TOWARDS A MORE UNITED & PROSPEROUS Public Disclosure Authorized UNION OF COMOROS Systematic Country Diagnostic Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized ABBREVIATIONS & ACRONYMS i CPIA Country Policy and Institutional Assessment CSOs Civil Society Organizations DeMPA Debt Management Performance Assessment DPO Development Policy Operation ECP Economic Citizenship Program EEZ Exclusive Economic Zone EU European Union FDI Foreign Direct Investment GDP Gross Domestic Product GNI Gross National Income HCI Human Capital Index HDI Human Development Index ICT Information and Communication Technologies IDA International Development Association IFC International Finance Corporation IMF International Monetary Fund INRAPE National Institute for Research on Agriculture, Fisheries, and the Environment LICs Low-income Countries MDGs Millennium Development Goals MIDA Migration for Development in Africa MSME Micro, Small, and Medium Enterprises NGOs Non-profit Organizations PEFA Public Expenditure and Financial Accountability PPP Public/Private Partnerships R&D Research and Development SADC Southern African Development Community SDGs Sustainable Development Goals SOEs State-Owned Enterprises SSA Sub-Saharan Africa TFP Total Factor Productivity WDI World Development Indicators WTTC World Travel & Tourism Council ii ACKNOWLEDGEMENTS We would like to thank members of the Comoros Country Team from all Global Practices of the World Bank and the International Finance Corporation, as well as the many stakeholders in Comoros (government authorities, think tanks, academia, and civil society organizations, other development partners), who have contributed to the preparation of this document in a strong collaborative process (see Annex 1). We are grateful for their inputs, knowledge and advice. This report has been prepared by a team led by Carolin Geginat (Program Leader EFI, AFSC2) and Jose Luis Diaz Sanchez (Country Economist, GMTA4). Marco Ranzani (Poverty Economist, GPV01), and Neelam Verjee (Social Development Specialist, GTFSA) were core team members and important background work for this report was conducted by Nadia Belhaj Hassine Belghith (Senior Poverty Economist, GPV01). The team gratefully acknowledges the overall guidance of Mark Lundell (Country Director, AFCS2), Mathew Verghis (Practice Manager, GMTA4), Magnus Lindelow (Practice Manager, GHN01), Rasit Pertev (Resident Representative, AFMKM), Antoissi Said Ali Said (Operations Officer, AFMKM), Thomas Buckley (Country Program Coordinator, AFCMZ), Raymond Bourdeaux (Program Leader SD, AFCS2) and Peter Holland (Program Leader HD, AFCS2). The table below identifies the full list of team members who have provided written inputs to the SCD. The team would like to thank the peer reviewers Alexis Sienaert (Senior Economist, CROCR), Robert Swinkels (Senior Economist, GPV07), Rafael Munoz Moreno (Program Leader, LCC5C) and Johannes Hoogeveen (Lead Economist, GPV06) for their very helpful comments. Finally, we would also like to thank Joana Mota (consultant) for excellent research assistance and Cybil Maradza for designing the final document. iii SECTOR OR THEME SCD TEAM MEMBERS Social Protection Andrea Vermehren Health and Gender Voahirana Hanitriniala Rajoela, Tazeen Hasan Education Peter Holland Poverty Marco Ranzani, Djibril Ndoye Macro Jose Luis Diaz Sanchez, Shireen Mahdi, Natasha Sharma Financial Sector Brinda Devi Dabysing, Nicholas Timothy Smith, Julian Casal Transport Papa Mamadou Fall, Atsushi Iimi Private Sector and Trade Yannick Saleman, Eneida Fernandes, Lorenzo Bertolini, Claire Hollweg Agriculture Ashesh Prasann Fishery Xavier Vincent, Maminiaina Rasamoelina, Julien Million Energy Jan Friedrich Kappen, Ewa Katarzyna Klimowicz Governance Tiago Carneiro Peixoto, Heriniaina Mikaela Andrianasy, Helene Grandvoinnet ICT Tim Kelly, Isabella Maria Linnea Hayward Jobs Andrea Vermehren, Julia Rachel Ravelosoa, Federica Ricaldi, Marco Ranzani, Arvo Kuddo Fragility Neelam Verjee Social Development Jana El-Horr Water Chris Heymans, Nicholas Kudakwashe Tandi DRM Ana Campos Garcia Environment &Natural Resources Maminiaina Solonirina Rasamoelina IFC Kailash Sharma Ramnauth, Ugo Amoretti iv CONTENTS 1 EXECUTIVE SUMMARY 1 2 INTRODUCTION 23 3 MEET COMOROS - SETTING THE SCENE 26 Geography and Society 27 The Political Setting 29 The Structure of the Economy 31 Introduction to the macro-economic context 34 Progress on the Millennium and Sustainable Development Goals 37 4 IDENTITY & INSTITUTIONS IN COMOROS 38 Limited State Reach 41 Sources of Resilience 46 5 POVERTY & SHARED PROSPERITY IN COMOROS 49 Comoros’ Performance on the Twin Goals 50 Poverty 50 Drivers of Poverty Reduction and rising Inequality since 2004 56 6 UNDERSTANDING COMOROS’ LOW GROWTH PERFORMANCE 67 What would it take for Comoros to escape its low-growth equilibrium? 