Language: English Original: French

Economic Reform Support and Financial Governance Programme (PAREGF) Country: UNION OF THE COMOROS PPRAISAL REPORT

Appraisal Team

Team Lead: Michel MALBERG OSGE.2 Team Members:

- A. AMOUMOUN, Financial Governance Expert OSGE.2 - Mohamed Souradjou IBRAHIM, Consultant

Sector Director:

- G. NEGATU, OSGE Country Director:

- Ms. D. GAYE, OREB

Peer Reviewers

- A. ZEJLY, Lead Economist OSGE - M. XUEREB DE PRUNELE, Economist MGFO - B. ALPERTE, Economist OSGE.1

African Development Bank African Development Fund

TABLE OF CONTENTS

Currency Equivalents, Fiscal Year, Weights and Measures, Acronyms and Abbreviations, Data on the Grant, Executive Summary, Results-based Logical Framework, Programme Implementation Schedule iii-ix

I  THE PROPOSAL.................................................................................................................................................. 1 

II  COUNTRY AND PROGRAMME CONTEXT................................................................................................. 1 

2.1  GOVERNMENT’S DEVELOPMENT STRATEGY AND MEDIUM-TERM REFORM PRIORITIES...................................... 1 2.2  ECONOMIC DEVELOPMENTS, MEDIUM-TERM CHALLENGES AND PERSPECTIVES................................................ 1 2.3  BANK GROUP PORTFOLIO STATUS .................................................................................................................... 4 

III  KEY DESIGN ELEMENTS AND SUSTAINABILITY................................................................................... 5 

3.1  LINK WITH THE CSP AND UNDERLYING ANALYTICAL FACTORS ...................................................................... 5 3.2  COLLABORATION AND COORDINATION WITH OTHER DONORS .......................................................................... 6 3.3  OUTCOMES FROM COMPLETED AND ONGOING SIMILAR OPERATIONS AND LESSONS LEARNED.......................... 7 3.4  THE BANK’S COMPARATIVE ADVANTAGES....................................................................................................... 7 3.5  LINKS WITH OTHER BANK OPERATIONS............................................................................................................ 7 3.6  APPLICATION OF BEST PRACTICES PRINCIPLES IN CONDITIONALITIES ............................................................... 8 3.7  IMPLEMENTATION OF THE BANK GROUP’S POLICY ON NON-CONCESSIONAL LOANS......................................... 8 

IV  PROPOSED PROGRAMME .............................................................................................................................. 8 

4.1  PROGRAMME GOAL AND OBJECTIVES ............................................................................................................... 8 4.2  PROGRAMME PILLARS AND COMPONENTS AND EXPECTED OUTCOMES ............................................................. 8 4.3  FINANCING NEEDS AND SOURCES OF FINANCING ............................................................................................ 12 4.4  BENEFICIARIES OF THE PROGRAMME ............................................................................................................. 13 4.5  IMPACT ON GENDER....................................................................................................................................... 13 4.6  ENVIRONMENTAL IMPACT.............................................................................................................................. 13 4.7  OTHER IMPACTS ............................................................................................................................................. 13 

V.  IMPLEMENTATION, MONITORING AND EVALUATION .................................................................... 14 

5.1  PROGRAMME IMPLEMENTATION .................................................................................................................... 14 5.2  MONITORING AND EVALUATION..................................................................................................................... 14 

VI  LEGAL DOCUMENTS AND AUTHORITY.................................................................................................. 15 

6.1  LEGAL DOCUMENTS....................................................................................................................................... 15 6.2  CONDITIONS PRECEDENT TO THE EFFECTIVENESS OF THE GRANT AGREEMENT AND TO DISBURSEMENTS...... 15 6.3  COMPLIANCE WITH BANK GROUP POLICIES ................................................................................................... 15 

VII.  RISK MANAGEMENT................................................................................................................................. 16 

7.1  RISKS AND MITIGATION MEASURES ................................................................................................................ 16 

VIII  RECOMMENDATION ................................................................................................................................. 17 

Tables Table 1 Programme Financing Needs 2009-2010 Table 2 Programme Financing Annexes Annex 1 Development Policy Letter Annex 2 Matrix of Program Measures Annex 3 Relations with the IMF Annex 4 Medium-term Macroeconomic and Financial Indicators Annex 5 List of Reference Documents Technical Annexes Technical Annex 1 Public Expenditure and Financial Assessment (PEFA) Report Technical Annex 2 Summary Table of Performance Indicators Technical Annex 3 Table of Government Financial Operations (TOFE) 2004-2011

Currency Equivalents April 2009

UA 1 = KMF 552.696 UA 1 = EUR 1.12344 UA 1 = USD 1. 49507

Fiscal Year 1 January to 31 December

ACRONYMS AND ABBREVIATIONS ADB : African Development Bank ADF : African Development Fund BADEA : Arab Bank for Economic Development in Africa BCC : Central Bank of the Comoros BCEAO : Banque Centrale des Etats de l’Afrique de l’ouest (Central Bank of West African States) BEAC : Banque des Etats d’Afrique centrale (Bank of Central African States) BWI : Bretton Woods Institutions COMESA : Common Market for Eastern and Southern Africa CPIA : Country Policy and Institutional Assessment CREF : Financial and Economic Reforms Monitoring Unit CVC : Auditing and Control Committee DBSL : Development Budget Support Loan DGB : Central Budget Department DGD : Central Customs Department DGID : Central Tax Department EPCA : Emergency Post-Conflict Assistance EU : European Union FSF : Fragile States Facility GDP : Gross Domestic Product HDI : Human Development Index HIPC : Heavily Indebted Poor Countries HIPCI : Heavily Indebted Poor Countries Initiative ICBP : Institutional Capacity Building Project I-CSP : Interim Country Strategy Paper IDA : International Development Association IFAD : International Fund for Agricultural Development IGF : General Inspectorate of Finance IMF ² : International Monetary Fund I-PRSP : Interim Poverty Reduction Strategy Paper KMF : Comorian Franc MDGs : Millennium Development Goals PAREGF : Economic Reform Support and Financial Governance Programme PEFA : Public Expenditure and Financial Assessment PIP : Public Investment Programme PRGF : Poverty Reduction and Growth Facility RMC : Regional Member Country SDR : Special Drawing Right TFP : Technical and Financial Partners TOFE : Table of Government Financial Operations UA : Unit of Account UNCTAD : United Nations Conference on Trade and Development UNDP : United Nations Development Programme UNO : United Nations Organization US : United States WB : World Bank WTO : World Trade Organization

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GRANT INFORMATION

Information on the Beneficiary DONNEE : Union of the Comoros SECTOR : Economic and financial governance EXECUTING AGENCY : Economic and Financial Reforms Monitoring Unit in the Ministry of Finance (CREF) AMOUNT : UA 2 million TERMS : Grant from the Fragile States Facility resources NUMBER OF TRANCHES : Two (2) tranches of 1 million each upon fulfillment by the Donnee of precedent conditions specific to each tranche

Programme Financing (2009-2010) Source Amount (in UA million) FRAGILE STATES FACILITY : 2 WORLD BANK : N.A. IMF : 1.5 EUROPEAN UNION : 5.21 KUWAIT : N.A. FRANCE, including AFD : N.A CHINA : N.A

Schedule - Key Dates Approval of the Concept Note : March 2009 Approval of the Programme : July 2009 Effectiveness : August 2009 Disbursement of the 1st tranche of the loan : September 2009 Mid-term Review : May 2010 Disbursement of the 2nd tranche of the loan : July 2010 Auditing of the accounts : 2009, 2010 Completion Report : December 2010

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COMOROS - PAREGF 2009-2010 – RESULTS-BASED LOGICAL FRAMEWORK

HIERARCHY OF OBJECTIVES

EXPECTED RESULTS REACH PERFORMANCE INDICATORS

INDICATIVE TARGETS SCHEDULE

ASSUMPTIONS/ RISKS

Objective: Reduce poverty through more effective and efficient management of public resources

Impact: Poverty is reduced through increased creation of wealth Economic growth is boosted

Beneficiaries The Comorian population in general, especially the poorest

Impact Indicators Poverty rate National wealth growth rate Inflation rate Budget deficit

Expected Long Term Progress - The poverty rate drops from 44.8% in 2004 to 27% in 2015 - The growth rate rises from 0.5% in 2008 to 1.0% in 2009 and 2.0% in 2010 - The inflation rate drops from 5.9% in 2008 to 4.5% in 2009 and 1.5% in 2010 - Deficit excluding grants goes from -9.3% of GDP in 2008 to -8.5% in 2009 and -8.3% in 2010

RISKS - Political instability - Weak government capacity to implement reforms - Government’s weak capacity to meet its debt obligations on its own resources - Vulnerability to external shocks - Fiduciary risk

