The Comorian authorities have made steady progress in fiscal consolidation, reinvigorated their structural reform agenda, and gathered strong public support for sound macroeconomic policies. Macroeconomic developments have been largely positive, mostly thanks to improved policies. External competitiveness has improved step by step in the last year by the recent depreciation of the euro vis-à-vis the U.S. dollar. In the medium term, the government intends to seek further gains in fiscal consolidation and to accelerate reform of public enterprises and civil service.

Background: Turned-Around Program Performance in a More Enabling Political Context

1. In September 2009, the IMF Board approved a three-year ECF arrangement to support Comoros’ medium-term economic recovery efforts. The reform agenda promotes strong sustained growth to achieve deeper gains in poverty alleviation and faster progress toward the MDGs. Key policies to strengthen economic competitiveness are geared to (i) achieving gains in fiscal consolidation while protecting spending for the social sectors, and restoring external viability; (ii) deepening financial intermediation; (iii) enhancing the efficiency of the public utilities; (iv) strengthening institutions and improving governance; and (v) improving the investment climate.

2. Program performance weakened substantially in late 2010 and early 2011. From late 2010, a sizeable public sector pay raise and lower-than-programmed domestic tax collection weighed heavily on fiscal developments, and nearly all programmed structural reform measures were delayed. As a result, Board discussion of the third and fourth reviews under the ECF arrangement, originally planned for 2011, was delayed.

3. Performance improved sharply in late 2011 under the reform-minded cabinet that took office in mid-year. Corrective revenue and spending measures introduced in the third quarter—including stepped-up tax arrears recovery efforts and the reversal of the prohibitive 2010 public sector wage increase—helped to steer the program back on track. The domestic primary budget deficit (excluding one-off nontax receipts) was limited at 1.4 percent of GDP; and all wage arrears accumulated in the earlier months of 2011 were cleared by end-year. In the structural area, several long-delayed reform measures were implemented; and, in June 2012, the Board completed the third ECF review and approved the extension of the program to end-2013.

4. The last Article IV consultation held in January 2011 concluded that further efforts were required to achieve tangible progress in putting the economy on a path of strong sustained growth, particularly on structural reforms. Despite the setback in program performance during 2011, the record of implementing these recommendations is now largely positive.

Text Figure 1:
Text Figure 1:

Selected Economic and Financial Indicators, 2012

Citation: IMF Staff Country Reports 2013, 032; 10.5089/9781475595253.002.A001

Source: Comorian authorities; and IMF estimates.1 2012 revenue estimate includes “economic citizenship program” receipts of about 3 percent of GDP

Recent Economic Developments

5. The political context has continued to improve and program ownership has further strengthened during 2012. The authorities in power since May 2011 have shown unwavering commitment to IMF-supported policies; and program ownership is strong not only in government, but also among trade unions, the private sector, and wider civil society. There is a broad national consensus on the need to stay the course for achieving the HIPC completion point and continuing satisfactory implementation of the ECF-supported program over the medium term.

6. Macroeconomic performance has strengthened during 2012 (Table 1 and Figure 1). Real GDP growth is now projected at 2.5 percent (2.0 percent during 2009–11), benefiting from strong agricultural exports, sustained construction activities, robust foreign aid and direct investment, and resilient remittances. Despite easing pressures on import prices, the depreciation of the euro against the dollar and the temporary impact of rain floods in April on domestic food prices have slowed the expected fall in inflation to a projected 5 percent for end-December (4.3 percent under the program). Solid exports of cloves and buoyant receipts of transfers, mainly under the economic citizenship program(ECP), have supported a narrowing of the external current account deficit to 6.9 percent of GDP (estimated 3.5 percent lower than programmed). 1 International reserves increased further and are expected to reach the equivalent of 7.2 months of imports of goods and services by the end of 2012 (6.7 months at end-2011). In the monetary area, persistent excess liquidity in the banking sector made the reduction in the reserve ratio ineffective as a tool for stimulating lending. As a result, a large reduction of central bank credit to government was only partially balanced by a modest expansion of bank credit to the private sector. The fiscal outturn is expected to be significantly better than anticipated thanks to buoyant receipts—particularly non-tax revenues—and continued restraint on spending, resulting in a projected domestic primary surplus of 2.2 percent of GDP, compared to a deficit of 1.1 percent under the program.

Table 1.

Selected Economic and Financial Indicators, 2009–17

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Sources: Comorian authorities; and IMF staff estimates and projections.

Revenue for 2011–12 includes exceptional “economic citizenship program” receipts (about 3 percent of GDP each year).

Includes interim HIPC assistance (2010-12) and expected debt relief under HIPC and MDRI upon completion point at end-2012.

Data for 2010 and 2011 reflect 2010 revenues collected in early 2011.

External debt ratios after full HIPC, MDRI and beyond HIPC relief from end-2012. Ratios from LIC-DSA (Appendix II - Table 1a) produced with a different methodology than those from HIPC-DRA (Appendix II - Paragraph 1).

Figure 1.
Figure 1.

Downside Scenario

Citation: IMF Staff Country Reports 2013, 032; 10.5089/9781475595253.002.A001

Source: GIMF and WEO (2012).

Program Performance in 2012

7. Program performance continued to be satisfactory (MEFP, Tables 1 and 2). At end-June 2012, all quantitative performance criteria and indicative targets, as well as structural benchmarks were met. Revenues exceeded the program target by 2.7 percent of GDP, reflecting adequate tax collection and continued strong non-tax receipts under the ECP. The wage bill remained within the programmed envelop, but primary current expenditure was 0.4 percentage points of GDP higher than programmed due to emergency spending following massive flood damages in April; and the domestic primary budget recorded a surplus of 2.1 percent of GDP at end-June (a deficit of 0.2 percent under the program). The performance criterion on net bank credit to government was observed with a wide margin, despite budget support falling below target by 1.1 percent of GDP. Five out of six structural benchmarks for June and September were met (MEFP, Table 2). Specifically, the government finalized a feasibility study on the establishment of an integrated computerized public finance management system and developed a reform strategy for the electricity parastatal (MA-MWE), with the assistance of development partners. The September benchmark for the implementation of newly approved civil service personnel frameworks has been delayed to early 2013 due to technical difficulties incurred by the authorities. In particular, filling in newly budgeted positions and matching them up with existing personnel skills at both Union and island levels have taken longer than initially anticipated. The authorities are confident that stepped up technical collaboration with relevant development partners will allow the new deadline to be met.

Table 2.

Consolidated Government Financial Operations, 2009–17

(In millions of Comorian francs, cumulative, unless otherwise indicated)

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Sources: Comoros Ministry of Finance; and IMF staff estimates.

Revenue for 2011–12 includes exceptional “economic citizenship program” receipts (about 3 percent of GDP each year).

Program projections for 2013 incorporate all identified budget support and anticipated net UFR, with zero net fiscal financing gaps.

2010 revenues received in early 2011; and, for 2013, HIPC and MDRI savings to be allocated in revised 2013 budget.

For 2009 includes further deferral of arrears to the HIPC decision point, following which these arrears are assumed to be cleared through restructuring or further deferral.

8. Fiscal performance improved markedly in 2012 thanks to stronger revenue mobilization and continued adequate control of the wage bill. The budget was tightly managed to ensure that the ECP revenue windfall would strengthen government savings and be available for additional outlays on priority infrastructure and social programs. Revenues are expected to reach 18.2 percent of GDP (14 percent of under the program), underpinned by continued improvement in the mobilization of direct and indirect taxes and by a sharp increase in receipts under the ECP. The latter receipts are projected at 4.5 percent of GDP (including a windfall of 3.1 percent of GDP), bringing non-tax revenues to 6.4 percent of GDP (2.2 percent under the program). With the wage bill maintained within the programmed envelope, the authorities have saved six tenths of the ECP revenue windfall (1.8 percent of GDP), and allocated the reminder to (i) urgent transport infrastructure rehabilitation expenditures and increased government contributions to the malaria and HIV/AIDS program managed jointly with the World Health Organization (1 percent of GDP); and (ii) a short-term loan to the financially strained national oil importing company to help secure an adequate supply of imported petroleum products (0.2 percent of GDP). As a result, the primary fiscal balance should post a surplus of 2.2 percent of GDP (a deficit 0.9 percent excluding ECP windfall), and net credit to the government should contract by 0.8 percent of GDP as opposed to an expansion of 1 percent under the program.

9. The government has completed a program of capacity building in external debt management and continued its prudent external debt management policy. With support from the AfDB, the debt office received upgrades in IT hardware, debt management software, and related training, which are now all operational.

Policy Discussions and Key Issues For 2013

A. Macroeconomic Outlook and Risks: Safeguarding Macroeconomic Stability and Strengthening Growth after Debt Relief

10. In the period ahead, economic growth is expected to continue trending up as the fiscal and structural reforms under the ECF arrangement advance and the business climate continues to improve (Text Table 1). Real GDP growth should strengthen moderately to 3.5 percent in 2013, building on increased and more reliable availability of electricity, timely civil service wage payments, investment in infrastructure, and the start of production of a new fisheries project. In addition, economic growth should benefit from sustained construction activities, robust domestic demand financed by remittances, and increased budget support. Inflation will likely recede further as world fuel and food prices decline. The external current account deficit is expected to remain broadly stable while FDI would continue to grow slowly from its already high level. In the fiscal area, the medium-term anchor remains the domestic primary budget, which is projected to be brought into balance in 2015. This will help consolidate recent gains in fiscal sustainability and preserve the improved debt dynamics in the post-HIPC/MDRI era.