70 The Capital Contribution 71 The Labor and Human Capital Contribution 78 Total Factor Productivity Growth 82 Entry points to raising productivity in agriculture and fisheries 85 Entry points for improving the potential of the tourism industry 86 7 RISKS TO THE SUSTAINABILITY OF GROWTH & POVERTY REDUCTION 88 Economic risks 89 Environmental risks 93 Political and social risks 96 8 PATHWAYS & PRIORITIZATION 100 Annex 1 Description of indicators used for the Prioritization Table 117 Annex 2 Results of consultations for the SCD 119 v Contents Annex 3 Historical Timeline Comoros 123 Annex 4 Progress towards the Sustainable Development Goals in Comoros 124 Annex 5 Decomposition of Urban-Rural Inequality 127 Annex 6 Decomposition of consumption growth 128 Annex 7 Inequality decomposition 129 Annex 8 The Effect of Remittances on Labor Force Participation 131 Annex 9 A profile of the formal private sector in Comoros 137 Annex 10 Statistical capacity summary 138 BIBLIOGRAPHY 143 IMAGE REFERENCES 148 LIST OF FIGURES vi Figure 1: Factor Contribution to Potential GDP growth 3 Figure 2: Total per capita wealth, Comoros and Comparators (panel a) and type (panel b) 8 Figure 3: Summary of how the pathways interact 13 Figure 4: Demographic trends, Comoros and comparators 28 Figure 5: Size of the agricultural sector, Comoros and comparators 32 Figure 6: Labor productivity 35 Figure 7: Inflation, Comoros and comparators 36 Figure 8: Countries classified as fragile by the World Bank group by CPIA rating 39 Figure 9: Remittances, Comoros and comparators 43 Figure 10: Poverty Incidence indicators by regions and between comparators 51 Figure 11: Poverty Indicators for Comoros 52 Figure 12: Portrait of life in Comoros by income and location 52 Figure 13: Progress in inequality and shared prosperity for Comoros 53 Figure 14: Inequality by region and island in Comoros 54 Figure 15: Welfare dimensions and indicators of the method 55 Figure 16: Multidimensional deprivation indicators by region and Island for Comoros 55 Figure 17: Destination of remittances 56 Figure 18: Multi-dimensional poverty indicators for Comoros 57 Figure 19: Accessibility to basic infrastructure 58 Figure 20: Demographic structure Comoros 59 Figure 21: Government expenditures on health and education, Comoros and Comparators 61 Figure 22: Health and well-being indicators 1, Comoros and comparators 62 Figure 23: Learning Gap 63 Figure 24: Health and well-being indicators 2, Comoros and comparators 65 Figure 25: Impact of political stability on growth 68 Figure 26: Demand side drivers of GDP growth 69 Figure 27: Supply side and sectoral drivers of GDP growth for Comoros 70 Figure 28: Investment and Capital Accumulation 72 Figure 29: FDI and private investment, Comoros and Comparators 75 Figure 30: Governance indicators and Business climate 76 Figure 31: Electricity costs, Comoros and comparators 77 Figure 32: Port tariffs in Comoros’ two main ports (Moroni and Mutsamudu) are five times higher than in vi Contents Mauritius and three time higher than in Mombasa 78 Figure 33: Migration trends and human capital for Comoros 79 Figure 34: Labor force and Unemployment by age 80 Figure 35: Human Capital in Comoros 81 Figure 36: Mobile sector Comoros and comparators 84 Figure 37: Transport costs in Comoros 84 Figure 38: Trade Balance, Comoros and comparators 89 Figure 39: Current expenditures covered by tax revenues 91 Figure 40: Wealth Indicators 94 Figure 41: Renewable internal freshwater resources per capita (thousand cubic meters) 94 Figure 42. Comoros is among the countries that are most vulnerable to climate change, but least prepared to deal with it 96 Figure 43: Health expenditures 98 Figure 44: Summary of how the pathways interact 107 Figure 45: Location of firms by region 136 LIST OF TABLES vii Table 1: Key binding constraints and prioritization 22 Table 2: Comoros and comparator countries 25 Table 3: Changes to the Constitution as per the Referendum of July 30, 2018 31 Table 4: Selected macroeconomic indicators 36 Table 5: The Human Capital Index and its components by income groups 62 Table 6: Summary of pathways and binding constraints 107 Table 7: Key binding constraints and prioritizations 116 Table 8: Unconditional Decomposition of Urban-Rural Inequality of Real Monthly Per capita Consumption 127 Table 9: Decomposition of consumption growth 128 Table 10: Inequality decomposition 130 Table 11: Individual Characteristics by Household Remittance Recipient Status 132 Table 12: Effect of Remittances on Labor Force Participation 133 Table 13: Post-diagnostic Mean Differences and Variance Ratios for Nearest Neighbor and Propensity Score Matching Estimators; Individual Level 134 Table