INTERNATIONAL DEVELOPMENT ASSOCIATION INTERNATIONAL MONETARY FUND COMOROS JOINT WORLD BANK-IMF DEBT SUSTAINABILITY ANALYSIS April 2020 Prepared jointly by the staffs of the International Development Association (IDA) and the International Monetary Fund (IMF) Comoros: Joint Bank-Fund Debt Sustainability Analysis1 Risk of external debt distress: Moderate2 Overall risk of debt distress Moderate Granularity in the risk rating Limited Space Application of judgment No Macroeconomic projections Deviations due to the COVID-19 Financing strategy Additional aid and borrowing Realism tools flagged No flagged issues Mechanical risk rating under the external DSA Medium Mechanical risk rating under the public DSA Medium 1 The DSA coverage remains unchanged, covering the central government, the central bank (IMF facilities), and government- guaranteed debt of state-owned enterprises. 2 Comoros’ debt carrying capacity is assessed as medium with the Composite Indicator (CI) of 2.97, which is based on the October WEO 2019 and the 2018 CPIA. This streamlined updated DSA incorporates the COVID-19 impact. Compared to the DSA prepared for the 2019 Article IV consultation, the economic outlook is assumed to be weaker. For 2020, economic growth projections are revised down by 5.6 percentage points to -1.2 percent, and growth of exports of goods and services is revised by 10.1 percentage points to -9.7 percent, followed by a fairly quick recovery in 2021. These and related changes result in additional external and fiscal financing needs of 5.2 percent of GDP and 4.7 percent of GDP in 2020-21, respectively. These needs are expected to be filled in part by additional grants (1.7 percent of GDP), and additional external borrowing (2.6 percent of GDP). Long run projections for economic and export growth remain broadly unchanged from before. Comoros’ debt carrying capacity continues to be assessed as medium, and total contingent liabilities are maintained at 10.9 percent of GDP. The realism tools do not flag issues. The updated DSA finds that the risk of external debt distress remains “medium”, with limited space to absorb shocks. As in the previous DSA, all debt and debt service indicators remain below their respective thresholds but exhibit an upward trend over the long run. (The PV of PPG external debt-to-exports ratio increases by 1 per-centage point in 2029 to 161.2 percent compared to the previous DSA). Also, buffers to high risk territory are now forecast to erode more quickly as a result of weaker export and growth performance and additional take-up of debt in the near term. Stress tests and alternative scenarios continue to demonstrate Comoros’ vulnerability to natural disasters, shocks to exports, and depreciation. Public-sector domestic debt remains small, with no breaches of the public debt benchmark under the baseline or adverse scenarios. 2 Table 1. Comoros: External Debt Sustainability Framework, Baseline Scenario, 2016-2039 (In percent of GDP; unless otherwise indicated) Actual Projections Average 8/ 2016 2017 2018 2019 2020 2021 2022 2023 2024 2029 2039 Historical Projections External debt (nominal) 1/ 16.4 17.0 19.6 23.8 29.7 32.3 33.0 33.6 33.9 34.8 38.0 20.2 32.5 of which: public and publicly guaranteed (PPG) 16.4 17.0 19.6 23.8 29.7 32.3 33.0 33.6 33.9 34.8 38.0 20.2 32.5 Change in external debt 2.5 0.5 2.7 4.2 5.9 2.6 0.7 0.6 0.3 0.3 0.3 Identified net debt-creating flows 3.4 0.8 0.7 3.1 5.9 3.5 2.7 1.7 1.0 0.2 0.0 1.4 1.7 Non-interest current account deficit 4.3 2.1 2.7 3.6 5.4 4.1 4.1 3.2 2.8 2.2 2.1 2.7 3.1 Deficit in balance of goods and services 15.8 16.4 17.1 17.7 18.2 17.0 17.5 17.4 17.4 16.6 16.0 19.0 17.2 Exports 10.7 11.9 12.9 12.4 11.2 11.9 12.6 13.2 13.2 13.5 13.9 Imports 26.5 28.4 30.0 30.1 29.3 29.0 30.1 30.6 30.6 30.1 30.0 Net current