Programme Objectives: 1 –Improve public resource management 2.- Streamline the public finance reform process

Expected results in the medium term 1.1 Expenditures executed correspond to the credits allocated in the original budget 1.2 Expenditure management is more effective and more transparent 2.1 The reform implementation strategy is adopted 2.2 The action plan to improve the efficiency

Beneficiaries - Ministry of Finance and - Sector Ministries - Ministry of Finance

CPIA Indicator N° 13 CPIA Indicator N° 16 Public finance reform strategy

Expected Medium Term Progress - CPIA Indicator N° 13 increases from 2 in 2008 to 2.5 in 2009 and 3 in 2010 - CPIA Indicator N° 16 increases from 2 in 2008 to 2.5 in 2009 and 3 in 2010 - The reform implementation strategy and action plan are adopted in 2010

MITIGATIVE MEASURES - Pursue international community efforts to maintain harmonious dialogue among the islands - Strengthening of institutional capacity in management and implementation of reforms with the Institutional Capacity Building Project (PRCI) and support of other donors

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HIERARCHY OF OBJECTIVES

EXPECTED RESULTS REACH PERFORMANCE INDICATORS

INDICATIVE TARGETS SCHEDULE

ASSUMPTIONS/ RISKS

and quality of the public finance management system is adopted

- the implementation of the strategy and action plan launched in 2010

- Support of development partners to mobilize the necessary resources - Pursue macroeconomic and structural reforms with support from development partners

Resources/Activities - Signing of the Grant Agreement - Adoption of statutory instruments (Decrees, Orders, Decisions and Circulars) relating to public finance reforms - Preparation of budget guidelines, the Table of Government Financial Operations (TOFE) and an action plan for implementing public finance reforms - Disbursement of the 1st and 2nd tranche of the grant - Monitoring and evaluation - Financial audits - Completion Report Financing ADF: UA 2 M WB: N.S. IMF: SDR 1.5 M EU: EUR 5.84 M FRANCE: N.S. CHINA: N.S.

Short-term outcomes - Disbursement of the 1st tranche of the grant - Strengthening of the legal basis for public resource management - Compliance with the provisions of the framework law on government financial operations, dated 17 June 2005. - Increase in government’s financial resources - Fulfillment of government’s contractual commitments to development partners

Beneficiaries Comorian government

Short-term outcome indicators Number of measures implemented (Source: Steering Committee quarterly report, the Bank’s mid-term review report, and the Bank’s completion report )

Expected progress in the short-term - 50% of measures implemented mid-term (May 2010) - 80 to 90% of measures implemented at the end of programme execution in December 2010

Assumptions/Risks

Ditto

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Executive Summary Programme Overview

The Economic Reform Support and Financial Governance Programme (Programme d’appui aux réformes économiques et à la gouvernance financière—PAREGF) is a budget support programme in the form of a UA 2 million grant disbursed in two equal tranches of 1 million. Its purpose is to promote more effective and efficient management of public resources. It aims specifically to improve public finance management and streamline the public finance reform process. Programme Outcomes The expected outcomes from implementing this programme include: greater credibility for the government budget, increased transparency of government transactions and public resource management, and, with respect to streamlining of the reform process, preparation of a strategy and action plan, and execution of both after the completion of PAREGF. Programme Rationale The Programme falls within the framework of the first pillar of Bank Group’s assistance strategy as defined in CSP-1, 2009-2010. It is also in line with the first component of the Poverty Reduction and Growth Strategy Paper (PRGSP-I) adopted by the Government of the Comoros in 2005 for the 2006-2009 period. The Bank’s Value Added The Bank has acquired proven experience in successful reengagement in post-crisis countries. This allowed the Bank to successfully resolve the issue of the Union of the Comoros’ debt payment arrears to the Bank and to re-engage in operations after about fifteen years of absence on the ground. Institutional Development Thanks to the reform measures that it comprises, PAREGF will help strengthen the operational capacity of the Finance Departments of the Ministry of Finance, Budget and Planning, and of organs responsible for monitoring the implementation of economic and financial reforms. PAREGF will also be implemented in synergy with the Institutional Capacity Building Project that the Bank will finance in the Comoros. This project seeks to strengthen capacities in public finance management and in the preparation and monitoring of development policies.

I. THE PROPOSAL 1.1 This document presents a proposed UA 2 million grant to finance an Economic Reform Support and Financial Governance Programme in the Union of the Comoros - a budget support programme that will be disbursed in two equal tranches of 1 million over the 2009-2010 period. Its objective is to improve conditions for sustainable development by strengthening governance. It comprises two components: (i) improving public finance management; (ii) streamlining the reform process in that regard. The programme will be implemented in close collaboration with other donors operating in the country within the framework of budget support. 1.2 This proposal is in line with the main thrusts of the Bank’s Interim Country Strategy Paper for 2009-2010, whose first pillar is consolidation of the macro-economic framework. Within the context of collaboration among donors, the proposed reforms will be further deepened during the mounting of a future IMF programme for accessing the resources of the Poverty Reduction and Growth Facility (PRGF). Quite advanced in 2007, the preparation of the PRGF programme was interrupted by the political crisis in Anjouan. The IMF plans to implement a new PRGF programme in 2009. To that end, an IMF mission is expected in June 2009. II. COUNTRY AND PROGRAMME CONTEXT 2.1 Government’s Development Program and Medium-term Reform Priorities 2.1.1 In 2005, the government adopted the Interim Poverty Reduction and Growth Strategy Paper (PRGSP-I) following a participatory preparation process. The Paper was updated and complemented by an action plan validated by a series of consultations, resulting—for the 2006-2009 period—in 35 priority programs which were chosen through discussions in technical workshops at the islands and Union level. Thus, PRGSP-I, which is now the benchmark document for economic and social development in the Comoros, comprises seven strategic pillars: (i) creating conditions for sustainable development through public finance reform, infrastructure rehabilitation and development; (ii) jump-starting the private sector with particular emphasis on tourism, fisheries, and agriculture; (iii) strengthening the legal system and promoting good governance; (iv) improving the health status of the population; (v) developing education and vocational training; (vi) promoting a healthy and sustainable environment; and (vii) strengthening the security of persons and property. Provision has been made for an institutional framework for implementation, monitoring/evaluation and a set of performance indicators, including those related to the Millennium Development Goals (MDGs). The government’s medium term reform priorities are based on these strategic PRGSP-I pillars. 2.2 Economic Developments, Medium-term Challenges and Prospects Recent Economic and Social Developments 2.2.1 The Union of the Comoros is slowly recovering from the latest episode in the long political crisis that has plagued the country for several decades. This political instability has resulted in a significant decline in per capita income, deterioration in basic social services and a substantial regression in institutional capacity. The forced removal, in March 2008, of former rebel leader Colonel Bakar, who had assumed power after fraudulent elections,

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followed by the transparent election of a new president on 29 June of the same year, set the stage for the return of Anjouan into the Union and for the resumption of inter-island cooperation. This resulted notably in the restoration of the revenue-sharing agreement among the islands (the Agreement was put in place in 2005 and with the following distribution: 37.5 percent for the Union, 27.4 percent for Ngazidja, 25.7 percent for Anjouan, and 9.4 percent for Moheli). A constitutional referendum aimed at reforming Comorian institutions was held on 17 May 2009 with a positive result. The institutional changes include, among others, a one-year extension of the Union President’s term of office and the replacement of presidents by governors in the autonomous islands. These reforms will help lighten the Comorian administrative structure, making it more effective and efficient. However, the institutional system will remain highly decentralized. 2.2.2 Economic growth: the Comorian economy is based essentially on three primary products that account for three-quarters (3/4) of the country’s exports (vanilla, cloves, and ylang ylang); its annual average growth rate was only 2.5 percent during 1999–2006, followed by a 0.5% decline in 2007 and 2008, and a scant 1% is expected in 2009 owing to political instability and the repeated violent transfer of presidential power that have marked the history of the country since its independence in 1975, with the latest episode as recent as 2008 in the Island of Anjouan.1 This has been compounded by: (i) a deterioration in the terms of trade by about 20%; (ii) a curtailment of domestic credit from the country’s banks, thus undermining job-creating investments, whose rate has not exceeded 11% of GDP in the last five years; (iii) frequent electricity outage which is harmful to production units because of obsolete MA-MWE equipment, worsened with the termination of Total’s contract to supply the country with petroleum products. Inflation, which had remained moderate previously, thanks to membership in the Franc Zone which advocates a strict monetary policy, soared to 9.5% at end 2008 as a result of higher world oil and food prices. 2.2.3 With respect to public finance, the fiscal situation has deteriorated over time because of the political crisis and the slowdown in economic activity. Public expenditures rose to 21.7% of GDP in 2008, compared to 21.2% in 2006, while domestic revenue declined to 12.4% of GDP compared to 13.6% of GDP for the same years. This drop in fiscal revenue is attributable to the general slowdown in economic activity and the freeze, until early 2008, of the tax revenue-sharing mechanism among the islands. However, owing to the decline in primary spending, notably the freezing of public service recruitments, computerization of the payroll, and the reduction in the number of ministries both in the Union and the Islands, the budget deficit (cash basis, including grants) was reduced somewhat, from -1.7% of GDP in 2006 to a position of equilibrium en 2008 (0% of GDP). Despite the difficult fiscal situation, the government reacted to the rising food and energy prices by: (i) reducing import duty on wheat, flour and yeast, resulting in an estimated revenue loss of KMF 39.3 million, and (ii) exempting oil products of taxes for a total of KMF 219 million in order to limit the rising trend of electricity tariffs. The fiscal impact of these measures was estimated at 0.14% of GDP. 2.2.4 Monetary situation: membership in the franc zone has enabled Comoros to contain inflation and maintain a stable exchange rate, thanks to a rigorous monetary policy. However, it limits the competitiveness of the country’s exports in relation to its main competitors in the sub-region. Money supply increased by 1 percent on average, in parallel with the equally

