Fiscal Space for Children: An Analysis of Options in Comoros
September 2018
Table of contents
List of abbreviations 5
Preface 7
Executive Summary 9
1 Introduction and methodology 13 1.1 The objective of the Fiscal Space Analysis 13 1.2 Methodology 13 1.2.1 Priority expenditure categories for children 14 1.2.2 Fiscal space ‘identity’ and analysis 14 1.2.3 Data sources 15 1.3 Organization of the FSA 16
2 Comoros’ macroeconomic and fiscal context 17 2.1 Longer-term national economic trends 17 2.1.1 Real GDP growth 17 2.1.2 Demographic trends 19 2.1.3 Structure and characteristics of the national economy 20 2.1.4 Poverty 21 2.2 Recent macroeconomic developments 21 2.2.1 Real GDP growth 21 2.2.2 International trade and the current account 21 2.2.3 Inflation and exchange rate 23 2.3 Recent fiscal performance 23 2.3.1 Government fiscal performance 23 2.3.2 Revenue performance 25 2.3.3 Government expenditure 28 2.3.4 Government debt 29 2.3.5 Prospects 31
3 Comoros’ priority expenditure and fiscal space 33 3.1 Introduction 33 3.1.1 Definition of priority sectors 33 3.1.2 Priority sectors in government strategies 33 3.2 Composition of total priority expenditure 34 3.3 Composition of expenditure in education sector 36 3.3.1 Introduction: Achievements and key policy challenges 36 3.3.2 Composition by economic category 37 3.3.3 Composition by programme 37 3.3.4 Composition by administrative levels 38
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3.3.5 Financing of the sector 39 3.4 Composition of expenditure in health sector 41 3.4.1 Introduction: achievements and key policy challenges 41 3.4.2 Composition by economic category 41 3.4.3 Composition by administrative level 42 3.4.4 Financing of the sector 43 3.5 Implications for the FSA 44
4 The base scenario 45 4.1 Assumptions 45 4.2 Base-scenario projection results 45
5 Alternative scenarios 49 5.1 Options to increase fiscal space 49 5.2 Alternative scenarios and projections compared with the base scenario 50 5.2.1 Alternative scenario 1: higher GDP growth 50 5.2.2 Alternative Scenario 2: Lower GDP growth 51 5.2.3 Alternative scenario 3: Improved tax collection efficiency 52 5.2.4 Alternative scenario 4: increase in priority expenditure funded by a reduction in non-priority expenditure 54 5.2.5 Alternative scenario 5: increased external financing to fund priority expenditure 55 5.2.6 Alternative scenario 6: increased priority expenditure through non-concessional loans 57 5.2.7 Summary of Scenario Results 59 5.3 Other options to enhance fiscal space 64 5.3.1 Tax policy measures 64 5.3.2 Reducing illicit financing flows 64
6 Conclusions 68
Bibliography 71
Appendix 1: Fiscal space projections 73
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List of abbreviations
AFD Agence Francaise de Développement CREF Cellule des Réformes Economiques et Financières EDF European Development Fund EDS-MICS Enquête Démographique, de Santé, couplée avec l'enquête à Indicateurs Multiples FY Fiscal Year GDP Growth Domestic Product IMF International Monetary Fund KMF Comorian Franc LG Local Government MTEF Medium-Term Expenditure Framework NGO Non-Governmental Organisation OBS Open Budget Survey PEA Political Economy Analysis PEFA Public Expenditure and Financial Accountability PIP Public Investment Plan PTSE Plan de Transition du Secteur de l’Education SCAD2D Stratégie de Croissance Accélérée et de Développement Durable TADAT Tax Administration Diagnostic Assessment Tool UHC Universal Health Coverage UNICEF United Nations Children’s Fund UNESCO United Nations Educational, Scientific and Cultural Organization VAT Value-Added Tax WHO World Health Organisation
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Preface
This report, which focuses on Comoros, is one of a series of country studies carried out by Ecorys for UNICEF over 2016, 2017 and 2018 in various sub-Saharan African states. These studies are deliverables under Ecorys’ contract with UNICEF entitled ‘National Political Economy Analysis and Fiscal Space Profiles of countries in the Eastern and Southern Africa Region’. The project aims to strengthen UNICEF advocacy capacity through a better understanding of the role of political economy factors in processes and decisions around creation and use of fiscal space for investments in children in Eastern and Southern Africa.
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Executive Summary
Fiscal space for child-friendly expenditure has remained very tight in Comoros, with the low level of domestic revenues being the main constraint. The level of domestic revenues has been historically low by regional standards. The current level of domestic revenue has averaged around 11 per cent of GDP, far below the country’s estimated tax potential (19%). Some modest efforts have been undertaken to reduce tax exemptions, but more comprehensive efforts will be required for revenue levels to increase significantly. Fiscal space has also been hampered by chronically low GDP growth, which has contributed negatively to the size of domestic revenues. The Government of Comoros is now giving more emphasis to public infrastructure, which is essential to raise productivity in key sectors, in particular agriculture, and boost growth prospects. However, the quality and quantity of public investment remain low. On the expenditure side, the current priority given to the wage bill and expenditure in administrative institutions has been an obstacle to fiscal space for child-friendly expenditure. The wage bill in Comoros has consistently consumed more than 60 per cent of domestically-generated revenue over the last decade, a much higher share than in other sub-Saharan African countries. The government’s contribution to goods and services (and capital expenditure) has been very small. To a large extent, service delivery in social sectors has been delegated to donors.
The fiscal picture is different across the two priority sectors selected for the exercise, health and education. The size of education expenditure is relatively high in Comoros (as percentage of GDP and of total expenditure). Conversely, the amount of health expenditure is relatively low. One factor behind this relates to the size of the wage bill. As the Government’s fiscal priority has been to support a high wage bill, wage-intensive sectors, in particular education, have generally benefited from that policy. However, this should not hide the fact that both sectors face a very challenging fiscal situation: the level of per capita expenditure is very low ($40 and $14 per capita respectively for education and health as of 2016). Of particular concern is the low share of non-wage current expenditure, especially goods and service expenditure. The implication of this is that households and donors are supporting most of the costs of service delivery in both sectors in Comoros. Against that background, the need for additional resources for both the health and education sectors is evident, but that need is quite different across the two sectors. While donor funding (as well as reallocation of expenditure from non-priority sectors) will help secure fiscal space especially in education, additional domestic revenue is likely to be critical in both sectors to support the necessary increase in current spending and to help absorb the required additional foreign-financed capital expenditure.
Assuming growth levels remain constant (base scenario), the Government of Comoros could sustain its current levels of expenditure in priority sectors. The base scenario suggests that Comoros can realize an increase in priority expenditure during the projection period (from US$153.6 per child in 2018 to US$188.9 per child in 2024). The overall net internal financing gap will be around 1.5 per cent over the projection period. Government debt-to-GDP ratio would be 40.6 per cent in 2024. In essence, this means that the Government of Comoros could sustain its current levels of expenditure in priority sectors if the economy were to achieve its expected performance and if no special measures were taken to create additional fiscal space.
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Changes in growth levels would moderately affect the level of priority spending. Scenario 1 and 2 demonstrate the effect of different potential economic growth scenarios. Should economic growth be higher than anticipated, priority spending per child would increase by 1.2 per cent and at the same time lead to a decrease in debt to 39.29 per cent of GDP. Should growth be lower (and decline to 0.5 per cent by 2024), this would lead to a decrease of 4.3 per cent in priority spending per child as compared to the base scenario. Debt levels would rise to 45.2 per cent of GDP.
Improving tax collection efficiency, such as through a reduction in tax exemptions, could allow the government to support the same amount of priority expenditure as in the base scenario, while closing the fiscal gap. With the assumptions of scenario 3, the average tax and non-tax revenue collection would increase by an average of 2.1 per cent of GDP over the projection period, compared to the base scenario. The net internal debt flow would be -0.5 per cent of GDP (compared with 1.5 per cent of GDP in the base scenario) – which means Comoros could close the fiscal gap. The total (external and internal) government debt stock would amount in 2024 to 27.8 per cent of GDP (compared with 40.6 per cent in the base scenario), meaning that overall the government finances would be in better shape as the increased revenues allow the government to pay back its debt.
A reprioritization of expenditure away from non-priority expenditure could support an increase in priority expenditure of 12.7 per cent as well as the largest decrease in debt. Under that scenario (scenario 4), the debt stock would total 30.2 per cent of GDP in 2024, 10.4 per of GDP lower compared to the base scenario. The average net internal debt flow would be -0.1 per cent of GDP over the projection period, which means Comoros could close the fiscal gap. It should be noted however, that reprioritization might have consequences on economic growth. A decrease in (capital) expenditure on non-priority sectors such as infrastructure could lead to a somewhat lower economic growth, which would in turn negatively affect fiscal space and priority spending.
An increase of external grants could fund an increase in priority expenditure without causing an increase in government debt or widening the fiscal deficit. Scenario 5 considers an increase of external grants to fund priority expenditure. In this particular scenario, an increase in priority expenditure resulting from grants aimed at increasing capital expenditure in the education sector by 20 per cent over the projected period is assumed. This would effectively slow down the decline of external grants as a percentage of GDP modelled for the base scenario, allowing the government to slowly increase capital expenditure in education from 0.66 per cent of GDP in 2018 to 1.3 per cent in 2024. Under that scenario, the average net internal debt flow would be lower than in the base scenario over the projection period (2018-2024). The total (external and internal) government debt stock would also be lower.
An option that is not advocated but is currently envisaged by the Government is to increase fiscal space for priority expenditure through non-concessional finance. This option has also been analysed (scenario 6) since the government is actively considering pursuing this strategy to fund health expenditure and more particularly a new hospital. Compared to the base scenario, this scenario assumes priority expenditure (as per cent of GDP) would be on average 4.9 per cent higher. On the other hand, the total debt stock would increase by 2.3 per cent of GDP to 42.9 per cent of GDP in 2024 (compared to 40.6 per cent in the base scenario).
Other options to increase fiscal space are briefly discussed in the report, without being the object of specific scenarios. The additional options discussed are tax policy measures and the reduction of illicit financial flows. In addition to improving tax administration, which is critical, tax
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policy reforms would be in theory another option to increase fiscal space in Comoros. There are no plans however over the coming years for major changes in tax policy, whether increases in rates or introduction of new taxes
Overall, the situation facing priority expenditure in Comoros – with limited fiscal space available and a heavy reliance on donor support – generally calls for partners active in priority sectors like UNICEF to strengthening their policy engagement with the Government on strategic resource allocation. As further discussed in the adjacent Political Economy Analysis (PEA), opportunities for such a dialogue are limited. By coordinating its efforts with other donors, UNICEF may however be able to overcome some of these challenges. Instruments such as the FSA can inform that process going forward.
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1 Introduction and methodology
UNICEF has commissioned a study to develop a methodological approach and carry out a projection exercise that UNICEF can use to inform its on-going dialogue with the government and other stakeholders regarding the “fiscal space” for expenditure essential for children. For this study, the fiscal-space concept simply means the flow of fiscal resources available for spending on children’s needs. The concept is central in UNICEF’s dialogue with the authorities: for the medium term, UNICEF would focus on ensuring as high a growth rate as possible for child-beneficial spending, subject, essentially, to two constraints: first, the need to ensure that the economy maintains sufficient capital formation to ensure sustained real-GDP growth; and, second, the need to ensure macroeconomic stability.
1.1 The objective of the Fiscal Space Analysis
The Fiscal Space Analysis (FSA) sets out by reviewing the recent evolution of the availability of financial resources within the government budget for expenditure flows directly relevant to children’s welfare and development. It does this through a fiscal-space accounting framework, centred on the government budget and the identification of “priority” sectors considered most relevant for children’s welfare.
The analysis also examines and evaluates options to increase overall fiscal space available in each economy. The fiscal space accounting framework makes it possible to examine the consequences of sets of assumptions - “scenarios” - describing future macroeconomic conditions for fiscal space. Different scenarios produce different outcomes for fiscal space and have different implications for the government’s capacity to fund its child-relevant expenditure. The scenarios described in this report are illustrative, in the sense that they are intended to show how UNICEF could apply the exercise to inform its discussions. Nevertheless, the options that are selected for the scenarios, are based on discussions with the UNICEF country office and key stakeholders.
A projection exercise of this kind could help UNICEF engage in a technical dialogue with policymakers and other stakeholders to discuss different possible government policy approaches, to determine how and whether these policies would make it possible for the authorities to sustain and perhaps enhance the fiscal space for expenditure in sectors on which children depend. Thus, the point of the exercise as presented here is not so much to analyse specific assumptions and results, but rather to show how UNICEF could use this exercise in its dialogue with policymakers and other stakeholders.
1.2 Methodology
The analysis is carried out using an Excel-based projection exercise (KmFS.xlsm). Section 1.2.1 outlines the definition used for priority expenditure; section 1.2.2 describes the set-up of the fiscal space analysis, using a fiscal identity; and section 1.2.3 highlights some data limitations.
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1.2.1 Priority expenditure categories for children This report uses the term “priority expenditure” to refer to expenditure categories regarded as beneficial to children. This label does not imply that expenditures defined as “priority” should be “prioritized” at the expense of the non-priority ones. The rationale is rather to single out, from among all expenditure categories, those that are of specific interest to UNICEF. For Comoros, “priority” expenditure categories for children comprise the following “institutional” expenditure categories: 1. Education; 2. Health.
Several points about the expression “priority expenditure” need to be clarified early on. First, the composition of the expenditure defined as such is inevitably somewhat arbitrary. Some expenditures in the categories listed above do not target or benefit children, directly or indirectly. On the other hand, expenditures not in the categories listed may benefit children, at least indirectly. Future analyses of this kind could work with different definitions of priority expenditure, although the methodology used in this study would still be applicable.
Second, this fiscal space discussion concerns expenditure carried out by government within its budget. However, an exception has to be made for donor funds, as they do not pass directly through the government budget laws’ in Comoros.1
1.2.2 Fiscal space ‘identity’ and analysis To analyse fiscal space for priority expenditure, the methodology first sets from the “identity” that governs the relationship of priority spending with its underlying fiscal space.
This identity states that total expenditure (comprising current, Fiscal identity non-interest, interest, and capital expenditure) less the sum of Priority expenditure total revenue and external grants is (identically) equal to the = overall deficit, which is in turn equal to the net flow of external Tax and non-tax revenue and internal financing to the government. If total expenditure is + External grants broken down in the three categories of (1) priority and (2) non- - Non-priority expenditure priority non-interest expenditure and (3) interest expenditure, - External debt service this identity can be rearranged for any year as shown in the - Internal interest expenditure box. + External debt disbursements
+ Net internal financing flows The “below-the-line” accounts taken together constitute fiscal space for the priority-expenditure flow. For a retrospective analysis – that is, for analysis of fiscal performance in historical years – this structure can be applied directly to show how the below-the-line flows (the retrospective fiscal space) combined to finance the priority expenditure flows. Chapter 3 describes the historical evolution of priority expenditure for the Comoros, for the fiscal years FY2012-2016.
For the projection analysis, the accounting identity is applied in a different way. For each projection year, the priority-expenditure flow is projected on the basis of programming assumptions, encompassing the various determinants of recurrent and non-recurrent expenditure in the education and health categories. Similarly, the below-the-line accounts, except for the net internal financing flows, are projected based on programming assumptions. The total net internal financing flow for each year is then calculated residually, to ensure that the accounting identity is satisfied.
1 The treatment of donor funds in the model used is further elaborated in Chapter 3. Given severe data limitations, different sources of data were used for the health and education sectors.
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For any projection year, this net internal financing flow is the fiscal-space “gap”, that is, the difference between the projected priority-expenditure flow and fiscal space. If this gap is “too large”, then the programming assumptions, taken together, would be considered unfeasible. The criteria for “too large” include the limits on the government’s capacity to borrow in domestic financial markets and the implied increase in the government’s debt-GDP ratio. Policy-makers would presumably want to avoid having the net internal borrowing flow as a percentage of GDP exceed nominal GDP growth in coming years, to prevent the internal-debt stock from rising as a percentage of GDP.
The projection exercise is formulated by applying various assumptions, together constituting a “scenario,” to the historical data base. The relatively simplified, illustrative projection exercise applies scenarios to historical data (as discussed in Appendix 1). Each scenario comprises programming assumptions for the years FY2018 to FY2024, covering: • world economic conditions; • basic Comoros macroeconomic variables; • merchandise exports and imports; • tax and non-tax revenue; • external grants to the government; • government expenditure in the priority and non-priority categories; and • external and internal debt.
For each scenario, some of the assumptions lines are set as simple numbers (growth rates, percentages of GDP, etc.). Many of the assumptions, however, are constructed from other assumptions. For example, the growth rates of real GDP and of the price level are numbers that the analyst chooses for any given scenario. It is straightforward to combine these assumptions into an assumed growth rate for nominal GDP.
1.2.3 Data sources Overall, severe data deficiencies across the board are a major impediment to the undertaking of this Fiscal Space Analysis.
The overall analysis is complicated by the fact that priority sectors Comoros’ fiscal framework for service delivery is defined by a highly decentralized framework, whereby islands are assigned large institutional responsibilities, including the delivery of primary and secondary health and education services.
The main data source for the retrospective analysis is the Ministry of Finance. Additional data sources include the World Bank/International Finance Corporation and the International Monetary Fund (International Financial Statistics and World Economic Outlook) and the United Nations Population Fund. The priority sectors are identified using the budget execution sector breakdown as reported by the Ministry of Finance. Data on expenditure for Education and Health reported by the Ministry of Finance in 2016 revealed inconsistencies in the reporting of economic classifications, as well as incomplete reporting of execution at the island level. As a result, executed data for priority sectors is often inconsistent and likely incomplete.
