Fiscal Space for Children:

An Analysis of Options in

Comoros

September 2018

2

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

3

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

5

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

7

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.

9

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.

10

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

11

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.

14

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,

non-interest, interest, and capital expenditure) less the sum of

total revenue and external grants is (identically) equal to the

overall deficit, which is in turn equal to the net flow of external

and internal financing to the government. If total expenditure is

broken down in the three categories of (1) priority and (2) non-

priority non-interest expenditure and (3) interest expenditure,

this identity can be rearranged for any year as shown in the

box.

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.

Fiscal identity

Priority expenditure

=

Tax and non-tax revenue

+ External grants

- Non-priority expenditure

- External debt service

- Internal interest expenditure

+ External debt disbursements

+ Net internal financing flows

15

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.

16

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.

17

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

(US$)**

$692.2 $701.2 $714.6 $721.8 $723.0 $768.1

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

growth rate (%)

2.7 1.3 1.9 1.0 0.2 6.2

Gross fixed capital formation (% of

GDP)

8.78 10.28 10.81 Na Na Na

Central-government fiscal surplus

(% of GDP)

Na Na na -0.8 2.9 -6.4

Merchandise-trade surplus (% of

GDP)

na na na -38.4% -30.3% -26.1%

Consumer prices (December)

growth rate (%)

1.8% 1.8% 2.4% -5.8% -5.4% -1.1%

Exchange rate (December) growth

rate (%)

3.3% -1.9% -4.3% 13.6% 11.5% 3.3%

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.

18

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)

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)

Source: International Monetary Fund, World Economic Outlook Database, October 2017.

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Actual WEO forecast

90

140

190

240

290

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Projections Comoros

Mauritius São Tomé and Príncipe

Seychelles Cabo Verde

19

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)

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

90

100

110

120

130

140

150

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Comoros Cape Verde Mauritus Seychelles

20

Figure 2-4 Comoros, population composition (thousands)

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

0

200

400

600

800

1 000

1 200

1 400

1 600

1 800

2 000

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Children (0-14) Youth (15-24) Adults (25-59) Elderly (60-100+)

21

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.

22

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

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

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.

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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

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.

359.5

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24

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

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

between economic categories and between ministries and/or institutions.15

15 PEFA 2016.

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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)

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

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2014 2015 2016

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26

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).

27

Figure 2-10 Comoros, ODA received 2000-2016

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.

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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)

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).

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2014 2015 2016

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29

Figure 2-12: Wage bill as a percentage of tax revenues (2015)

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)

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Seychelles

Uganda

Kenya

Tanzania

Comoros

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Figure 2-13 General government gross debt (per cent 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

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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

33

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.

34

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).

35

Figure 3-1: Priority expenditure in Comoros as a share of total expenditure (includes foreign-financed

investment projects)

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.

22.4% 22.5%

17.8%

8.4% 8.2%

7.1%

0%

5%

10%

15%

20%

25%

30%

35%

2014 2015 2016

Education Health

36

Figure 3-1: Priority expenditure in 2016, breakdown between administrative units (excluding donor

funding)

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).

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

Union Ngazidja Anjouan Mohéli

37

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)

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

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2014 2015 2016

Wages Goods and services Investments (domestic) Investments (donor funded) Transfers

38

Figure 3-3: Composition of education expenditure by programmes (includes donor-funded expenditure)

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)

Sources: Paiement de l’état: secteurs sociaux 2016, Ministry of Finance

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

2014 2015 2016

Pre-school and primary education Secondary education Tertiary education Other

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

Union Ngazidja Anjouan Mohéli

39

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)

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.

-

2,000.00

4,000.00

6,000.00

8,000.00

10,000.00

12,000.00

14,000.00

16,000.00

2014 2015 2016 2017 2018 2019

Personnel Goods and services

Transfers Investment (domestic)

Investments (donor funded)

40

Figure 3-7: Education expenditures by economic category, final scenario (includes donor-funded

expenditure)

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

-

2,000.00

4,000.00

6,000.00

8,000.00

10,000.00

12,000.00

14,000.00

16,000.00

2014 2015 2016 2017 2018 2019

Personnel Goods and services

Transfers Investment (domestic)

Investments (donor funded)

41

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.

42

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

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.

23.05%

0.27%

25.11%

0.38%

51.18%

2016

Wages

Goods and services

Transfers

Internal Investment

External Investment

43

Figure 3.9: Health expenditure in 2016 by administrative level as percentage of total health expenditure

(excludes donor-funded expenditure)

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.

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

Union Ngazidja Anjouan Mohéli

44

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.

45

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.