Text Table 1:

Selected Economic and Financial Indicators, 2013–17

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Sources: Comorian authorities; and IMF staff estimates and projections.

11. Key risks to the outlook for 2013 stem from Comoros’ dependence on the global economy, particularly on remittances, aid, and FDI inflows. Price shocks on key import commodities, notably oil and food, could also depress growth and unsettle external and fiscal balances. Risks of delay to SOE reforms have receded over the past year, reflecting strengthened program ownership (see ¶28–31).

B. Fiscal Policy for 2013

12. The consolidation of public finances will continue in 2013 with the deficit of the domestic primary budget contained at 0.9 percent of GDP (1.2 percent, excluding ECP windfall, in 2011–12). To this end, the government is stepping up efforts to increase domestic revenue, including by improving further the efficiency of the tax and customs administrations (¶14, and MEFP ¶9). These efforts should increase tax revenue to 12.2 percent of GDP (11.8 percent in 2011), while ECP receipts are expected to return to their historical average of about 2 percent of GDP (4 percent in 2011–12). On expenditure, the government will intensify controls to contain current spending at 16.3 percent of GDP (¶14, and MEFP ¶9), with the wage bill representing 7.6 percent of GDP (8.0 percent in 2012). Spending and the fiscal deficits will however be ultimately higher in 2013 when the government allocates part of anticipated HIPC/MDRI debt relief (2.1 percent of GDP) to additional poverty reduction outlays under a revised budget (Text Box 1). External budgetary support is projected to reach 2 percent of GDP (1 percent under the program) as donors’ interest in the country rises.

13. Should additional donor resources be forthcoming, the government will consult with staff on potential uses and prepare a supplemental budget for their allocation. Priority will be given to clearing domestic payment arrears and increasing its reserves and deposits with central bank.

Budgeting Received HIPC/MDRI Debt Relief and Bilateral Assistance Beyond HIPC

HIPC, MDRI, and bilateral debt relief beyond HIPC are projected at an annual average of US$8.89 million (CF3, 142 million or 0.8 percent of GDP) during 2013–31.1 Estimated at US$15.6 million (2.1 percent of GDP based on 2013 exchange rate), the debt service savings for 2013 would be confirmed at Paris Club discussions scheduled for early 2013, and allocated to additional poverty reduction outlays and domestic arrears reduction in a revised budget to be discussed in parliament next year. The savings for 2014–2017 are estimated at an average of 1.1 percent of GDP; they have helped reduce Comoros’ projected net fiscal financing needs for the period to an annual average of 1.5 percent of GDP, compared with 2.6 percent of GDP before debt reduction.

1 Annual debt service savings based on 2011 exchange rates, consistent with the HIPC methodology (Table A5 of the HIPC completion point document for Comoros). The amounts in local currency and in percent of GDP may differ from those obtained on the basis of projected annual average exchange rates.

14. Continued reform of public finance management will be required to achieve the government’s fiscal objectives in 2013 and beyond (MEFP ¶19). In line with recommendations from past FAD TA missions, the authorities intend to enhance the efficiency of tax and customs administrations notably by: (i) starting operations of the new General Tax and Property Administration (AGID) by March 2013, (ii) establishing an electronic network between the country’s four major customs offices by June 2013, and (iii) increasing financial and human resources of the joint tax-customs investigations brigade. In addition, the government will continue to manage rigorously the large taxpayer registry, and make full use of ad valorem taxation of imports thanks to a more effective management of the Moroni Port. Efforts to contain expenditure are focused on gaining full control of recurrent expenditure—especially for public wages—and avoiding accumulation of new payment arrears. In this context, the authorities will continue to strictly adhere to the new automated personnel expenditure management system (GISE) and implement in January 2013 the new civil service organizational frameworks with a view to achieving a more efficient and financially viable civil service in the medium term. These frameworks set the optimal size of the civil service at 11,666 full-time positions. However, cognizant of the need to preserve the medium-term sustainability of the wage bill, the government will initially limit the number of civil servants to the 10,521 employees validated under the 2011 census (19 percent less than the 13,000 reported prior to verification). Staff and the authorities agreed that the optimal number of civil servants could be reached over the medium term, provided that the wage bill does not exceed the equivalent of 6 percent of GDP. With the assistance of the World Bank, the government is also developing an integrated public finance information management system aimed at improving the quality of budget execution, and the monitoring of revenue and expenditures in all phases of the budget cycle. The new system is expected to be operational by end-June 2013 at a cost of US$1.5 million fully covered by the AfDB.

15. Within the 2013 fiscal framework spelled out above, the government’s net fiscal financing requirements are fully covered with already-identified budget support and anticipated use of IMF resources (Text Table 2). Net bank credit to government would amount to 1.4 percent, half of which representing a drawdown of government deposits with the central bank.

Text Table 2.

Comoros - Strategy for filling the financing gap, 2012–13

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Source: Comorian authorities; and IMF estimates.

C. Structural and Financial Sector Reforms

16. The reform of public enterprises is advancing with the assistance of development partners (MEFP, ¶46, 47, and 48). In particular, the privatization of Comores Telecom is proceeding as scheduled. [In late November 2012, the government issued a call for bids from potential investors], following approval in October of a social plan for the company. The selection of a strategic partner and the sale of 51 percent of the company’s equity are expected in 2013. The government also plans to open the sector to competition through the transparent and competitive issuance of a second mobile license, and to improve connectivity (Completion Point Document, [¶20]). With the support of the World Bank, the government has adopted a reform strategy for the state-owned oil importing company (SCH) aimed at improving the structure of tariffs and making petroleum products prices more flexible,2 strengthening internal controls, and defining a medium-term investment plan (MEFP, ¶18). In the case of the electricity and water utility MA-MWE, the Bank and other partners are providing financial and technical support to put the company on a financially sustainable footing before privatization; the government is enlisting external expertise in company management.

17. Comoros’s banking system is generally sound (Text Table 3). Following a year of record profits in 2011, the nonperforming loans ratio has declined during 2012 to 12.0 percent at the end of June, compared to 15.7 percent at end-2011; the level is still high by regional standards but well-provisioned. Liquidity and solvency ratios remain high. The government has two priorities for strengthening the financial sector: (i) the privatization of the Development Bank of the Comoros is well advanced and the process should be completed in 2013; (ii) the restructuring of the National Post and Financial Services Institution (SNPSF) is likely to include the separation of banking activity from the postal office and foreign direct investment in the creation of a new fully-fledged commercial bank in 2013.

Text Table 3.

Bank Prudential Ratios Compliance

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Source; Central Bank of Comoros.

18. The Central Bank of Comoros continues implementing recommendations from the 2010 safeguards report and strengthening banking supervision with IMF and Banque de France assistance. The BCC started on-site inspections of financial institutions in 2012, and is working towards the establishment of a credit bureau. Also, the BCC has started drafting a new banking law; and the audit of its financial statements for 2011 has been completed and the financial statements will be published by end-December 2012 (MEFP, ¶11–12).

D. Program Monitoring and Risks to IMF Resources

19. The program will be monitored on the basis of quarterly quantitative targets and structural benchmarks (MEFP Tables 1 and 2). Program performance criteria have been set for end-June 2012 and end-December 2012 for the fourth and fifth ECF reviews, respectively, at the time of Board consideration of the third ECF review. No revisions to performance criteria and indicative targets are requested; and new targets for the sixth review are being proposed for end-June 2013. The fifth and sixth ECF reviews are expected to be completed by June and December 2013, respectively.

20. In the structural area, the fifth program review will focus on reforms to further strengthen revenue mobilization and control of wage outlays, and to improve efficiency of public utilities. These include the effective operation of the General Administration of Taxes and implementation of new ministry personnel frameworks; as well as the privatization of the state-owned telecommunications company.

21. The risks to IMF resources are manageable. For the rest of the program (2012–13), debt service to the IMF would average 0.007 percent of exports of goods and services while in the medium term (2012–2023), it would average less than 1.3 percent of exports of goods and service (Table 8), within Comoros’s capacity to repay the IMF.

Table 3.

Consolidated Fiscal Operations, 2009–17

(In percent of GDP, unless otherwise indicated)

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Sources: Comoros Ministry of Finance; and IMF staff estimates.

Revenue for 2011-12 includes exceptional “economic citizenship program” receipts (about 3 percent of GDP each year).

Program projections for 2013 incorporate all identified budget support and anticipated net UFR, with zero net fiscal financing gaps.

2010 revenues received in early 2011; and, for 2013, HIPC and MDRI savings to be allocated in revised 2013 budget.

For 2009 includes further deferral of arrears to the HIPC decision point, following which these arrears are assumed to be cleared through restructuring or further deferral.

Table 4.