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To cope with these issues, which would otherwise limit the consistency of the model, different data sources (Ministry of Finance, Ministry of Education, Public Investment Programme, and the National Institute of Statistics) were compared to each other to obtain a more credible estimate of executed data. For years for which data was particularly scarce, or for which information about economic classification was not available, values were estimated using 2016 data as the basis since that is the most complete year in terms of data. With respect to population data, actual numbers provided in the World Bank’s Development Indicators were used.
For the analysis of the composition of priority expenditure (chapter 3), specific data sources have been used. For education, the main source of data is the sector’s 2018-2020 medium-term expenditure framework (MTEF)2, complemented by data from the Ministry of Finance (MoF) and from the islands’ administrations. For health, the majority of data comes from the Cellule des Réformes Economiques et Financières (CREF), complemented with data from MoF, from the islands’ administrations and from the Public Investment Programme (PIP)3. Given data limitations, expenditure data for health is available only for 20164, while for education it covers three years (2014-2016). The calculation of donor-financed expenditure also differs in the two sectors covered: for education, MTEF data is used, while for health the source is data from the PIP. There are significant differences between those data sources, with the amount of donor projects executed significantly higher in the PIP.
The inclusion of island expenditure data in the analysis allows to have a comprehensive fiscal overview of both sectors, especially given that most of the service delivery expenditure in both sectors is financed through the islands’ budgets. However, the data accessible at the island level is also less detailed than at the union level, which limits the depth of analysis at the island level.
1.3 Organization of the FSA
The remainder of this report is organized as follows. Chapter 2 summarizes the Comoros’ present macroeconomic context – in particular, its fiscal context. Chapter 3 analyses the recent evolution of the expenditure flows in the categories of priority expenditure and outlines some specific challenges in the various areas relevant for expenditure on children. Chapter 4 and 5 discusses various options available to policy makers to enhance fiscal space, using an illustrative projection exercise for the priority expenditure flows and fiscal space that would fund them for the years FY2018-FY2024. The exercise is a sensitivity analysis, consisting of a base-scenario projection based on a broad range of macroeconomic and fiscal-policy assumptions, with various alternative scenarios based on changes to the base-scenario assumptions. Chapter 6 summarises the main findings from the analysis. Appendix 1 provides further details of the sensitivity analysis.
2 Cadre de Dépenses à Moyen Terme relatif au Plan de Transition du Secteur de l’Education 2018-2020. 3 2016 execution data from the Programme Annuel d’Investissement Public 4 Data for the previous two years, when presented, is extrapolated from 2016.
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2 Comoros’ macroeconomic and fiscal context
This chapter starts with a discussion of the main macroeconomic developments and trends in Comoros. The second part of this chapter captures Comoros’ fiscal performance and prospects. Together, this chapter portrays the macroeconomic and fiscal context to the Fiscal Space Analysis.
2.1 Longer-term national economic trends
The table below presents some of the main characteristics of the Comorian economy. The characteristics of the economy are discussed in the following sub-sections.
Table 2-1 Selected Economic Indicators for Comoros 2011 2012 2013 2014 2015 2016 Gross domestic product* $489.1 $507.6 $529.8 $548.1 $562.1 $611.1 Real GDP Growth (%) 5.2 3.8 4.4 3.5 -0.4 3.1 Gross domestic product per capita $692.2 $701.2 $714.6 $721.8 $723.0 $768.1 (US$)** Real GDP per capita growth (%) 2.7% 1.3% 1.9% 1.0% 0.2% 6.2% Non-government consumption** $692.2 $701.2 $714.6 $721.8 $723.0 $768.1 Non-government consumption 2.7 1.3 1.9 1.0 0.2 6.2 growth rate (%) Gross fixed capital formation (% of 8.78 10.28 10.81 Na Na Na GDP) Central-government fiscal surplus Na Na na -0.8 2.9 -6.4 (% of GDP) Merchandise-trade surplus (% of na na na -38.4% -30.3% -26.1% GDP) Consumer prices (December) 1.8% 1.8% 2.4% -5.8% -5.4% -1.1% growth rate (%) Exchange rate (December) growth 3.3% -1.9% -4.3% 13.6% 11.5% 3.3% rate (%) Population growth rate (%) 2.4% 2.4% 2.4% 2.4% 2.4% 2.3% Population under fifteen growth rate (%) 2.0% 2.0% 2.0% 1.9% 1.9% 1.9% Source: IMF International Financial Statistics, World Bank World Development Indicators * US$ million at 2015 prices and exchange rate. ** US$ at 2015 prices and exchange rate.
2.1.1 Real GDP growth In the last two decades, the Comorian economy has suffered from anaemic growth. Between 2002 and 2016, the average annual real growth rate was 2.1 per cent of GDP, slightly below the population growth rate (2.4%).5 Overall, growth has been penalized by the slow progress in the implementation of investment projects, the generally unfriendly business-orientated policies, in particular towards importers, as well as by the high level of fiscal instability.
5 International Monetary Fund (IMF), World Economic Outlook, October 2017, http://www.imf.org/external/datamapper/datasets/WEO.
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The economic growth has generally been too weak to improve the living conditions of the population, as it has remained below the level required to reduce the number of people living in poverty or at risk of falling into poverty, and to absorb the rapid growth of the labor force
While the IMF projects that the performance of the Comorian economy will improve after 2017, the country’s GDP growth is still projected to stay below 4 per cent, as outlined in the figure 2-1 below.
Figure 2-1 Comoros, Real GDP growth (% change) 4.5
4
3.5
3
2.5
2
1.5
1
0.5
0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Actual WEO forecast
Source: International Monetary Fund, World Economic Outlook Database, October 2017.
On the basis of these low growth figures, Comoros’ real growth rate is far below those of its peers. Using 2010 as the base-year, figure 2-2 outlines this clearly.
Figure 2-2 Real GDP growth (index, 2010=100)
290
240
190
140
90 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Projections Comoros Mauritius São Tomé and Príncipe Seychelles Cabo Verde
Source: International Monetary Fund, World Economic Outlook Database, October 2017.
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2.1.2 Demographic trends The importance of accelerating economic development in the Comoros stems partly from the rapidly increasing population, with current economic growth too low to compensate for the annual population increase (2.3 per cent6). UN population projections indicate that the total population of Comoros will increase by 50 per cent (from 832,000) and the labor force will double over the next 15 years. This poses a major challenge in terms of job creation, poverty reduction and management of additional pressures on the limited amount of land and natural resources. As figure 2-3 underscores, annual projected population growth is markedly higher than those of similar island nations in Africa.
Figure 2-3 Population growth index (2010=100) 150
140
130
120
110
100
90 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Comoros Cape Verde Mauritus Seychelles
Source: International Monetary Fund, World Economic Outlook Database, October 2017.
Furthermore, Comoros has a large proportion of youth population, which requires a gradual increase in child-friendly spending if the Government is to maintain its priority expenditure per child. In 2015, about 40 per cent of the total population was under 14 years old. The share of the population under 14 years old has stabilized in recent years, although with the population still growing at a relatively high rate the number of children will continue to grow. By 2025, the population is expected to grow to almost 1 million. While the share of children (0-14) will be smaller as compared to 2015 (37.5 percent), the absolute number of children will be higher (394,000 versus 312,000 in 2015).7
6 Source: Banque Mondiale 7 United Nations DESA/Population Division
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Figure 2-4 Comoros, population composition (thousands) 2 000
1 800
1 600
1 400
1 200
1 000
800
600
400
200
0 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Children (0-14) Youth (15-24) Adults (25-59) Elderly (60-100+)
Source: United Nations Population Division, https://esa.un.org/unpd/wpp/Download/Standard/Population/ (constant fertility projections).
2.1.3 Structure and characteristics of the national economy Comoros is a Small Island Developing State (SIDS). The economy of Comoros suffers both from remoteness and small size. It is also highly sensitive to external shocks, and highly dependent on remittances and external aid. In recent times, growth has been anaemic, and the country continues to suffer from structural imbalances that are hindering growth and investment. Positively though, Comoros has seen three peaceful transitions of power over the last decade and a half. Nonetheless, the lack of coordination and the difficult relations between the three islands and the Union government remains an important source of tension. In parallel, an unfavourable business atmosphere limits the dynamism of the economy.
The country is largely dependent on one agriculture product, vanilla, which accounts for 80 per cent of exports and employs 45 per cent of the workforce. Comoros is the world’s second largest producer of vanilla. The government has outlined plans to significantly expand production over the coming three years. Tourism is also seen as having growth potential, but is so far barely developed.
The large Comorian diaspora plays a major role in sustaining economic growth. In parallel, the economy is largely dependent on the development assistance from the international community, and in particular from the Gulf. It is estimated at about 10 per cent of GDP.8 Improved diplomatic relations with Saudi Arabia and Gulf countries have led to significant budget and off-budget support in recent years, including the project to build roads connecting Moroni, the capital, to the airport and Ouani to Bambao, two cities in Anjouan.
A 2014 World Bank diagnostic study9 has pointed out that the foundations of a stronger Comorian economy lie primarily in strengthening public and private institutions. The economy is characterized by a private sector that remains weak and mostly trade-oriented. It is also dominated by considerable informal activities and low productivity. As the state's ability to provide services has deteriorated, the obstacles to economic activity in the private sector, ranging from poor quality and high cost of infrastructure services, high administrative costs for doing business and low skill of the
8 Article IV, IMF Country Report 16/393, December 2016 9 Notes de politique sur les Comores : Accélération du développement économique dans l’Union des Comore, February 2014
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workforce, have increased. Not surprisingly, the domestic credit to the private sector relative to GDP, although increasing, remains low (26.1per cent)10.
The current development strategy of the Government, the Stratégie de Croissance Accélérée et de Développement Durable (SCA2D 2018-2021) aims at the structural transformation of the economy towards making the Comoros an emerging economy in 2030. The main approach to do so is through an increase in investment in infrastructure, in particular through large projects in transport and energy. A very ambitious five year investment plan (Programme d’Investissement Pluriannuel 2016-2020) has been developed to that effect, the implementation of which has been weak so far.
2.1.4 Poverty Figures from the World Development Indicators show that Comoros’ poverty levels remain very high and have slightly increased in recent years, from 61.6 per cent of people living under 5.50 USD a day (2011 USD PPP) in 2004 to 63.1 per cent in 2013.11 Similarly, the percentage of people living with 1.90 USD a day also increased from 3.7 per cent to 6.3 per cent over the same period. The continued high poverty rates are explained by the country’s geographic isolation, weak inter- island and international connectivity, as well as poor business environment and public infrastructure, which both hold back the country’s growth. At the same time, progress on equality appears to be made, as the World Bank reports a decrease of the Gini coefficient from 0.56 in 2004 to 0.45 in 2013.
Meanwhile, unemployment is high and persistent. The very large public wage bill can be seen as a government strategy to absorb the unemployed work force and to reduce the risk of social unrest resulting from high (youth) employment. The problem of unemployment could be exacerbated in the future by the demographic profile of the Comoros, as outlined in the previous section.
The continued high level of poverty is also reflected in GDP per capita levels. GDP per capita has failed to grow past its peak of US$ 1593 in 2003.
According to IMF country ranking by GDP (at purchasing power parity per capita 2016 estimates12). Comoros is ranking 172 among 193 countries, making it one of the poorest countries in the world.
2.2 Recent macroeconomic developments
2.2.1 Real GDP growth Following a slump in 2014 and 2015 linked to the electricity crisis, growth levels slightly improved in 2016 and 2017. The purchase of new power stations led to the recovery of electricity production, which revitalized entire sectors of the economy, including tourism, hospitality, trade, and the distribution of fresh food products. Another important factor contributing to recovery is the rise in international prices of the country’s main export products, including Bourbon vanilla whose price per kilo rose from US$ 60 in 2014 to US$ 400–US$ 500 in 2017.
2.2.2 International trade and the current account Traditionally, being a small archipelago with few natural resources, Comoros has imported more than it exported. Over the years, export earnings have increased moderately, while imports have
10 World Bank Development Indicators 11 World Bank Development Indicators 12 Ibidem.
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grown at a much faster rate. Traditional export products like cloves and vanilla still account for over half of the export earnings.
Figure 2-5 Comoros export/import composition, US$ million 150
100
50
0
-50
-100
-150 2012 2013 2014 2015
Cloves Vanilla Essential Oils Metals Non-fillet frozen fish Scrap vessels Other export Machines Animal producs Vegetable products Foodstuffs Chemical products Metals and mineral OTHER
Source: Atlas of Economic Complexity MIT, https://atlas.media.mit.edu/en/13.
Like most non-oil developing economies, Comoros runs a deficit on the current account, which averaged 5.46 per cent of GDP between 2010 and 2016. This is largely driven by an increase in imports resulting from the country’s public investment projects in the energy and telecom sectors and a stagnation of exports. Figure 2-6 illustrates the increasing current account deficit between 2010 and 2014, both in terms of US$ millions and in percentage of GDP, which is then projected to decrease after 2016.
Figure 2-6 Current account balance 2010-2022 in US$ millions and in % of GDP 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 200 2
- 0
-200 -2
-400 -4
-600 -6 % of GDP of %
USD, Millions USD, -800 -8
-1,000 -10
-1,200 -12
-1,400 -14 US$ millions Percent of GDP
Source: International Monetary Fund, World Economic Outlook Database, October 2017.
13 The Atlas of Economic Complexity data from the MIT is collected by customs offices, therefore it includes only goods and not services. This is an important drawback, as services are becoming a rising share of international trade.
22
Comoros’ current account deficit mainly results from a large trade deficit (historically around 30 percent of GDP), which is counterbalanced by sizeable remittances that hover around 20 percent of GDP. Project grants have allowed the country to maintain a stable international reserve position, which has hovered at around 6 months of imports. Recently, the country’s international reserve position has been unusually high at 9.1 months of imports by thanks to the Saudi Arabian budget grant at the end of 2015.
Overambitious domestic revenue targets over the last two years have put heavy pressure on customs authorities in the last two years. This in turn has led to aggressive revenue collection practices which have particularly affected importers, and led to shortages of a number of imported goods. The fall in tariff revenues in the context of trade liberalisation has been partly offset by an increase in internal indirect tax revenues, more particularly through excise duties, the economic effect of which is said to have been generally distorting in particular on importers.
2.2.3 Inflation and exchange rate Inflation rates in Comoros have been relatively stable and below 6 per cent since 2007, largely thanks to the country’s use of a fixed exchange rate system.14 In recent years, inflation has remained well-anchored at around 2 per cent, notwithstanding a sharp real-effective depreciation of the Comorian franc, owing to the depreciation of the euro against the U.S. dollar in 2015 (see figure 2-7).
Figure 2-7 Average exchange rate and average yearly consumer price index change 500.0 7.0 443.6 444.8 436.6 450.0 382.9 6.0 400.0 371.5 370.5 370.8 359.5 354.1 353.9 5.9 335.9 350.0 5.0
4.8 4.8 300.0 4.5 4.0
250.0 3.9 3.0 200.0
150.0 2.0 2.2 2.0 2.0 100.0 1.8 1.6 1.3 1.0 50.0
0.0 0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Average exchange rate Average CPI change
Source: International Monetary Fund, World Economic Outlook Database, October 2017.
2.3 Recent fiscal performance
2.3.1 Government fiscal performance Comoros’ fiscal situation has been very unstable and precarious in recent years. Comoros faces a structural imbalance between chronically low domestic revenues and high level of expenditures, especially on the wage bill.
14 The Comorian franc is pegged to the euro.
23
Domestic revenues have averaged around 11 to 12 per cent of GDP over the last few years, while expenditures have fluctuated between 22 per cent and 26% of GDP since 2014, meaning at each year, the Government had a budget deficit (before grants) to fill of about 10-12 per cent of GDP. The deficit has been largely financed by grants (which fluctuated between 9 per cent and 15 per cent of GDP between 2014 and 2016) and to a much lesser extent through loans.
Figure 2-8 Primary deficit 2014 – 2016 30.0%
25.0%
20.0%
15.0%
10.0%
5.0% % of GDP of %
0.0% 2014 2015 2016 -5.0%
-10.0%
-15.0% Domestic revenues Current expenditures Total expenditures Primary Deficit
Source: Ministry of Finance
The limited size of the revenue envelope and the large size of the wage bill has meant that the country has experienced a continuous primary deficit. Meanwhile, as illustrated in table 2-8, the Government has struggled to finance its current expenditure through domestic revenues. With its own revenues, the Government has financed primarily salaries, and only marginally ‘goods and services’. A share of current expenditures has been externally financed, including by one-off budget support (from Qatar and Saudi Arabia). The previous government used most of the budget grant from Saudi Arabia in the amount of €40 million (7.5 per cent of GDP) to clear the wage and salary arrears that had been accumulated in the course of 2015. Such operations have somehow masked the true extent of the fiscal imbalances in the country.
The instability of the fiscal situation has been exacerbated by the tendency for (over) ambitious budgeting. In the 2017 Budget Law (Loi des Finances 2017), the amount of domestic resources increased from 16 per cent to 28 per cent of GDP compared to the previous year, while the amount of expenditures from 32 per cent to 40 per cent of GDP. This overambitious budgeting has led to large budget cuts and reallocations during the year, as well as expenditure arrears. Because of the lack of access to private financing (including domestic debt), adjustments have been made mostly through cuts in capital spending and arrears accumulation.
The implication of this unrealistic budgeting is also that allocated budgets bear little resemblance to executed ones. The PEFA 2016 highlights that Comoros’ expenditure, while robust on an aggregate level, lacks credibility given the high volume of reallocations within the year, both 15 between economic categories and between ministries and/or institutions.
15 PEFA 2016.
24
The Government has indicated that it wants to stabilise its public finances over the medium-term, through both improvements in revenue collection and reduction in expenditure.16 However, a fiscal policy is not yet in place and there is no evidence that fiscal stabilisation has taken place in the last two years – on the contrary. In this context, the likelihood of an IMF-supported programme appears unlikely, even if the authorities have expressed an interest in such a programme.