transfers (negative = inflow) -10.9 -13.8 -13.8 -13.5 -12.2 -12.3 -12.8 -13.5 -13.8 -13.9 -13.8 -16.0 -13.5 of which: official -1.5 -3.5 -1.5 -1.4 -3.2 -1.6 -1.4 -1.4 -1.2 -1.1 -0.9 Other current account flows (negative = net inflow) -0.6 -0.5 -0.6 -0.6 -0.6 -0.6 -0.7 -0.7 -0.7 -0.5 -0.2 -0.3 -0.6 Net FDI (negative = inflow) -0.4 -0.4 -0.6 -0.3 0.0 -0.1 -0.7 -0.7 -1.0 -1.1 -1.2 -0.9 -0.7 Endogenous debt dynamics 2/ -0.6 -0.9 -1.4 -0.2 0.5 -0.5 -0.7 -0.7 -0.8 -0.9 -0.9 Contribution from nominal interest rate 0.1 0.1 0.1 0.1 0.2 0.3 0.4 0.4 0.4 0.4 0.5 Contribution from real GDP growth -0.5 -0.6 -0.6 -0.4 0.3 -0.9 -1.1 -1.2 -1.2 -1.3 -1.4 Contribution from price and exchange rate changes -0.2 -0.3 -0.9 … … … … … … … … Residual 3/ -0.9 -0.2 2.0 1.1 0.0 -0.9 -2.0 -1.2 -0.7 0.0 0.3 -3.4 -0.4 of which: exceptional financing 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Sustainability indicators PV of PPG external debt-to-GDP ratio ... ... 10.9 14.1 18.5 20.3 20.8 21.1 21.3 21.7 25.1 PV of PPG external debt-to-exports ratio ... ... 84.7 113.7 165.7 170.8 166.1 160.8 160.9 161.2 180.6 PPG debt service-to-exports ratio 2.9 2.9 3.3 7.8 6.9 7.3 7.4 8.2 9.2 9.5 10.7 PPG debt service-to-revenue ratio 3.9 3.7 4.1 11.2 8.4 9.3 9.7 11.0 12.2 12.6 14.0 Gross external financing need (Million of U.S. dollars) 43.0 22.1 29.6 50.7 73.8 62.2 58.2 51.1 46.1 48.3 83.6 Key macroeconomic assumptions Real GDP growth (in percent) 3.5 4.2 3.6 1.9 -1.2 3.1 3.6 3.7 3.8 3.9 3.8 3.3 3.1 GDP deflator in US dollar terms (change in percent) 1.3 2.1 5.6 -1.3 2.0 3.1 2.4 2.2 2.1 1.9 1.9 -0.5 1.8 Effective interest rate (percent) 4/ 0.5 0.4 0.6 0.7 1.0 1.2 1.4 1.3 1.3 1.1 1.3 0.5 1.1 Growth of exports of G&S (US dollar terms, in percent) 11.4 18.7 18.6 -3.6 -8.9 13.4 11.7 11.0 6.6 6.1 6.3 8.1 5.6 Growth of imports of G&S (US dollar terms, in percent) 0.2 14.0 15.9 0.8 -1.7 4.9 10.2 7.6 6.1 5.7 6.1 3.7 5.0 Grant element of new public sector borrowing (in percent) ... ... ... 33.0 33.8 39.8 48.5 50.8 50.2 46.4 41.2 ... 45.1 Government revenues (excluding grants, in percent of GDP) 8.0 9.4 10.6 8.7 9.2 9.4 9.6 9.8 9.9 10.2 10.6 8.6 9.8 Aid flows (in Million of US dollars) 5/ 8.5 27.9 11.5 80.5 86.1 74.6 58.7 62.0 64.4 84.1 151.0 Grant-equivalent financing (in percent of GDP) 6/ ... ... ... 4.6 4.3 3.7 2.8 2.8 2.7 2.5 2.3 ... 3.1 Grant-equivalent financing (in percent of external financing) 6/ ... ... ... 53.4 48.5 55.9 63.6 65.0 64.6 60.4 54.0 ... 60.3 Nominal GDP (Million of US dollars) 1,013 1,077 1,179 1,186 1,196 1,271 1,348 1,428 1,513 2,010 3,529 Nominal dollar GDP growth 4.8 6.4 9.5 0.6 0.9 6.3 6.1 5.9 6.0 5.8 5.8 2.9 5.0 Memorandum items: PV of external debt 7/ ... ... 10.9 14.1 18.5 20.3 20.8 21.1 21.3 21.7 25.1 In percent of exports ... ... 84.7 113.7 165.7 170.8 166.1 160.8 160.9 161.2 180.6 Total external debt service-to-exports ratio 2.9 2.9 3.3 7.8 6.9 7.3 7.4 8.2 9.2 9.5 10.7 PV of PPG external debt (in Million of US dollars) 128.9 166.8 221.3 258.6 281.0 302.0 322.2 436.5 887.1 (PVt-PVt-1)/GDPt-1 (in percent) 3.2 4.6 3.1 1.8 1.6 1.4 1.5 1.8 Non-interest current account deficit that stabilizes debt ratio 1.8 1.5 0.0 -0.5 -0.4 1.5 3.3 2.6 2.5 1.9 1.8 Sources: Country authorities; and staff estimates and projections. 1/ Includes both public and private sector external debt. 2/ Derived as [r - g - ρ(1+g) + Ɛα (1+r)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, ρ = growth rate of GDP deflator in U.S. dollar terms, Ɛ=nominal appreciation of the local currency, and α= share of local currency-denominated external debt in total external debt. 3/ Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes. 4/ Current-year interest payments divided by previous period debt stock. 5/ Defined as grants, concessional loans, and debt relief. 6/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt). 