1 There have been at least two dozen violent episodes of transfer of power since the country’s independence in 1975,

creating political instability that is detrimental to nation-building and social peace.

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modest increase of domestic credit to 1.05 percent. The Comoros banking sector currently comprises four (4) institutions: Banque pour l’industrie et le commerce (BIC), Banque de développement des Comores (BDC), Banque fédérale pour le commerce (BFC) and EXIM Bank from Tanzania; two decentralized financial institutions - l’Union des Meck and l’Union régionale des Sanduk d’Anjouan; and, finally, two (2) financial intermediaries, the Société nationale des postes et des services financiers and Comores Express. The BIC, which previously enjoyed a near monopoly, has seen its share of the market decrease from 64 percent in 2004 to only 46 percent in December 2007, in favor of the two decentralized micro-credit financial institutions whose consolidated share of the market rose from 24 percent in 2004 to 44 percent in 2007. This opening of the financial sector should help make the banking sector more competitive and thus, spur recovery of credit to the formal and informal private sector. 2.2.5 Foreign accounts: on average, imports accounted for 41 percent of GDP and exports, 15 percent only during 2006-2008. Were it not for public transfers ($4.53 million) and especially remittances from Comorians living abroad ($28 million), the current account deficit would have reached -26 percent of GDP on average during the period under review. Thanks to remittances, foreign exchange reserves were maintained at over 7 months of goods and services imports. 2.2.6 Public debt: although the conclusion of an arrears clearance agreement with the African Development Bank helped reduce the net present value of debt to exports ratio to 236 percent, compared to 390 percent at end 2006, the debt level remains high and unsustainable. Even though the authorities do not yet have a clear arrears clearance policy, they have reached arrears clearance agreements with the majority of multilateral creditors, in particular ABEDA, IFAD, the Arab Monetary Fund, the European Investment Bank (EIB), and the Islamic Development Bank (IsDB). The stock of arrears at end 2007 was estimated at KMF 31.3 billion, or about 140 percent of domestic revenue. Wage arrears alone, including contributions to the retirement fund, were estimated at KMF 9.1 billion, or 40 percent of domestic revenue and 18 percent of GDP. The government has committed to recruiting a renowned international firm to audit these arrears to assess their exact amount. Thereafter, it will be possible to prepare a clearance strategy in line with the government’s financial possibilities during 2009. The terms of reference for the audit were prepared and accepted by the European Union, which is expected to provide the financing. 2.2.7 With respect to social indicators, it is worth noting that Comoros has an estimated population of 750,000 inhabitants, with the density among the world’s highest. The country is ranked 134th out of 177 on the 2007 Human Development Index. For each of the islands, people living below the poverty line (set at KMF 285,144) per person per year stand at 38.4 percent in Anjouan, 37.8 percent in Mohéli, and 35.3 percent in Grande Comores. Monetary poverty is higher in rural environments (41.1 percent) than in urban areas (26.7 percent). In the education sector, some good results have been recorded, notably in literacy. In 2007, gross primary enrolment was estimated at 85 percent, compared to 75 percent in 1990. In contrast, in the health sector, the country’s progress towards the MDGs is very slow. According to the planning agency (Commissariat Général au Plan), the information was not sufficient in 2005 to assess the probability of attaining the MDGs, with the exception of reducing mortality among children under 5, which will very likely be achieved. A new evaluation is underway.

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Medium-term Challenges and Prospects 2.2.8 The challenges facing the Comorian economy are numerous. The first challenge is political because the national consensus and the institutional framework that Comorians have established after a long period of political turmoil remain fragile. The jurisdictional conflicts between the Union and the islands continue to resurface periodically, even as the multiplication of administrative structures encroaching on each other has created a plethoric administration (over 12,000 civil servants for about 750 000 inhabitants), heavy and slow to make the most basic decisions. The second challenge is the vulnerability of the economy to external shocks, given its exposure to world markets and concentration on three primary products (vanilla, cloves and ylang-ylang accounting for over 85 percent of exports). The third challenge is the debt burden, which weighs on public finance and reduces the domestic capacity to invest in economic development and fight poverty (see paragraph. 2.2.6). Finally, the fourth challenge is the weak competitiveness of the economy as reflected in poor export performance and increasing external account imbalances set to worsen due to declining global demand and falling remittances brought about by the current world crisis. 2.2.9 In the light of the above and according to the International Monetary Fund,2 the medium-term prospects of the Comorian economy will depend on the authorities’ efforts to: (i) achieve gradual fiscal consolidation while increasing pro-poor spending; (ii) mobilize more financial resources and technical assistance from donors; and (iii) promote the private sector by eliminating the constraints that hinder its development and taking measures to encourage investments and job creation by economic operators. Thus, in the medium term (2008-2011), expectations are for :(a) real annual growth of 1.5 percent, underpinned by the response of subsistence agriculture to higher food prices, and investment in tourism and in construction and public works; (b) annual inflation at 3 percent on average; (c) a widening of the current account deficit to 10–11 percent of GDP, reflecting limited export gains and stronger remittance-funded imports following the end of the crisis; (d) a gradual reduction of the domestic primary fiscal deficit to -0.8 percent of GDP in 2011, compared to -2,2 percent of GDP in 2007. Although this scenario denotes progress in relation to the recent past, it will still translate into a decline in per capita income, given the relatively high population growth rate (2.7 percent) and a fertility rate of 4 children per woman. Therefore, it will be necessary to quickly envisage strengthening the implementation of the family planning policy. 2.3 Status of Bank Group Portfolio The Bank Group currently has no active operation in Comoros since the country was under sanctions for accumulating debt arrears from 1993 to end-September 2008. Balances on projects that were active in the early 90s had been cancelled. In June 2007, the Boards of Directors approved a Dialogue Note which gave Comoros the status of post-conflict country eligible for the resources of the Post-Conflict Countries Facility for the clearance of arrears owed the Bank Group. The conclusion of the arrears clearance operation in September 2008 marked the start of the Bank’s re-engagement in the country. Thus, in November 2008, the ADF approved a UA 1.5 million grant to support the balance of payments in response to the food crisis. That grant has been fully disbursed. In addition, an Interim Country Strategy Paper (I-CSP) for 2009-2011 was prepared and was the subject of a validation seminar with the participation of the authorities and civil society representatives. The document retains economic management capacity building as its first pillar. In that regard, the preparation of an

