IMF Executive Board Concludes Article IV Consultation with Djibouti

On January 30, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Djibouti.

Djibouti’s fundamental development challenges remain to reduce widespread poverty and unemployment, and diversify its economy to reduce dependence on the ports. Forty two percent of the population lives in extreme poverty and 48 percent of the labor force is unemployed.

Djibouti is undergoing an investment boom which would accelerate economic growth. Aggregate investment is projected to rise from 26 percent of GDP in 2010-13 to 52 percent in 2014-16. GDP growth is expected to rise from 6 percent in 2014 to about 7 percent in 2015-19. Inflation is projected to pick up from 3 percent in 2014 to 3.3 percent in 2015-19 as the large investment spending fuels demand for housing and basic services.

High debt-financed public investment spending is exerting considerable fiscal and external debt pressures. The fiscal deficit, on a commitment basis, should rise from 5.9 percent in 2013 to 12 percent in 2014, and peak at 13.8 percent in 2015. External public and publicly guaranteed debt is projected to peak at about 81 percent of GDP in 2017-18. Exports, comprising mainly port services, are expected to increase. However, the current account deficit is estimated to widen from 23.3 percent of GDP in 2013 to about 28 percent in 2014-15, due to large capital goods imports financed by loans or Foreign Direct Investments (FDI).

Central bank gross foreign assets are projected to remain strong, permitting full currency board coverage over the period 2015-19. The authorities have indicated that external and domestic arrears are being cleared. The central bank made further progress in strengthening its banking supervision capacity, adopting new instructions on liquidity and the licensing of credit institutions. However, nonperforming loans increased from 11.4 percent of total loans in 2012 to 16.2 percent at end-June 2014—which the authorities attribute to the introduction of stricter loan classification requirements.

Executive Board Assessment[2]

Executive Directors noted that Djibouti is enjoying strong economic growth supported by an ambitious infrastructure program aimed at reducing widespread poverty and unemployment. However, the debt-financed investments have increased fiscal and external debt vulnerabilities. Directors urged the authorities to take steps to ensure a sustainable fiscal and external debt path. They stressed the need to urgently address major structural bottlenecks to promote sustainable strong and inclusive growth and diversify the economy. Steadfast commitment to reforms will be important.

Directors underlined the need for fiscal consolidation. Expanding the tax base and improving tax administration will be crucial in this effort. More broadly, Directors urged the authorities to reexamine the fiscal framework, including rationalizing investment incentives and making them more transparent and efficient. It is also important to contain the wage bill and reform fuel subsidies in conjunction with plans to design targeted social safety nets to protect the poor and vulnerable.

Directors stressed the importance of strengthening the capacity of the central government and public enterprises to select, coordinate, and manage public investment projects. Equally important is enhancing debt management capacity, including the monitoring of contingent liabilities. Directors encouraged the authorities to formulate a debt strategy, with Fund technical assistance, to manage and reduce the external debt burden and improve coordination among government units responsible for contracting, monitoring, and servicing debt. Directors urged the authorities to seek concessional financing to the extent possible and take steps to clear arrears and remain current on Djibouti’s debt obligations.

Directors agreed that the fixed exchange rate regime under the currency board arrangement has served Djibouti well. They emphasized that safeguarding its stability, including through adequate levels of reserves, is a top priority. Directors highlighted the importance of strengthening bank supervision to preserve financial stability. Close attention should be given to enhancing credit risk analysis and reinforcing instruments to counter money laundering and terrorist financing. Efforts to deepen the financial sector and promote financial inclusion will be important.

Directors urged the authorities to implement structural reforms to boost competitiveness, achieve inclusive and diversified growth, and reduce poverty. Reforms should aim to improve the business climate, particularly by streamlining business regulation, improving electricity and water supply, and providing appropriate skills training to labor.

Djibouti: Selected Economic and Financial Indicators, 2012–19
Est. Proj.
2012 2013 2014 2015 2016 2017 2018 2019
(Annual percentage change)
National accounts
Real GDP per capita 682.6 697.2 718.9 744.8 775.2 807.6
Real GDP (annual change in percent) 4.8 5.0 6.0 6.5 7.0 7.1 7.1 7.0
Consumer prices (annual average) 3.7 2.4 3.0 3.0 3.5 3.5 3.5 3.0
(Percentage of GDP)
Investment and saving
Total fixed capital investment 28.1 29.4 48.2 54.9 51.5 35.3 31.7 30.4
Gross national savings 7.8 6.1 20.7 27.1 29.7 21.9 18.5 18.4
Savings/investment balance -20.3 -23.3 -27.4 -27.8 -21.8 -13.4 -13.2 -12.0
Public finances
Total revenue and grants 34.5 31.8 35.6 35.4 32.9 31.0 26.9 26.4
Expenditure and net lending 37.2 37.7 47.5 49.4 45.3 34.6 32.7 31.1
Total revenue (excluding grants) 25.9 27.4 28.8 27.1 25.4 24.2 23.3 22.9
Overall balance (commitment basis, incl. grants) -2.7 -5.9 -12.0 -14.0 -12.4 -3.6 -5.8 -4.7
Change in domestic arrears (decrease -) -0.6 -1.0 -0.6 -0.5 -0.5 -0.4 -0.4 -0.4
Stock of domestic arrears 5.6 4.1 3.2 2.4 1.6 1.0 0.5 0.1
Overall balance (excluding grants) -11.3 -10.3 -18.7 -22.3 -19.9

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