Consolidated Government Fiscal Operations, 2011–13

(In millions of Comorian francs, cumulative, unless otherwise indicated)

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Sources: Comoros Ministry of Finance; and IMF staff estimates.

Revenue for 2011–12 includes exceptional “economic citizenship program” receipts (about 3 percent of GDP each year).

Program projections for 2013 incorporate all identified budget support and anticipated net UFR, with zero net fiscal financing gaps.

2010 revenues received in early 2011; and, for 2013, HIPC and MDRI savings to be allocated in revised 2013 budget.

Table 5.

Monetary Survey, 2009–17

(In millions of Comorian francs)

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Sources: Central Bank of Comoros; and IMF staff estimates and projections

Includes net credit to government entities other than public treasury.

Table 6.

Balance of Payments, 2009–17

(In millions of Comorian francs, unless otherwise indicated)

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Sources: Comorian authorities, and IMF staff estimates and projections.

For 2009 includes further deferral of arrears to the HIPC decision point, following which these arrears are assumed to be cleared through restructuring or further deferral.

Table 7.

Education and Health Expenditure, 2009–13

(In millions of Comorian francs)

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Sources: Comorian authorities; and IMF staff estimates and projections.
Table 8.

Indicators of Capacity to Repay the Fund, 2009–23

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Sources: IMF staff estimates and projections.

Temporary waiver of interest payments on PRGT borrowing until December 2012 is assumed.

Assuming ECF disbursement of the entire amount of SDR 13.57 million (152.5 percent of quota). The entire EPCA credit of SDR 1.1 million (12.5 percent of quota) was repurchased by the first ECF disbursement.

Total debt service before HIPC interim assistance; includes IMF repurchases and repayments.

E. Poverty Reduction Strategy Paper

22. The second annual progress report (APR), completed in October 2012, assesses moderately positive performance in implementing the Poverty Reduction Strategy Paper (PRSP) in 2011. Particularly noteworthy are achievements in maintaining macroeconomic stability, rekindling the reform of the public utilities, and securing improvements in health and human capital indicators. However, poverty remains widespread—particularly in rural areas—and local technical capacity constraints are important obstacles to effective implementation of the reform agenda. The APR also shows that there remain major challenges to implementing the PRS, including weaknesses in data collection and statistics. In addition, the growth prospects continue to be hampered by energy shortages and infrastructure bottlenecks (JSAN, ¶13–14).

HIPC Initiative Completion Point and Financing Assurances Review

23. Comoros has broadly met the conditions for reaching the HIPC Initiative completion point. With assistance from development partners, the authorities have implemented all but one of the HIPC Initiative completion point triggers (Completion Point Document), including broadly satisfactory implementation of the poverty reduction strategy in the last two years; achievement of gains in fiscal consolidation and macroeconomic stability; progress in improving public financial and debt management; and advances in restructuring the public utilities. The authorities have also developed new institutional frameworks aimed at achieving improved outcomes in procurement and governance, and in better tackling corruption. In the education and health sectors, new schools have been built and required vaccination campaigns undertaken. The authorities have requested a waiver for the nonobservance of the completion point trigger on the distribution of school books, in part due to a change in strategy on education, as recommended by relevant donors (Completion Point Document, ¶27).

24. The authorities have concluded debt restructuring agreements with their main bilateral and multilateral creditors, consistent with the November 2009 Paris Club Agreement and the HIPC Initiative framework. They are negotiating with remaining multilateral and official bilateral creditors and making good faith efforts to reach collaborative agreements with private creditors (completion point document, ¶42).

25. An updated low-income country debt sustainability analysis (LIC-DSA) indicates that Comoros would face a high risk of debt distress post HIPC/MDRI. The country had been in debt distress prior to reaching the HIPC Initiative completion point, but would likely not experience debt repayment difficulties after receiving full HIPC, MDRI, and beyond-HIPC debt relief. However, the debt-to-exports ratio reveals a protracted breach of the relevant threshold under the baseline, and the external debt dynamics would remain vulnerable to shocks over the long term. While remittances are an important source of foreign exchange, they have a limited impact on growth and affect the external debt outlook only moderately. (Completion point Document, Appendix II). In light of Comoros’ narrow export base and high vulnerability to exogenous shocks it is critical that the government’s fiscal financing needs continue to be met mostly with grants, and that new borrowing is contracted on concessional terms for the foreseeable future.

Article IV Discussions: Managing Risks and Consolidating Recent Gains in Macro-Economic Stability and Competitiveness

26. Comoros’ external position improved markedly in 2012 despite persistent trade imbalances (Text Figure 3). The current account deficit is projected to decline to 6.9 percent of GDP (9.0 percent in 2011), mainly reflecting stronger-than-anticipated official transfers. Over the medium term, external imbalances should decline gradually as sizable investment in the tourism sector comes on stream and import dependence declines—facilitated notably by improved energy efficiency from ongoing energy sector reforms (¶16).

Text Figure 2:
Text Figure 2:

Reserve Adequacy Assessment

(In months of imports)

Citation: IMF Staff Country Reports 2013, 032; 10.5089/9781475595253.002.A001

Source: Comorian authorities; and IMF estimates.
Test Figure 3:
Test Figure 3:

Current account and its financing

(In percent of GDP)

Citation: IMF Staff Country Reports 2013, 032; 10.5089/9781475595253.002.A001

source: Comorian

27. The Comorian franc is broadly in line with its medium-term fundamentals (Box 1). Comoros’ real effective exchange rate depreciated by about 13 percent between October 2009 and September 2012, mainly reflecting the weakening of the euro vis à vis the US dollar. Over the medium term, results based on standard CGER-like methodologies indicate that Comoros’ exchange rate is subject to overvaluation pressures, but would remain broadly consistent with external sustainability provided that the authorities maintain fiscal discipline and continue pressing ahead with structural reforms to improve competitiveness. In this regard, despite recent progress, Comoros’ structural indicators suggest that the overall quality of the business environment remains poor, with the country scoring below peers in areas such as the ease of doing business, government effectiveness, and quality of regulation (Text Table 4 and Box 2). Staff urged the authorities to adhere closely to the polices set out in the ECF arrangement; continue making progress in promoting the development of sectors with high growth potential, such as agriculture, fishing, and tourism; and further improve the business environment to attract foreign investors and promote private sector development. The authorities concurred with staff’s assessment of the exchange rate and reiterated their adherence to the exchange rate peg under the Franc Zone arrangement, which they view as an appropriate anchor for external stability and low inflation.

Text Table 4:

Doing Business Indicators: Comoros and selected East African Countries

(2013 ranking)

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Bottom ranking 185 equals worst business climate; top 1 equals best business climate.

Source: World Bank Group.

28. Thanks to strong remittances and aid inflows, Comoros’ international reserves remain at an adequate level for precautionary purposes. In 2012, reserve holdings are expected to increase to 7.2 months of imports, equivalent to 32 percent of GDP and 90 percent of broad money. Over the medium term, reserve accumulation would remain adequate as indicated by a model-based approach to reserve adequacy in LICs, which explicitly takes into account Comoros’ structural characteristics—including its vulnerability to external shocks—and different costs of holding reserves (Text Figure 2).3 The authorities concurred with staff’s analysis and reiterated their commitment to prudent reserve management, consistent with relevant Zone Franc regulations, to support the peg with the euro.

29. A small open economy, Comoros is particularly vulnerable to external shocks; and delays in programmed public enterprise and financial sector reforms would significantly affect medium-term prospects. The mission discussed the (i) potential impact of external shocks transmitted through remittances, FDI, trade, and aid with a focus on vulnerability to disruptions in aid and FDI receipts (Box 2); and (ii) potential fall-out from a domestic policy shock that would delay public enterprise and banking sector reforms.

30. Achieving strong sustained growth requires steady efforts to alleviate Comoros’ vulnerability to import price shocks, and to develop a diversified goods and service exports base. Fuel imports, the bulk of which for electrical power generation, exceed 10 percent of GDP. The authorities concurred that enhancing the flexibility of domestic fuel pricing policies and reforming MA-MWE and SCH are essential to shielding the budget from adverse global fuel price developments. In contrast, goods exports account for only 4 percent of GDP. The authorities stressed their commitment to export diversification, pointing to fishing and tourism projects that are underway. They recognized that the long-term success of their export development strategy hinges on a further strengthening of economic competitiveness more generally, which requires continued adherence to stability-oriented fiscal policies and to increased investments in infrastructure and education.

31. The authorities broadly agreed that a suspension of SOE reform would negatively affect overall program performance, curtail anticipated aid flows, and delay much needed gains in overall economic competitiveness. They concurred that such developments would frustrate achievement of the government’s medium-term growth and poverty alleviation objectives. However, the authorities felt that the likelihood of this downside scenario materializing was low since they were fully committed to the SOE reform and were indeed carrying it forward. The authorities reiterated their commitment to fiscal discipline and to continued progress in implementing their structural reform agenda, as a means of building fiscal buffers and enhancing investor and donor interest in Comoros.