2 IMF Report N° 09/42, February 2009

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Institutional Capacity Building Project (PRCI) initiated by the Bank is well advanced and will focus on public finance management and national statistics capacity building. The new capacity building project is fully complements PAREGF. It is expected that both PAREGF and PRCI will synergize, as PAREGF aims to improve the public finance management system through the implementation of programme measures and PRCI seeks to strengthen institutional capacity in the public finance management and public policy management through training, technical assistance, the preparation of procedures and the equipment of the ministries involved. III. KEY DESIGN ELEMENTS AND SUSTAINABILITY 3.1 Linkages with the CSP and Underlying Analytical Factors 3.1.1 PAREGF is a budget support programme that contributes to the implementation of the PRGSP since its objective is to reduce poverty through more effective and efficient management of public resources. It is also in line with the Interim Country Strategy Paper 2009-2011 for Comoros as approved by the Bank, the two pillars of which are: (i) consolidation of the macroeconomic framework by strengthening government’s performance; and (ii) improvement of access to drinking water. The priority of the first pillar is to promote macro-economic stability through better public finance and debt management. The Programme’s analytical base is the Public Expenditure and Financial Assessment (PEFA) financed by the European Union and implemented in 2007. The PEFA Study underpins the reform measures adopted under the Programme as well as for the Institutional Capacity Building Project (PRCI) prepared, in parallel, to facilitate implementation of the PAREGF by the relevant Comorian authorities. The programme also draws on works carried out by the Public Service High Authority and financed by the World Bank that allowed the definition of organic frameworks applicable to all ministries. The Programme drew its analytical base from several studies, including: (i) the 2007 World Bank Report on Public Finances; (ii) the 2006 World Bank Report on the Computerization of the Expenditure Chain; (iii) the 2007 World Bank Report on the Public Procurement System; (iv) the 2005 IMF Report on Taxation and Customs Reforms; and (v) the 2005 World Bank Customs Diagnostic Study. Compliance with General and Technical Precedent Conditions 3.1.2 As Table 1 below shows, the Bank’s assistance through a budget support operation is clearly justified and complies with the Bank’s Fragile States Policy.3 3.1.3 The availability of external resources is needed to revamp and stabilize the Comorian economy. The country is gradually regaining political and institutional stability after the last upheavals caused by the Anjouan crisis in 2007-2008. Nevertheless, there is still the risk of destabilization if the organization of the 22 March constitutional referendum on institutions does not produce positive results. In contrast, the positive outcome of the referendum would help stabilize the country while waiting for the 2010 Union-wide presidential elections. 3.1.4 The budget support envisaged for the Comoros is a timely and efficient instrument through which the Bank will provide assistance based on the country’s development priorities, in collaboration with other donors and in accordance with the Paris Declaration, recently reaffirmed by the Accra Action Plan. It is also an instrument that provides effective

3 ADB/BD/WP/2008/103 – ADF/BD/WP/2008/60, Annex 7

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support for the voluntary measures adopted by the government and confirmed in the IMF Emergency Post-Conflict Assistance. The voluntary measures aim at restoring a sound environment that will pave the way for the country to benefit from the Poverty Reduction and Growth Facility (PRGF). Budget support will help stabilize the economic situation, mitigate the impact of the financial crisis and the prospects of a decline in private transfers, while strengthening transparency in public finance management especially by adopting appropriate regulatory instruments. It will also contribute to the implementation of reforms that could lead to the HIPC-I decision point. Finally, thanks to the related institutional capacity building support that will help facilitate its implementation, the programme will be decisive in building a sustainable post conflict situation.

Table 1 General and technical conditions for budget support in accordance with the Bank’s operational guidelines for fragile States The country must have met the two criteria for eligibility for the FSF

The country meets the two criteria for eligibility for the FSF

There must be consensus between the government and donors on development priorities to be supported by the DBSLs

There is consensus among donors on priorities to be supported under the DBSL. The PRGSP serves as the basis for donor interventions

The country should be in the process of implementing a credible institutional capacity building programme

The country has requested ADB support for a substantial institutional support and capacity building project. The Institutional Capacity Building Project (PRCI) will finance the implementation of activities to eliminate the weaknesses identified by the PEFA

The rationale for the operation must be stated in the programme document and the appraisal report, and must include measures to mitigate fragility risks

The rationale for budget support is in the CSP

The operation will not be audited by a public audit agency but by an auditing firm and at least once a year during the execution of the operation

The budget support will be audited by an independent auditing firm after every tranche. In addition, the Accounts Audit committee will transmit each relevant report on budget support.

In cases where institutional capacity is deemed weak, the Bank Group should, through the FSF, recruit the professionals assigned to the public agencies concerned to strengthen institutional capacity, if it is to support the operation

The institutional capacity building programme that will be financed alongside the PAREGF envisages the recruitment of international consultants who will provide technical assistance to the structures involved in implementing the progrramme

The Bank will always involve other donors, although it may play the major role in coordinating activities and disbursing of funds

Close collaboration is envisaged between the Bank and other donors, notably the World Bank, the International Monetary Fund, the European Union, and the UNDP for the implementation of the PAREGF

Disbursements will be made in several tranches Disbursement will be in two tranches 3.2 Collaboration and Coordination with Other Donors 3.2.1 PAREGF was appraised in coordination with the International Monetary Fund, the European Union, the World Bank, France and other technical and financial partners, including the UNDP. In December 2008, the IMF approved two complementary financial support operations: Emergency Post Conflict Assistance for SDR 1.1 million and assistance under the Exogenous Shocks Facility (ESF) for SDR 2.2 million. In recent years, development partners based in the Comoros have organized regular consultations under UNDP supervision. Donors based in the country meet monthly basis among themselves, and quarterly with the government. Reports on discussions are shared with partners not present on the ground. The main donors intervening in the Comoros include the European Commission, France, the World Bank, and agencies in the United Nations System, the IMF, China and

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Arab bilateral partners including Kuwait. Other technical and financial partners include BEAC/BCEAO, Pôle Dette and COMESA. There is close but relatively informal coordination among the World Bank, the European Commission, the IMF, the ADB, France and the UNDP. Discussions have been launched to set up a partnership framework for budget support and institutional capacity building in order to formalize coordination among these institutions. Discussions between the European Commission, the World Bank and the ADB are underway to formulate a common intervention matrix within the budget support framework. 3.3 Outcomes from Similar Completed and Ongoing Operations and Lessons 3.3.1 After a 15-year interruption in the Bank’s operations in the Comoros, the arrears clearance operation approved by the Board of Directors, which started in December 2007 and ended in September 2008, was the starting point for the Bank’s re-engagement in the country. Thanks to this re-engagement, the Comoros benefited from a UA 1.5 million grant on 24 December 2008—the Bank’s response to the food crisis in Africa. 3.3.2 The following lessons can be drawn from the Bank’s cooperation with the Comoros: (i) permanent dialogue with the authorities and with all stakeholders is essential because of the country’s geopolitical specificity; (ii) because of the chronic outstanding arrears owed to the Bank, the country has not been able to benefit from continuous and sustained support, whereas its needs are enormous in all areas; (iii) given its weak institutional capacity, the government has decided that all operations must include a “capacity building” component to ensure their successful implementation; (iv) the absence of a Bank office in the Comoros may make implementation of projects more difficult. Some lessons can also be drawn from similar interventions implemented by other donors, for instance those of the European Commission and the IMF: (i) programmes should be focused and a smaller number of conditions imposed in order to avoid disbursement delays; (ii) the IMF-supported EPCA staff-assisted programme was successfully implemented, overall (April 2009); (iii) the European Commission support audits were effectively conducted and indicated satisfactory implementation. 3.4 The Bank’s Comparative Advantages 3.4.1 Owing to the long absence of Bank Group operations in the Comoros, the Bank has not developed an obvious comparative advantage in the country. However, it has accumulated rich experience in successful re-engagement in countries transitioning from crisis or post-conflict countries. The Bank made the most of its experience to successfully resolve the problem of payment of arrears outstanding since 1993. PAREGF was possible because of the establishment of the Fragile States Facility (FSF) that allows intervention in the form of budget support to fragile countries. 3.5 Linkages with other Bank Pperations 3.5.1 To date, there is no ongoing Bank Group operation in the country. In fact, the Comoros was under sanctions from 1993 to 2008. The Institutional Capacity Building Project (PRCI) is appraised along with PAREGF. The two operations are closely linked and synergy between both is expected (see paragraph 2.3).

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3.6 Application of Best Practice Principles Regarding Conditionalities 3.6.1 In designing the program, four (4) out of five (5) best practices regarding conditionalities were followed: (i) ownership is strengthened by the fact that the programme was designed in close collaboration with the authorities and the design is based on PRGSP-I strategic orientations; (ii) the Bank’s responsibility framework and support conditions were aligned with national concerns in terms of reform needs and priorities; (iii) disbursement conditions are based on seven (7) of the 19 programme measures (5 for the first tranche and 2 for the second tranche), including consideration of the country’s weak capacity; and, finally, (iv) the Bank’s support is divided into two (2) budget cycles, with an in-built mid-term performance review. 3.7 Implementation of the Bank Group’s Policy on Non-concessional Loans 3.7.1 Within the framework of the Emergency Post-Conflict Assistance (EPCA) Programme concluded with the IMF in December 2008 and currently being implemented, no non-concessional loan may be taken by the government. Thus, the Bank Group’s policy on this front will be respected. IV. PROPOSED PROGRAMME 4.1 Programme Goal and Objectives 4.1.1 The objective of the Economic Reform Support and Financial Governance Programme (Programme d’appui aux réformes économiques et à la gouvernance financière—PAREGF) is to help reduce poverty through more effective and efficient public resource management. It aims specifically to: (i) improve public finance management; and (ii) streamline the public finance reform process. 4.2 Programme Pillars, Components and Expected Outcomes 4.2.1 The government is aware that to obtain sustainable macro-economic stability and improve the economic situation, public finances must be consolidated, while a rational process for implementing the necessary reforms must be adopted. For that reason, this ADF-supported programme focuses on improving public finance management through actions likely to produce immediate impact, while streamlining the public finance reform process. Improvement of Public Finance Management 4.2.1 Composition of real expenditures in relation to the Budget: in the Comoros, the composition of real sectoral expenditures in relation to the initial budget approved is the budget chapter most lacking in credibility. According to the PEFA Study, variations could range from 557 percent in 2004 and 30.27 percent in 2006 for the education sector, and 838 percent and 2.73 percent for the health sector, during the same reference years. To address this situation, the government has set up an Economic and Financial Reforms Monitoring Unit (CREF) charged, among other things, with submitting monthly data on the budget transactions of each island and sectoral department for monitoring, analysis, and consolidation. To prevent these slippages, the Programme has decided to maintain the monthly meetings of the budget departments of the four entities (the Union and the three islands) under CREF’s supervision, to ensure permanent coordination of expenditure channels.