2.3.2 Revenue performance Domestic revenue generation has been a long-standing challenge in Comoros. As discussed above, in recent years current spending has constantly exceeded internal revenues, which increases the country’s need of foreign finance to close the financing gap.
The level of domestic revenues has been historically low by regional standards17. The scope to increase domestic revenue mobilisation is estimated to be significant. For Comoros, the current level of domestic revenue is about 11 per cent of GDP, while its tax potential has been estimated at 19.2 per cent of GDP18.
The figure below shows that the level of domestic revenues (excluding non-fiscal revenues) is broadly equivalent to the amount of grants received.
Figure 2-9 Composition of revenues (executed data as share of GDP) 35.0%
30.0%
25.0%
20.0%
15.0% % of GDP of %
10.0%
5.0%
0.0% 2014 2015 2016
Fiscal revenues Non-fiscal revenues Budget support Projects
Source: Ministry of Finance
Domestic revenues Several diagnostics and reports over the years, such as the TADAT, identified a number of structural weaknesses that explain Comoros’ weak revenue performance.19 The three main shortcoming/challenges can be categorised as follows:
16 In its letter of Intent of 216 to the IMF, the Government’s medium-term fiscal targets are specified. The government’s long- term objectives are to raise domestic revenues by 50 percent and reduce public spending by 40 percent and has appointed commissions with Union and island representatives to develop proposals to these ends. However, the government recognizes that short-term options are much more limited partly because of the need to take into account the fragility of Comorian society when considering measures to reduce the wage bill 17 In IMF Country Report No. 16/394 (Selected Issues), the revenue performance of Comoros was compared with 30 other low- income, non-oil exporting countries in sub-Saharan Africa (SSA). The conclusion was that, while Comoros is certainly not the sole country to experience difficulties in mobilizing additional tax revenue, its performance is nevertheless well below average. 18 IMF "2014 Article IV consultation" IMF Country Report 15/34, February 2015 19 Tax Administration Diagnostic Assessment Tool (TADAT), 2016, Comoros
25
1. The Administration Générale des Impôts et des Domaines (AGID), has remained chronically inefficient. The Comorian tax authority is still heavily fragmented20 and the current segmentation of tax payers remains inadequate, with in particular large companies not being the subject of specific management through a unit of large taxpayers. Meanwhile, the procedures of registrations are weak, controls and sanctions insufficient, and there is no effective computerization of AGID. While there have been some attempts to reform the agency, partly supported by donors (AFDB and AFD), the ownership of those reforms has been limited. 2. The extensive granting of tax exemptions on a largely discretionary basis has continued. A culture of tax exemptions is still prevailing, despite some efforts made to reduce them in 2016. Losses of revenue seized at the customs level constitute the bulk of the overall shortfall. Conventions signed with tax payers cover all taxes levied at the customs, such as customs duties, excise taxes, consumption tax, business license, and miscellaneous profits tax exemptions. Meanwhile, a large number of companies benefit from exemptions under the Investment Code. Exemptions for diplomats excluded, the loss from tax exemptions represents 1.4 per cent of GDP and 11.1 per cent of tax revenue according to the TADAT. 3. A policy of trade liberalization aimed at reducing fiscal distortions has reduced the revenue from taxing trade: over the period 2009-2014, tariff revenues shrank from 5.1 per cent to 2 per cent of GDP (which is also attributable to extensive exemption measures). The fall in tariff revenue has been offset by an increase in internal indirect tax revenues (+3.0 points of GDP), more particularly through excise duties (+2.3 points of GDP), of which the economic effect has been generally distorting, in particular on importers.21
The inability of the government to address these issues reflects partly prevailing governance and political economy conditions22. This results in an inability to mobilize the fiscal resources necessary for the financing of public goods and in significant distortions which, in turn, are corrected by derogations which affect the economic activity.
External aid Official Development Assistance (ODA) has been a major source of financing for the Comoros, broadly on an equal par to domestic revenues. Grants have oscillated between 9 per cent and 15 per cent of GDP between 2014 and 2016. Figure 2-10 below presents ODA trends since 2000 based on World Bank data. While the Comoros has been a major aid recipient as a share of GDP, the country has in parallel been categorised as a donor orphan, as the number of donors present is limited. The main donors are the European Union, the UN, the World Bank, Saudi Arabia, the African Development Bank, France, Dubai Care and the Qatar Foundation.
20 The integration of the AGID has still not been realized to date: the island entities continue to each have a tax administration whose Regional Director remains appointed and under the authority of the governor of each island. 21 Comores, Reforme Du Systeme Fiscal: Les Etapes A Franchir, Gérard Chambas Et Jean-François Brun, Mai 2015, FAD, IMF Country Report No. 16/394, December 2016 (Selected Issues), 22 This is elaborated in the Political Economy Analysis (PEA).
26
Figure 2-10 Comoros, ODA received 2000-2016 100 20 90 18 80 16 70 14 60 12 50 10
40 8 GNI of % USD, millions USD, 30 6 20 4 10 2 0 0 20002001200220032004200520062007200820092010201120122013201420152016
Net ODA received (constant 2015 US$) Net ODA received (% of GNI)
Source: World Bank, World Development Indicators, https://data.worldbank.org/data-catalog/world-development-indicators.
The high level of fluctuation in grants largely reflects the fact that Comoros has benefited from very large one-off budgetary grants, such as in 2015 by Saudi Arabia. Otherwise, projects grants have been relatively stable (between 8 per cent and 9 per cent of GDP during the 2014-2016 period). The level of project grants is extremely high by regional standards. As of end-2015, the level of project grants in Comoros was about three times the average of sub-Saharan African countries as percent of GDP.23 As a share of total revenue, grants accounted for over 46 per cent in 2014, but this number declined to around 40 per cent in 2016.
While donor funding is reported as financing capital expenditures, evidence suggests that donor funding has played an important role – not directly captured in the budget – in supporting current expenditure. 50 per cent of donor-funded expenditure in 2016 consisted of capital expenditure, 33 per cent of technical assistance, and 27 per cent of operational expenditure.24 Field visits in the islands confirmed that in priority sectors (health, education), goods and services were nearly exclusively funded by donors.
Donors are expected to play a major role in financing the 2016-2020 Public Investment Plan (PIP), as part of the revised development strategy, the SCAD2D25. The Government plans to host a Donor forum in 2018 to attract support. Prospects of traditional donors stepping up their commitments towards Comoros in the next few years appear however limited. Commitments for the upcoming years are currently broadly similar to current engagement, if not slightly lower. There is ample evidence of donor fatigue, including from the largest multilateral donors, in a context where relations between the Government and the donor community have faced challenges lately.26 There is a lack of a functioning dialogue structure between the two sides. The Government appears to currently privilege relations with non-traditional donors.
More broadly, the absorption of additional donor funding remains very limited, given the poor quality of investment projects but also given the limited size of domestic revenues. In a context where the government is not able to finance current expenditure and support the maintenance of donor
23 See IMF, Country Report No.16/394, December 2016 (Selected Issues). 24 Based on 2016 execution data for the Public Investment Plan. 25 Stratégie de Croissance Accélérée et de Développement Durable 2018-2021 26 The EC’s 11th EDF mid-term reallocation process, in which the Government’s allocation was reduced by more than €30 million, has been highlighted as an example of the difficult relations between the Government and the donor community.
27
projects (not to mention providing counterpart funds), increasing donor funding will not automatically improve fiscal sustainability.
2.3.3 Government expenditure In recent years, total government expenditure oscillated between 22 per cent of GDP (in 2014 and 2015) and 26 per cent (in 2016). The increase in 2016 was mainly driven by externally financed capital investments, which were about 2 percentage points higher than the previous year. In terms of current expenditure, an increase in transfers from 2 per cent to 3 per cent of GDP drove the increase between 2015 and 2016, which was partially offset by a modest decrease in wages and salaries, following the new administration’s termination of a large number of contractual positions.
The total level is of expenditure is high. While it partly reflects the complex administrative structure of Comoros, it is largely the result of the very high spending on wages and salaries. As a result, there is little room for government spending on goods and services and capital expenditures, as outlined in the next figure. Most of the spending on capital expenditure is donor-financed.
Figure 2-11 Comoros, composition of expenditure (executed data as percentage of GDP) 30.0%
25.0%
20.0%
15.0% % of GDP of % 10.0%
5.0%
0.0% 2014 2015 2016
Wage recurrent Non-wage recurrent Domestic capital External capital
Source: Ministry of Finance.
With regards to the wage bill, Comoros is a clear outlier. A high wage bill remains a chronic challenge to the Comorian government. The wage bill in Comoros has consistently consumed more than 60 per cent of domestically-generated revenue over the last decade, a much higher share than on average in other sub-Saharan African countries (Figure 2-12).
28
Figure 2-12: Wage bill as a percentage of tax revenues (2015)
Comoros
Tanzania
Kenya
Uganda
Seychelles
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Source: IMF Country Report No. 16/394 (Article IV Consultation)
Regarding spending on goods and services, Comoros’ average spending was about 3.9 per cent of GDP over the last decade. A large part of expenditure on goods and services has been for administrative institutions27, both at Union and island levels (i.e. such as towards gouvernorats), meaning that the Government’s contribution to service provision in social sectors has been small (except for salaries). Donors (and beneficiaries) have largely financed those services.28 The existence of a large contingency fund (the dépenses communes budget line), which amounted to about 20 per cent of budgeted expenditure in the 2014-2016 period, has contributed to the imbalance towards administrative expenditure.
The amount of capital expenditure has been small, but has slightly increased, mostly on account of an increase in donor-funded projects. Between 2015 and 2016 foreign-financed capital expenditure increased from 6.7 per cent to 9.3 per cent of GDP. Conversely, domestic capital expenditure slightly decreased from 1.7 to 1.4 per cent of GDP over the same period. The overall level of capital expenditure has been affected by low execution ratios. The rate of execution of the PIP has remained weak and on a declining trajectory in recent years, decreasing from 47 percent in 2012 to around 40 percent in 2016. The low execution ratio not only signals weaknesses in budget credibility, but also causes the delay and even failure of ongoing projects.
In-year budget reallocations, which are frequent, have been generally at the expense of goods and services expenditure and (domestically-financed) capital expenditure. Salary payments have always been the priority from a treasury management perspective. This has contributed negatively to the level of expenditure for goods and services and for investments.
2.3.4 Government debt
External debt Comoros benefited from extensive irrevocable debt relief in 2013 when it reached the HIPC debt relief initiative completion point, which resulted in a decline in nominal external debt from 40.5 per cent of GDP at the end of 2012 to 18.5 per cent at the end of 2013. Since the completion point, Comoros has contracted one loan with India of about US$ 33 million (with a concessionality level close to 50 percent) for the construction of a heavy-fuel electricity generation plant. In 2015, partly as a result of this loan, debt levels had already increased to 32 per cent of GDP by 2016 (see figure 2-13 below).
27See Comoros, Public Expenditure and Financial management review, 2016. Administrative institutions include Assemblée de l'union ; Cour constitutionnelle; Cour suprême ; Dépenses communes ; Garde sceaux, justice, de la FOP; Ministère de l'intérieur, de l'information, de la décentralisation; Présidence de l'union; Vice présidence Mayotte; Vice présidence ministère des finances, de l'économie, budget et des investissements; Relation extérieures et de la coopération, de la diaspora, de la francophonie et du monde Arabe. Commissariats et ministères correspondants au niveau des iles. 28 This has also been confirmed by field visits (Moheli and Anjouan)
29
Figure 2-13 General government gross debt (per cent of GDP) 70
60
50
40
30
20
10
0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
General Government gross debt (% of GDP)
Source: IMF WEO, October 2017.
The latest IMF/World Bank Debt Sustainability Analysis (2016)29 underscored that debt sustainability remains sensitive to growth, remittances and revenue shocks, categorising Comoros as having a moderate level of debt distress. The document emphasised the importance of obtaining loans on concessional terms, as well as the stability provided by the exchange rate peg of the Comorian Franc to the Euro under the monetary cooperation agreement with France. Likewise, the government debt strategy30 favors the mobilization of grants and highly concessional external borrowing in order to ensure debt sustainability.
The commitment to the implementation of that strategy remains however uncertain. The Government has put a lot of emphasis on the PIP. However, the reticence from traditional multilateral donors to fund infrastructure projects forced the country to resort to bilateral partners, particularly emerging donors (China, India, etc.). Already, Comoros has begun to draw on previously contracted external loans, the US$ 33 million one from India in 2013 mentioned above and another one from China in 2010 (US$ 32 million). The government is now in discussion with a private bank for the (non-concessional) financing of a new US$ 40 million hospital, which is a flagship PIP project.
The contracting of these loans with non-traditional partners, together with the delays in the passing of a law aimed at strengthening the debt management framework, have raised questions about the commitment of the government to the debt strategy, and increase the risks concerning debt sustainability.
Domestic debt There is no domestic market in Comoros that allows for the issuance of government securities. Domestic debt essentially takes the form of statutory advances from the BCC.
29 See Article IV, IMF Country Report 16/393, December 2016 30 Document de Stratégie d’Endettement Public pour 2017-2019, Union des Comores, Octobre 2016
30
The level of arrears (domestic and external) has over recent years been very high, reaching more than 50% of annual expenditure.31 Data on the stock of domestic arrears is not available. The one- off budget support grant by Saudi Arabia in 2015 mostly aimed at clearing salary arrears that had been accumulating.
2.3.5 Prospects The fiscal situation of the Comoros has remained highly unstable in recent years, despite the debt relief and the one-off budget support grants it has benefited from. The scope for expanding the limited fiscal space for child-friendly expenditure remains at best limited in that context.
The low level of domestic revenues remains the main constraint in that regard. Without an increase in domestic revenues, the Government will have limited capacity to increase current spending in particular and absorb other sources of financing. Some modest efforts have been undertaken to reduce tax exemptions, and some steps have been taken to improve the efficiency of the AGID, but more comprehensive efforts will be required for revenue levels to increase significantly, and for the country’s tax potential to be reached.
In addition, the Government needs to achieve higher economic growth, as that would result in increased tax revenues. The Government of Comoros is now giving more emphasis to public infrastructure, which is essential to raise productivity in key sectors, in particular agriculture, and boost growth prospects. However, the quality and quantity of public investment remains low. Other growth barriers remain also very present.
On the expenditure side, the current priority to salary expenditure and expenditure in administrative institutions is an important obstacle to fiscal space on child-friendly expenditure. To some extent, the government has delegated service delivery in social sectors such as health and education to donors.
From the perspective of social sectors, the renewed focus on infrastructure should not necessarily be unwelcome, as it is necessary to boost growth and domestic revenues prospects over the medium-term to support domestic spending in those sectors.
Addressing these fiscal shortcomings and imbalances will be essential for creating fiscal space for priority expenditures. The current Government approach of relying heavily on donors to boost fiscal space for capital investments needs to be accompanied by efforts on the domestic revenue front and on expenditure reallocation if it is to have a positive lasting fiscal impact and contribute to fiscal space.
31 PEFA 2016
31
3 Comoros’ priority expenditure and fiscal space
This chapter describes in more detail which categories of the budget were selected as “priority” expenditure for the purposes of this exercise and analyses the composition of priority expenditures (composition of total priority expenditure, as well as composition of health and education expenditure respectively).32 The funding profile of both sectors is also briefly described. The chapter concludes with implications for the FSA.
3.1 Introduction
3.1.1 Definition of priority sectors As explained in section 1.2 of chapter 1, this analysis defines “priority expenditure” as spending which is particularly relevant to children. The point is simply to categorize expenditures of priority interest to children in general and UNICEF in particular, and as such, the composition of “priority” expenditure is chosen by UNICEF and the consultants. Priority expenditure incorporates both domestically-financed and donor-financed expenditure.
For Comoros, health and education have been selected as priority sectors. Priority expenditure consists of expenditure for the Ministry of National Education, Instruction and Research and the Ministry of Health and Solidarity (Union) as well as of expenditure of the Commissariats in charge of education and health at the level of each of the three islands (Ngazidja, Anjouan, Moheli). This reflects the fact that in Comoros, health and education are both a responsibility of the Union (Ministries) and of the islands (Commissariats). In the education sector for example, the Ministry of National Education, Instruction and Research is responsible for the design of education policies and programs, their monitoring and evaluation as well as the management of higher education and training and research. Meanwhile, according to the Comorian Constitution, the mandate of the autonomous islands includes the construction, equipment and maintenance and management of educational establishments and personnel, preschool, primary and secondary but also the local vocational training of base. It should be noted in parallel that the management of Technical Education and Vocational Training falls under the dual supervision of the Ministry of Education, Instruction and Research and the Ministry of Employment and Vocational Training at Union level.
3.1.2 Priority sectors in government strategies The new administration that came to power in 2016 considered that some re-prioritizing was needed, particularly toward greater focus on infrastructure investment in the electricity, road, and telecommunications sectors. Improvement of infrastructure can be considered as the core component of the Government’s strategy to make Comoros an ‘‘emerging economy’ by 2030.
To that effect, the Government has decided to adjust the Stratégie de Croissance Accélérée et de Développement Durable (SCAD2D) into a revised SCAD2D (2018-2021). While there are no major changes compared to the previous SCAD2D, the new administration has put a strong emphasis on the Public Investment Programme (Programme d’Investissement Public – PIP) as part of the strategy.
32 Contrary to other similar studies in other countries, this chapter does not discuss the evolution of priority expenditure, given data limitations.