32. Although the banking sector remains sound, it may lack the dynamism to support Comoros’ growth ambitions more effectively. Recent years have seen the arrival of two new commercial banks and a significant increase in both the geographic coverage of financial services and the volume of savings mobilization. As a result, financial intermediation has expanded and competition in the banking industry increased. However, the persistent excess bank liquidity, high interest spreads between deposit and lending rates, and still high NPL ratios point to institutional bottlenecks that still have to be addressed. These include an outdated regulatory framework, the absence of a credit bureau, and weaknesses in the legal system that make enforcement of rulings against loan defaulters costly and slow.

33. The authorities concurred with staff’s assessment of the banking system’s soundness and urgent need for modernization. They noted BCC’s recently bolstered banking supervision capacity and other important policy actions under way to strengthen the central bank’s ability to support the development of the financial sector (¶18).

Comoros’ Exchange Rate and Competitiveness Assessment

An updated assessment of the real effective exchange rate (REER) indicates that the Comorian franc is broadly in line with its medium-term fundamentals. However, non-price indicators suggest that the country’s external competitiveness continues to be undermined by the weak overall quality of the business environment—particularly in the areas of ease of doing business, government effectiveness, and quality of regulation. These results are subject to considerable uncertainty due to the difficulties of assessing the exchange rate with standard analytical methodologies in developing countries and the volatility of economic variables—especially in small islands.1,2

Standard exchange rate assessment methods3

The Macroeconomic Balance approach points to an 11 percent overvaluation of the REER with respect to its medium-term fundamentals. These include economic growth, fiscal balance, income, net foreign assets position, aid, remittances, and demographics.

uA01fig02

Exchange Rate Assessment

(in 2017; percent misalignment)

Citation: IMF Staff Country Reports 2013, 032; 10.5089/9781475595253.002.A001

Source: Comorian authorities; and IMF estimates

The External Sustainability approach suggests an overvaluation of the Comorian franc of 22.5 percent, if the country’s net foreign asset position was to be maintained at its 2011 level (12 percent of GDP). The estimated overvaluation increases if a lower net foreign position-to-GDP ratio is targeted over the medium term.

uA01fig03

Export market shares

(In percent)

Citation: IMF Staff Country Reports 2013, 032; 10.5089/9781475595253.002.A001

Source: Comorian authorities; and IMF estimates

The Equilibrium Real Exchange Rate and the Purchasing Power Parity approaches indicate that the currency is undervalued with respect to its long-run equilibrium level in the range of 2.6–6.6 percent, which falls within the margin of errors of these methods.

Non-price indicators

Comoros’ export performance has been lackluster compared to other CFA countries, leading to a marked decline of the country’s share in world export and contributing to a significant widening of the trade balance deficit. Over the medium term, exports are expected to pick up, reflecting important investment in the service sector and efforts to broaden the export base.

uA01fig04

Structural Indicators of Governance: Comoros and CFA countries

(percentile rank: 0-100) (1)

Citation: IMF Staff Country Reports 2013, 032; 10.5089/9781475595253.002.A001

(1) Ranking of the country among all Countries of the world; 0 (100) indicates lowest (highest) rank.Source: World Bank.

The overall quality of the business environment remains poor, despite recent progress. The 2013 Doing Business Indicators report ranks Comoros 158 out of 185 countries (also 158 in 2012), underscoring the need for further improvement—particularly with respect to the ease of starting a business, enforcing contracts, and resolving solvency. In addition, structural governance remains weak—including in the areas of government effectiveness and quality of regulation—as indicated by the 2012 Governance Indicators from the World Bank.

1 A. Prati, and others, “Performance in Low-Income Countries”, IMF occasional Paper, n. 272, 2011. 2 W. Easterly and A. Kraay, “Small States, Small Problems? Income, Growth, and Volatility in Small States”, in World Development, Vol. 28, Issue 11, November 2000, pp. 2013–2027. 3 The exchange rate assessment is based on Vitek, 2010, Exchange Rate Assessment Toolkit, mimeo; and Aydin, 2010, Exchange Rate Assessment for Sub-Saharan Economies, mimeo. The dataset used for the regressions contains annual data on non-oil exporting Sub-Saharan countries over the period 1990–2011.

Interconnectedness and Spillovers: Assessing Comoros’ Vulnerability to Global Shocks

Comoros can be affected by changes in global conditions through four main channels: remittances, foreign aid, FDI, and exports. For 2012-13, these sources of foreign exchange average an estimated 35 percent of GDP. To assess the potential impact of global shocks on Comoros, staff simulated the impact of two adverse scenarios based on WEO projections by using the GIMF model.1

The baseline scenario is based on global medium term (2013-17) growth of 4.1 percent and falling commodity prices (including fuel). Two alternative scenarios are considered: (i) a scenario assuming a 3-percentage-point fall in growth in 2013 (from 3.5 percent in 2012), followed by a gradual recovery of real GDP growth to an average 4.1 percent in the medium term (Figure 1);2 and (ii) a protracted growth decline scenario consisting of an average 15-percent fall (-0.59 percentage point) in growth between 2013 and 2014, followed by a steep recovery to an average real GDP growth of 3.2 percent in the medium term (Figure 2).3

Figure 2.
Figure 2.

Protracted Growth Decline Scenario

Citation: IMF Staff Country Reports 2013, 032; 10.5089/9781475595253.002.A001

Source: GIMF and WEO (2012).

Changes in global conditions would affect aggregate demand through three main channels:

  • Remittances, mostly from France, have averaged 25 percent of GDP in 2009–11 and have been resilient throughout the recent crisis. They are important for financing imports (49 percent of GDP in 2009–11). A further slowdown in the Euro Zone could depress the level of remittances and household consumption could suffer severely, although remittances have so far been quite resilient in the face of the global slowdown.

  • Foreign aid (about 8–10 percent of GDP) could be susceptible to continued austerity policies in donor countries, particularly in Europe. Lower budget and project grants would have a relatively important impact on growth. However, these risks would be mitigated by potentially stronger resource flows from multilateral donors and partner countries from the Gulf region if program performance remains satisfactory.

  • FDI flows in Comoros have accelerated recently (to about 5 percent of GDP). They are predominantly originating from the Gulf region. Staff analysis suggests that adverse developments in the Gulf region could put future and existing projects at risk, with far reaching implications for economic activity in Comoros.

  • Exports (4 percent of GDP) are dominated by cloves and vanilla. World price fluctuations would affect export earnings, but with contained repercussions on the wider economy.

With only 10 percent of remittances allocated to productive activities, the direct growth effect of lower inflows is somewhat small, and a very high propensity to import and a narrow domestic production base make the indirect (multiplier) effect even less significant. Staffs estimate the growth elasticity of remittances at around 0.15 in remitting countries as compared to 1.5 found in literature. 4 As for FDI receipts and foreign aid, their growth elasticities in source regions are set at 21 and 0.1, respectively.5 The impact of the downside scenario and the protracted growth decline scenario are presented in Figure 3 and Figure 4, respectively.

Figure 3.
Figure 3.

Impact of a Downside Scenario1

Citation: IMF Staff Country Reports 2013, 032; 10.5089/9781475595253.002.A001

Source: Staffs’ calculations.
Figure 4.
Figure 4.

Impact of a Protracted Scenario2

Citation: IMF Staff Country Reports 2013, 032; 10.5089/9781475595253.002.A001

Source: Staffs’ calculations.

Under either scenario, Comoros has limited buffers to absorb the negative effects of external shocks. A tightening of fiscal policy could be necessary, should a reduction in budget support and FDI materializes. Continued fiscal prudence and timely implementation of the structural agenda remain critical.

1 The GIMF model is a tool for analyzing the interaction among macroeconomic policies of the world economy. It is a dynamic general equilibrium model (Kumhof, Michael, Douglas Laxton, Dirk Muir, and Susana Mursula, 2010, “The Global Integrated Monetary and Fiscal Model (GIMF) – Theoretical Structure,” IMF Working Paper No. 10/34). 2 In this scenario, the euro area sovereign and banking stress intensifies and spills over to other regions. The scenario assumes that credit in both core and periphery euro zone countries contracts significantly for two years. Sovereign risk premiums rise by 300 bps for core countries and 500 bps for periphery countries by 2014; fiscal policies are further tightened, and risk spills over to all other regions. 3 In this scenario, potential output in advanced and emerging markets is lower than assumed in the baseline. In advanced economies hysteresis in unemployment, slower technological advancement, and/or more cautious behavior of households and firms drive the long-run reduction in activity. The slower growth in advanced economies implies more subdued external prospects for emerging economies. 4 “Determinants of Bilateral Remittance Flows,”(Lueth and Ruiz-Arranz; The B.E. Journal of Macroeconomics: Vol. 8: Iss. 1 (Topics), Article 26). 5 Based on Dabla-Norris, Honda, Lahreche, and Verdier, 2010, “FDI Flows to Low-Income Countries: Global Drivers and Growth Implications,” IMF Working Paper No. 10/132; and Raghuram G. Rajan and Arvind Subramanian, 2005 “Aid and growth: what does the cross-country evidence really show?” IMF Working Paper No. 05/127, respectively.