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4.2.2 Comprehensiveness and transparency of the budget: although two weaknesses have been noted at this level (specifically the incomplete nature of financial and budget monitoring of public enterprises and autonomous public administrations, and inadequate public access to key budget information), the Programme focuses on the latter aspect with a view to improving transparency, the keystone of financial governance. 4.2.3 Public access to key budget information: with respect to governance, transparency and accountability also require that the public have easy access to information on public finance management by the government. While the budget document and the external audit reports are currently available at the Ministry of Finance and the Audit Committee, respectively—although these institutions are not easily accessible—the other documents, such as the end-of-year financial statements and public contracts awarded, as well as the resources allocated to basic units remain inaccessible to the public. The government has decided to build a Ministry of Finance website where all public information from the Cabinet and departments of the Ministry will be posted. Besides this modern communication tool, other less sophisticated communication media (print, audiovisual media and information forums) will be used. The objective is to enable civil society actors to access information so they can exercise control over government action, notably in public finance management. 4.2.4 Budget cycle: the first concern is to make the necessary arrangements for preparation of annual government budget, ensuring that it adequately reflects the country’s economic reality and meets the strategic objectives of the PRGSP. The second concern relates to: (i) efficiency in the collection of tax and customs revenue; (ii) cash, debt and guarantee monitoring and management; (iii) accounting, information recording and financial reporting; (iv) competition, optimal use of resources and procurement control; and (v) effectiveness of the internal and external auditing system. 4.2.5 Preparation of government budget: in the initial budget preparation process, it is important to ensure that the macro-economic policy letter is prepared on time and contains not only priority programme orientations to be implemented in the fiscal year, but also budget ceilings that will serve as financial constraints and will guide the streamlining of budget options. Similarly, complete and consolidated TOFEs should be prepared regularly to obtain a complete view of the government’s financial operations and facilitate their monitoring on a monthly basis. To that end, the Budget Committee (which comprises representatives from the Ministries of Finance of the Union and island governments, and monitors budget execution in accordance with the provisions of the budget law) should also meet regularly and report to the Minister of Finance of the Union and the islands. 4.2.6 Effective collection of tax and customs revenue: at present, it is difficult to obtain reliable information on tax and customs collection based on returns by revenue agencies. Without data, the performance of such agencies cannot be objectively measured. In discharging their duties, the agencies base their efficiency on achievements in relation to budget forecasts and not in terms of revenue returns. The revenue transfers from both agencies to the Public Treasury account at the Central Bank are not made at the same frequency (monthly for one and daily for the other). This may affect the government’s cash flow as it strives to meet its commitments. To address this situation, the Government has undertaken to: (i) render taxpayer liabilities and obligations more transparent; (ii) improve efficiency in customs and tax revenue collection by setting up, since April 2008, a Revenue Collection Committee in Anjouan to take over the outstanding liquidation files resulting from the crisis that the island experienced, and update them; (iii) for the sake of efficiency, pool

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revenue control and collection resources by setting up joint revenue collection brigades; (iv) establish a single taxpayer identification number; (v) set up the ASYCUDA++ system that will make it possible to institute autonomous customs procedures and traceability of cash receipts in Moheli, at parcel post services and airport brigades; and (vi) install a large taxpayers office at Anjouan and conduct a survey of such taxpayers for monitoring purposes. The programme will adopt implementable measures, taking into account the country’s limited institutional capacities and the programme implementation deadlines. (See Matrix of Measures in Annex 2 of the report). 4.2.7 Cash flow, debt and guarantee monitoring/management: according to the PEFA, the treasury and debt monitoring system is inadequate. Bank balances at the Central Bank (BCC) are not consolidated due to the structure of the revenue sharing system. The Union has six accounts and each of the islands two accounts at the BCC, one for salaries and the other for goods and services expenditure. Union accounts cannot be consolidated. It has been decided that under the Programme, a number of regulatory instruments will be adopted, namely: (i) the Order establishing a Treasury Committee which, once appointed, will be in charge of drawing up a monthly cash flow plan; (ii) the Decree concerning Procedures Manual for the General Treasuries of the Comoros; and (iii) the Decree concerning the Budget Procedures Manual. The adoption of the last two (2) instruments is a condition precedent to the disbursement of the first tranche of the grant. 4.2.8 Accounting, information recording and financial reporting: the budget execution chain is not yet computerized to generate standardized accounting documents and the sources of information produced, maintained and disseminated to help budget management officials make decisions and subsequently prepare financial reports. Hence, the following regulatory instruments will be adopted under the programme: (i) Decree establishing the harmonized budget nomenclature of the Union of the Comoros; (ii) Decree regulating public expenditure; and (iii) Decree establishing the nomenclature of supporting documents on public expenditure. The adoption of these three decrees is also a condition precedent to the disbursement of the first tranche. Regarding accounting, the following regulatory instruments will be adopted: (i) General instruction on the functioning of the new Government Accounting Plan, pursuant to the decree establishing the accounting nomenclature (condition of the first tranche); (ii) adapting public accounting regulation to the new accounting plan by amending the Order regulating public accounting (condition of the second tranche). 4.2.9 Competition, optimal use of resources and procurement control: in addition to the many legal and administrative flaws identified by a study carried out by World Bank experts in 2006, the Procurement Code adopted in 2005 by Decree No. 5-77/PR of 1 August 2005 has not yet been implemented. The Procurement Regulatory Authority envisaged in the provisions of the Code is not yet operational. It is necessary to revise the Code to align it with COMESA standards. To produce a final version of the Code with all implementation instruments, it will be necessary to set up an international expertise assistance that could be provided under the Institutional Capacity Building Project (PRCI). Hence, within the Programme framework, provision has been made to start the revision of the Procurement Code. 4.2.10 Effectiveness of the internal audit system: in accordance with the provisions of the framework law on government financial operations, budget allocations are authorized by order of the Minister of Finance. The Budget Director, by delegation of the Minister, is the

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sole authorizing officer for public expenditures. In that capacity, s/he commits and orders expenditures. The Financial Controller, the sole ex-ante control body, verifies and authorizes the expenditure. However, in the current organizational chart of the Ministry of Finance, the Financial Control Department falls under the Director General of the Budget. The administrative position of the control body makes the independent judgment of the Financial Controller an illusion. The General Inspectorate of Finance (IGF) is the other internal control body under the supervision of the Ministry of Finance. It has carried out controls in some ministries and government agencies, including the Moroni Airport Authority. However, IGF has very limited resources to fulfill its mission. This is compounded by the fact that another control body, the Accounts Verification Committee (CVC) fulfils the same internal control missions and sometimes in the same bodies already covered by IGF (the airport for example). This duplication of effort results in jurisdictional conflicts and waste of resources. For that reason, the Programme includes two measures: (i) separation of the Financial Control Department of the DGB as provided for in the Budget Procedures Manual, whose formal adoption by decree is one of the programme measures (see § A.3.3); (ii) preparation of a study clarifying the roles of the audit and control bodies, notably the IGF and the Accounts Audit Committee. 4.2.11 Scope, type and monitoring of external control: The Audit Bench of the Supreme Court created by organic Law No. 5-12/AU of 27 June 2005 has statutory jurisdiction on external control. This Court comprises 3 divisions, including the Accounts Division. However, this external verification institution is not yet operational. Thus, it is the Accounts Auditing Committee (CVC), created by Order No. 7/CE of 5 April 2000 and placed under the direct authority of the Head of State, which plays the partial role of external control body. In that capacity, the CVC has since 2005 verified the 2005, 2006, and 2007 Budget Laws and submitted the reports to Parliament. Similarly, controls were carried out during the same period in state-owned enterprises, some of which had been inspected by the IGF. Hence, the CVC plays the same role as the IGF, another internal control body, without entirely fulfilling its role as an external control body (examination of budget review laws and their submission to the Legislative Branch after compliance notice). Therefore under the Programme, the study to be carried out within the PRCI framework and explained in § A.3.6 above, will also review the current status and functions of the CVC, suggest a refocusing of its activities and its transformation into an Audit Bench within the Supreme Court with mission to carry out full external control of the revenue and expenditure account of the Public Accountant and produce budget review laws intended for submission to Parliament.

