| Notes: | "July 2016."
"November 18, 2016; approved by Middle East and Central Asia Department; prepared by Victor Davies, Hamid Reza Tabarraei, and Boumedienne Taya"--Page 2 of pdf.
Includes bibliographical references.
Description based on online resource; title from pdf title page (IMF website, viewed September 7, 2016).
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| Summary: | Djibouti is experiencing a predominantly debt-financed scaling up of public investment which the authorities consider vital to boost growth and reduce widespread poverty and unemployment. The investment scaling-up is driven by two large infrastructure projects, which, because of the small size of the economy-less than 1 million people and a GDP of $1.6 billion in 2014-have led to a significant deterioration of fiscal and external debt indicators. Information is insufficient to project the likely impact of the projects on government revenues, jobs and poverty. However, negative primary balances are projected to prevail over 2015--34, suggesting that fiscal consolidation is imperative to enhance fiscal sustainability. Fiscal reforms will be needed to support fiscal consolidation while creating space for pro-poor expenditures that can promote inclusive growth. Reform of the investment incentive framework and overall tax regime is required not only to support fiscal consolidation but also to level the playing field for investors and enhance revenue mobilization. Social safety nets are essential to help protect the poor, but their design and implementation will be challenging given the weak public institutional capacity and the high level of poverty. --
Djibouti has engaged in many large-investment projects to reinforce its port capacities and to catch-up with some of its infrastructure gaps. The debt financed investment program can bring about higher economic output, but it also exacerbates fiscal and external debt vulnerabilities when the country is already at high risk of debt distress. This note studies the implications of scaling up public investment on debt sustainability and growth when the government is subject to inefficiencies on the spending and revenue side. A baseline scenario, based on the staff report projections, is compared to a high investment scenario. The simulations show that the success of investment projects in terms of sustainability and growth depends largely on improving the efficiency of public management investment returns and the readiness of the government to raise taxes. In presence of inefficiencies, the high investment profile does not generate significantly higher growth than the baseline scenario and public debt becomes unsustainable. -- The liberalization of Djibouti's banking sector in 2006 led to an increase in the number of banks, as well as to an improvement in the indicators reflecting access to financial services. The level of financial inclusion, however, remains low, as most of the adult population and small and medium-scale enterprises do not have access to financial services. The financial sector is largely dominated by banks, whose business is concentrated with a few economic players. To broaden financial inclusion, in order to promote inclusive growth with a view to reducing poverty, it will be necessary to strengthen financial infrastructure, develop the microfinance sector, and improve economic formalization.
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