V. Staff Appraisal

34. Staff takes note of progress the authorities have made in the last 12 months in implementing reforms under the ECF arrangement. The main achievements include a return to medium-term viability for the wage bill and rekindling of the structural reform agenda. Furthermore, the authorities have successfully concluded debt rescheduling negotiations with their main creditors and broadly met the requirements for reaching the HIPC Initiative completion point.

35. Preserving macroeconomic stability remains a key medium-term objective for the government. This requires sustained efforts to strengthen revenue mobilization and keep spending at levels compatible with medium-term fiscal sustainability. Staff urges the timely establishment of the new General Administration of Taxes and implementation of parliament-approved new ministry personnel frameworks, as well as the continued rigorous adherence to the new automated personnel expenditure management system (GISE); all of which are essential to ensuring that the fiscal program stays on track.

36. The authorities concur about the need for continued close collaboration with development partners in the reform of SOEs and in the effort to improve the business environment. In the coming year, they intend to focus on enlisting strategic partners of international repute in the management of the telecommunication (Comores Telecom) and electricity (MA-MWE) parastatals; and on strengthening management of the oil-importing company (SCH). With IFC technical assistance, the authorities are also streamlining the administrative requirements to starting a company, and developing reliable contract-enforcement mechanisms for the private sector. Continuing rigorous implementation will be critically important in the period ahead.

37. The main risks to the program remain resistance to civil service and public enterprise reforms, although these risks have receded over the last year. The prospects for higher aid, FDI and remittances could be undermined by a further weakening of the global economy, especially if the Gulf region, an important source of FDI and aid for Comoros, were affected. To mitigate the risks to the economic outlook, staff urges continued close adherence to the ECF-supported reform agenda and stepped-up efforts to enhance public support for reforms, including through stronger actions to improve governance and accountability in public resources management and the deployment of a well-targeted communication strategy.

38. Staff recommends the completion of the fourth review under the ECF arrangement and financing assurances review, disbursement of related ECF resources, as well as the conclusion of the 2012 Article IV consultation.

39. It is proposed that the next Article IV consultation with the Union of Comoros take place within 24 months subject to the provisions of the decision on consultation cycles in program countries.

Figure 5.
Figure 5.

Macroeconomic developments and projections, 2004–15

Citation: IMF Staff Country Reports 2013, 032; 10.5089/9781475595253.002.A001

Table 9.

Availability Dates of Proposed ECF Disbursements and Reviews, 2009–13

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Source: IMF staff estimates and projections.

Based on access of 152.5 percent of quota (SDR 13.5725 millions).

Includes early repayment of the SDR 1.1125 million EPCA purchased in December 2008.

Appendix 1–Letter of Intent

Moroni, November 30, 2012

Madame Christine Lagarde

Managing Director

International Monetary Fund

Washington, D.C. 20431

Dear Ms. Lagarde,

1. After decades of instability, the Union of the Comoros is entering a new era of peace, political calm, and renewed efforts to combat poverty. In this new context, the government intends to pursue with increased rigor the program of economic and social reforms supported by the IMF under the Extended Credit Facility (ECF). The main program measures are based on the national Poverty Reduction Strategy Paper (PRSP) adopted in 2009; its key objectives remain the expansion of fiscal space to permit increased spending on priority sectors and support growth, and increased competitiveness of the economy to promote strong, inclusive growth.

2. As expressed in our discussions with Fund staff for the fourth review of the ECF-supported program, we report that all relevant performance criteria, including the quantitative targets for the period ending June 30, 2012, were met. In particular, solid revenue collection and rigorous monitoring of expenditures helped to maintain net credit to the government within program limits; and the accumulation of new payment arrears was avoided thanks to stricter monitoring of treasury operations. Implementation of the structural program component was also satisfactory, with the timely adoption of measures programmed for the above deadline: Parliament’s adoption of the law creating the General Tax Administration and the establishment of the new list of government personnel to implement the recommendations of the recent civil service census.

3. The government is determined to stay the course with the fiscal consolidation and structural reform efforts under way in order to strengthen fiscal and macroeconomic sustainability and restore lasting growth. To this end, it will ensure that its revenue targets are met and maintain the wage bill within limits compatible with its capacity to mobilize domestic revenue. Cognizant of the need to strengthen economic competitiveness, the government plans to step up implementation of its structural reform program, particularly the restructuring of public enterprises. In view of the satisfactory performance and favorable outlook for the program, the government requests the completion of the fourth review under the ECF arrangement and the disbursement of related ECF resources. Furthermore, confident that it has successfully executed all except one of the triggers for the Heavily Indebted Poor Countries (HIPC) Initiative completion point, for which a waiver is being requested, the government requests access for Union of the Comoros to the debt relief benefits under the HIPC Initiative and the Multilateral Debt Reduction Initiative (MDRI).

4. Macroeconomic developments were generally favorable in 2012. The rate of real GDP growth is projected at 2.5 percent, supported by construction and private consumption sustained by transfers from the Diaspora, and by financial support and investments by foreign public and private partners. Inflation has declined moderately, reflecting a relatively less difficult international context than in 2011, despite the flooding that had affected food crop production in the second quarter. The current account deficit is expected to decline significantly, primarily due to a strong rebound in current public and private transfers. The improvements in the public financial position begun in 2011 continued, and the domestic primary budget balance is expected to post a surplus of 2.2 percent of GDP, reflecting the impact of increased efforts to mobilize domestic resources, exceptionally high receipts from the economic citizenship program, and renewed control of the wage bill.

5. The architecture and basic objectives of the ECF-supported program remain unchanged. As indicated in the accompanying memorandum of economic and financial policies, the government will continue to conduct a prudent fiscal policy with support from the IMF, ensuring the preservation of resources allocated to social sectors in support of its efforts to combat poverty. The government also intends to expedite the structural reforms needed to strengthen the competitiveness of the Comorian economy. The Government believes that the policies set forth in this letter and the MEFP are adequate to achieve the objectives of its program, but will take any further measures that may become appropriate for this purpose. We will consult with the Fund on the adoption of these measures and in advance of any revision to the policies contained in the MEFP, in accordance with the Fund’s policies on such consultation. We intend to remain in close consultation with Fund staff and provide timely information necessary for monitoring economic developments and implementation of policies under the ECF arrangement. It is expected that the fifth review of the ECF arrangement will take place on or after March 15, 2013, and that the sixth review will be completed on or after September 2013.

6. In line with our commitment to transparency in government operations, we agree to the publication of documents relating to our discussions with Fund staff under the fourth review of our ECF-supported program.

Sincerely yours,

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Attachment 1: Memorandum of Economic and Financial Policies for 2013

I. Introduction

1. This memorandum takes stock of progress made in 2011–12 in implementing the reforms supported by the International Monetary Fund under the Extended Credit Facility (ECF), and sets out the measures and policies that the government plans to implement in 2013 in order to achieve its objectives.

II. Economic Developments and Program Performance

A. Recent economic developments and program implementation

2. Economic activity is gradually gaining momentum. According to projections, real GDP growth should rise modestly to 2.5 percent in 2012, buoyed by sustained activity in the construction and public works sector, a reasonably good harvest of cash crops, the resilience of remittances from expatriate workers, increased external financial support, and a modest return of foreign direct investment (FDI). Inflation is projected at 5 percent year-on-year, reflecting the euro’s depreciation vis-à-vis the dollar and the impact of the April 2012 floods on the supply of locally produced foodstuffs. Inflation would nonetheless be lower than last year (7 percent), contained by reduced pressure on international prices of key imports.

3. The fiscal position improved considerably in 2012, reflecting satisfactory revenue mobilization and more effective control of spending, particularly the wage bill. Revenue is expected to exceed the targeted 14 percent of GDP and reach 18.2 percent of GDP thanks to increased collection of direct and indirect taxes and a marked increase in revenue from the economic citizenship program; the latter will increase to 4.5 percent of GDP in 2012 compared with a target of 1.4percent of GDP under the program, or a gain equivalent to 3.1 percent of GDP. The government has decided to save the bulk of the windfall (1.8 percent of GDP), and to allocate the remainder to urgent expenditures to rehabilitate infrastructure, primarily roads, and to spending on the malaria and HIV/AIDS program managed jointly with the World Health Organization (WHO, 1 percent of GDP); as well as to a short-term loan to the financially strained national oil importing company to help secure an adequate supply of imported petroleum products (0.2 percent of GDP). Under these circumstances, with the wage bill maintained within the programmed envelope, (i) the primary fiscal balance is expected to record a surplus of 2.2 percent of GDP (1.6 percent in 2011), and (ii) net bank financing to the government is expected to decline by 0.8 percent of GDP as against an expansion of 1 percent of GDP projected under the program.

4. The current account deficit is expected to narrow significantly in 2012. According to projections, the external current account deficit is expected to fall to 6.9 percent of GDP (9 percent in 2011), reflecting the relatively strong performance of clove exports and sharp rise in public and private transfers, despite the increase in imports financed by external assistance and resulting from the rebound of FDI, including fuel imports. International reserves are expected to increase to the equivalent of at least seven months of non-factor goods and services imports by end-2012.