Streamlining the Reform Process 4.2.12 Following the completion of the PEFA Study, it is indispensable to undertake necessary reforms to eliminate the weaknesses noted, based on a given schedule. This calls for a prospective vision of the extent to which carefully-defined institutional arrangements contribute to the reform planning and execution process. Therefore, the objectives, purpose and pace of the reforms must be determined, and measures envisaged to mitigate possible resistance to their implementation. Although action plans exist in some departments, e.g. Customs and Tax Departments, what is required at this juncture is to define a national strategy, reform priorities, and an action plan for the improvement of the public finance management system. For that reason, the programme adopted the following two measures: (i) the preparation and adoption of a strategy and a reform action plan; and (ii) the implementation of the adopted and action plan.

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4.3 Financing Needs and Sources of Financing 4.3.1 The Table below presents the government’s budget financing needs

Table I – Financing Needs (in KMF million)

2009 2010 TOTAL Revenue and grants Of which: tax revenue

38 271 19 391

38 809 21 380

77 080 40 771

Total spending Including: recurrent expenditure Capital expenditures Net loan

40 513 29 509 11 004 -

42 997 29 547 13 450 -

83 510 59 056 24 454 -

Deficit, payment order basis -2241 -4189 -6 430 Net variation in arrears -2 478 -640 -3 118 (A) Deficit, cash basis (including grants) - 4 719 - 4 829 -9 548 (B)Amortizations and external arrears Domestic amortization External arrears

-3 735 -968 -2 767

-2 532 -639 -1 893

-6 267 -1 607 -4 660

(C) Financing needs (A+B) -8 454 -7 361 -15 815 Source: 2009 IMF Report No. 9/42 of February 2009

Table II-Financing of 2009-2010 Programme (in KMF million)

2009 2010 TOTAL

(D) Programme Financing 2479.176 2321.768 4800.944

Including: - World Bank - IMF - European Union - ADF/FSF - France

N.S. 826.392 1 101.856 550.928 N.S.

N.S. N.S. 1 770.84 550.928 N.S.

N.S. 826.392 2872.696 1 101.856 N.S.

(E) RESIDUAL GAP (C+D) -5 974.824 -5 039.232 -11 014.056

4.3.2 As Tables I and II above show, the budget deficit, cash basis (including grants) stands at KMF -4719 million in 2009 and KMF-4829 million in 2010, amounting to KMF 9548 for the two years of programme execution. In addition, for 2009 and 2010, KMF -3735 and KMF -2532 representing amortization and external arrears, and internal recourse to non-bank financing should also be amortized. Thus, total financing needs are estimated at KMF -8454 million and KMF 7361 million in 2009 and 2010, respectively, or KMF 15.815 million for the duration of the programme. Known budget support sources to date include the IMF (1.5 million SDR in 2009, or KMF 826.392 million), the ADF (UA 2 million for 2009 and 2010, or KMF 1,101.856 million) and the European Union (EUR 2.24 million in 2009 and EUR 3.6 million in 2010, or KMF 1,101.856 million and KMF 1,770.84 million, respectively). Consequently, the residual financing gap will stand at KMF 5,974.824 million in 2009 and KMF 5,039.232 million in 2010, totaling about KMF 11,014.56 million for the two years of programme implementation. The gap will be filled by contributions from other donors such as the World Bank (yet to appraise its budget support), France, Kuwait, the Arab League and China (yet to determine their respective contributions), and the IMF within the framework of the conclusion of an PRGF-backed programme and debt relief under the HIPC and MDRI.

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4.4 Programme Beneficiaries Generally, the Comorian people are the main programme beneficiaries, particularly the poorest to whom the government will be able to allocate more resources under poverty reduction programmes thanks to better public resource management. Other beneficiaries include (i) the islands of the Union of the Comoros, which will see improvements in their budget resource management in the wake of different reform measures implemented by financial authorities to improve tax and customs duties collection; (ii) civil servants who, as a result of public finance management consolidation may expect partial payment of their salary arrears; (iii) government financial agencies that will benefit from operational capacity building through the use of computer management tools (ASYCUDA++); and (iv) economic operators whose transactions with the government will be more transparent. 4.5 Impact on Gender Comorian women represent 50.4 percent of the population. Although they have a life expectancy of 60.6 years at birth and have relatively easy access to prenatal care (72.7 percent of women have attended at least one prenatal consultation), they constitute the most vulnerable section of the population. Nevertheless, for some time now, there has been an increase in the membership of Comorian women in associations. There are more than fifty associations throughout the country; most of them carry out income-generating activities (agriculture, livestock farming and handicraft in rural areas, and trade, food service, sewing, service provision, etc. in urban areas). Some of the women are real entrepreneurs in the import-export, building and construction sectors and have acquired creditworthiness to the extent of bidding for public contracts. Hence, they will benefit from transparency in government transactions, with the coming into force of the new Procurement Code, whose adoption constitutes one of PAREGF measures. In addition, improvement in public finance management and implementation of the arrears clearance strategy will allow the government, the main employer in the country, to pay the salaries of 12,000 civil servants more regularly. In turn, the workers will be able to provide their families with easier access to basic social services (education and primary healthcare). Finally, thanks to the successful implementation of reform measures under the PAREGF and the EPCA concluded with the IMF, the Comoros can benefit from the HIPC and MDRI, which will give it access to new resources for reducing poverty and improving the living standards of the most vulnerable sections of the population (i.e. women and children). 4.6 Environmental Impact The two programme components will not have any negative impact on the environment. The PAREGF offers the Ministry in charge of the Environment the opportunity to underscore, within the framework of rational management of public finances, the need for environmental preservation for sustainable development. 4.7 Other Impacts 4.7.1 Impact on governance: all the measures adopted under the first component of the programme, “Improvement of public finance management”, will help promote financial governance, namely: the implementation of a computerized customs duty collection tool to avoid reprehensible practices, stricter control of budget expenditure to avoid slippages, wider

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public access to budget information and strengthening of transparency in government transactions through the completion of a new Public Procurement Code for subsequent implementation. 4.7.2 Impact on poverty reduction: the ultimate purpose of the PAREGF is to reduce poverty through improved public resource management. Good management practices result in better resource allocation, increasing amounts of which will gradually be injected into social programmes beneficial to the poorest. In addition, the government may clear part of the salary arrears owed civil servants, whose increased purchasing power will allow them to meet critical family needs (education, primary healthcare, housing, etc). V. IMPLEMENTATION, MONITORING AND EVALUATION 5.1 Programme Implementation 5.1.1 Executing Agency: the Program will use the same implementation and monitoring/evaluation mechanism as the IMF Staff Monitored Programme. The Economic and Financial Reform Monitoring Unit (Cellule de suivi des réformes économiques et financières—CREF) will coordinate technical work with the administrative bodies responsible for implementing the reforms. It will send the reports to the Budgetary Committee for review before transmission to the Ministries of Finance of the Union and the islands. After approval by the latter, the reports will be forwarded to the Bank. 5.1.2 Procurement of goods and services: the programme does not raise any direct questions about procurement. If necessary, goods and services will be procured in accordance with national procedures. The national procurement system currently being revised should meet standards acceptable to the Bank. 5.1.3 Disbursement: the UA 2 million grant will be disbursed in two equal tranches of 1 million in 2009 and 2010, respectively, after the Donee fulfills the specific conditions precedent to each tranche. The conditions precedent to the disbursement of the first tranche should be fulfilled prior to the presentation of the programme for approval by the Board of Directors. Funds will be disbursed into a special account opened at the Central Bank of the Comoros, the references of which will be communicated to the ADF. 5.1.4 Audits: after each tranche, budget support will be audited by an independent firm in compliance with TORs acceptable to the Bank. In addition, the auditing committee (Commission de Vérification des Comptes) will transmit all relevant reports related to budget support. 5.2 Monitoring and Evaluation 5.2.1 CREF will provide monitoring and evaluation in accordance with the Programme’s logical framework and will forward related reports to the Bank. The Bank will monitor Programme implementation as well as the use of grant resources during supervision missions to Moroni in coordination with other donors, including the Bretton Woods Institutions and the European Union. The Bank will also tap from reports by other institutions concerning their respective budget support during the implementation of the PAREGF.

