide poverty reduction expenditures.

Directors observed that the Comoros' participation in the French franc zone had contributed to maintaining low inflation and a high level of reserves in recent years. However, high domestic costs, especially due to inefficient utilities, had eroded the country's external competitiveness. Directors urged the authorities to accelerate the implementation of structural reforms to improve the efficiency of the economy.

Directors commended the authorities for the progress in reconciling the external debt data with creditors as a first step toward addressing the external arrears situation. They urged the authorities to complete the reconciliation as soon as possible, to strengthen debt management, and to start discussions with a view to quickly regularizing relations with external creditors. Directors noted that the provisional debt sustainability analysis indicated that the Comoros could be eligible for debt relief under the enhanced HIPC Initiative. They looked forward to discussing a preliminary HIPC document, possibly by mid-2002, provided performance under the SMP is satisfactory.

Directors noted that the macroeconomic database of the Comoros remains weak, despite the authorities' recent efforts to strengthen it, which complicates the design and monitoring of economic policies. They urged the authorities to make further efforts, including by making good use of technical assistance from the Fund.