5. Determined to reduce external debt to a sustainable level, the government has implemented the triggers for reaching the Heavily Indebted Poor Countries (HIPC) Initiative and expect to obtain substantial debt relief under the HIPC and Multilateral Debt Reduction (MDRI) initiatives. As a result, the net present value of external debt should be reduced to the equivalent of 78.9 percent of goods and services exports at end-December 2012 from 233.8 in 2011, representing a reduction of 64.3 percent.

B. Program implementation

6. Implementation of the ECF-supported program was satisfactory in 2012 (Tables 1 and 2). All quantitative performance criteria and indicative targets, as were the structural benchmarks, for end-June were met. Revenue exceeded the programmed target by 2.7 percent of GDP (9.7 percent against 7 percent), the result of solid tax collection and continued high levels of nontax receipts from the economic citizenship program. The wage bill remained within the established target, but current primary expenditures were higher than planned due to emergency purchases of goods and services for victims of the flooding caused by heavy rainfall in April and to the rehabilitation of roads and some sports infrastructures pursuant to longstanding sub-regional commitments. The primary domestic budget posted a surplus equivalent to 2.1 percent of GDP, while the program provided for a deficit of 0.2 percent, and the performance criteria relating to net bank credit to the government was observed with a large margin, despite budgetary support falling short of the program objective by roughly 1 percent of GDP. The solid performance in the fiscal area continued in the third quarter. On the structural front, five of the six program benchmarks for end-June and end-September were observed. In particular, Parliament adopted the law creating the new tax and property administration and providing for improved functional integration; and the government prepared a new list of government employees conforming to the results of the civil service census – an indispensable measure for improved control of the wage bill. In addition, the strategy to reform the water and electricity utility (MA-MWE) was adopted. However, implementation of the new civil service organizational frameworks (cadres organiques, ministry staffing allocations), initially planned for end-September, is not expected to begin until January 2013 following long technical delays for various upstream actions, including filling in of newly budgeted positions by the regional entities.

III. Economic and Financial Policies for 2013

A. Macroeconomic Framework

7. Real GDP growth is projected to rise to 3.5 percent in 2013, with lower inflation reflecting the continued easing of pressure on international fuel and food prices. Growth will continue to be driven primarily by activity in foodcrop agriculture thanks to satisfactory rainfall, and by continuing recovery of the construction and public works sector, which is expected to benefit from increased foreign aid, remittances from the Diaspora, and renewed FDI, including in the hotel industry. Year-on-year inflation is expected to recede to around 3.6 percent. In the external sector, the current account deficit is expected to be contained at 7.3 percent of GDP.

B. Fiscal Policy

8. In 2013, the government is committed to rigorous execution of its fiscal policy supported by the IMF under the ECF. The domestic primary fiscal deficit (excluding exceptional economic citizenship receipts) should be contained at the equivalent of 0.9 percent of GDP (1.2 percent in 2011/12). To this end, the government will step up efforts to mobilize revenue by increasing the efficiency of the tax and customs administrations. If external budgetary support exceeds the programmed amounts, the government will consult Fund staff regarding utilization of the windfall and will prepare a supplemental budget providing for allocation of the resources. In that context, the government will accord priority to clearing domestic payment arrears and increasing its reserves and deposits with the BCC.

9. Domestic revenue is expected to increase to the equivalent of 14.5 percent of GDP in 2013 and expenditures to remain within 25 percent of GDP, with the wage bill representing 7.6 percent of GDP. Efforts to mobilize revenue will rely chiefly on continuation of the reforms to increase efficiency in the tax and customs authorities as described in paragraph 19 below. Control of spending, particularly wages, will also be intensified (paragraphs 19b and 20). The budget contribution to investment expenditures will be increased to 2.1 percent of GDP (1.5 percent of GDP in 2011-2012), and spending for the social sectors of education and health will be increased to CF 13.908 billion (CF 13.034 billion in 2012). The government will continue to strengthen cash flow monitoring to prevent any new accumulation of domestic payment arrears and ensure regular, timely payment of monthly wages to government employees.

10. The overall fiscal position (cash basis, including grants) is projected to be nearly in balance in 2013. The government’s net financing needs will be covered entirely by financial support from partners in the Gulf region, the IMF, the African Development Bank (AfDB), and the World Bank. If revenue or grants fall below programmed amounts, the government will take appropriate offsetting measures including reduced spending for goods and services consumption and equipment purchases and more vigorous collection of tax arrears.

C. Money, Credit, and the Financial System

11. Monetary policy will remain prudent. It will aim to preserve the stability of prices and the macroeconomic framework while ensuring adequate supply of liquidity to the economy. In this context, the required reserves ratio was reduced to 20 percent in 2012. The rapid expansion of broad money in recent years is expected to stabilize, and credit to the private sector should increase to 11 percent in 2013. After strengthening its bank supervision department, the BCC intends to expedite the implementation of a credit information repository (centrale des risques) to promote the sound development of credit in the context of expanded financial intermediation in the Comoros. The BCC will also continue to implement the recommendations of the 2010 safeguards assessment, including the mandated routine and timely publication of its financial statements in accordance with applicable international standards. Publication of the 2011 BCC audited financial statement has been delayed, but will take place by end-December 2012.

12. Financial strengthening of the banking system remains a priority. The majority of financial institutions saw improved profitability and a decline in the large proportion of nonperforming loans in their portfolios in 2012. The BCC is supporting these improvements and intends to push them further in the coming years by ensuring that the country’s banks and financial institutions adhere strictly to prudential standards. The reform of the banking system will focus on privatizing the Comoros Development Bank (BDC) and restructuring the National Postal and Financial Services Company (SNPSF), including separation of the banking and postal functions and the sale of a substantial stake to a new foreign partner. The details of this key reform are in preparation and expected to be available by end-March 2013. The BCC, under the government’s direction, expects to ensure prompt implementation in due course.

D. Balance of Payments and External Debt

13. The external current account deficit, including grants and private and official transfers, is expected to narrow to further to 6 percent of GDP in 2013 (6.9 percent of GDP in 2012). This notably reflects a pickup in tourism services and the impact of received HIPC/MDRI debt relief, despite a decline in current public transfers after a sharp increase in 2012. In a context of improved terms of trade, the trade balance should not decline significantly, and according to projections, international reserves will represent the equivalent of 7.7 months of goods and services imports in 2013.

14. In the past two years the government successfully executed the triggers for the HIPC Initiative completion point. This will help the Union of the Comoros achieve not only debt relief under the HIPC Initiative but also substantial debt reductions under the MDRI. The net present value of the external debt to export ratio is expected to decline to 78.9 percent of GDP by end-December 2012. The union of the Comoros appreciates the debt reduction accorded by its creditors, which will enable it to devote additional resources to support its development efforts.

15. To preserve the renewed sustainability of our external debt, the government will continue pursuing a prudent budget policy and develop a comprehensive new debt strategy. In this context, the government will ensure that its financing needs are largely covered by grants, and will contract debt only under concessional terms. As in the past, any external debt contracted or guaranteed by the government will be subject to the prior approval of the Ministry of Finance of the Union, and the islands governments will not be authorized to a contract or guarantee external loans. Furthermore, the government will not contract or guarantee short-term external or nonconcessional debt as defined in the Technical Memorandum of Understanding (TMU). The authorities will continue to consult Fund staff before contracting or guaranteeing any concessional external debt in excess of US$20 million.

E. Structural Policies

16. With assistance from the development partners, the government relaunched the reform of public enterprises. The reform focuses on privatization of Comores Télécom with support from the International Finance Corporation (IFC) and restructuring of the public electricity utility (MA-MWE) and oil importer and distributor Société Comorienne des Hydrocarbures (SCH) with technical assistance from the World Bank, the AfDB, and the European Union. The government recently completed the reform strategies for the three enterprises and plans to quickly proceed with implementation.

17. The restructuring of Comores Télécom will include the sale of 51 percent of shareholding to a strategic partner of international repute. To this end, the government issued a call for expressions of interest in late November 2012, preceded by the adoption of a social plan for the company in October. The government will ensure that the new partner is effectively involved in company management before end-June 2013.

18. The government is determined to take vigorous measures to substantially improve the management of MA-MWE and SCH. It has issued a call for expressions of interest to recruit a specialized partner in charge of invigorating MA-MWE’s commercial operations. The collection rate for electricity consumption bills is extremely low in the Comoros, estimated at 30 percent. In addition to a flexible, cost-based, pricing policy, a substantial improvement in the rate of collections from the company’s customers is a key prerequisite to a sustainable turnaround of its operations and financial position. With assistance from the World Bank, the government expects to make significant progress in these areas in the coming months. In the context of the energy sector strategy adopted in August 2012, the government plans to revitalize SCH through a series of actions supported by the World Bank and other partners. The most important initiatives concern: (i) the development of appropriate price structures for the various petroleum products sold and a better alignment of domestic petroleum products prices to relevant parameters entailing enhanced pricing flexibility, (ii) improved supervision of financial management and governance, and (ii) the development of an investment program designed to increase the capacity and improve the security of storage facilities.

19. Reforms in the area of public finance aim to enhance the efficiency of tax and customs administrations and improve control of the wage bill.