33
In the Plan d’Actions Prioritaires 2018-2021 attached to the SCAD2D (and which is the basis for the PIP), 50% of the total allocation is devoted to Axis 1 (Acceleration of the structural transformation of the economy and sustainable management of the environment) while Axis 2 (Acceleration of human capital development and promotion of social well-being) receives only 29 per cent. 70 per cent of Axis 2 is constituted of health and education expenditure (with a broadly equal share between the two sectors). The high share provided to Axis 1 generally points out to the strong ‘structural economic transformation’ focus of the revised SCAD2D.
The focus on the PIP also underscores a shift in infrastructure across sectors, including in social sectors. The Government is now requesting systematically donors to include an infrastructure component in each project, including in priority sectors. This focus on infrastructure, including in social sectors, has been exemplified by the flagship project to build a new hospital in Moroni.
The limited interest of in particular traditional donors in financing infrastructure has meant that infrastructure funding has not been forthcoming and that the execution of the PIP (which is nearly entirely donor-financed) has been weak, especially for Axis 1. On the other hand, spending in priority sectors, for which funding has been relatively forthcoming, has been strong. In 2016, 16 per cent of total PIP expenditure was in health, and 27 per cent in education.
Concerning the recurrent budget, there is no evidence that the relative shift in policy priorities has been translated into shifts in inter-sector allocation. The budget preparation process is very incremental and lacks a policy focus. Maintaining (or increasing) the high wage bill has been the overall budget priority for many years.
3.2 Composition of total priority expenditure
Figure 3-1 shows the priority expenditure as a share of total expenditure. Total priority expenditure amounted to 30 per cent of total expenditure in 2014 and 2015, and 25 per cent in 2016. In constant US dollar terms, this represented a decrease from US$ 46 million in 2014 to US$ 40 million in 2016, which translates into a decrease from US$ 152.71 per child in 2014 to US$ 123.72 in 2016. The bulk of the priority expenditure is in the education sector (more than 75 per cent of priority expenditure).
34
Figure 3-1: Priority expenditure in Comoros as a share of total expenditure (includes foreign-financed investment projects) 35%
30%
8.4% 8.2% 25%
7.1% 20%
15%
22.4% 22.5% 10% 17.8%
5%
0% 2014 2015 2016
Education Health
Source: Paiements de l’état: secteurs sociaux 2016, Ministry of Finance
The education sector in Comoros has indirectly benefited from being very wage-intensive, in a context where the main fiscal priority of the government has been to support a high wage bill.
It is noted here that a presentation of expenditure by functional and economic classification in Comoros can be misleading, as health and education expenditure at island level would be incorporated as “services généraux des administrations publiques” and not as health and education.
Figure 3-2 presents the share of priority expenditure at the level of the Union and at the level of the islands (excluding donor-financed expenditure). It highlights that about 70 per cent of priority expenditure was executed at the level of the islands. The amounts budgeted for the islands, as indicated in the Loi des Finances (the budget law), are generally not fully disbursed (except for salaries) because those transfers are not prioritised during in-year budget execution. The level of expenditure on health and education at island level is directly affected by this.
35
Figure 3-1: Priority expenditure in 2016, breakdown between administrative units (excluding donor funding) 35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0% Union Ngazidja Anjouan Mohéli
Sources: Paiaments de l’état: secteurs sociaux 2016, Ministry of Finance
3.3 Composition of expenditure in education sector
This section provides an aggregate overview of the spending profile of each priority sector. It first briefly assesses the main achievements and outstanding reform challenges in the sector and continues with an analysis of the composition of expenditure. It then presents the MTEF projections for the sector. This section aims at providing a brief overview of the composition of expenditure across the education sector. The focus is here again on executed data and not on budgeted allocations.33
3.3.1 Introduction: Achievements and key policy challenges In recent years, the overall national education sector has made progress in terms of access and quality, manifested by an increase in enrollment at each level (pre-school, primary, secondary) of the system and an improvement in completion, especially at the primary level. Primary education has now a net enrollment rate of 81 per cent and a transition rate of 92per cent. The increase in enrolment is however largely linked to the increase in private schools, in particular at the secondary level.
Significant concerns remain concerning the quality of the education system. The sector suffers from dysfunctions linked, among other things, to the lack of school facilities, with some schools operating under a double-shift system. While the teacher pupil ratio (at 1/31 for primary) is relatively high for a Low Income Country, there is a severe lack of teaching material, and the teachers are often poorly trained, many of them being ‘volunteers’.
The current sector plan, the Plan de Transition du Secteur de l’Education (PTSE) 2018-2020, highlights that the biggest challenge for the quality of education is the increasing inadequacy of
33 The main source of data is the sector MTEF. Importantly, there are significant discrepancies in terms of donor-funded expenditure in the MTEF and in PIP execution reports. According to the latter, the size of donor support to the sector is significantly higher (up to three times larger). The PIP also underscores that a large number of donor-financed projects support activities are recurrent in nature (this is unsurprising as the government’s budget allocates very little resources to non- wage recurrent expenditure).
36
textbooks for the main subjects taught in primary schools, and the distribution of these textbooks to schools. In that context, the main policy priorities of the PTSE can be summed up as follows: • Increasing the operating costs of administrations and schools and training to improve quality; • maximizing the use of classrooms while preserving quality; • The controlled revaluation of teachers' remuneration; • The decrease in the frequency of repetition; • Streamlining the use of teachers (especially in secondary schools) and the recruitment policy.
The total annual budget of the PTSE for 2016 amounts to KMF 12.7 billion, as follows; KMF 10.8 billion for salary and personnel expenditure, KMF 243 million for goods and services and internal investment, and KMF 1.6 billion for external assistance. This amounts to a total annual budget of about US$ 30 million (US$ 95.3 per child) or 6.8% of GDP.
3.3.2 Composition by economic category The central issue in terms of the economic composition of education expenditure is the imbalance between salary and non-salary expenditure. Figure 3-3 highlights that salaries consisted of 85 per cent of total expenditure over 2016, and of 98 per cent of recurrent expenditure.34 This proportion, even considering that education is by nature a highly staff intensive sector, is uniquely high when compared to similar countries.35
Figure 2-3: Composition of education expenditure by main economic categories (including donor- funded expenditure) 14,000
12,000
10,000
8,000
6,000
4,000
2,000
- 2014 2015 2016
Wages Goods and services Investments (domestic) Investments (donor funded) Transfers
Sources: Cadre de Dépenses à Moyen Terme relatif au Plan de Transition du Secteur de l’Education 2018-2020
3.3.3 Composition by programme Figure 3-4 below presents the composition of expenditure by main education programmes. The most striking feature of this distribution is the limited focus on primary education. This distribution is atypical for a country that has not achieved the goal of Universal Primary Education (UPE). Preschool and primary education receive a relatively small part (31 per cent) of total expenditure, while secondary receives a particularly high proportion (42 per cent).
34 As mentioned above, some expenditure which is classified as capital because it is donor-funded may be recurrent in nature. 35 According to the latest Article IV report by the IMF (December 2016), the wage bill in Comoros has been more than 50% higher than in SSA countries
37
Figure 3-3: Composition of education expenditure by programmes (includes donor-funded expenditure) 100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0% 2014 2015 2016
Pre-school and primary education Secondary education Tertiary education Other
Source: Cadre de Dépenses à Moyen Terme relatif au Plan de Transition du Secteur de l’Education 2018-2020
3.3.4 Composition by administrative levels Figure 3-5 below presents the share of the education expenditure per administrative level. Even if transfers to islands have been under pressure recently, the level of education expenditure executed at the island level remains by far superior to expenditure at the union level. Nearly 80 per cent of the sector expenditure are spent at that level. This is in line with the ongoing decentralisation process in Comoros, with plans for the communes to be transferred key service delivery responsibilities, including in the education sector.
Figure 3-4: Education expenditure in 2016 by administrative level as % of total education expenditure (excluding donor-funded expenditure) 40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0% Union Ngazidja Anjouan Mohéli
Sources: Paiement de l’état: secteurs sociaux 2016, Ministry of Finance
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3.3.5 Financing of the sector This section briefly looks at the financing of the education sector.
Figure 3-6 highlights that external financing amounted to approximately 10% of total expenditure over the 2014-2016 period.36 The same table also presents a basis scenario for the evolution of expenditure and external finance for upcoming years on the basis of the sector MTEF, which underscores the continued predominance of wages in the expenditure framework.37
Figure 3-6: Education expenditures by economic category, basis scenario (includes donor-funded expenditure)
16,000.00
14,000.00
12,000.00
10,000.00
8,000.00
6,000.00
4,000.00
2,000.00
- 2014 2015 2016 2017 2018 2019
Personnel Goods and services Transfers Investment (domestic) Investments (donor funded)
Source: Cadre de Dépenses à Moyen terme relatif au PTSE 2018-2020
Figure 3-7 presents the evolution of expenditure taking into account the new activities, which are selected on the basis of the priority actions in the PTSE. The implementation of those policy options requires a shift in the amount and intra-sectoral allocation of expenditure, which is described in the MTEF. This underscores that the largest effort going forward is expected to be undertaken by donors. At the same time, an increase in goods and service expenditure is also planned.
36 This share may be underestimated. PIP data shows a much higher amount of donor funds in the education sector. 37 The baseline projection uses the highest budget amount for the period 2014-2016 (executed) as the basis for figures, with adjustments to 2017 data as projected estimates of the implementation of the 2017 budget.
39
Figure 3-7: Education expenditures by economic category, final scenario (includes donor-funded expenditure)
16,000.00
14,000.00
12,000.00
10,000.00
8,000.00
6,000.00
4,000.00
2,000.00
- 2014 2015 2016 2017 2018 2019
Personnel Goods and services Transfers Investment (domestic) Investments (donor funded)
Source: Cadre de Dépenses à Moyen terme relatif au PTSE 2018-2020, projections are from final scenario
Based on the sector MTEF for the period 2018-2020, the education sector will require an overall annual budget of 62.9 billion KMF. 70 per cent of the total will be supported by domestic resources, 87 per cent of which will still be used for staff salaries. It should be noted that the MTEF projections assume a level of domestic revenue mobilization of 15 per cent by 2020, which is very ambitious in light of the current situation. Most of those foreseen additional resources are to be used for non- salary expenditure, and are expected to be mostly financed by donors.
Based on the sector MTEF and on interviews, the funding from development partners over 2018- 2020 will consist mainly of the following: • The EU which has reserved under the 11th EDF an amount of EUR 12 million for Technical and Vocational Training; • The Qatar Foundation will provide US$ 3.4 million, mainly focused on access, from June 2018; • Dubai Cares will provide US$ 2 million USD, mostly for pre-school; • The AFD is planning a project that will benefit the education sector from 2019, the amount of which is likely to be EUR 6 million; • The United Nations systems, including UNICEF and other UN agencies, are expected to provide continued support; • A new GPE grant of US$ 2.3 million to finance the sector's capacity building activities is planned.
Commitments for the coming years suggest that the amount of funding to the sector will broadly increase compared to the 2015-2017 period. There have also been talks with China to finance education infrastructure, although the status of those discussions is unclear.
A key question in that respect is to what extent the planned significant increase in donor resources can be absorbed. The distribution of expenditure by economic category in the MTEF shows a gradual increase in current expenditure (necessary to achieve universal enrollment). That increase in current expenditure may however be insufficient to absorb the large increase in donor-financed
40
capital expenditure that is projected. It is expected to consist mostly of classroom construction and equipment for all levels of education (preschool, primary and general secondary) as well as textbooks and teacher guides.
3.4 Composition of expenditure in health sector
3.4.1 Introduction: achievements and key policy challenges
The performance of the health sector in Comoros has shown signs of improvement in recent years, in particular with infant mortality, which has reduced steadily: the infant mortality rate stands at 35 deaths per 1,000 live births.38 82 per cent of births are assisted by qualified medical staff. Immunization coverage has remained however at only 62 per cent.39 The number of doctors, nurses and midwives per 10,000 inhabitants is also chronically low (1.9)40. Undernourishment remains an important challenge as well, as 30 percent of children under 5 are malnourished.41
The key sectoral policy documents are the National Health Policy (Politique Nationale de la Santé – PNS 2015-2024) and the National Health Development Plan (Plan National de Développement de la Santé - NDS 2015-2019). The vision of the 2015-2024 PNS is "to enable the Comoros Union to develop a well-functioning health system that enables the entire population, particularly the most vulnerable and disadvantaged, to access health care services, quality health, with the effective involvement of all actors". To achieve this, the PNS has set several targets to be achieved by 2024, including: • Increase to at least 75 per cent the access to care for the population, especially the most vulnerable; • Reduce the incidence of malaria to less than 1/1000 inhabitants in order to progress towards its elimination; • Ensure effective and efficient coordination and management of the interventions of all stakeholders; • Ensuring the respect of staff standards in 80 per cent of health services; • Make quality health products available and accessible in 90 per cent of health facilities at all levels, etc.
Contrary to the education sector, the sector policy documents are not accompanied by a sector MTEF. The key policies areas/targets mentioned above nevertheless give an indication of where expenditure priorities should lie. The subsequent section describes the composition of expenditure in the sector by various categories.
3.4.2 Composition by economic category Figure 3.8 below presents the share of health expenditure per economic category. It presents a very different picture compared to the education sector, as the share of salary expenditure as a percentage of total expenditure is much lower (23 per cent compared to 85 per cent for education), while on the other hand, the share of donor-funded capital expenditure is much higher (51 per cent compared to 15 per cent).42 The share of non-wage recurrent expenditure is also significantly higher (at 25 per cent, consisting mostly of domestic transfers).
38 EDS-MICS 2012 39 Id 40 PNDS 2015 41 EDS-MICS 2012 42 This difference though partly reflects the fact that the source of data for donor-funded expenditure is different in the two sectors.
41
One implication of the limited government support to non-wage recurrent expenditure (except transfers) is that a share of donor funds support current expenditure, even if not classified as current expenditure in the budget (the individual contributions of the development partners are integrated in the national budget under an annex on the PIP). According to PIP execution data, 29 per cent of all health expenditure in the PIP was supporting activities of a recurrent or Technical Assistance nature in 2016.
Figure 3.8: Composition of health expenditure per economic classification in 2016
2016 23.05%
Wages 0.27% Goods and services 51.18% Transfers Internal Investment 25.11% External Investment
0.38%
Source: Paiements de l'état : Secteurs Sociaux 2016, Public Investment Programme 2016
3.4.3 Composition by administrative level Decentralization of health expenditure in Comoros is in accordance with the political and administrative organization of the country. Thus, the government of the Union provides a share of the expenditure through the Ministry of Health and Solidarity. The other part of the expenditure, covering service delivery, is provided by the autonomous Islands through the Commissariat in charge of health.
Table 3.9 underscores that in 2016 the amount spent at the island level was 33.8 per cent of total expenditure, with 15.3 per cent to Ngazidja, 14.4 per cent to Anjouan, and 4.1 per cent to Moheli. This represents again a different picture from the education sector, in which the majority of spending is at the level of the islands.
42
Figure 3.9: Health expenditure in 2016 by administrative level as percentage of total health expenditure (excludes donor-funded expenditure) 70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0% Union Ngazidja Anjouan Mohéli
Sources: Paiement de l’etat: secteurs sociaux 2016, Ministry of Finance
3.4.4 Financing of the sector Health care is financed by a number of stakeholders in Comoros, with the government playing a relatively modest part. According to the National Health Accounts of 201143, households are the largest contributors at 48.88 per cent, followed by the government (27.17 per cent), donors (18.64%), social insurance (2.54 per cent), the private sector (2.04 per cent) and NGOs (0.73 Per cent). This huge share of household in the financing of the sector far exceeds the 20 per cent maximum recommended by the WHO. Based on the same National Health Accounts, total health expenditure is estimated at US$ 49.57 per capita and 13.27 per cent of GDP.
As outlined in the National Health Accounts and as further discussed in this section, the country's health system is highly dependent on external assistance in financing certain programs. With a view to seeking innovative financing to improve the financial accessibility of the population to quality care, studies have been conducted recently on the viability of mutual health insurance, the establishment of health insurance mandatory for civil servants and state agents, and the levying of taxes in certain sectors. While Universal Health Coverage (UHC) is currently a major area of attention in the sector, it is not discussed here. It is unlikely that in the period of analysis of this study, UHC will play any role in contributing to increase fiscal space for health expenditure.
The PNS 2015-2024 has pointed out the key financing challenges facing the sector: - Insufficient funding for the functioning of health structures; - Lack of investment budget for health structures; - 50% of the financing is provided by the direct payment of households; - Lack of unified health sector management and audit procedures in line with international standards; - Insufficient sustainable mechanism and innovative alternative financing modes; - Absence of a sectoral MTEF
Given the absence of a sectoral MTEF (although this is now being discussed among health sector stakeholders), there are no concrete fiscal projections available. The revised SCAD2D points to the need to increase the share of the health budget in relation to the national GDP over the coming
43 Comptes Nationaux de la Sante, 2011.
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years and mobilize (and harmonize) additional external financing, more specifically for heavy infrastructure. The government, aware of the many challenges facing the financing of the health sector, has now made UHC a priority, but this is unlikely to take shape in the next few years, partly because of financial constraints.
In light of the relative reluctance of donor to support large infrastructure spending (in particular in social sectors) in Comoros, the government is now planning to borrow (on highly non-concessional terms) to finance a flagship new hospital in Moroni. This has raised major concerns in the donor community, both from the perspective that the project may not adequately address health needs and as it will significantly increase the debt burden of the government.
As in the education sector, the limited size of financing from the government for non-wage recurrent expenditure (especially goods and services) remains a major impediment to service delivery. Without an increase in domestic resource mobilisation and a reallocation of expenditure away from non-priority sectors, the prospects for changes in that respect appear limited. It is likely that non- wage service delivery expenditure in the health sector will continue to be supported largely by donors in the coming years.
3.5 Implications for the FSA
The above assessment of priority expenditure underscores some findings which are relevant for the fiscal space analysis.
