The Djibouti economy has a number of severe and worsening problems. Its economy is narrowly based around the ports – mainly a free zone and transshipment to landlocked Ethiopia. The government receives income and other benefits from the presence of foreign bases on its territory – most notably a reduced need for military spending. Despite this, government finances are badly handled and poorly directed. The population of Djibouti does not receive value for money from government spending, and social indicators are abysmal.
Economic growth has for some years been positive, but this has been under threat for two years and government statistics suffer from poor reliability and accuracy.
The international financial institutions, the African Development Bank, and the EU have all been pressing the government to correct its errors and address some of the key macroeconomic & fiscal problems and vulnerabilities. The International Monetary Fund (IMF) has led this pressure, but the response from the government has been merely tokenistic and superficial. This is obvious from the small print of IMF reports over recent years (see below).
The key macroeconomic & fiscal reform aims the government has been resisting include:
- Improved budget discipline, including improved debt & cash management and financial controls, faster reduction of debt, and improved prioritization of government spending
- Development of a more efficient financial system, including ‘urgent’ banking reforms, internationalization of finance, a range of reforms in the central bank and regulation of individual banks
- Higher foreign currency reserves and other measures to help withstand future external economic shocks
- Reforms in the management of state commercial undertakings so as to reduce their negative impact on macroeconomic performance and economic growth
In support of these aims a number of structural reforms have been strongly suggested but still resisted:
- Diversification of the economy away from just ports, transport, and leases for bases
- A broader improvement of the international competitiveness of the economy
- An increase on foreign direct investment, and a halt to the decline in investment levels
- Reforms to increase real economic growth, to improve the ‘business climate’ and to ensure that a much larger part of the population benefit from such growth
- A better allocation of funds for the reduction of poverty and unemployment
The size of the problems can be seen in the data. Whilst the economic growth outturn at the end of 2010 was expected to be 4.5%, this is based on statistics that are less than robust, and is based on a high – above target – inflation forecast (also 4.5%).
However, the level of growth is unsustainable – it was achieved by the government spending in 2009 a huge 4.5% of GDP more than it received in income, and by borrowing heavily – taking aggregate debt to 63%, and a projected 68-70% by the beginning of 2011. On current trends, the government is fast headed for bankruptcy. What’s more, much of the 2009 and 2010 economic performance was based on ‘one off’ investments, mostly from UAE, with whom relations with the Djibouti government have soured. The result by the end of 2009 was a massive current account deficit of 20% of GDP.
According to IMF data, no significant benefits accrued to the population from this reported 2009 and 2010 economic growth. This is first because of poorly directed (misused) government spending, second because high utility prices & monopolistic terms, and labour hiring complications, dampen down the effects of foreign investment, and third because of poor investment in education, ports and construction have to bring in skilled staff from outside Djibouti.
The structure of state spending, and poor controls across government, lie behind the decline in social indicators alongside moderate economic growth. Estimates put the proportion of state funds spent on ‘security’ (police, secret police, army, republican guard etc) at just under two thirds. The official expenses of the Presidency and President’s family have grown by 20% since 2005.
The resistance to reform is clearly set out in IMF reports over a period of time, where repeated appeals to reform are made, year after year, as the following extracts from IMF reports show:
i) REFUSAL TO REGULATE BANKS – NEW UNREGULATED BANKS ALLOWED
IMF 2008 Article IV Consultation (July 2009 IMF Country Report No. 09/216, Djibouti): ‘In the coming months, the number of banks expected to operate in Djibouti will increase to eight, with very diverse capital origins and regulatory structures. Furthermore, unlike the previous situation, in which the CBD could entrust the supervisory authorities from the parent institution (France) to oversee the global operations of the only two financial groups operating in the country, some of the new institutions do not have strong home supervisory and regulatory agencies’.