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VI. LEGAL DOCUMENTS AND AUTHORITY 6.1 Legal Documents The financing instrument used for the PAREGF is the Grant Agreement that will be signed between the Government of the Union of Comoros and the ADF. 6.2 Conditions precedent to the effectiveness of the Grant Agreement and to Disbursements

A. Conditions precedent to effectiveness of the grant 6.2.1 The Grant Agreement will become effective on the date of its signature B. Condition precedent to the disbursement of any tranche 6.2.2 The disbursement of the two tranches will be subject to the positive assessment of the programme agreed with the IMF.

C. Conditions precedent to the disbursement of the first tranche of UA 1 million

(i) Show proof of opening a special foreign currency account at the Central Bank of the Comoros for the exclusive purpose of receiving grant resources under PAREGF (§ 5.1.3)

(ii) Show proof of the adoption of the Decree concerning the Procedures

Manual for the General Treasuries of Comoros (§ A.3.3)

(iii) Show proof of the adoption of the Decree Regulating Public Expenditures (§ A.3.4)

(iv) Show proof of the adoption of the Budget Procedures Manual (§

A.3.4);

(v) Show proof of the adoption of the general guidelines on the functioning of the new Government Accounting Plan following the Decree establishing the classification of accounts. (§ A.3.4)

D. Conditions precedent to the disbursement of the 2nd tranche of UA 1 million

(i) Show proof of preparation and adoption of the reforms strategy and action plan (§ 4.2.7);

(ii) Show proof of adaptation of government accounting regulations to the

new Accounting Plan by amendment of the Order regulating government accounting (§ 4.2.8)

6.3 Compliance with Bank Group Policies

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6.3.1 The following Bank policies, guidelines, and guiding principles are deemed applicable or directly relevant to the preparation of the PAREGF: (i) Guidelines relating to development budget support loans/grants (ADB 2004); (ii) Rules for Preparation of Appraisal Reports and Annotated Format (August 2008); (iii) Bank Policy on Non- Concessional Debt (2008); (iv) Operational Guidelines of the Fragile States Facility (July 2008); (V) Response of the African Development Bank to the Financial Crisis in Africa. VII. RISK MANAGEMENT 7.1 Risks and Mitigative Measures 7.1.1 Several types of risks are likely to affect the implementation of the programme: (i) political instability; (ii) weak government capacity to implement reforms; (iii) non-sustainability of the debt and vulnerability to external shocks; and (iv) fiduciary risk. 7.1.2 Political instability resulting in lack of ownership and policy continuity: although the political risk stemming from jurisdictional conflict between the Union and the autonomous islands has lessened considerably, it remains significant. The referendum initially planned for March 2009 and postponed to a future date could help stabilize the institutional and political situation, but may also increase tensions. The efforts of the international community, in particular the African Union, which strives to maintain harmonious dialogue among the islands, could help mitigate these risks. Strengthening dialogue with the authorities and the different interventions on the ground should also have a positive impact. 7.1.3 Inadequate government capacity to implement reforms: previous experiences in the Comoros underscore the government’s lack of human, institutional and financial resources to implement projects and reforms. This risk will be mitigated by the planned capacity building activities, and by greater coordination among donors with regard to capacity building. 7.1.4 Inadequate government capacity to meet its debt obligations, and vulnerability to external shocks: poor prospects for growth may lead to public resource deficit and, consequently, difficulties in meeting debt service obligations to the Bank, resulting in the application of sanctions and the interruption of activities on the ground. This risk will be mitigated not only by the different actions aimed at strengthening public expenditure and debt management capacity currently being implemented by the Bank and other partners, notably the IMF, but also by efforts by the joint donor to help Comoros benefit from comprehensive debt relief under the HIPC Initiative. Comoros is highly vulnerable to external shocks as its economy depends directly on terms of trade fluctuations, foreign aid, remittances from the Diaspora, oil prices, and natural disasters (disease outbreaks, volcanic eruptions and cyclones, etc.). To reduce the country’s vulnerability to these shocks, the Bank and technical/financial partners are firmly engaged in constructive dialogue with the country, striving to mobilize all possible resources. 7.1.5 Fiduciary risk: the fiduciary risk is relatively high because of weak institutional capacity. Measures that could help mitigate this risk include, PAREGF-supported reforms, donor-supported capacity building activities, including the Bank’s PRCI, close monitoring and supervision of the programme by the Bank, close collaboration among donors, and continuing dialogue between the Bank and Comorian authorities.

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VIII. RECOMMENDATION In view of the foregoing, it is recommended that the Board of Directors approve a UA 2 million grant on FSF resources to the Government of the Union of the Comoros for the implementation of the programme, subject to the conditions stipulated in this Report.

ANNEX.1 Page 1 / 8

DEVELOPMENT POLICY LETTER UNION OF COMOROS Moroni, --- March 2009 To Mr. Donald KABERUKA President of the African Development Bank (AfDB) Tunis Subject: Development Policy Letter Mr. President, 1. After the long political crisis compounded by institutional instability that has plagued the country for several decades and has resulted in a major decline in per capita GDP, deterioration of basic social services, and considerable regression in institutional capacity, peace was restored to the Union of the Comoros with the end of the rebellion in Anjouan in July 2008 and the resumption of inter-island cooperation. This newfound peace facilitated the resumption of relations with the international financial community, thus creating conditions that are conducive to the implementation of the development programme based on a growth and poverty reduction strategy adopted in 2005 through a participatory preparation process. This programme, which is now a model for economic and social development in Comoros, covers the 2009-2011 period in its final version. It comprises the following five (5) main pillars: (i) stabilizing the economy and laying the foundation for accelerated and sustainable growth based on equity; (ii) promoting the private sector and reviving growth sectors by building the institutional capacities of producer organizations and creating an enabling environment for investment and business activity; (iii) strengthening governance and the legal system; (iv) improving the health status of the population; and (v) promoting education and vocational training to improve human capital. 2. While underscoring their determination to pursue political reconciliation within the Union and to establish viable institutions with a view to fostering harmony and the interests of the population, Union and island governments realize that to guarantee successful implementation of the Growth and Poverty Reduction Strategy, the requisite reform measures must be taken immediately. These reforms should be scheduled based on an agreed strategy and defined action plan. They will focus primarily on improving public finance management in order to increase the means of action used by the government to implement its growth promotion and poverty reduction policy. 3. This Development Policy Letter sums up the economic and social progress achieved by Comoros in the last few years under the government’s programme, and reviews the social context and recent economic developments. It then describes the government’s medium-term reform policies. The programme measures and objectives are in line with the Interim Poverty Reduction and Growth Strategy Paper (I-PRGSP) and with the full PRGSP, which is being finalized. The government of Comoros is requesting assistance from the African Development Fund (ADF) to support this three-year reform programme which is aimed at macroeconomic stabilization and the implementation of the necessary reforms to consolidate peace and reduce poverty.

ANNEX.1 Page 2 / 8

I. RECENT ECONOMIC AND SOCIAL DEVELOPMENTS 1.1 The Comorian economy was strongly affected by the adverse effects of the long political crisis that the country experienced and that undermined the gains from past development efforts. Today, more than in the past, the economy faces constraints whose combined effects weigh heavily on medium-term economic development prospects. To meet the challenge of poverty reduction, the government must address four major constraints, namely: (i) the national consensus and the institutional framework that Comorians have established after this long period of political unrest remain fragile; (ii) the economy is highly vulnerable to external shocks owing to the fact that it is adversely affected by world prices and that it is based on only three primary products (vanilla, cloves, and ylang-ylang), which by themselves, represent more than 85 percent of exports; (iii) the debt burden weighs heavily on public finance and reduces the domestic capacity to invest in economic development and in the fight against poverty; (iv) the weak competitiveness of the economy reflected in poor export performance and growing foreign account imbalances; (v) weak institutions that are unable to provide services of the requisite quality and quantity. 1.2 To exit from this crisis situation worsened by the devastating impact on household purchasing power and the surge in world fuel and food prices the government concluded an Emergency Post-Conflict Assistance (EPCA) agreement with the International Monetary Fund in December 2008. This programme aims, on the fiscal front, to mobilize resources and to control the wage bill, and on the structural front, to gradually restore inter-island cooperation, to address the main constraints to public expenditure sustainability in the medium term, and to tackle core economic distortions. The latest review of this program in March this year showed that the poor economic performance recorded at end-March 2009 were also due to the deterioration of the global economic situation and that, in this context, the government has nonetheless modestly exceeded its revenue objectives for 2008 and has improved control of the wage bill. The EPCA served as a catalyst for the interventions of other donors such as the World Bank, the European Union, the ADB, and France. Successful implementation of this programme should result in the inception of a new IMF-supported PRGF program as well as progress towards the decision point of the HIPC Initiative and the Multilateral Debt Relief Initiative (MDRI). This will create all the conditions necessary for longer term reengagement of the international community to strengthen our country’s capacity to deepen the necessary macro-economic and structural policies. A. Macroeconomic and financial framework 1.3 Growth: The Comorian economy, which is based primarily on cash cropping with only three products (vanilla, cloves, and ylang-ylang), recorded an average growth rate of only 0.9 percent during the last three years, a -1.6 percent decline in per capita annual income. All assumptions point to an expected growth rate of 0.8 percent in 2009. This poor economic performance is attributable to political instability and the violent transfers of presidential powers that have marked the history of the island since its independence in 1975, with the latest episode as recent as 2008 in the Island of Anjouan.4 This was compounded by (i) a deterioration in the terms of trade by about 20 percent; (ii) a low investment rate, which hit a ceiling of 11 percent of GDP in recent years as a result of a domestic credit crunch; (iii) frequent electricity outages harmful to productive units, after the termination of Total’s contract to supply the country with petroleum products. Inflation rose rapidly to 9.6 percent on a year-to-year basis due to higher fuel prices and transportation costs. 4 At least some twenty episodes of violent power transfers have occurred since independence in 1975, creating political