  1. The tax and customs administrations will function more effectively following: (i) the start of operations of the new General Tax and Property Administration (AGID) in March 2013, (ii) the establishment of an electronic network between the country’s four major customs offices by June 30, 2013 (a new structural benchmark), and (iii) increased financial and human resources for the joint tax-customs investigations brigade. The government will also continue to rigorously manage the large taxpayer registry and make full use of ad valorem taxation of imports in the context of a more effective management of the Moroni Port.

  2. To better control the wage bill in the medium term, the government will continue to adhere strictly to the new automated personnel expenditure management system (GISE). In the near term, the government intends to limit the number of civil servants to the 10,521 employees validated under the 2011 census, a 19 percent reduction from the 13,000 reported prior to verification. It will implement the delayed new civil service organizational frameworks approved by the Parliament, beginning in January 2013. Those frameworks make room for 11,666 budgeted positions, representing the optimum size of the civil service. However, cognizant of the need to preserve the medium-term sustainability of the wage bill, the government will phase in the increase gradually, subject to the condition that the wage bill not exceeds the equivalent of 6 percent of GDP.

20. The government has begun development of an ambitious integrated public financial management system. It recently completed the system feasibility study with support from the World Bank. The system’s deployment is expected to improve monitoring of government revenue and expenditures in all phases of the budget cycle and substantially improve the quality of budget execution. The new system is expected to be online before end-June 2013, at a cost of US$1.5 million fully covered by the AfDB.

21. By end-June 2013, the government will complete a new strategy to improve public financial management for the period 2014–2017 (a new structural benchmark). The document will assess progress made in this area in recent years and define the new reform measures needed to consolidate the gains and establish new bases for more sound management of government finance in the context of a second three-year reform program supported by the IMF under the ECF.

F. Poverty Reduction Strategy Paper (PRSP) and Improvement of Economic and Social Statistics

22. The second annual progress report on PRSP implementation, completed in October 2012, reviews activities completed in 2011. It reveal the establishment of some road infrastructures, a modest recovery in the tourism and fishing sectors, and progress with respect to growth, macroeconomic stability, institutional development, and political governance. At the same time, the report notes persistent shortcomings in implementing the poverty reduction strategy and weak capacity to absorb available resources, which limit tangible gains in the social sectors. The lack of updated data on poverty remains a major constraint. The government intends to improve the effectiveness of its poverty reduction strategy by making use of the report’s conclusions and recommendations. In this context, it also plans to organize a national symposium on the promotion of the most productive sectors of the economy in order to identify policies and actions to remove constraints on the development of these sectors with strong growth potential. The government has also begun preparations for the third annual progress report on PRSP implementation, which is expected to be finalized in June 2013.

23. The government will continue its efforts to improve the socio-demographic and macroeconomic databases needed for effective design and monitoring of its development policy. It will continue to receive substantial technical assistance from the AfDB in this context, including in the preparation of the national accounts and consumer price index. The program to improve the quality of national accounts and consumer price statistics is expected to be completed in 2013. With support from the European Union, the government is implementing a program to strengthen the reform monitoring unit (CREF) capacities in the area of gathering, compiling, verifying, processing, and consolidating economic and financial data and preparing the table of government financial operations (TOFE).

IV. Monitoring of Program Execution and Rephasing of Disbursements

24. The program monitoring will be based on quarterly targets with performance criteria established on a semiannual basis (Tables 1 and 2). The government will transmit information required for program monitoring to the IMF in accordance with the TMU. During the program period, it will refrain from instituting or increasing restrictions on payments or transfers for current international transactions, and will not introduce or modify any multiple currency practices, conclude any bilateral payment agreements that are inconsistent with Article VIII of the IMF Articles of Agreement, or impose any restrictions on imports for balance of payments purposes.

25. The fifth review of the ECF-supported arrangement will be conducted in June 2013. In the area of structural reforms, the review will focus primarily on measures to improve budget management and implementation of reforms of public enterprises, including: (i) implementation of the civil service organizational frameworks; (ii) development of the new integrated public financial management system; (iii) establishment of the new AGID; and (iv) restructuring of Comores Télécom, MA-MWE, and SCH.

Table 1.

Comoros: Quantitative Performance Criteria, Benchmarks and Indicative Targets Under ECF Through End-June 2013 1

(In millions of Comorian francs, cumulative since end of previous year, unless otherwise specified)

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Definitions of targets and adjusters are provided in the Technical Memorandum of Understanding (TMU).

Targets and realizations adjusted as specified in the TMU.

Excluding trade credits.

Monitored on a continuous basis.

Table 2.

Proposed Structural Benchmarks for the ECF Arrangement, 2012–13

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Attachment 2: Technical Memorandum of Understanding

Moroni, November 30, 2012

1. This Technical Memorandum of Understanding (TMU) defines the quantitative performance criteria, indicative targets, and structural benchmarks to be used to monitor implementation of the program supported by the three-year arrangement under the Extended Credit Facility (ECF). It also identifies the data to be report for program monitoring purposes.

I. Definition

2. Unless otherwise indicated below, “the government” is meant to include the government of the Union of the Comoros and the autonomous island governments. Local governments, the central bank, and any government-owned entity with independent legal status are excluded from the definition of government. The units covered under this definition of government are consolidated for the needs of the program.

II. Quantitative Performance Criteria

3. New quantitative performance criteria are proposed for June 30, 2013 with respect to changes in net domestic credit to the government and the zero limit on accumulation of new domestic payment arrears; with indicative targets for March 31, 2013. The following performance criteria are proposed for monitoring on a continuous basis: (i) the government’s external payment arrears; (ii) the contracting or guaranteeing of new nonconcessional external debt by the government; and (iii) the contracting or guaranteeing of new short-term external debt by the government.

A. Change in Net Domestic Credit to the Government
Definitions

4. Net domestic credit to the government is defined as overall net credit extended to the government from domestic bank and nonbank sources. Net bank credit to the government reflects the net debt position of the government vis-à-vis the central bank, commercial banks, and the National Postal and Financial Services Company (SNPSF), as well as microfinance institutions. It is the difference between the government’s gross indebtedness to the banking system and its claims on the banking system. These government claims include all deposits at the central bank and commercial banks, as well as Treasury cash holdings. The government’s debt to the banking system includes central bank credit (statutory advances as well as any long-term credit and IMF net credit) and commercial bank credit, as well as net deposits at the SNPSF. Domestic nonbank credit to the government includes changes in the stock of Treasury bills placed in the domestic market, privatization receipts, and any other domestic financial debt of the government held outside the banking sector other than arrears.

5. The change in net domestic credit to the government as at the date for the performance criterion or indicative target is defined as the difference between the stock on the date indicated and the stock on December 31, 2011.

Performance criteria

6. The amounts set out in Table 1 of the MEFP on net credit to government for December 31, 2012 and June 30, 2013 are ceilings and constitute performance criteria. The amounts set out in the above table for September 30, 2012 and March 31, 201 are ceilings and constitute indicative targets.

Reporting requirements

7. The Central Bank of the Comoros (BCC) will report the provisional data on net bank credit to the government to Fund staff on a monthly basis, with a lag of no more than 45 days after the end of each observation period. Final data will be reported with a maximum lag of two months. The Ministry of Finance will report monthly on any financing from nonbank sources.

B. New domestic payment arrears
Definition

8. New domestic payment arrears of the government are defined as any of the following: (i) invoice that a spending ministry has received from a supplier of goods and services, delivered and verified, and for which payment has not been made within 90 days from the date the payment order (ordonnancement) was cleared; (ii) in the case of specific contracts between the suppliers and the government, any invoice received and not paid on the due date stipulated in the contracts; (iii) tax credits confirmed by the proper authorities after review, and not paid within 60 days from the date when the payment order was issued; or (iv) wages and salaries and any payments to a government employee that were due to be paid in a given month but remained unpaid on the 15th day of the following month.

Performance criterion

9. Under the program, the government will not accumulate any new domestic payment arrears. The zero limit on new domestic payment arrears for June 30 and December 31, 2012 constitute performance criteria. The zero limit on new domestic payment arrears for September 30, 2012 and March 31, 2013 constitute indicative targets.

C. External payment arrears
Definition

10. External payments arrears are defined as the sum of payments due but unpaid on outstanding external debt (for a definition of external debt see paragraph 15) that has been contracted or guaranteed by the government, with the exception of external payments arrears arising from public debt being renegotiated with creditors, including Paris Club members.

Performance criterion

11. Under the program, the government will not accumulate any external payments arrears with respect to the public debt, except for payments being renegotiated with creditors, including Paris Club members. This performance criterion will be monitored on a continuous basis.

Reporting requirements

12. The authorities will report to Fund staff any accumulation of external payments arrears as soon as the due date has been missed. They will provide each month, within a maximum lag of 15 days, a table showing external debt due (after rescheduling) and paid.

D. Ceiling on the Contracting or Guaranteeing of New Nonconcessional External Debt or Short-Term Debt by the Government
Definition

13. This performance criterion applies not only to debt as defined in Point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Executive Board Decision No. 6230-(79/140), last amended by Executive Board Decision No. 1441-(09/91), effective December 1, 2009), but also to commitments contracted or guaranteed by the government for which value has not been received.