The picture is very different across the two selected priority sectors, education and health. The size of education expenditure is relatively high in Comoros (as percentage of GDP and of total expenditure). On the contrary, the amount of health expenditure is lower. One factor behind this relates to the size of the wage bill. As the Government’s fiscal priority has been to support a high wage bill, wage-intensive sectors, in particular education, have generally benefited from that policy.
However, this should not hide the fact that both sectors face a very challenging fiscal situation: the level of per capita expenditure is very low ($40 and $14 per capita as of 2016). Of particular concern, is the low share of non-wage current expenditure, in particular goods and service expenditure. The implication of this is that households and donors are supporting most of costs of service delivery in Comoros.
Against that background, the need for additional resources for both the health and education sectors is evident, but that need is not uniform across the two sectors. While donor funding (as well as reallocation of expenditure from non-priority sectors) will help secure fiscal space especially in education, additional domestic revenue is likely to be critical in both sectors to support the necessary increase in current spending and to help absorb the additional foreign-financed capital expenditure.
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4 The base scenario
Chapter 4 and 5 set out the projection exercise. Whereas chapter 4 describes the base scenario, chapter 5 discusses options to increase fiscal space and presents a number of alternative scenarios, and compares the results of those to the base scenario.
4.1 Assumptions
The projection analysis is carried out first with a “base scenario”, a straightforward and non- controversial set of assumptions covering the years 2018-2024. The goal of this scenario is to illustrate how much fiscal space will be available for the Comoros government in the coming years if the current state of the economy remains more or less stable.
This scenario is based on several key assumptions, such as the growth rates of GDP, the exchange rate, and population. Other variables in the economy depend on these key assumptions.44 Table 4-1 in Appendix 1 lists the base-scenario assumptions and provides brief explanations for them. Key base-scenario assumptions include the following:
Table 4-1 Key assumptions in the base scenario Growth rates 2018 2019 2020 2021 2022 2023 2024 Real GDP (%) 3.0 3.0 3.0 3.0 3.0 3.0 3.0 Consumer price index (%) 2.0 2.0 2.0 2.0 2.0 2.0 2.0 Population growth (%) 2.3 2.3 2.3 2.1 2.1 2.1 2.1
The growth rate of the exchange rate (national currency per US$) would be equal to the differential of the Comorian Franc and international (US$) inflation rates. Table 4-2 in Appendix 1 lists the numerical values of the base-scenario assumptions.
These assumptions reflect the following view of Comoros’ future economic performance. The growth rate of real GDP remains stable at 3 per cent through the projected period. Consumer-price inflation is assumed to persist at about 2 per cent. The population growth rate is assumed to decline gradually from 2.3% to 2.1%. The exchange-rate assumption reflects the view that the real-effective exchange rate will remain stable as the Comorian Franc is pegged to the Euro and maintains a fixed exchange rate.
4.2 Base-scenario projection results
Table 4-2 shows some of the key projection results for the years 2018-2024, based on the base scenario assumptions:
44 Thus, for example, certain variables are assumed to grow at the same rate as the nominal GDP – that is, they are assumed to grow at the “combined” rates of real GDP and the GDP deflator.
45
Table 4-2 Key Projection results for the base scenario 2018 2019 2020 2021 2022 2023 2024
Priority expenditure
Per cent of total 24.9 25.0 24.9 24.8 24.6 24.5 24.3 expenditure Per cent of GDP 7.0 7.2 7.4 7.5 7.7 7.7 7.8
Per child in USD at 2016 153.6 160.8 167.5 173.3 178.8 184.0 188.9 exchange rate and prices Net internal financing gap (fiscal gap)
Per cent of total -4.1 -0.4 2.9 5.7 7.8 9.7 11.6 expenditure Per cent of GDP -1.1 -0.1 0.9 1.7 2.4 3.1 3.7
Fiscal Deficit (surplus/deficit)
Per cent of GDP -1.7 -2.5 -3.2 -3.9 -4.4 -4.9 -5.3
Taken together, the programming assumptions would imply rough stability in the evolution of the economy’s key ratios. Under these assumptions, priority expenditure would be increasing in terms of per child expenditure, as well as a percentage of GDP. As the growth rate would remain high, the fiscal deficit would grow because expenditure would rise faster than revenues. The net internal financing flow (the resources needed to finance priority expenditure) would increase accordingly, both as a percentage of total expenditure and as a percentage of GDP.
The base scenario thus suggests that Comoros can realize an increase in priority expenditure (from US$153.6 per child to US$188.9 per child), creating an average fiscal gap of 3.7%. Table 4-3 shows that on average, the overall net internal financing gap will be around 1.5 per cent over the projection period. Government debt-to-GDP ratio would be 40.6 per cent in 2024. In essence, this means that the Government of Comoros could sustain its current levels of expenditure in priority sectors if the economy were to achieve its expected performance and if no special measures were taken to create additional fiscal space.
Table 4-3 Results for the other elements of the fiscal account Results Base Scenario
Average tax and non-tax revenue/GDP, 2018-2024 15.6
Average priority expenditure/GDP, 2018-2024 7.5
Average priority expenditure per child (USD at 2015 prices & exchange rate), 2018-2024 172.4
Net internal debt flow/GDP, 2018-2024 1.5
Total government debt/GDP, 2024 40.6
Table A-3 in Appendix 1 shows the full projection results, based on the base-scenario assumptions.
Base-scenario and fiscal-space “mapping” The “mapping” of the government’s funding sources to its expenditure programs, and its priority expenditure, can be characterized straightforwardly by the government’s overall funding flows. As
46
explained in chapter 1, the funding flows (i.e. how the Government funds its expenditure) broadly comprise the following: 1. tax and non-tax revenue; 2. external grants; and 3. the net (external and internal) financing of the fiscal deficit.
Over any time interval, total funding flows are equal to the total expenditure flows, which comprise the three broad categories of: 1. priority expenditure (as defined in chapter 3); 2. non-priority expenditure (expenditure on all other sectors, excluding interest); 3. interest expenditure.
With only a few exceptions, no category of expenditure can be said to be directly linked with any specific funding source, and no funding source can be said to be linked with any specific expenditure. The exceptions are that certain grants and loan disbursements are provided to fund specific project expenditures, and these would be in specific sectors. Apart from these exceptions, all expenditures can be funded by all types of funding flows (e.g. expenditure in the priority sectors can be financed by taxation, but also by external grants or loans).
Figure 4-1 Comoros, Fiscal mapping chart.
40.0 FUNDING (+)
Internal interests 30.0 expenditure (-)
Net Internal financing 20.0 (+)
External-debt 10.0 disbursements (+) External grants (+) 0.0 Tax and non-tax revenue (excl. external grants)
Per cent of GDP of cent Per -10.0 (+) Total non-priority non- interest expenditure (-) -20.0 External debt service (-)
-30.0 Total priority expenditure (-) SPENDING (-) -40.0 2016 2017 2018 2019 2020 2021 2022 2023 2024
Figure 4-1 is a fiscal-mapping chart, with 2018-24 projections according to the base scenario. The projections are shown as percentages of GDP. In the “stacked-bar” presentation, funding sources are above and expenditure flows below the horizontal axis. The sum of everything shown above the horizontal axis effectively funds everything shown below. By definition, the sum of the net external and internal financing flows is the same as the overall fiscal deficit.
For the base scenario, the expenditure flows would imply a negative net internal government debt flow. Under the base scenario, the government deficit would increase from 1.7 per cent per cent of
47
GDP in 2018 to 5.3 per cent per cent in 2024, while the net internal debt flow would increase from - 1.1 per cent of GDP in 2018 to 3.7 per cent in 2024. This means that if Comoros’ economy and public finance policies remain unchanged over the projected period, expenditures will have to be financed in significant part by debt.
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5 Alternative scenarios
5.1 Options to increase fiscal space
In principle, policy-makers have the following general options for enhancing fiscal space for priority expenditure: 1. increasing tax and non-tax revenue, and possibly earmarking some of this for priority expenditure – e.g. increased tax revenue will be set aside to be spent on a priority sector such as education, instead of a non-priority sector, such as defence; 2. increasing external financing, i.e. attracting more development aid; 3. reducing spending in priority sectors, possibly by increasing expenditure efficiency; 4. reducing non-priority expenditure; 5. reducing external debt service, presumably through agreements with creditors; 6. increasing external debt disbursements; and 7. increasing net internal borrowing flows.
Apart from government policy choices, changes in the macroeconomic context can affect fiscal space. For example, increased GDP growth would increase the fiscal space by increasing tax revenue.
From the analysis in chapter 2, Comoros’ options to increase fiscal space within the next seven years are constrained. Comoros must maintain a prudent fiscal policy, as the country is already dependent on foreign aid to finance current expenditure and needs to maintain its external debt under control. While increasing the tax base is a long-term priority for the Government, options to further increase revenue collection will not have significant effects over the projection period.
Although options to increase fiscal space are not as evident as for other countries, Comoros may find some room to manoeuvre.
GDP growth levels have been sluggish in Comoros in recent years. Increasing GDP growth will be challenging in that respect but it is also the main option to increase priority expenditure and fiscal space: • Alternative scenario 1 assumes an improved business environment and higher commodity prices, which allow Comoros to realize a higher growth of GDP; • Alternative scenario 2 mirrors scenario 1, assuming a worsening business environment and lower commodity prices leading to lower GDP growth than assumed in the base scenario.
The other main option for increasing fiscal space involves increasing (or reallocating) revenues from in particular internal sources. To illustrate what pursuing these options would look like in the case of Comoros we consider three scenarios: • Alternative scenario 3 calculates the result of increased effectiveness of tax collection; • Alternative scenario 4 shows the potential for increasing priority expenditure by reducing non- priority expenditure; • Alternative scenario 5 considers how an increase in external grants could finance education expenditure.
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Finally, another option for funding expenditure in priority sectors being assessed is an increase in non-concessional loans in the health sector. This option is not encouraged as it is likely to have ample negative effects on the sustainability of the Comorian economy, but it is nevertheless analysed, as the Government has concrete plans to finance the construction of a new hospital with a non-concessional loan. To illustrate the risks and negative consequences of this strategy, we consider one scenario: • Alternative scenario 6 models the effect of a non-concessional loan to fund health expenditure;
5.2 Alternative scenarios and projections compared with the base scenario
5.2.1 Alternative scenario 1: higher GDP growth One of the key challenges for Comoros is creating and sustaining high GDP growth. If the government succeeds in creating a more attractive investment climate and other external variables have a positive effect (remittance flows increase or the price of Comoros’ exports increase), a higher GDP growth than assumed in the base scenario would be possible.
Scenario 1 uses the same assumptions as the baseline scenario with the only difference that the real growth rate is now moderately higher, (gradually increasing from 3 per cent in 2018 to 4 per cent in 2024) than the growth assumed in the base scenario. This alternative assumption is highlighted in table 5-1.
Table 5-1 Key assumptions in scenario 1 Growth rates 2018 2019 2020 2021 2022 2023 2024
Real GDP (%) 3.0 3.1 3.3 3.5 3.6 3.8 4.0 Consumer price index (%) 2.0 2.0 2.0 2.0 2.0 2.0 2.0
Population growth (%) 2.3 2.3 2.3 2.1 2.1 2.1 2.1
Table 5-2 shows the projection results using the assumption of a higher GDP growth than in the base scenario. Higher real GDP growth will result in higher government revenues and higher capital expenditure. The share of priority expenditure as a percentage of GDP would increase as higher capital expenditure is needed to sustain growth. Furthermore, per child expenditure would be positively affected and increase by 27 per cent over the projection period.
Table 5-2 Key projection results in scenario 1 2018 2019 2020 2021 2022 2023 2024
Priority expenditure
Per cent of total 24.9 25.0 24.9 24.8 24.7 24.6 24.4 expenditure Per cent of GDP 7.0 7.2 7.4 7.5 7.6 7.7 7.8
Per child in US$ at 2016 153.6 161.0 168.2 174.7 181.3 188.0 194.8 exchange rate and prices Net internal financing gap (fiscal gap)
50
2018 2019 2020 2021 2022 2023 2024
Per cent of total -4.1 -0.5 2.8 5.5 7.5 9.4 11.1 expenditure Per cent of GDP -1.1 -0.1 0.8 1.7 2.3 3.0 3.6
Fiscal Deficit (surplus/deficit)
Per cent of GDP -1.7 -2.5 -3.2 -3.8 -4.3 -4.8 -5.2
Table 5-3 compares the projection results of this scenario with those of the base scenario. The assumption of higher GDP growth would lead to a minimal increase of average revenue.45 Average priority spending per child would increase by US$ 2.1, to US$174.5. The average net internal debt flow would be 1.4 per cent of GDP (compared with 1.5 per cent of GDP in the base scenario). The total (external and internal) government debt stock would amount in 2024 to 39.3 per cent of GDP (compared with 40.6 per cent in the base scenario).
Table 5-3 Results from scenario 1 Results Base Scenario 1 Variation Scenario Average tax and non-tax revenue/GDP, 2018-2024 15.6 15.6 -0.01
Average priority expenditure/GDP, 2018-2024 7.5 7.5 -0.01 Average priority expenditure per child (USD at 2015 prices & 172.4 174.5 2.1 exchange rate), 2018-2024 Net internal debt flow/GDP, 2018-2024 1.5 1.4 -0.1
Total government debt/GDP, 2024 40.6 39.3 -1.3
5.2.2 Alternative Scenario 2: Lower GDP growth Comoros could also be facing external shocks, such as commodity price volatility or lower flow of remittances, which would negatively affect its economic growth. This scenario therefore considers a GDP growth lower than that of the base scenario.
Scenario 2 uses the same assumptions as the baseline scenario with the only difference that the real growth rate gradually declines from 3 per cent in 2018 to 0.5 per cent in 2024. This alternative assumption is highlighted in table 5-4.
Table 5-4 Key assumptions for scenario 2 Growth rates 2018 2019 2020 2021 2022 2023 2024 Real GDP 3.0 2.2 1.7 1.2 0.9 0.7 0.5
Consumer price index 2.0 2.0 2.0 2.0 2.0 2.0 2.0
Population growth 2.3 2.3 2.3 2.1 2.1 2.1 2.1
Table 5-5 shows the projection results for this scenario. Unlike the previous scenario, lower GDP growth would reduce the percentage of total expenditure spent on priority sectors from 24.2 per cent in the base scenario to 21 per cent in 2024. Per child expenditure would increase to US$171.0 in 2024, instead of US$188.9 in the base scenario.
45 The increase is very small: 0.038 per cent of GDP. Therefore, table 4-21 includes a variation of 0.00 per cent.
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Table 5-5 Key projection results for scenario 2 2018 2019 2020 2021 2022 2023 2024
Priority expenditure
Per cent of total 24.9 24.9 24.9 24.7 24.5 24.2 24.0 expenditure Per cent of GDP 7.0 7.2 7.4 7.6 7.7 7.8 7.9 Per child in USD at 2016
exchange rate and 153.6 159.6 164.3 167.2 169.2 170.4 171.0 prices Net internal financing gap (fiscal gap)
Per cent of total -4.1 -0.3 3.4 6.4 8.8 11.0 13.1 expenditure Per cent of GDP -1.1 -0.1 1.0 2.0 2.8 3.5 4.3 Fiscal Deficit (surplus/deficit)
Per cent of GDP -1.7 -2.5 -3.4 -4.1 -4.7 -5.3 -5.8
Table 5-6 compares the projection results with those of the base scenario. The average internal debt flow would be 1.8 per cent of GDP (compared with 1.5 per cent of GDP in the base scenario). The total (external and internal) government debt stock would conclude in 2024 at 45.2 per cent of GDP (compared with 40.6 per cent in base scenario). This scenario also highlights the fragility of the Comorian economy as a small and gradual decrease of the rate of GDP growth already leads to a 4.6 per cent increase in government debt compared to the base scenario.
Table 5-6 Results from Scenario 2 Results Base Scenario 2 Variation Scenario Average tax and non-tax revenue/GDP, 2018-2024 15.6 15.7 0.1 Average priority expenditure/GDP, 2018-2024 7.5 7.5 0.02 Average priority expenditure per child (USD at 2015 prices & 172.4 165.1 -7.4 exchange rate), 2018-2024 Net internal debt flow/GDP, 2018-2024 1.5 1.8 0.3
Total government debt/GDP, 2024 40.6 45.2 4.6
5.2.3 Alternative scenario 3: Improved tax collection efficiency The government of Comoros has signalled that it wants to stabilize its public finances through improvements in revenue collection and reduction in expenditures.
Scenario 3 considers an improvement in tax collection effectiveness. Table 5-7 shows the key assumptions with regard to GDP, consumer price index (CPI) and population growth stay the same. Two assumptions related to tax collection efficiency have been altered as compared to the base scenario (“alternative assumptions”).
The assumptions altered concern two main types of taxes: consumption taxes and import taxes. These are two fundamental types of taxes as they represent roughly 25 per cent of the government’s total fiscal revenues. Without increasing the tax rate (the average tax rate of both
52
taxes is 10 per cent), the government could increase the efficiency of collection, thus leading to an increase in revenue and therefore creating additional fiscal space. In practical terms, this could be achieved through a decrease in tax and customs exemptions, which could reduce the losses in revenue.
In this scenario, an assumption is made that consumption tax collection efficiency increases gradually from 30.4 per cent in 2018 to 31 per cent in 2024, while import tax collection efficiency increases gradually from 57.6 per cent in 2018 to 60 per cent in 2024.