ii) REFUSAL TO IMPLEMENT KEY REFORMS
IMF July 2009 Country Report No. 09/204 Djibouti: Joint Staff Advisory Note on the Poverty Reduction Strategy Paper: ‘…the report recognizes that the implementation of the PRSP-I slowed, if not halted, after the first year. As a result, only 17 percent of the priority actions were fully implemented, about thirty percent were partially implemented and many objectives, particularly in the second pillar of developing human capital, were not achieved.
iii) DECLINING FISCAL POSITION
IMF April 22, 2010 – DJIBOUTI—PROGRAM NOTE. ‘…the fiscal deficit widened to over 4.5 percent of GDP. External debt is now estimated at over 63 percent of GDP as a result of increased external borrowing..’. ‘Reforms to strengthen financial sector soundness should focus on implementing recommendations of the 2008 Financial Sector Assessment Program, namely improving bank supervision and liquidity management at the central bank’.
iv) MORE BANKS – STILL NO REGULATION
September 2010 IMF Country Report No. 10/277: ‘The risks of a weak banking supervision could be compounded by the rapid increase in the number of banks and lower projected economic growth. The BCD [central bank] should strive to promptly implement the FSAP and SA recommendations to upgrade its banking supervision and crisis prevention capacity’. ‘Staff emphasized the need to rapidly strengthening banking supervision in view of the potential adverse effects of the slower economic growth on asset quality’. ‘The initial safeguards assessment (SA) of the BCD , completed in February 2009, found serious risks in most areas of the safeguards framework’. ‘The risk of external debt distress remains high. While the stock of external debt decreased to 59.2 percent of GDP , the net present value (NPV) of debt increased to 53 percent of GDP . As a result, external debt is expected to remain above the sustainability threshold until the late 2020s.’
v) SUSPENDED IMF FUNDNG
Economist Intelligence Unit, October 29th 2010: IMF ECF fund release deferred – ‘The IMF’s most recent review expressed concern about Djibouti’s fiscal performance and deferred the release of additional funds under the ECF until further progress is made. China and Djibouti have signed an agreement under which there will be economic and technical co-operation between the countries within an agreed framework’.
Response to IMF consultation
In January 2011 Abdourahman Boreh responded to the formal completion of the Article IV consultation process for fiscal year 2009. You can read his response here.
In addressing the macroeconomic and fiscal problems in Djibouti and bringing the country into sustainable economic growth that benefits a much wider part of the population, the following aims must be pursued:
- Reduction of aggregate debt over a 5 year period to below 60% of GDP (target 50%) and the reduction of the annual budget deficit to 3.5% of GDP in fiscal 2011 and 3% of GDP in fiscal 2012.
- On the basis of an agreed debt reduction programme, a transfer of debt to concessionary terms finance
- Improved debt and cash management in the Ministry of Finance, overseen by a joint Central Bank and Ministry of Finance Committee, which will also institute new financial disbursement controls throughout the year
- The use of banking regulation, interest rate adjustments, demonoplisation and selective tariff reductions in order to bring annual-equivalent inflation down to 2.5% by 2012.
- Establishment of a transparent MTEF-style spending prioritization and value-for-money system, to focus government finance on improving social and ‘pro-growth’ indicators [MTEF means medium term economic framework – a system for limiting and prioritising state spending over the medium term within a macroeconomic policy framework]
- Banking regulation and licensing to international standards (including implementation of Basle III where appropriate)
- Steps to increase foreign direct investment – especially in the provision of transport and other services for the Ethiopian economy.
- Development of ‘retail tourism’ and hub air transport businesses (by tariff reductions on key consumer goods), to bring in more foreign currency and reduce the large current account deficit
- Demonopolisation, and sale of the government’s equity stakes in the utility sectors
- Elimination of non-essential government spending, especially ‘trophy projects’ and quasi-monarchical extravagances
Getting things done
In order to establish such high level macroeconomic-related and fiscally-related reforms in a short space of time, it will be necessary to establish a macroeconomic reform unit to implement structural reforms across the government structure, without being deflected by private or administrative interests.
The Djibouti economy is in crisis, alongside the security, poverty and foreign relations problems. Transparency measures will be introduced immediately to help prevent derailing of reforms.