46

Table 4-2 Key Projection results for the base scenario

2018 2019 2020 2021 2022 2023 2024

Priority expenditure

Per cent of total

expenditure

24.9 25.0 24.9 24.8 24.6 24.5 24.3

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

prices

153.6 160.8 167.5 173.3 178.8 184.0 188.9

Net internal financing gap (fiscal gap)

Per cent of total

expenditure

-4.1 -0.4 2.9 5.7 7.8 9.7 11.6

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

47

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.

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

-40.0

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

2016 2017 2018 2019 2020 2021 2022 2023 2024

Pe

r ce

nt

of

GD

P

Internal interestsexpenditure (-)

Net Internal financing(+)

External-debtdisbursements (+)

External grants (+)

Tax and non-tax revenue(excl. external grants)(+)Total non-priority non-interest expenditure (-)

External debt service (-)

Total priority

expenditure (-)

FUNDING (+)

SPENDING (-)

48

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.

49

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.

50

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

expenditure

24.9 25.0 24.9 24.8 24.7 24.6 24.4

Per cent of GDP 7.0 7.2 7.4 7.5 7.6 7.7 7.8

Per child in US$ at 2016

exchange rate and

prices

153.6 161.0 168.2 174.7 181.3 188.0 194.8

Net internal financing gap (fiscal gap)

51

2018 2019 2020 2021 2022 2023 2024

Per cent of total

expenditure

-4.1 -0.5 2.8 5.5 7.5 9.4 11.1

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

Scenario 1 Variation

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 &

exchange rate), 2018-2024 172.4 174.5 2.1

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.

52

Table 5-5 Key projection results for scenario 2

2018 2019 2020 2021 2022 2023 2024

Priority expenditure

Per cent of total

expenditure 24.9 24.9 24.9 24.7 24.5 24.2 24.0

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

prices

153.6

159.6

164.3

167.2

169.2

170.4

171.0

Net internal financing gap (fiscal gap)

Per cent of total

expenditure -4.1 -0.3 3.4 6.4 8.8 11.0 13.1

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

Scenario 2 Variation

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 &

exchange rate), 2018-2024 172.4 165.1 -7.4

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

53

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

efficiency (%) 30.4 30.5 30.6 30.7 30.8 30.9 31.0

Import tax collection

efficiency (%) 57.6 58.0 58.4 58.8 59.2 59.6 60.0

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

expenditure 24.9 25.0 24.9 24.8 24.6 24.5 24.3

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

prices

153.6

160.8

167.5

173.3

178.8

184.0

188.9

Net internal financing gap (fiscal gap)

Per cent of total

expenditure -5.6 -3.4 -1.5 -0.1 0.5 0.9 1.2

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

54

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

Scenario 3 Variation

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

prices & exchange rate), 2018-2024 172.4 172.4 =

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

expenditure (% of GDP) 7 8 8 8 9 9 10

Total Non-Priority non-

interest expenditure (% of

GDP)

20 20 19 19 19 19 19

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.

55

Table 5-11 Key projections results for scenario 4

2018 2019 2020 2021 2022 2023 2024

Priority expenditure

Per cent of total

expenditure 25.9 27.0 28.1 29.2 30.4 31.7 33.1

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

prices

156.9

168.3

180.5

192.8

206.0

220.3

235.7

Net internal financing gap (fiscal gap)

Per cent of total

expenditure -5.8 -3.7 -1.6 0.1 1.3 2.4 3.7

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

Scenario 4 Variation

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 &

exchange rate), 2018-2024 172.4 194.4 22.0

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

56

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

expenditure (% of GDP)

7.7 7.6 7.5 7.3 7.2 7.1 7.0

Central government non-

recurrent education

expenditure (% of GDP)

0.66 0.74 0.83 0.93 1.04 1.16 1.30

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

expenditure 25.0 25.1 25.1 25.0 24.9 24.9 24.8

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

prices

154.0

161.6

168.8

175.3

181.6

187.7

193.7

Net internal financing gap (fiscal gap)

Per cent of total

expenditure -4.0 -0.4 3.0 5.8 7.9 9.9 11.8

Per cent of GDP -1.1 -0.1 0.9 1.8 2.5 3.1 3.8

Fiscal Deficit (surplus/deficit)

57

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

Scenario 5 Variation

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 &

exchange rate), 2018-2024 172.4 174.7 2.3

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.

58

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

expenditure (% of GDP)

1.4 1.4 1.3 1.3 1.3 1.3 1.3

External-debt

disbursements (% of GDP) 4.0 3.8 3.6 3.4 3.2 3.0 2.8

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

expenditure 26.1% 26.0% 25.8% 25.6% 25.4% 25.2% 25.0%

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

and prices

163.0

169.7

176.0

181.5

186.8

191.7

196.5

Net internal financing gap (fiscal gap)

Per cent of total

expenditure -4.0% -0.3% 3.0% 5.8% 8.0% 9.9% 11.8%

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.