Table 5-7 Key assumptions for scenario 3 Growth rates 2018 2019 2020 2021 2022 2023 2024
Real GDP 3.0 3.0 3.0 3.0 3.0 3.0 3.0
Consumer price index 2.0 2.0 2.0 2.0 2.0 2.0 2.0 Population growth 2.3 2.3 2.3 2.1 2.1 2.1 2.1 Alternative assumptions (compared to base scenario)
Consumption tax collection 30.4 30.5 30.6 30.7 30.8 30.9 31.0 efficiency (%) Import tax collection 57.6 58.0 58.4 58.8 59.2 59.6 60.0 efficiency (%)
Table 5-8 shows the projection results when using the alternative assumptions on tax collection efficiency. The projection results show that increased tax collection efficiency would lead to a lower increase of the fiscal deficit over the projection period from -1.6 percent of GDP to 0.4 percent by 2024, which is half of the projection for the base scenario.
Table 5-8 Key projection results for scenario 3 2018 2019 2020 2021 2022 2023 2024
Priority expenditure
Per cent of total 24.9 25.0 24.9 24.8 24.6 24.5 24.3 expenditure Per cent of GDP 7.0 7.2 7.4 7.5 7.7 7.7 7.8 Per child in USD at 2016
exchange rate and 153.6 160.8 167.5 173.3 178.8 184.0 188.9 prices Net internal financing gap (fiscal gap)
Per cent of total -5.6 -3.4 -1.5 -0.1 0.5 0.9 1.2 expenditure Per cent of GDP -1.6 -1.0 -0.4 0.0 0.1 0.3 0.4 Fiscal Deficit (surplus/deficit)
Per cent of GDP -1.3 -1.6 -1.9 -2.1 -2.1 -2.1 -2.0
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Table 5-9 compares the results from alternative scenario 3 with the results from the base scenario. With the assumptions of scenario 3, the average tax and non-tax revenue collection would increase by an average of 2.1 per cent of GDP over the projection period, compared to the base scenario. The net internal debt flow would be -0.5 per cent of GDP (compared with 1.5 per cent of GDP in the base scenario) – which means Comoros could close the fiscal gap. The total (external and internal) government debt stock would amount in 2024 to 27.8 per cent of GDP (compared with 40.6 per cent in the base scenario), meaning that overall the government finances would be in better shape as the increased revenues allow the government to pay back its debt.
Table 5-9 Results from scenario 3 compared to the base scenario Results Base Scenario 3 Variation scenario Average tax and non-tax revenue/GDP, 2018-2024 15.6 17.7 2.1 Average priority expenditure/GDP, 2018-2024 7.5 7.5 = Average priority expenditure per child (USD at 2015 172.4 172.4 = prices & exchange rate), 2018-2024 Net internal debt flow/GDP, 2018-2024 1.5 -0.5 -2.0 Total government debt/GDP, 2024 40.6 27.8 -12.8
In this particular scenario, we only model an increase in revenues without an increase in priority expenditure. However, it is possible to envision a scenario where the government uses fiscal space created through improved tax collection efficiency to increase priority (or non-priority) expenditure instead of paying back its debt.
5.2.4 Alternative scenario 4: increase in priority expenditure funded by a reduction in non-priority expenditure Scenario 4 shows the effect of an increase in priority expenditure, which would be funded by the reallocation of non-priority expenditure. Table 5-10 specifies the two assumptions.
Table 5-10 Key assumptions for scenario 4 Growth rates 2018 2019 2020 2021 2022 2023 2024
Real GDP 3.0 3.0 3.0 3.0 3.0 3.0 3.0
Consumer price index 2.0 2.0 2.0 2.0 2.0 2.0 2.0
Population growth 2.3 2.3 2.3 2.1 2.1 2.1 2.1 Alternative assumptions
Total Priority non-interest 7 8 8 8 9 9 10 expenditure (% of GDP) Total Non-Priority non- interest expenditure (% of 20 20 19 19 19 19 19 GDP)
Table 5-11 shows the projection results, when using the assumptions of table 5-10. Priority expenditure as a percentage of GDP over the projected period would be, on average, 12.2 per cent higher than in the base scenario. While this is an ambitious goal, it could potentially be achieved by reducing expenditure in areas that take up a large percentage of the budget such as public administration and defence.
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Table 5-11 Key projections results for scenario 4 2018 2019 2020 2021 2022 2023 2024
Priority expenditure
Per cent of total 25.9 27.0 28.1 29.2 30.4 31.7 33.1 expenditure Per cent of GDP 7.1 7.6 8.0 8.4 8.8 9.3 9.8 Per child in USD at 2016
exchange rate and 156.9 168.3 180.5 192.8 206.0 220.3 235.7 prices Net internal financing gap (fiscal gap)
Per cent of total -5.8 -3.7 -1.6 0.1 1.3 2.4 3.7 expenditure Per cent of GDP -1.6 -1.0 -0.4 0.0 0.4 0.7 1.1 Fiscal Deficit (surplus/deficit)
Per cent of GDP -1.2 -1.6 -1.9 -2.2 -2.3 -2.5 -2.7
Table 5-12 compares the outcome of this scenario with the base scenario. It appears that the average net internal debt flow would be -0.1 per cent of GDP over the projection period, which means Comoros could close the fiscal gap. Total government debt stock (external and internal) would amount to 30.2 per cent of GDP in 2024, 10.4 per cent of GDP lower compared to the debt stock of 40.6 per cent projected in the base scenario. As a result, the fiscal space freed by the reduction in non-priority expenditure would allow Comoros to increase its expenditure on priority sectors, as well as reduce its debt.
While the reprioritization of expenditure could realize an increase in priority expenditure as well as the largest decrease in debt, it should not be forgotten that reprioritization might have consequences on economic growth. A decrease in (capital) expenditure on non-priority sectors such as infrastructure could lead to a somewhat slowed down economic growth, which would in turn negatively affect fiscal space and priority spending in the future.
Table 5-12 Results from scenario 4 Results Base Scenario 4 Variation Scenario Average tax and non-tax revenue/GDP, 2018-2024 15.6 15.6 =
Average priority expenditure/GDP, 2018-2024 7.5 8.4 0.9 Average priority expenditure per child (USD at 2015 prices & 172.4 194.4 22.0 exchange rate), 2018-2024 Net internal debt flow/GDP, 2018-2024 1.5 -0.1 -1.6
Total government debt/GDP, 2024 40.6 30.2 -10.4
5.2.5 Alternative scenario 5: increased external financing to fund priority expenditure As discussed in Chapters 2 and 3, the prospects for increased donor grants in priority sectors appear relatively limited. There is also evidence that, without an increase in domestic revenue to
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finance current expenditure and support the maintenance of current projects (not to mention providing counterparts funds), increasing donor funding does not provide a sustainable solution to increasing fiscal space in those sectors. Nevertheless, in the education sector there is scope for raising more funding through external grants, especially as external grants are likely to increase thanks to funding from Arab donors.
Scenario 5 considers an increase of external grants to fund priority expenditure. In this particular scenario, an increase in priority expenditure resulting from grants aimed at increasing capital expenditure in the education sector by 20 per cent over the projected period is assumed. This would effectively slow down the decline of external grants as a percentage of GDP modelled for the base scenario, allowing the government to slowly increase capital expenditure in education from 0.66 per cent of GDP in 2018 to 1.3 per cent in 2024. Table 5-13 lists the standard and alternative assumptions used to project this scenario.
Table 5-13 Key assumptions in scenario 5 Growth rates 2018 2019 2020 2021 2022 2023 2024
Real GDP 3.0 3.0 3.0 3.0 3.0 3.0 3.0 Consumer price index 2.0 2.0 2.0 2.0 2.0 2.0 2.0 Population growth 2.3 2.3 2.3 2.1 2.1 2.1 2.1 Alternative assumptions
Central-government external grants for capital 7.7 7.6 7.5 7.3 7.2 7.1 7.0 expenditure (% of GDP) Central government non- recurrent education 0.66 0.74 0.83 0.93 1.04 1.16 1.30 expenditure (% of GDP)
Table 5-14 summarizes the projection results, using these assumptions. Priority expenditure will grow at a faster pace than that projected in the base scenario, but the net internal financing gap and fiscal deficit will remain the same as the additional funds will be provided by external sources instead of the government’s own revenues.
Table 5-14 Key projection results in scenario 5 2018 2019 2020 2021 2022 2023 2024
Priority expenditure
Per cent of total 25.0 25.1 25.1 25.0 24.9 24.9 24.8 expenditure Per cent of GDP 7.0 7.2 7.5 7.6 7.8 7.9 8.0 Per child in USD at 2016
exchange rate and 154.0 161.6 168.8 175.3 181.6 187.7 193.7 prices Net internal financing gap (fiscal gap)
Per cent of total -4.0 -0.4 3.0 5.8 7.9 9.9 11.8 expenditure Per cent of GDP -1.1 -0.1 0.9 1.8 2.5 3.1 3.8 Fiscal Deficit (surplus/deficit)
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2018 2019 2020 2021 2022 2023 2024
Per cent of GDP -1.7 -2.5 -3.3 -3.9 -4.4 -4.9 -5.4
Table 5-15 shows that, with these assumptions, the average net internal debt flow would be lower than in the base scenario over the projection period (2018-2024). The total (external and internal) government debt stock would also be lower. Grants could thus fund an increase in priority expenditure without causing an increase in government debt or widening the fiscal deficit.
Table 5-15 Results from scenario 5 Results Base Scenario 5 Variation scenario Average tax and non-tax revenue/GDP, 2018-2024 15.6 15.6 =
Average priority expenditure/GDP, 2018-2024 7.5 7.6 0.1 Average priority expenditure per child (USD at 2015 prices & 172.4 174.7 2.3 exchange rate), 2018-2024 Net internal debt flow/GDP, 2018-2024 1.5 1.0 -0.5
Total government debt/GDP, 2024 40.6 37.4 -3.1
5.2.6 Alternative scenario 6: increased priority expenditure through non-concessional loans Another option available to the government to increase fiscal space is obtaining non-concessional finance to finance an increase of priority expenditure. When increasing external debt to fund priority expenditure, caution is needed with regard to the maturity of such debt. In general, macroeconomic policy specialists concur that it is inadvisable to use commercial external debt to fund education, health, or social-protection expenditure. The reasoning is straightforward: eventual returns to education and health expenditure are realised over decades, but debt service on commercial external debt is generally due within a decade.
Since investments in social infrastructure financed through commercial loans do not tend to generate the necessary returns to pay back the loans, this is not a scenario or strategy that is advocated. This is particularly not an advisable scenario in the case of Comoros, a country prone to debt crises, highly sensitive to external shocks and that has recently benefited from substantial debt relief. This scenario is also particularly unadvisable if not combined with a scenario in which domestic revenues increase. An increase in non-recurrent expenditure in the health sector requires a parallel fiscal expansion in recurrent expenditures (for the recurrent costs of the increased capital expenditure to be covered).
However, since the government is actively considering pursuing this strategy to fund health expenditure and more particularly a new hospital, modelling the potential effects of such a loan is a worthy exercise.
Scenario 6 considers an increase (compared to the base scenario) of priority expenditure. The loan considered in this scenario could be used to fund expenditures that would have taken place under the base scenario or to fund expenditures not contemplated in the base scenario. We take the latter approach, assuming that the loan will be used to fund non-recurrent health expenditure not considered in the base scenario. Table 5-16 shows the alternative assumption, a decrease of non- recurrent health expenditure from 1.4 per cent of GDP in 2018 to 1.3 per cent of GDP in 2024.
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Compared to the base scenario, this scenario assumes priority expenditure (as per cent of GDP) would be on average 4.9 per cent higher.
It should be noted that projecting a significant increase in priority expenditure is difficult based on the assumptions used. The main assumptions underlying this scenario is an increase in non- recurrent health expenditure, which also results in a higher debt stock and higher interest payments on external debt as the increased expenditure would be funded through a non-concessional loan.
Table 5-16 Key assumptions for scenario 6 Growth rates 2018 2019 2020 2021 2022 2023 2024 Real GDP 3.0 3.0 3.0 3.0 3.0 3.0 3.0 Consumer price index 2.0 2.0 2.0 2.0 2.0 2.0 2.0 Population growth 2.3 2.3 2.3 2.1 2.1 2.1 2.1 Alternative assumption (compared to base scenario) Central government non- recurrent health 1.4 1.4 1.3 1.3 1.3 1.3 1.3 expenditure (% of GDP) External-debt 4.0 3.8 3.6 3.4 3.2 3.0 2.8 disbursements (% of GDP)
Using the assumptions in table 5-16, the projection results (presented in table 5-16) show an increase in priority expenditure over the projection period in terms of per cent of total expenditure and per child expenditure, which is slightly higher than the projected increase in the base scenario. On average, the loan modelled would allow the Comorian government to increase priority expenditure as a percentage of GDP by 0.8 per cent on average over the projected period.
Table 5-17 Key projection results for scenario 6 2018 2019 2020 2021 2022 2023 2024
Priority expenditure
Per cent of total 26.1% 26.0% 25.8% 25.6% 25.4% 25.2% 25.0% expenditure Per cent of GDP 7.4% 7.6% 7.8% 7.9% 8.0% 8.1% 8.1% Per child in USD at
2016 exchange rate 163.0 169.7 176.0 181.5 186.8 191.7 196.5 and prices Net internal financing gap (fiscal gap)
Per cent of total -4.0% -0.3% 3.0% 5.8% 8.0% 9.9% 11.8% expenditure Per cent of GDP -1.1% -0.1% 0.9% 1.8% 2.5% 3.2% 3.8% Fiscal Deficit (surplus/deficit)
Per cent of GDP -2.1% -2.9% -3.6% -4.3% -4.8% -5.2% -5.7%
Table 4-9 demonstrates that under this scenario, priority expenditure would increase by 0.5 per cent of GDP compared to the base scenario over the projection period (2018-2024). Average per child priority expenditure would increase by US$ 8.3 compared to the base scenario.
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Comparing the projection results of scenario 6 with the projection results from the base scenario (see table 5-18), it appears that the average net internal debt would increase to 1.6 per cent of GDP (compared with 1.5 per cent of GDP in the base scenario) over the projection period. The total (external and internal) government debt stock would increase by 2.3 per cent of GDP to 42.9 per cent of GDP in 2024 (compared with 40.6 per cent in the base scenario).
Table 5-18 Results from scenario 6 compared to the base scenario Results Base Scenario 6 Variation Scenario Average tax and non-tax revenue/GDP, 2018-2024 15.6 15.6 =
Average priority expenditure/GDP, 2018-2024 7.5 7.8 0.4 Average priority expenditure per child (USD at 2015 prices & 172.4 180.7 8.3 exchange rate), 2018-2024 Net internal debt flow/GDP, 2018-2024 1.5 1.6 0.1
Total government debt/GDP, 2024 40.6 42.9 2.3
It is important to note that in this case it is assumed that GDP growth will be the same as in the base scenario, and yet this scenario results in a sizeable increase in debt over the projection period. As the Comorian economy is highly sensitive to external shocks, this scenario underscores how using external debt to fund social spending is not advisable.
5.2.7 Summary of Scenario Results The impact on fiscal space of the scenario considered, are summarized in table 4-25.
Table 5-19 Summary of scenario results Gov. Priority Spending per Percentage Change debt child (in USD, average compared to the 2024 2017-2024) base scenario Base scenario 40.59 172.41 = Higher real GDP growth 39.29 174.52 1.2% Lower Real GDP growth 45.22 165.06 -4.3% Enhanced tax administration (% increase) 27.82 172.41 = Reduction of non-priority expenditure and increased priority expenditure 30.23 194.36 12.7% Increase in ODA for capital expenditure in education 37.45 174.69 1.3% Non-concessional hospital loan 42.87 180.75 4.8%
The projection exercise has produced illustrative results that show alternative means of creating enhanced fiscal space that can be used to finance priority spending. These scenarios show the effect of different economic growth scenarios (scenarios 1 and 2), as well as how increase in priority spending could be financed in a number of different ways. We have explored how the Government could seek to create fiscal space through:
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• A gradual increase in the efficiency of tax administration (increase in consumption tax and import tax collections without any increase in tax rates) (Scenario 3); • a re-prioritisation of priority / non-priority spending, reallocating funding from non-priority sectors to priority sectors (Scenario 4); • An increase of external grants (Scenario 5)
Finally, while this is not an advisable strategy, the potential effect of pursuing non-concessional finance as a way fund priority expenditure has been modelled (Scenario 6).
Scenario 1 and 2 demonstrate the effect of different potential economic growth scenarios. Should economic growth be higher than anticipated, priority spending per child would increase by 1.2 per cent and at the same time lead to a decrease in debt to 39.29 per cent of GDP. Should growth be lower (and decline to 0.5 per cent by 2024), this would lead to a decrease of 4.3 per cent in priority spending per child as compared to the base scenario. Debt levels would rise to 45.2 per cent of GDP.
Out of the scenarios above, while the reprioritization of expenditure could support an increase in priority expenditure of 12.7 per cent as well as the largest decrease in debt, it should not be forgotten that reprioritization might have consequences on economic growth. A decrease in (capital) expenditure on non-priority sectors such as infrastructure could lead to a somewhat slowed down economic growth, which would in turn negatively affect fiscal space and priority spending.
Figures 5-1, 5-2 and 5-3 once again summarize the effects of the different scenarios on Comoros’s fiscal surplus/deficit, total government debt as a percentage of GDP and child priority expenditure in constant US dollars.