7/ Assumes that PV of private sector debt is equivalent to its face value. 8/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years. 3 Table 2. Comoros: Public Sector Debt Sustainability Framework, Baseline Scenario, 2016-2039 (In percent of GDP; unless otherwise indicated) Actual Projections Average 6/ 2016 2017 2018 2019 2020 2021 2022 2023 2024 2029 2039 Historical Projections Public sector debt 1/ 16.5 17.1 19.6 23.9 30.1 32.8 33.5 34.0 34.5 36.4 42.8 20.8 33.3 of which: external debt 16.4 17.0 19.6 23.8 29.7 32.3 33.0 33.6 33.9 34.8 38.0 20.2 32.5 of which: local-currency denominated Change in public sector debt 1.6 0.6 2.5 4.2 6.2 2.7 0.7 0.5 0.5 0.7 0.4 Identified debt-creating flows 8.2 2.2 3.3 6.8 12.2 8.4 6.8 6.5 6.0 4.2 3.1 1.5 6.3 Primary deficit 8.4 4.6 3.3 6.9 11.8 9.7 8.0 7.8 7.5 5.8 4.9 2.4 7.5 Revenue and grants 8.8 12.0 11.5 11.3 11.2 11.2 10.9 11.1 11.2 11.3 11.5 12.5 11.2 of which: grants 0.8 2.6 1.0 2.6 2.0 1.8 1.3 1.3 1.2 1.1 0.9 Primary (noninterest) expenditure 17.2 16.5 14.8 18.2 23.0 20.8 18.9 18.9 18.7 17.1 16.4 14.9 18.7 Automatic debt dynamics -0.2 -2.3 0.0 -0.1 0.3 -1.2 -1.2 -1.4 -1.5 -1.6 -1.7 Contribution from interest rate/growth differential -0.7 -0.6 -0.5 -0.1 0.3 -1.2 -1.2 -1.4 -1.5 -1.6 -1.7 of which: contribution from average real interest rate -0.2 0.1 0.1 0.3 0.1 -0.3 -0.1 -0.2 -0.3 -0.2 -0.2 of which: contribution from real GDP growth -0.5 -0.7 -0.6 -0.4 0.3 -0.9 -1.1 -1.2 -1.2 -1.3 -1.6 Contribution from real exchange rate depreciation 0.4 -1.7 0.5 ... ... ... ... ... ... ... ... Other identified debt-creating flows 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Privatization receipts (negative) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Recognition of contingent liabilities (e.g., bank recapitalization) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Debt relief (HIPC and other) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other debt creating or reducing flow (please specify) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Residual -6.6 -1.6 -0.7 -2.6 -6.0 -5.7 -6.1 -5.9 -5.5 -3.6 -2.8 -3.6 -4.8 Sustainability indicators PV of public debt-to-GDP ratio 2/ ... ... 11.3 14.2 18.8 20.8 21.3 21.5 21.8 23.4 29.9 PV of public debt-to-revenue and grants ratio … … 98.2 125.9 168.1 185.7 195.1 194.0 195.6 207.0 260.2 Debt service-to-revenue and grants ratio 3/ 4.4 4.2 3.7 8.6 7.5 11.3 12.8 13.5 14.0 22.2 52.3 Gross financing need 4/ 8.8 5.1 3.7 7.9 12.7 10.9 9.4 9.3 9.1 8.3 10.9 Key macroeconomic and fiscal assumptions Real GDP growth (in percent) 3.5 4.2 3.6 1.9 -1.2 3.1 3.6 3.7 3.8 3.9 3.8 3.3 3.1 Average nominal interest rate on external debt (in percent) 0.5 0.4 0.6 0.7 1.0 1.2 1.4 1.3 1.3 1.1 1.3 0.5 1.2 Average real interest rate on domestic debt (in percent) -1.6 -0.1 -1.0 -3.3 0.5 0.9 1.1 1.1 1.1 1.1 1.1 -1.4 0.6 Real exchange rate depreciation (in percent, + indicates depreciation) 3.2 -10.9 3.1 … ... ... ... ... ... ... ... 1.9 ... Inflation rate (GDP deflator, in percent) 1.6 0.1 1.0 4.2 2.5 2.0 1.9 1.9 1.9 1.9 1.9 1.4 2.2 Growth of real primary spending (deflated by GDP deflator, in percent) -1.3 -0.2 -7.0 25.1 24.9 -6.6 -5.9 3.5 2.7 4.6 4.1 3.9 4.9 Primary deficit that stabilizes the debt-to-GDP ratio 5/ 6.9 3.9 0.8 2.7 5.6 7.0 7.3 7.3 7.0 5.1 4.5 3.8 6.0 PV of contingent liabilities (not included in public sector debt) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Sources: Country authorities; and staff estimates and projections. 1/ Coverage of debt: The central government, central bank, government-guaranteed debt . Definition of external debt is Residency-based. 2/ The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections. 3/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt. 4/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period and other debt creating/reducing flows. 