59

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

Scenario 6 Variation

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 &

exchange rate), 2018-2024 172.4 180.7 8.3

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.

debt

2024

Priority Spending per

child (in USD, average

2017-2024)

Percentage Change

compared to the

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:

60

• 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.

61

Figure 5-1 Comoros, Fiscal surplus/deficit as percentage of GDP

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

Scenario 0 Scenario 1 Scenario 2

Scenario 3 Scenario 4 Scenario 5

Scenario 6

62

Figure 5-2 Comoros, Total government debt stock as percentage of GDP

Base Scenario

Scenario 1

Scenario 2

Scenario 3Scenario 4

Scenario 5

Scenario 6

25%

30%

35%

40%

45%

50%

Scenario 0 Scenario 1 Scenario 2 Scenario 3

Scenario 4 Scenario 5 Scenario 6

63

Figure 5-3 Comoros, Per child priority expenditure, USD 2016 price and exchange rate

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

2024*

Education*

*

Health** Total**

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

Scenario 1

Base ScenarioScenario 2

Scenario 3

Scenario 4

Scenario 5

Scenario 6

50

70

90

110

130

150

170

190

210

230

250

Scenario 0 Scenario 1 Scenario 2

Scenario 3 Scenario 4 Scenario 5

64

Gov. debt

2024*

Education*

*

Health** Total**

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.

65

Figure 5-4 Comoros Illicit Financial Flows 2005-2014 (in US$ millions)

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.

0

20

40

60

80

100

120

140

160

180

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Mil

lio

ns

US

do

llar

Total Illicit Financial Flows (low) Total Illicit Financial Flows (high)

66

Figure 5-5 Illicit Financial Flows, 2005-2014 average (as percentage of total trade)

Source: Global Financial Integrity, http://www.gfintegrity.org.

14.0%

27.9%

2.6%

4.3%

0%

5%

10%

15%

20%

25%

30%

Outflows (low) Outflows (high) Inflows (low) Inflows (high)

Pe

rce

ng

ate

of

tota

l tr

ad

e

Comoros Sub-Saharan Africa

67

68

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,

69

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.

70

71

Bibliography

Institut National de La Statistique et des Etudes Economiques et Démographiques, Mémoire

Budgétaire Education, December 2017

Institut National de La Statistique et des Etudes Economiques et Démographiques, Mémoire

Budgétaire Santé, December 2017

Union des Comores, Plan de Transition du Secteur de L’education, PTSE – 2017/18-2019/20, July 2017

UNICEF, Country Programme Document Comores, 2015-2019

Union des Comores, Politique Nationale de la Santé, 2015-2024

Cycle De Suivi De L’IHP+ 2016, Rapport Des Comores, 2016

Gavi, Synthèse du Rapport d’audit des Programmes Au Comores, Juillet 2017 Bacari Kone, Ha Vu, Daniel Tommasi, IMF FAD TA Report, Renforcer les Procedures de Préparation du Budget de l’Etat, July 2014 Open Budget Survey Questionnaire Comoros, January 2018. PEFA 2016, Comoros. Initiative Citoyenne pour la Transparence Budgétaire aux Comores, Annual Report 2016. Union des Comores, Projet de Document de Stratégie de Réforme de la Gestion des Finances Publiques 2010-2019, 2009.

Gérard Chambas et Jean-François Brun, IMF FAD TA Report, Réforme du Systeme Fiscal : Les Etapes a Franchir, May 2015

TADAT Comoros, IMF, January 2016.

IMF Country Report No. 16/394, December 2016 (Selected Issues) IMF Country Report No. 16/393, December 2016 (Article IV) wledgements World Bank, Comoros Public Expenditure and Fiscal Management Review, 2016 African Development Bank, African Economic Outlook, 2018. Union des Comores, Lois des Finances 2013 à 2018. World Bank, Notes de Politique sur les Comores : Accélération du Développement Économique dans l’union des Comores, February 2014 Union des Comores, Stratégie de Croissance Accélérée et de Développement Durable (SCAD2D), December 2017 Union des Comores, Document de Strategie d’endettement Public pour l’année 2017-2019

72

Union des Comores, Rapport Final sur l’Etude de la Fragilité en Union des Comores, February

2017

73

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

74

(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

75

(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.

76

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

77

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,

excluding merchandise-imports

insurance and freight

0.15 0.07 0.06 0.06 0.06 0.05 0.05 0.05

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:

78

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

with respect to nominal GDP

1 1 1 1 1 1 1 1

(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

79

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

80

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

81

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.

42

25381.

79

25323.

37

25119.

74

24839.

10

24561.

60

24287.

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

9

-

6646.8

0

-

7746.4

5

-

8389.5

7

-

9007.2

1

-

9597.4

7

-

9893.7

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

8

-

5960.3

8

-

6519.3

9

-

7060.6

4

-

7580.4

5

-

8077.2

1

-

8551.6

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

82

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

84

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