Finding a better balance between the resources available and expenditures should be the central focus of Comoros “so that it can avoid the incurrence of arrears, particularly on wages and external debts, and make allocations to some important initiatives,” an International Monetary Fund (IMF) staff team has advised.
Observing that the Indian Ocean archipelago island nation, off the East African coast, faces many challenges, IMF Mission Chief for Comoros and team leader, Harry Trines, said late Tuesday that urgent action is also needed to improve the reliability of the energy supply, a key constraint to growth.
“For the medium term, the key challenges are to create fiscal space for infrastructure investment and social spending through greatly strengthened revenue mobilization, accelerate inclusive growth and employment generation, and reduce poverty, while also strengthening resilience against external shocks, including natural disasters,” Trines remarked at the conclusion of the team’s consultation with the Comoros government.
The IMF team visited Moroni, capital of the Comoros, from 20 October – 4 November, to conduct discussions for the 2014 Article IV consultation.
According to the team’s preliminary findings, Comoros has made notable progress in recent years and macroeconomic policy making and economic performance have improved since the adoption of the new constitution in 2009.
However, Trines noted that much remains to be done to consolidate and accelerate inclusive economic growth through continued focus on policies that emphasize macroeconomic stability and improvements in infrastructure, and that foster structural reform to improve the competitiveness of the economy and strengthen the business environment.
Comoros’ real economic growth was estimated at 3.5 percent in 2013 and is expected to be 3-3.5 percent in 2014. Inflation was 3.5 percent at end-2013 but had eased to 0.7 percent by August 2014.
Trines said the archipelago’s both exports and imports grew strongly in volume terms in 2013, the former from a very low base.
“While remittances also continued to increase, the current account deficit is estimated at above 10 percent in 2014 compared to 9.5 percent in 2013,” he said. “Fiscal developments in 2013 were strongly affected by the spending of significant amounts of proceeds from the Economic Citizenship Programme (ECP) that accrued in 2012.”
The Comoros overall balance (cash basis, net of debt relief) went from a surplus of 1.6 percent of GDP in 2012 to a deficit of 1.3 percent in 2013.
The IMF team observed that implementation of the 2014 budget has been challenging, particularly after mid-year. Resources have been inadequate to meet the higher wage bill resulting from the increase in teacher salaries, approved in March, and previously unbudgeted expenditures, including on the administration of the elections.
During discussions, the mission urged the authorities to prioritize spending for the remainder of the year so that arrears on wages and salaries and external loans can be eliminated by year-end.
“The mission underscored that the main cause of the current difficulties, as well as the inability to undertake more public investment projects, lay in the low level of domestic revenues,” said Trines. “Therefore, the most urgent task for the authorities is to strengthen domestic revenue mobilization.”
In this regard, the mission urged the authorities to focus their efforts on strengthening revenue administration, including through a freeze on new exemptions, better management of the large tax payers list, and improving general tax compliance.
Also, the mission noted the importance of strengthening public financial management, particularly through the implementation of effective cash management and greater fiscal transparency.
“All transactions on behalf of the government, whether for revenue or spending, should be reflected in the budget. Better cash management should limit the incurrence of arrears, including on wages and salaries, while greater transparency should contribute to lessened distrust among stakeholders, including autonomous island governments,” Trines emphasized.
Regarding the 2015 budget, the mission emphasized the need to base spending plans on realistic expectations of resource availability.
According to Trines, the results of increased efforts to strengthen revenue mobilization are bound to take time.
“With the scope for financing constrained, current spending, particularly on wages and salaries, the largest component of expenditure from domestic resources, needs to be carefully controlled in the near term,” he suggested.
The IMF mission noted that the authorities were in the process of developing a new strategy for sustainable development (SCADD) to replace the expiring poverty reduction strategy.
Though the mission concurred with the main objectives of the strategy, they pointed out that the strategy needed to be based on realistic assumptions regarding available financing and should contain a strong component aimed at improving the attractiveness of the Comorian economy as an investment and tourist destination.
The mission urged the authorities to add a strong private sector development component to the SCADD.
Trines said that already started reforms in the electricity sector, with the help of the World Bank and the African Development Bank, need to be pursued vigorously and deepened to alleviate the electricity shortages that are currently affecting the country and are a key impediment to economic growth.
Noting that non-performing loans in the banking system have increased and recovery is difficult, the mission encouraged the Comorian authorities to implement structural reforms and correct weaknesses in the application of the law.
The mission also observed that Comoros’ economic data gathering was in urgent need of strengthening.
“The lack of high quality and timely economic data makes assessment of economic performance, as well as the formulation of economic projections, difficult,” said Trines, adding that despite the challenging budgetary environment, the mission has urged the authorities to make adequate allocations to the new statistical agency to enable it to provide the data necessary for efficient policy making.
Meanwhile, the IMF continues to work closely with the authorities in providing policy advice and technical assistance and training in areas of its competence, including the development of an effective macroeconomic and budgetary framework and cash management.
Additional technical assistance is also planned for tax policy, balance of payments and national accounts statistics, as well as banking supervision.
In Moroni, the mission met with President Dhoinine Ikililou and held discussions with Vice President and Minister of Finance Mohamed Ali Soilihi, Minister of Planning Alféine Soifiat Tadjiddine, Governor of the Central Bank Abdou Mohamed Chanfiou, Councilor to the President and Permanent Secretary of the Economic and Financial Reform Agency Chei Oubeidi, and other government officials, representatives of the private sector, unions, and the donor community.