5/ Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question. 6/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years. 4 Figure 1. Comoros: Indicators of Public and Publicly Guaranteed External Debt Under Alternatives Scenarios, 2019-2029 1/ 2/ PV of debt-to GDP ratio PV of debt-to-exports ratio 45 300 40 250 35 30 200 25 150 20 15 100 10 50 5 Most extreme shock: Natural disaster Most extreme shock: Exports 0 0 2019 2021 2023 2025 2027 2029 2019 2021 2023 2025 2027 2029 Debt service-to-exports ratio Debt service-to-revenue ratio 16 20 18 14 16 12 14 10 12 8 10 8 6 6 4 4 2 2 Most extreme shock: Exports Most extreme shock: One-time depreciation 0 0 2019 2021 2023 2025 2027 2029 2019 2021 2023 2025 2027 2029 Baseline Historical scenario Most extreme shock 1/ Threshold Customization of Default Settings Borrowing assumptions on additional financing needs resulting from the stress tests* Size Interactions Default User defined Shares of marginal debt No No External PPG MLT debt 100% Tailored Stress Terms of marginal debt Combined CL Yes Avg. nominal interest rate on new borrowing in USD 1.5% 1.5% Natural disaster No No USD Discount rate 5.0% 5.0% Commodity price n.a. n.a. Avg. maturity (incl. grace period) 29 29 Market financing n.a. n.a. Avg. grace period 8 8 Note: "Yes" indicates any change to the size or interactions of * Note: All the additional financing needs generated by the shocks under the stress tests are the default settings for the stress tests. "n.a." indicates that the assumed to be covered by PPG external MLT debt in the external DSA. Default terms of marginal stress test does not apply. debt are based on baseline 10-year projections. Sources: Country authorities; and staff estimates and projections. 1/ The most extreme stress test is the test that yields the highest ratio in or before 2029. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented. 2/ The magnitude of shocks used for the commodity price shock stress test are based on the commodity prices outlook prepared by the IMF research department. 5 Figure 2. Comoros: Indicators of Public Debt Under Alternative Scenarios, 2019-2029 PV of Debt-to-GDP Ratio 60 50 40 30 20 10 Most extreme shock: Natural disaster 0 -10 2019 2021 2023 2025 2027 2029 PV of Debt-to-Revenue Ratio Debt Service-to-Revenue Ratio 300 30 250 25 200 20 150 100 15 50 10 0 -50 Most extreme shock: Natural disaster 5 Most extreme shock: Combined contingent liabilities -100 0 2019 2021 2023 2025 2027 2029 2019 2021 2023 2025 2027 2029 Baseline Most extreme shock 1/ TOTAL public debt benchmark Historical scenario Borrowing assumptions on additional financing needs resulting from the stress Default User defined tests* Shares of marginal debt External PPG medium and long-term 83% 83% Domestic medium and long-term 0% 0% Domestic short-term 17% 17% Terms of marginal debt External MLT debt Avg. nominal interest rate on new borrowing in USD 1.5% 1.5% Avg. maturity (incl. grace period) 29 29 Avg. grace period 8 8 Domestic MLT debt Avg. real interest rate on new borrowing 0.0% 0.0% Avg. maturity (incl. grace period) 1 1 Avg. grace period 0 0 Domestic short-term debt Avg. real interest rate -2.2% -2.2% * Note: The public DSA allows for domestic financing to cover the additional financing needs generated by the shocks under the stress tests in the public DSA. Default terms of marginal debt are based on baseline 10-year projections. Sources: Country authorities; and staff estimates and projections. 1/ The most extreme stress test is the test that yields the highest ratio in or before 2029. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented. 