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Figure 5-1 Comoros, Fiscal surplus/deficit as percentage of GDP 0.0%
-1.0%
-2.0%
-3.0%
-4.0%
-5.0%
-6.0%
-7.0%
Scenario 0 Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5 Scenario 6
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Figure 5-2 Comoros, Total government debt stock as percentage of GDP
50%
45%
Base Scenario
Scenario 2 40%
Scenario 1 Scenario 6 35%
Scenario 5 30%
Scenario 3 Scenario 4 25%
Scenario 0 Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5 Scenario 6
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Figure 5-3 Comoros, Per child priority expenditure, USD 2016 price and exchange rate 250 Scenario 5 230 Scenario 6 210 Scenario 4
190
170 Scenario 1
150 Base Scenario 130 Scenario 2
Scenario 3 110
90
70
50
Scenario 0 Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5
Meanwhile, the table below summarizes the effect of each scenario per sector. The table shows clearly how the government could potentially increase average per-child expenditure in critical sectors like education and health. Without compromising its fiscal standing, Comoros could create fiscal space for priority expenditure by increasing its GDP growth (scenario 1), improving its tax administration (scenario 3), reallocating resources from non-priority sectors (scenario 4), or by obtaining external grants (scenario 5). As highlighted in the table below, these strategies would not lead to an increase in debt, and would even, in the case of scenarios 3 and 4 allow the government to pay back a significant part of its debt thus further expanding its future fiscal space by lowering interest payments.
On the other hand, scenario 2 highlights how adverse economic conditions could negatively affect priority expenditure and also lead to a higher debt stock. Finally, scenario 6 illustrates that commercial external debt, while allowing Comoros to create fiscal space for priority expenditure, would also lead to a substantial increase in debt that would put the country’s finances under stress in the short run.
Table 5-20 Summary of scenario results per sector Gov. debt Education* Health** Total** 2024* * Base scenario 40.59 129.01 43.40 172.41 Higher real GDP growth 39.29 130.65 43.87 174.52 Lower Real GDP growth 45.22 123.28 41.77 165.06 Enhanced tax administration (% increase) 28.96 129.01 43.40 172.41 Reduction of non-priority expenditure and increased priority expenditure 30.23 137.33 57.03 194.36
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Gov. debt Education* Health** Total** 2024* * Increase in ODA for capital expenditure in education 37.45 131.29 43.40 174.69 Non-concessional hospital loan 42.87 129.01 51.74 180.75
5.3 Other options to enhance fiscal space
This section mentions other options to increase fiscal space that have not been used for the above- mentioned scenarios. It briefly explains why these options have not been chosen to be worked out in a set of illustrative alternative scenarios.
5.3.1 Tax policy measures In addition to improving tax administration, which is critical, tax policy reforms would be in theory another option to increase fiscal space in Comoros. There are no plans however over the coming years for major changes in tax policy, whether increases in rates or introduction of new taxes. Customs tariffs are low, however this reflects international trade agreements, so the scope for increases is limited. Discussions have been ongoing for several years over a possible adoption of a Value-Added-Tax (VAT) to replace the Consumption tax but any such change would not be imminent. Overall, most tax experts generally recognize that the main fiscal problem of Comoros is tax administration, not tax policy.
5.3.2 Reducing illicit financing flows While not included in the model, another (unquantifiable) option to free up resources is to improve capturing illicit financial flows. Illicit financial flows (IFFs) are illegal movements of money or capital from one country to another. The latest report of Global Financial Integrity (GFI) has investigated these IFFs, using two sources: (1) deliberate misinvoicing in merchandise trade (the source of GFI’s low and high estimates), and (2) leakages in the balance of payments (also known as “hot money flows”).46 The GFI report provides low estimates, which are based on trade between Comoros and advanced economies only; and high estimates, which also take into account trade between developing countries. Naturally, measurements of illicit financial flows are identified indirectly and hence data on IFFs is imprecise. Figure 4-5 illustrates that the estimates of IFFs in Comoros significantly differ. When taking into account IFFs between Comoros and all countries, the estimates suggest an increase up to 2012, after which the IFFs have been somewhat decreased.
46 Global Financial Integrity (GFI), Illicit Financial Flows to and from Developing Countries: 2005-2014, April 2017, http://www.gfintegrity.org/wp-content/uploads/2017/05/GFI-IFF-Report-2017_final.pdf.
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Figure 5-4 Comoros Illicit Financial Flows 2005-2014 (in US$ millions) 180
160
140
120
100
80
60 Millions US dollar US Millions 40
20
0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Total Illicit Financial Flows (low) Total Illicit Financial Flows (high)
Source: Global Financial Integrity, http://www.gfintegrity.org.
Figure 4-6 demonstrates illicit financial inflows and outflows as percentage of total trade. Illicit financial outflows are estimated at 14 to 27.9 per cent of Comoros’ total merchandise trade, and inflows at 2.6 to 4.3 per cent of Comoros’ total trade. Whereas illicit inflows in Comoros are below the average in the region, its illicit outflows to both developed and developing countries, (the high estimates) are much higher than the sub-Sahara African average. If the government of Comoros were able to more effectively address trade mispricing practices, significant resources could be potentially captured and directed toward priority sectors.
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Figure 5-5 Illicit Financial Flows, 2005-2014 average (as percentage of total trade)
30% 27.9%
25%
20%
15% 14.0%
10% Percengate of total trade of totalPercengate
5% 4.3% 2.6%
0% Outflows (low) Outflows (high) Inflows (low) Inflows (high) Comoros Sub-Saharan Africa
Source: Global Financial Integrity, http://www.gfintegrity.org.
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6 Conclusions
The current report has underscored the unique challenges Comoros faces in increasing fiscal space for child-friendly expenditure. Comoros’ very low level of domestic revenue mobilisation and persistent low GDP growth represent both a major obstacle to increasing fiscal space for priority expenditure, while prioritisation of expenditure towards in particular wage and administrative expenditure has generally not benefited priority sectors. Unfortunately, there are no immediate signs of a significant shift in policy in that regard.
The report has presented a fiscal space analysis of expenditure beneficial for children as well as scenarios to increase it. Below is a recapitulation of the key ongoing issues in that respect: 1. The chronically low level of domestic revenue mobilization represents the main constraint on fiscal space for priority expenditure. Prospects that the necessary – and long-identified - steps to address that situation are taken in the near-term appear limited, starting with improving tax administration and reducing tax exemptions. The political economy context remains unconducive to major changes in revenue policies, such as a reduction in tax exemptions. 2. GDP growth levels have also been disappointing over the years, which has contributed negatively to fiscal space for priority expenditure. Looking forward, much of the growth trajectory will depend on the capacity of the government to work more effectively with the private sector and on the infrastructure investment programme to start delivering higher returns, which would necessitate major improvements in project selection and implementation capacities. 3. The continued prioritization towards non-priority expenditure (and especially the wage bill, and ‘administrative expenditure’) constitutes another important constraint to increasing fiscal space for priority expenditure. There are no indication that these patterns will change in the near term. Increasing priority expenditure is currently not the main government priority. 4. The predominance of wages expenditure in priority sectors, especially education, has also underscored the scope for improving intra-sector expenditure allocations– towards service delivery expenditure in particular. 5. Against that background, donor funding has played a major role in supporting fiscal space for priority expenditure, contributing not only to capital expenditure, but also to financing a large part of the non-wage recurrent expenditure, especially in the health sector. Looking ahead, prospects for continued donor support are mixed – on one hand, traditional donors are in retreat, while the presence of non-traditional donors is growing. Education remains a sector of particular interest for these new donors, in particular those from the Gulf. 6. Without major efforts to increasing domestic revenue and with prospects for enhanced donor engagement mixed, the government is pursuing other avenues to increase fiscal space for priority expenditure. This includes issuance of non-concessional loans (to support construction of a new hospital), with poses a risk to debt sustainability. 7. Overall, the likely continued heavy reliance on donors to support fiscal space for priority expenditure can be seen as both a blessing and a curse. The implicit approach of the Government has been to ‘delegate’ the funding of non-wage service delivery expenditure to donors in priority sectors. This not only raises sustainability and absorption questions (especially given the absence of a domestic revenue mobilisation strategy) but is also not consistent with the ‘emergence’ narrative emphasised by the current administration. Indirectly,
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this continued heavy dependence on donor support may not encourage the Government to address the structural causes behind the lack of fiscal space.
8. The peculiar situation facing priority expenditure in Comoros – with very limited fiscal space available and a heavy reliance on donor support - generally calls for partners active in priority sectors like UNICEF to strengthening their policy engagement with the Government on strategic resource allocation. As further discussed in the adjacent Political Economy Analysis (PEA), opportunities for such a dialogue are however limited. By coordinating its efforts with other donors, UNICEF may however be able to overcome some of these challenges. Instruments such as the FSA can inform that process going forward. UNICEF and other partners should in parallel reflect on the continued over-reliance of priority sectors on donors – including for service delivery expenditure. As outlined in the recent study on the State of Fragility47, this is a situation that contributes directly to the continued fragility of the country. In particular, continued donor support to service delivery expenditure would need to be matched by a progressive increase in government contributions in that area. Partners such as UNICEF should take such considerations on board as they develop their new cooperation strategy for Comoros.
9. This analysis has also underscored the fundamental challenge of discussing a topic like fiscal space in a country like Comoros where the quality of fiscal data is very low – as experienced in this assignment and underscored by the recent Open Budget Survey (OBS) or studies like the PEFA. The steps described above need to be accompanied by action to strengthen the quality, transparency of budget data. To some extent, this is a prerequisite to any meaningful dialogue on resource allocation in the country. Positively, UNICEF has recently embarked on that work (i.e. through the budget briefs and the OBS). Broader efforts to strengthen fiscal transparency, budget comprehensiveness, classification, reporting and auditing remain essential in that respect.
47 Union des Comores, Rapport Final sur l’Etude de la Fragilité, juillet 2017.
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Appendix 1: Fiscal space projections
Programming assumptions base scenario
The base-scenario programming assumptions are intended to be relatively simplified, to make the calculation relatively easy to carry out and to understand. The following general explanatory points are noted: 1. The assumptions are “programming” assumptions. They are not intended, and should not be understood, as forecasts, but rather as plausible possibilities for planning purposes. In particular, the growth rates of government expenditure are intended as plausible policy settings; 2. In general, the aim for Scenario 0 is to set programming assumptions that are “neutral” in character. For example, Malawi`s merchandise export volumes are assumed to grow at the same rates as the world trade volume, so Malawi’s exports maintain the same share of the world trade volume. The volume of Comoros’ merchandise imports is assumed to grow at the same rates as real GDP, so merchandise imports would tend to maintain the same percentage of GDP. For recurrent expenditure, the assumption that staff sizes will grow at the same rate as the population would be neutral in a similar sense. So is the assumption that government wage rates would grow at the same rate as per-capita nominal GDP; 3. The elasticities that help determine the government’s revenue performance are taken to be unitary for Scenario 0. This is also a “neutral” assumption. (In general, it is inadvisable to apply econometric point estimates based on historical data for these values, for at least two reasons. The first is that future elasticities of tax revenue with respect to their underlying determinants are likely to differ from historical elasticities. The second is that, say, if the elasticity of a given revenue line with respect to nominal GDP is assumed to exceed (be less than) one, the projected revenue flow would rise (diminish) indefinitely as a percentage of GDP; 4. It is straightforward to set programming assumptions that adjust gradually over the projection period, using (“geometric”) adjustment formulas. This is useful for several different assumption lines. For example, a large proportion of the assumptions are set as growth rates. These can be assumed to rise or diminish gradually from their initial projection values toward their final projection values. Another way to use a gradual adjustment would be for the elasticity of a given revenue line with respect to nominal GDP to take on an initial value somewhat different from one, but then gradually adjust toward a long-term value of one.
Table 21 Assumptions notes for the Base Scenario
(A) World economic conditions (1‑3):
(1) The growth rate of the world trade volume decreases gradually from its estimated 2017 value of 5.9 per cent to 2024 value of 5 per cent.
(2) The growth rate of the U.S.-dollar world price level declines gradually from its estimated 2017 value of 3.7 per cent to a 2024 value of 2 per cent.
(3) The London Interbank Offer Rate rises gradually from its 2017 value of 2.4 per cent to a 2024 value of 3 per cent.
(B) Basic macroeconomic variables (4‑10):
(4) The growth rate of real GDP remains stable at 3 per cent through the projected period
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(5) The growth rate of real GDP gradually increases from -6.5 per cent in 2017 to 2 per cent in 2024 (6) The growth rate of real GDP gradually increases from -1.9 per cent in FY16-17 to 2 per cent in FY23-24 (7) The growth rate of real GDP gradually increases from 0.2 per cent in to 2 per cent in (8) The overall population growth rate slowly decrease from 2.2 in 2017 to 2.1 per cent in2024
(9) The population under fifteen growth rate slowly decrease from 1.5 in 2017 to 1.3 per cent in2024 (10) The headcount poverty incidence declines gradually from 17.8 per cent in 2017 to 20 per cent in 2024.
Exports and imports of goods and non-factor services (11‑17): (11) The export volume grows at the same rate as the world trade volume. (12) Export prices grow at the same rate as the world U.S.-dollar price level. (13) The import volume grows at the same rate as real GDP. (14) Import prices grow at the same rate as the world U.S.-dollar price level. (15) Non-factor service exports grow at a rate equal to the combined growth rates of world trade volume and the world US$ price level. (16) Non-factor service imports excluding insurance and freight charges for merchandise imports grow at a rate equal to the combined growth rates of world trade volume and the world US$ price level. (17) Insurance and freight charges remain stable at 12 per cent of the value of merchandise imports through the projection period National-expenditure accounts (18‑20):
(18) Consumption expenditure by government entities outside the central government remains at -12.1 per cent of GDP over the projection period.
(19) Gross fixed capital formation remains at 0 per cent of GDP. (20) The net increase in inventory stocks remains at 0 per cent over the projection period.
(C) Tax and non-tax revenue (21‑31): (21) The elasticity of personal income tax with respect to nominal GDP declines from 1.1 in 2018 to 1 in 2024.
(22) The elasticity of company-tax revenue with respect to nominal GDP declines from 1.1 in 2018 to 1 in 2024.
(23) The elasticity of other income-tax revenue with respect to nominal GDP declines from 1.1 in 2018 to 1 in 2024. (24) The elasticity of customs revenue with respect to merchandise-imports value will remain at the value of 5.1 over the projection years (25) The elasticity of excise revenue with respect to nominal GDP declines from 1.1 in 2018 to 1 in 2024. (26) The elasticity of export-duty revenue with respect to export value increases from 1.1 in 2018 to 1 in 2024. (27) The internal Consumption tax rate remains unchanged at 10 per cent. (28) The internal Consumption tax collection efficiency increases gradually from 30.4 per cent in 2018 to 31 per cent in 2024 (29) The import-based Consumption tax rate remains at 35 per cent. (30) The import-based Consumption tax collection efficiencecy remains stable at 0.1 per cent through the projection period (31) The elasticity of central-government non-tax revenue with respect to nominal GDP remains at 1 over the projected years (D) External grants to the government (32‑33):
(32) Central-government external grants for current expenditure remains stable at 0.5 per cent of GDP through the projection period
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(33) Central-government external grants for capital expenditure slowly decline from 7.8 per cent of GDP in 2017 to 7 per cent of GDP in 2024 (E) Government expenditure in the priority and non-priority categories (34‑47): (E.1) For non-interest recurrent expenditure, (E.1.a) In the education sector, (34) The staff size grows at the same rate as the number of children. (35) Staff salaries grow at a rate equal to the growth rate of per-capita nominal GDP. (36) Expenditure on current goods and services grows at a rate equal to the combined growth rates of the year-average CPI and the sectoral staff size.
(37) Expenditure on non-staff recurrent expenditure excluding current goods and services grows at a rate equal to the combined growth rates of the year-average CPI and the number of children.
(E.1.b) In the health sector, (38) The staff size grows at the same rate as the population. (39) Staff salaries grow at a rate equal to the growth rate of per-capita nominal GDP. (40) Expenditure on current goods and services grows at a rate equal to the combined growth rates of the year-average CPI and the sectoral staff size. (41) Expenditure on non-staff recurrent expenditure excluding current goods and services grows at a rate equal to the combined growth rates of the year-average CPI and the population growth rate. (E.1.f) In the non-priority expenditure sectors, (42) The staff size grows at the same rate as the population. (43) Staff salaries grows at a rate equal to the growth rate of per-capita nominal GDP (44) Expenditure on current goods and services grows at a rate equal to the combined growth rates of the year-average CPI and the sectoral staff size. (45) Expenditure on non-staff recurrent expenditure excluding current goods and services grows at a rate equal to the combined growth rates of the year-average CPI and the population growth rate. (E.2) For non-recurrent expenditure, over the projection years, (46) Education non-recurrent central-government expenditure remain at the 2017 value of 0.6 over the projection years. (47) Health non-recurrent central-government expenditure remain at the 2017 value of 0.9 per cent of GDP over the projection years. (48) Non-priority non-recurrent central government expenditure increases gradually from the 2017 value of 11.4 per cent of GDP to a 2024 value of 14.2 per cent of GDP. (F) For external and internal debt (49‑53): (49) Average interest rates on the previous year’s year-end external debt stock increase (decrease) with LIBOR. (50) Average interest rates on the previous year’s year-end internal debt stock increases gradually from 0 per cent in 2017 to 0 per cent in 2024.
(51) External-debt repayments remain stable at 2.9 per cent of the preceding year’s year-end external-debt stock through the projection period
(52) External-debt repayments gradually decreases from 3.8 per cent of GDP in 2017 to 2.5 per cent of GDP in 2024
(53) External-debt disbursements in each projection year amount to 29.5 per cent of total non-recurrent expenditure.