14. Short-term debt refers to external debt with a contractual maturity of less than one year. External debt refers to debt owed to nonresidents.

15. The definition of debt, as specified in Point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt, reads as follows: “(a) For the purposes 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. Debt can take a number of forms, including: (i) loans, i.e., advances of money to the 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 sometime 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), 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.”

16. For program purposes, a debt is concessional if it includes a grant element of at least 50 percent, calculated as follows: the grant element of a debt is the difference between the present value (PV) of debt and its nominal value, expressed as a percentage of the nominal value of the debt. The PV of debt at the time of its contracting is calculated by discounting the future stream of payments of debt service due on this debt1. The discount rates used for this purpose are the currency specific commercial interest reference rates (CIRRs), published by the Organization for Economic Cooperation Development (OECD). For debt with a maturity of at least 15 years, the ten-year-average CIRR will be used to calculate the PV of debt and, hence, its grant element. For debt with a maturity of less than 15 years, the six-month average CIRR will be used. To both the ten-year and six-month averages, the same margins for differing repayment periods as those used by the OECD need to be added (0.75 percent for repayment periods of less than 15 years, 1 percent for 15 to 19 years, 1.15 percent for 20 to 29 years, and 1.25 percent for 30 years or more).

17. For the purposes of this performance criterion, the government is understood to include the government (as defined in paragraph 2 above), as well as local administrations, public institutions of an industrial and commercial nature (EPICs), public administrative institutions (EPAs), public enterprises, and government-owned or -controlled independent companies (i.e., public enterprises with financial autonomy of which the government holds at least 50 percent of the capital).

Performance criterion

18. The government as defined in paragraph 19 will not contract or guarantee nonconcessional or short-term external debt as defined above. This performance criterion will be monitored on a continuous basis. It does not apply to debt rescheduling and restructuring operations. In addition, import-related credit and pre-export financing secured on export contracts of less than one year maturity are excluded from this performance criterion on short-term debt.

Reporting requirements

19. The authorities will report any new external borrowing and its terms to Fund staff as soon as external debt is contracted or guaranteed by the government.

III. Indicative Targets

A. Domestic Primary Balance
Definition

20. The consolidated domestic primary fiscal balance (payment order basis) is calculated as total government revenue (defined below), excluding foreign grants, less expenditure, excluding interest payments, and foreign-financed technical assistance and investment expenditure.

Indicative targets

21. The targets for the floor for the domestic primary fiscal balance, cumulative from the beginning of the 2012 and 2013 calendar years, respectively, are set at CF–1.821 billion for September 30, 2012; CF –2.621 billion for December 31, 2012; CF –1.184 billion for March 31, 2013; and CF –1.610 billion for June 30, 2013.

Reporting requirements

22. During the program period, data on the domestic primary fiscal balance (payment order basis) will be forwarded to Fund staff monthly by the Ministry of Finance of the Union within 45 days following the end of each month.

B. Government Revenue
Definition

23. Government revenue is defined as reported in the consolidated government financial operations table (TOFE), and includes all tax and nontax receipts and excludes external grants.

Indicative targets

24. The floor for government revenue, cumulative from the beginning of calendar years 2012 and 2013, respectively, are set at CF 24.029 billion for September 30, 2012; CF 31.847 billion for December 31, 2012; CF 7.796 billion for March 31, 2013; and CF 16.662 billion for June 30, 2013. These amounts are considered indicative targets under the program for the respective dates indicated.

Reporting requirements

25. The Ministry of Finance will report preliminary revenue data to Fund staff monthly, with a lag of no more than 45 days, on the basis of actual collections as recorded in Treasury accounts. Final data will be provided once the final Treasury accounts are available, but not later than two months after the reporting of preliminary data.

C. Expenditures Made by Cash Advance
Definition

26. Expenditures made by cash advance include all expenditures paid without prior commitment order.

Indicative targets

27. Responsibility for complying with the ceiling on expenditures made other than through normal procedures rests with both the Union government and the autonomous island governments. This ceiling, cumulative from January 1, 2012 and 2013, respectively, is set at CF 150 million at September 30, 2012, December 31, 2012, March 31, 2013, and June 30, 2013.

Reporting requirements

28. Data on expenditures made other than through normal procedures will be forwarded to Fund staff monthly by the Ministry of Finance of the Union, within 30 days following the end of each month.

D. Domestically financed social spending
Definition

29. Total domestically financed social spending (current and capital) is calculated, for each category of current expenditure (wages, goods and services, transfers and subsidies) and capital expenditure as: (1) expenditure executed by the Ministry of Health (under “health”), and (2) expenditure executed by the Ministry of Education (under “education”). Domestically financed social spending is classified according to the above categories (health and education) based on a classification of each project presented in the 2012 budget as health or education. Total domestically financed current and capital social spending includes social spending financed by domestic resources, including revenues, domestic financing, and general external budget support, and excludes all social spending financed by project-specific foreign grants and/or loans.

Indicative targets

30. The floor for total domestically financed social spending for the period from January 1, 2013 to December 31, 2013 is set as CF 14.908 billion. This amount is considered an indicative target under the program.

Reporting deadline

31. During the program period, data on domestically financed social spending will be forwarded to Fund staff by the Ministry of Finance within 45 days following the end of the period.

E. Reduction of Gross Domestic Payment Arrears
Definition

32. Domestic payment arrears of the government are defined as any of the following: (i) any invoice that a spending ministry has received from a supplier of goods and services, delivered and verified, and for which payment has not been made within 90 days from the date the payment order (ordonnancement) was cleared; (ii) in the case of specific contracts between the suppliers and the government, any invoice received and not paid on the due date stipulated in the contracts; (iii) tax credits confirmed by the proper authorities after review, and not paid within 60 days from the date when the payment order was issued; or (iv) wages and salaries and any payments to a government employee that were due to be paid in a given month but remained unpaid on the 15th day of the following month.

Indicative targets

33. The floor for reduction of gross domestic payment arrears, cumulative for the period from January 1, 2012 to December 31, 2012 and from January 1 to June 30, 2013, respectively, is set at CF -0.864 billion for September 30, 2012; CF -1.152 billion for December 31, 2012; CF -0.529 billion for March 31, 2013; and CF -1.058 billion for June 30, 2013. These amounts are considered indicative targets under the program.

Adjuster

34. If the amount of external budget support is below the programmed level, the floor for quarterly reduction of gross domestic payment arrears as reported in the government financial operations table (TOFE) will be adjusted downward by the full amount of the shortfall. If the amount of external budget support is above the programmed level, the floor for quarterly reduction of gross domestic payment arrears will be adjusted upward by the full amount of the surplus. Cumulative from January 1 of the year concerned, the program assumes external (including IMF) budget support of CF 4.358 billion by end-September 2012; CF 6.980 billion by end-December 2012; CF 2.460 billion by March 31, 2013; and CF 3.980 billion by June 30, 2013.

Reporting requirements

35. The authorities will report to Fund staff any accumulation of domestic payments arrears as defined above as soon as incurred, as well as the status of outstanding Treasury balances payable (restes à payer).

IV. Additional Information for Program Monitoring

36. The authorities will report to Fund staff the following information and data according to the schedule provided, either directly (e-mail or facsimile) or by airmail. Barring any agreement to the contrary, the data will take the form mutually agreed by the authorities and the IMF. The fiscal data, monetary data, external debt data, the consumer price index, and any information on important legislative and/or other developments will be provided not later than 45 days after the date to which they pertain.

Monthly:

The monetary survey and the monthly balance sheets of the BCC and commercial banks; Classification of commercial bank loans by economic sector; Interest rates;

TOFE data on a cash and payment order basis, the related detailed tables on revenue, and a table showing the link between the payment order basis and cash basis for expenditures;

External public debt operations (debt contracted and guaranteed by the government, settlement of external payments arrears, and debt service paid, broken down between interest and principal);

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.

Quarterly:

Production of major agricultural products (vanilla, cloves, ylang-ylang).

Annually:

National accounts data;

Balance of payments data.

Moreover, information on important measures adopted by the government in the economic and social areas that would have an impact on program developments, amendments of laws, and any other pertinent legislation, will be reported to Fund staff by the authorities on a timely basis.
1

Revenues under the economic citizenship program (ECP), a 2008 arrangement whereby the government grants citizenship (in exchange for KMF 1 million; about US$3,000) to foreigners willing to make large investments in Comoros. To prevent abuses, these receipts are channeled through the Banque de France to the Treasury account with Central Bank of Comoros.

2

This corrective measure will strengthen compliance with the continuous benchmark on maintaining a flexible petroleum pricing arrangement (MEFP, Table 2). Greater price flexibility would help avoid fiscal liabilities. After an 8.3 percent price increase in September 2011, there have been no subsequent price changes, and losses at the state oil company required a small loan from the government (0.2 percent) in 2012.

3

The assessment of reserve adequacy for Comoros is based on the methodology developed in the IMF Policy Paper “Assessing Reserve Adequacy” (www.imf.org/external/np/pp/eng/2011/021411b.pdf).

1

The calculation of concessionality will take into account all aspects of the loan agreement, including maturity, grace period, payment schedule, upfront commissions, and management fees.

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