6 Table 3. Comoros: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2019-2029 (In percent) 7 Table 4. Comoros. Sensitivity Analysis for Key Indicators of Public Debt, 2019-2029 8 Figure 3. Comoros: Drivers of Debt Dynamics – Baseline Scenario External Debt Gross Nominal PPG External Debt Debt-creating flows Unexpected Changes in Debt 1/ (in percent of GDP; DSA vintages) (percent of GDP) (past 5 years, percent of GDP) Current DSA 25 80 Residual 25 Previous DSA proj. 20 70 DSA-2015 20 Interquartile range (25-75) Price and 15 60 exchange rate 15 50 10 10 Real GDP Change in PPG growth 40 5 5 debt 3/ 30 Nominal 0 interest rate 0 20 -5 Median Current -5 10 account + FDI -10 0 -10 -15 Change in 5-year 5-year 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 PPG debt 3/ Contribution of Distribution across LICs 2/ historical projected -20 unexpected change change Public debt Gross Nominal Public Debt Debt-creating flows Unexpected Changes in Debt 1/ (in percent of GDP; DSA vintages) (percent of GDP) (past 5 years, percent of GDP) Residual 50 Current DSA Previous DSA proj. 25 DSA-2015 Interquartile 80 Other debt 20 range (25-75) creating flows 70 15 Real Exchange 60 rate depreciation 10 50 0 Real GDP growth 5 Change in debt 40 0 30 Real interest rate 20 -5 Primary deficit 10 -10 -50 Median 0 Change in debt 5-year 5-year -15 Distribution across LICs 2/ 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 historical projected Contribution of -20 unexpected change change 1/ Difference between anticipated and actual contributions on debt ratios. 2/ Distribution across LICs for which LIC DSAs were produced. 3/ Given the relatively low private external debt for average low-income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation. 9 Table 4. Comoros: Realism Tools 3-Year Adjustment in Primary Balance Fiscal Adjustment and Possible Growth Paths 1/ (Percentage points of GDP) 10 0 14 Distribution 1/ Projected 3-yr adjustment 8 -1 12 3-year PB adjustment greater In percentage points of GDP than 2.5 percentage points of 6 -2 10 GDP in approx. top quartile In percent 8 4 -3 6 2 -4 4 0 -5 2 -2 -6 0 2013 2014 2015 2016 2017 2018 2019 2020 Baseline Multiplier = 0.2 Multiplier = 0.4 more -4.5 -4.0 -3.5 -3.0 -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 Multiplier = 0.6 Multiplier = 0.8 1/ Data cover Fund-supported programs for LICs (excluding emergency financing) approved since 1990. The 1/ Bars refer to annual projected fiscal adjustment (right-hand side scale) and lines show possible real size of 3-year adjustment from program inception is found on the horizontal axis; the percent of sample is GDP growth paths under different fiscal multipliers (left-hand side scale). found on the vertical axis. Public and Private Investment Rates Contribution to Real GDP growth (percent of GDP) (percent, 5-year average) 30 4 28 26 3 24 22 3 20 18 2 16 14 2 12 10 1 8 6 1 4 2 0 0 Historical Projected (Prev. DSA) Projected (Curr. DSA) 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Gov. Invest. - Prev. DSA Gov. Invest. - Curr. DSA Contribution of other factors Priv. Invest. - Prev. DSA Priv. Invest. - Curr. DSA Contribution of government capital 10 Table 5. Comoros: Qualification of the Moderate Categories, 2019-2029 PV of debt-to GDP ratio PV of debt-to-exports ratio 45 200 40 180 35 160 140 30 120 25 100 20 80 15 60 10 40 5 20 0 0 2019 2021 2023 2025 2027 2029 2019 2021 2023 2025 2027 2029 Debt service-to-exports ratio Debt service-to-revenue ratio 16 20 18 14 16 12 14 10 12 8 10 8 6 6 4 4 2 2 0 0 2019 2021 2023 2025 2027 2029 2019 2021 2023 2025 2027 2029 Threshold Baseline Limited space Some space Substantial space Sources: Country authorities; and staff estimates and projections. 1/ For the PV debt/GDP and PV debt/exports thresholds, x is 20 percent and y is 40 percent. For debt service/Exports and debt service/revenue thresholds, x is 12 percent and y is 35 percent. 11