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Table 22 Assumptions for the base scenario 2017 2018 2019 2020 2021 2022 2023 2024 (A) EXTERNAL'STATE-OF-THE-WORLD' VARIABLES: Growth rates:
*World trade volume 0.06 0.06 0.06 0.06 0.05 0.05 0.05 0.05 **World U.S.-dollar price level 0.04 0.03 0.03 0.03 0.03 0.02 0.02 0.02 Average world U.S.-dollar oil price (US$/bbl.) -0.14 0.03 0.03 0.03 0.03 0.02 0.02 0.02 Average world U.S.-dollar copper price (US$/MT) 0.00 0.03 0.03 0.03 0.03 0.02 0.02 0.02 Interest rates:
London Interbank Offer Rate (LIBOR) 0.02 0.03 0.03 0.03 0.03 0.03 0.03 0.03 (B) BASIC MACROECONOMIC VARIABLES: Growth rates: Gross domestic product (national currency - millions) 0.04 0.01 0.05 0.05 0.05 0.05 0.05 0.05 Gross domestic product at 216 prices and exchange rate (US$ million) 0.11 0.03 0.03 0.03 0.03 0.03 0.03 0.03 GDP deflator -0.06 -0.02 0.02 0.02 0.02 0.02 0.02 0.02 Consumer prices (year-average) -0.02 -0.02 0.02 0.02 0.02 0.02 0.02 0.02 Consumer prices (December) 0.00 0.02 0.02 0.02 0.02 0.02 0.02 0.02 Exchange rate (year-average) -0.03 -0.04 -0.01 -0.01 0.00 0.00 0.00 0.00 Exchange rate (December) -0.12 -0.01 -0.01 -0.01 0.00 -0.02 -0.02 -0.01 Population (millions) 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 Population under fifteen (millions) 0.01 0.02 0.02 0.02 0.01 0.01 0.01 0.01 Population in poverty -0.12 0.03 0.03 0.03 0.00 -0.02 -0.02 -0.01 Headcount poverty incidence 0.18 0.18 0.19 0.20 0.20 0.20 0.20 0.20 Growth rates (US$ million):
Merchandise exports: -0.09 0.09 0.09 0.08 0.08 0.08 0.08 0.08 Unit value -0.14 0.03 0.03 0.03 0.03 0.02 0.02 0.02 Volume 0.06 0.06 0.06 0.05 0.05 0.06 0.06 0.05 Copper exports: -0.09 0.09 0.09 0.08 0.08 0.08 0.08 0.08 Unit value -0.14 0.03 0.03 0.03 0.03 0.02 0.02 0.02 Volume 0.06 0.06 0.06 0.05 0.05 0.06 0.06 0.05 Non-copper exports: 0.10 0.09 0.09 0.08 0.07 0.10 0.10 0.08 Unit value 0.04 0.03 0.03 0.03 0.02 0.04 0.04 0.03 Volume 0.06 0.06 0.06 0.05 0.05 0.06 0.06 0.05 Merchandise imports: -0.13 0.07 0.06 0.06 0.05 0.05 0.03 0.03 Unit value -0.14 0.03 0.03 0.03 0.03 0.02 0.02 0.02 Volume 0.06 0.06 0.06 0.05 0.05 0.06 0.06 0.05
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2017 2018 2019 2020 2021 2022 2023 2024
Oil imports: -0.04 0.07 0.06 0.06 0.06 0.06 0.05 0.05 Unit value -0.14 0.03 0.03 0.03 0.03 0.02 0.02 0.02 Volume 0.11 0.03 0.03 0.03 0.03 0.03 0.03 0.03 Non-oil imports: 0.15 0.07 0.06 0.06 0.05 0.07 0.07 0.06 Unit value 0.04 0.03 0.03 0.03 0.02 0.04 0.04 0.03 Volume 0.11 0.03 0.03 0.03 0.03 0.03 0.03 0.03 Growth rates: Non-factor services receipts 0.10 0.09 0.09 0.08 0.08 0.07 0.07 0.07 Non-factor services payments, 0.15 0.07 0.06 0.06 0.06 0.05 0.05 0.05 excluding merchandise-imports insurance and freight Ratios: Ratio, insurance and freight costs/merchandise imports value 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 Incremental capital-output ratio 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Per cent of GDP: Consumption expenditure by governments excl. central government -0.12 -0.12 -0.12 -0.12 -0.12 -0.12 -0.12 -0.12 GENERAL-GOVERNMENT FINANCIAL ACCOUNTS: Tax and non-tax revenue (excl. external grants) (+): (C) TAX REVENUE: Central government: Elasticities of... personal income tax with respect to nominal GDP 0.81 1.10 1.08 1.07 1.05 1.03 1.02 1.00 company-tax revenue with respect to nominal GDP 0.81 1.10 1.08 1.07 1.05 1.03 1.02 1.00 other income-tax revenue with respect to nominal GDP 0.81 1.10 1.08 1.07 1.05 1.03 1.02 1.00 customs revenue with respect to merchandise-imports value 6.66 5.08 3.88 2.96 2.25 1.72 1.31 1.00 excise revenue with respect to nominal GDP -0.28 1.10 1.08 1.07 1.05 1.03 1.02 1.00 export-duty revenue with respect to export value 0.06 1.10 1.08 1.07 1.05 1.03 1.02 1.00 internal Consumption tax revenue with respect to nominal GDP 0.81 1.00 1.06 1.06 1.06 1.06 1.06 1.06 Consumption tax revenue from imports with respect to the value of merchandise imports -19.26 1.10 0.16 0.14 0.13 0.37 0.34 0.20 Consumption taks: Internal consumption tax:
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2017 2018 2019 2020 2021 2022 2023 2024
Internal consumption tax rate 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 Internal consumption tax collection efficiency 0.30 0.30 0.31 0.31 0.31 0.31 0.31 0.31 Consumption tax revenue from imports:
External consumption tax rate 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 External consumption tax collection efficiency 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 NON-TAX REVENUE: Elasticities of... central-government non-tax revenue 1 1 1 1 1 1 1 1 with respect to nominal GDP (D)External grants (+): Per cent of GDP: Central-government external grants for current expenditure 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 Central-government external grants for capital expenditure (projects) 0.08 0.08 0.08 0.07 0.07 0.07 0.07 0.07 (E) CENTRAL-GOVERNMENT EXPENDITURE: Growth rates:
Recurrent education expenditure: 0.07 0.00 0.04 0.04 0.04 0.04 0.04 0.04 Central-government recurrent education expenditure:
Education staff 0.06 0.02 0.02 0.02 0.01 0.01 0.01 0.01 Education remuneration rates 0.02 -0.01 0.03 0.03 0.03 0.03 0.03 0.03 Non-staff recurrent education expenditure: 0.18 0.00 0.04 0.04 0.03 0.03 0.03 0.03 Recurrent education expenditure on goods and services 0.00 0.00 0.04 0.04 0.03 0.03 0.03 0.03 Other non-staff recurrent education expenditure -0.05 0.00 0.04 0.04 0.03 0.03 0.03 0.03 Recurrent health expenditure: -0.04 0.01 0.05 0.05 0.05 0.05 0.05 0.05 Central-government recurrent health expenditure: -0.04 0.01 0.05 0.05 0.05 0.05 0.05 0.05 Health staff 0.00 0.02 0.02 0.02 0.02 0.02 0.02 0.02 Health remuneration rates 0.02 -0.01 0.03 0.03 0.03 0.03 0.03 0.03 Non-staff recurrent health expenditure: -0.23 0.00 0.04 0.04 0.04 0.04 0.04 0.04 Recurrent health expenditure on goods and services -0.06 0.00 0.04 0.04 0.04 0.04 0.04 0.04 Other non-staff recurrent health expenditure -0.04 0.00 0.04 0.04 0.04 0.04 0.04 0.04 Non-priority recurrent expenditure: 0.02 0.05 0.04 0.04 0.03 0.03 0.02 0.02 Central-government non-priority recurrent expenditure: 0.02 -0.01 0.03 0.03 0.03 0.03 0.03 0.03
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2017 2018 2019 2020 2021 2022 2023 2024
Non-priority staff -0.02 0.07 0.07 0.07 0.06 0.05 0.05 0.04 Remuneration rates in non-priority sectors -0.04 0.09 0.08 0.07 0.06 0.05 0.05 0.04 Non-staff recurrent non-priority expenditure: 0.03 0.00 0.04 0.04 0.04 0.04 0.04 0.04 Recurrent non-priority expenditure on goods and services 0.06 0.02 0.02 0.02 0.01 0.01 0.01 0.01 Other non-staff recurrent non-priority expenditure 0.02 -0.01 0.03 0.03 0.03 0.03 0.03 0.03 Per cent of GDP:
Non-recurrent education expenditure: 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 Central government non-recurrent education expenditure: 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 Non-recurrent health expenditure: 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 Central government non-recurrent health expenditure: 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 Non-priority non-recurrent expenditure: 0.11 0.12 0.12 0.13 0.13 0.13 0.14 0.14 Central-government non-priority non- recurrent expenditure 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 (F) EXTERNAL AND INTERNAL DEBT: Average interest rates (applied to preceding year-end debt stock):
Average interest rates on external debt 0.01 0.03 0.03 0.03 0.03 0.03 0.03 0.03 Average interest rates on internal debt 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Per cent of preceding year-end debt stock:
External-debt repayments (-) -0.03 -0.03 -0.03 -0.03 -0.03 -0.03 -0.03 -0.03 Per cent of GDP:
External-debt disbursements (+): 0.04 0.04 0.03 0.03 0.03 0.03 0.03 0.03 External-debt disbursements/total non- recurrent expenditure 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 External-debt repayments (-) -0.01 -0.01 -0.01 -0.01 -0.01 -0.01 0.00 -0.01 Net internal-debt flow (+): 0.04 -0.01 0.00 0.01 0.02 0.03 0.04 0.04
Projection results Base Scenario
Table 3 shows the projections results for the base scenario (i.e. using the assumptions mentioned the preceding tables).
Table 23 Projection results for the base scenario
2017 2018 2019 2020 2021 2022 2023
(A) Total priority non-interest expenditure 6.69 6.67 6.64 6.60 6.56 6.53 6.49
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2017 2018 2019 2020 2021 2022 2023
Total education expenditure 4.94 4.92 4.89 4.86 4.82 4.79 4.75 Total health expenditure 1.75 1.75 1.75 1.75 1.74 1.74 1.74 Priority recurrent expenditure: 5.15 5.12 5.10 5.06 5.02 4.98 4.95 Recurrent education expenditure: 4.35 4.32 4.30 4.26 4.23 4.19 4.16 Central government recurrent education expenditure: 4.35 4.32 4.30 4.26 4.23 4.19 4.16 Expenditure on education staff 4.23 4.21 4.18 4.15 4.12 4.08 4.05 Non-staff recurrent education expenditure: 0.12 0.12 0.12 0.11 0.11 0.11 0.11 Recurrent education expenditure on goods and services 0.12 0.12 0.12 0.11 0.11 0.11 0.11 Other non-staff recurrent education expenditure 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Recurrent health expenditure: 0.80 0.80 0.80 0.80 0.79 0.79 0.79 Central government recurrent health expenditure: 0.80 0.80 0.80 0.80 0.79 0.79 0.79 Expenditure on health staff 0.51 0.51 0.51 0.51 0.51 0.51 0.51 Non-staff recurrent health expenditure: 0.29 0.29 0.29 0.29 0.28 0.28 0.28 Recurrent health expenditure on goods and services 0.22 0.22 0.22 0.22 0.21 0.21 0.21 Other non-staff recurrent health expenditure 0.07 0.07 0.07 0.07 0.07 0.07 0.07 Priority non-recurrent expenditure: 1.54 1.54 1.54 1.54 1.54 1.54 1.54 Non-recurrent education expenditure: 0.59 0.59 0.59 0.59 0.59 0.59 0.59 Central government non-recurrent education expenditure: 0.59 0.59 0.59 0.59 0.59 0.59 0.59 Non-recurrent health expenditure: 0.95 0.95 0.95 0.95 0.95 0.95 0.95 Central government non-recurrent health expenditure: 0.95 0.95 0.95 0.95 0.95 0.95 0.95 (B) Tax and non-tax revenue (excl. external grants) (+): 17.54 17.46 17.36 17.23 17.20 17.13 16.99 Tax revenue: 14.46 14.38 14.27 14.14 14.11 14.04 13.90 Central government tax revenue: 14.46 14.38 14.27 14.14 14.11 14.04 13.90 Income tax: 2.26 2.27 2.28 2.28 2.29 2.29 2.29 Personal income tax 0.53 0.53 0.53 0.53 0.53 0.53 0.53 Company tax: 1.73 1.73 1.74 1.74 1.75 1.75 1.75 Other income tax 0.01 0.01 0.01 0.01 0.01 0.01 0.01 Consumption tax: 8.89 8.69 8.47 8.26 8.14 8.01 7.84 Consumption tax on internal transactions 3.04 3.05 3.06 3.07 3.08 3.09 3.10 Consumption tax on imports 5.85 5.63 5.41 5.19 5.06 4.93 4.74 Customs and excise duties: 1.61 1.68 1.73 1.76 1.78 1.78 1.77 Customs duties 0.45 0.51 0.55 0.59 0.61 0.60 0.59 Excises 1.17 1.17 1.18 1.18 1.18 1.18 1.18 Export duties 1.69 1.74 1.79 1.84 1.90 1.96 2.01 Non-tax revenue (excl. external grants) (+): 3.09 3.09 3.09 3.09 3.09 3.09 3.09 Central government non-tax revenue: 3.09 3.09 3.09 3.09 3.09 3.09 3.09 (C) External grants (+): 8.21 8.09 7.97 7.86 7.74 7.62 7.50
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2017 2018 2019 2020 2021 2022 2023
External grants for current expenditure: 0.52 0.51 0.51 0.51 0.51 0.50 0.50 Central government external grants for current expenditure: 0.52 0.51 0.51 0.51 0.51 0.50 0.50 External grants for capital expenditure (projects): 7.70 7.58 7.46 7.35 7.23 7.12 7.00 Central government external grants for capital expenditure (projects): 7.70 7.58 7.46 7.35 7.23 7.12 7.00 (D) Total non-priority non-interest expenditure (-): -20.20 -20.77 -21.29 -21.74 -22.17 -22.56 -22.92 Non-priority recurrent expenditure: -8.40 -8.57 -8.69 -8.75 -8.77 -8.76 -8.72 Central government non-priority recurrent expenditure: -8.40 -8.57 -8.69 -8.75 -8.77 -8.76 -8.72 Non-priority expenditure on staff -3.70 -3.77 -3.82 -3.85 -3.87 -3.88 -3.88 Non-staff recurrent non-priority expenditure: -4.70 -4.80 -4.87 -4.90 -4.90 -4.88 -4.84 Recurrent non-priority expenditure on goods and services -3.62 -3.73 -3.81 -3.85 -3.86 -3.85 -3.82 Other non-staff recurrent non-priority expenditure -1.07 -1.06 -1.06 -1.05 -1.04 -1.03 -1.02 Non-priority non-recurrent expenditure: -11.80 -12.20 -12.60 -12.99 -13.40 -13.80 -14.20 Central government non-priority non-recurrent expenditure: -11.80 -12.20 -12.60 -12.99 -13.40 -13.80 -14.20 (E) External-debt disbursements (+): 3.60 3.38 3.19 3.00 2.82 2.66 2.50 External-debt disbursements (+) (US$ millions): 25348. 25381. 25323. 25119. 24839. 24561. 24287. 42 79 37 74 10 60 19 (F) External debt service (-): -1.56 -1.68 -1.79 -1.84 -1.88 -1.91 -1.90 External interest expenditure (-) -0.80 -0.89 -0.97 -1.00 -1.02 -1.04 -1.02 External interest expenditure (-) (US$ million) ------5613.3 6646.8 7746.4 8389.5 9007.2 9597.4 9893.7 9 0 5 7 1 7 0 External debt repayments (-) -0.76 -0.79 -0.82 -0.84 -0.86 -0.87 -0.88 External debt repayments (-) (US$ million) ------5385.7 5960.3 6519.3 7060.6 7580.4 8077.2 8551.6 8 8 9 4 5 1 9 (G) Net internal financial flows (incl. internal interest) (+): -0.89 0.17 1.20 2.11 2.86 3.59 4.32 Net internal-debt flow (+): -0.89 0.17 1.20 2.11 2.86 3.59 4.32 Internal-debt disbursements (+) 0.00 Internal debt repayments (-) 0.00 Internal interest expenditure (-) 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Discrepancy (+) 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Table 24 Summary of projection results per scenario Scenario 1 2 3 4 5 6 Average over projected years US$ per child priority expenditures at 2016 prices and exchange rate
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Scenario 1 2 3 4 5 6 Total priority non-interest expenditure: 151.81 153.59 145.57 151.81 177.54 153.32 Total education expenditure 111.65 113.01 106.89 111.65 122.92 113.16 Total health expenditure 40.16 40.58 38.68 40.16 54.62 40.16 Per cent of GDP Central government surplus: -4.10 -4.04 -4.33 -2.53 -2.78 -4.10 Central government primary surplus -3.13 -3.09 -3.32 -1.56 -1.82 -3.14 Tax revenue 14.19 14.17 14.24 15.89 14.19 14.19 Other revenue 3.09 3.09 3.09 3.09 3.09 3.09 External grants 7.86 7.86 7.86 7.86 7.86 7.91 Total non-interest expenditure (-) -28.26 -28.20 -28.51 -28.40 -26.95 -28.33 Central government external and internal interest -0.96 -0.95 -1.00 -0.97 -0.96 -0.96 Total priority non-interest expenditure: 6.60 6.59 6.62 6.60 7.69 6.66 Total education expenditure 4.85 4.85 4.86 4.85 5.33 4.92 Total health expenditure 1.74 1.74 1.76 1.74 2.36 1.74 Net financing (gross of interest): 4.10 4.04 4.33 2.53 2.78 4.10 Net external financing 2.19 2.20 2.15 2.18 2.19 2.19 Net internal financing 1.91 1.84 2.18 0.35 0.60 1.92 Final-year central-government debt stock: 43.10 41.74 47.90 33.00 34.83 43.13 Final-year central-government external-debt stock 30.49 29.70 33.13 30.42 30.49 30.49 Final-year central-government internal-debt stock 12.61 12.03 14.77 2.57 4.34 12.65
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