instability that is detrimental to nation-building and social peace.

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1.4 Public finance: Despite the deterioration in world economic conditions, domestic revenue improved considerably, from 12.7 percent of GDP in 2007 to 13.3 percent of GDP in 2008, compared to the programme objective of 12.4 percent of GDP. In contrast, goods and services expenditures clearly exceeded the programme limit of 4.6 percent of GDP, compared to the 3.6 percent slated for 2008, even though, in addition, the wage bill was contained at 8.9 percent of GDP, compared to the 9.1 percent slated for the same year 2008. This slippage in public expenditures is attributable to military operations against the secessionist island of Anjouan, government financial support to the national electricity company during the energy crisis that occurred during the better part of 2008, and tax measures taken by the government to limit the impact of food price increases. The primary balance recorded a deficit of -2.8 percent of GDP, compared to a -2.7 percent forecast. This created a stressful cash situation, all the more serious because only 52 percent of aid expected under the programme was actually received. This resulted in an accumulation of domestic arrears and an increase in net banking sector claims on the government (4.1 percent of money supply in 2008, compared to 0 percent of GDP in 2007). 1.5 On the monetary front, it was noted that the vast majority of banking sector credits to the private sector involved import-export activities, which are rapid outcome operations, unlike investments in development projects. The banking sector expanded thanks to the arrival of new banks on the market, and as a result of remarkable growth of decentralized micro-credit institutions better suited to the funding of income-generating activities in rural areas, especially for women. 1.6 With respect to external accounts, cash crops exports fell by 55 percent in 2008 in relation to 2007 due to the sharp decline in world prices; in the meantime, remittance-driven imports rose 16.3 percent during the same base years, deepening the trade balance deficit which was partially offset by public transfers and mostly private transfers from Comorians living abroad. Current account balance (including transfers) went from -6.7 percent of GDP in 2007 to -9.2 percent of GDP in 2008. Notwithstanding these transfers, the deficit would have stood at -31.5 percent of GDP in 2008. New external arrears in the amount of USD 3.3 million were recorded for that year. 1.7 Finally, external public debt remains significant since the debt-to-GDP ratio stood at 53.1 percent in 2008, compared to 57.6 percent in 2007; the ratio of debt service to goods and services exports rose to 13.4 percent in 2008, compared to 11.4 percent in 2007, despite arrears clearance agreement with the African Development Bank Group. Outstanding domestic arrears were estimated at KMF 31.3 billion at end-2007, or about 140 percent of domestic revenue. Wage arrears owed to government workers as well as contributions to the retirement fund were estimated at 9.1 billion KMF, or 40 percent of domestic revenue and about 18 percent of GDP. Aware of the negative impact of this situation on the performance of civil servants, the government has decided to hire a firm of international repute to prepare, before end-2009, an arrears clearance strategy that will be implemented based on the financial resources available.

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B. Structural context 1.8 The EPCA agreement with the IMF translates into a programme aimed at ensuring fiscal balance. To ensure harmonious management of the three islands and the Union, a Budgetary Committee meets monthly to monitor budget implementation. To improve expenditure management, a Treasury Committee will be established under the authority of the Minister of Finance of the Union and will comprise the Secretary General of the Ministry of Finance of the Union, the Directors General of Customs and Taxation, the Director General of Budget, the Payer, and the Director of Debt of the Union. This Treasury Committee will meet once a week to adjust payment orders and payments made by the Payer to government revenue. The CREF serves as the secretariat of both Committees. Other structural measures have been taken under the EPCA programme, such as the operation of the mechanism that ensures quarterly adjustment of petroleum product prices, the computerization of civil service payroll operations, and the hiring of staff for the unit that monitors and controls salary payments. The government hereby confirms its determination to implement all the other structural measures of the programme that can facilitate the planned implementation of a new PRGF-supported programme. C. Social Context 1.9 The social context in the Comoros remains marked by the prevalence of poverty in urban and rural areas. Indeed, in each of the islands, the population living under the poverty line, set at KMF 285,144 per person per year, reached 38.4 percent in Anjouan, 37.8 percent in Mohéli and 35.3 percent in the Grande Comore. Monetary poverty is higher in rural areas (41.1 percent of population) than in urban areas (26.7 percent). Most social indicators are poor compared to other African countries. Thus, the gross primary school enrolment rate stood at 85.4 percent in 2007, compared to 96.4 percent on average for the rest of Africa; adult illiteracy was 46.2 percent, compared to 42.9 percent, access to sanitation was 33 percent, compared to 45 percent, the ratio of girls to boys in primary education was 88 percent, compared to 91 percent. However, in some social areas, we have made more progress in relation to the rest of Africa. This is the case in particular for life expectancy (65 years versus 54 years) and for the Human Development Index (0.561 in 2007 versus 0.514). For all these reasons, our whole development strategy is focused on fighting poverty. II. THE GOVERNMENT’S REFORM PROGRAMME FOR 2009-2011 A. Preamble 2.1 Under the full version of the PRGSP 200-2011, the government has opted for a development model based on a mixed approach targeting, on the one hand, sectors with a high concentration of the poor in order to rapidly and quickly increase their incomes, and, on the other hand, the medium-term development of new growth-oriented sectors whose yield could be redistributed through taxation and public expenditures that are equitable and provide incentives. In the short term, attention has been focused on micro- and small enterprises and on the agrifood sector in general (agriculture, fisheries, and livestock breeding) because these are the sectors where a significant proportion of households are found, where the incidence of poverty is higher than the national average, and which are predisposed to responding quickly to incentives. The government is convinced that, in the short term, promoting growth in the agricultural and fishery sectors will contribute directly to the creation of jobs and income for

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the poorest. However, in the medium term, the engine of the economy will be tourism development. This option is at the heart of the government’s development strategy. Indeed, despite an obvious potential in tourism, the Comoros have not yet been able to develop this sector like the other islands in the Indian Ocean. However, the government remains convinced that, to successfully implement this development model, it must first develop a good economic and financial policy instrument by making significant improvements to public finance management. B. Improving Public Finance Management 2.2 The government has taken into account the results of the Public Expenditure and Financial Assessment (PEFA) study that was financed by development partners. This study has allowed us to identify weaknesses in public resource management. For the moment and bearing in mind the country’s institutional capacities, the government will strive to implement, in the context of its programme, the necessary reforms in the following areas: strengthening budget credibility, ensuring budget transparency and comprehensiveness, and, finally, scrupulously observing the different phases of the budget cycle. The government is committed to taking all reform measures that will address the most serious weaknesses that have been identified in this study and that are the most likely to be implemented within the programme implementation timeframe. 2.3 In the fiscal area, the program will focus on restoring inter-island cooperation and initiating fiscal consolidation. To that end, the 2008 budget of the Union, which was approved by parliament in February of 2008, has been amended and approved by the National Assembly last November to include Anjouan and to consolidate the framework of the revenue sharing mechanism. The objectives of the fiscal program can only be achieved through strict adherence to the revenue-sharing mechanism. Therefore, the governments of the Union and of the autonomous islands have fully restored inter-island cooperation and have strengthened the latter’s accountability in public finance management. To improve efficiency, the parties have also agreed to centralize certain functions such as revenue administration, budget execution monitoring, and the compilation of economic statistics. The implementation of the revenue-sharing mechanism will be monitored by committees representing the various levels of government and the administrative units in charge of data compilation and dissemination as well as economic policy coordination. A unit (CREF) has been established to consolidate fiscal data from the Union and island governments. In this context, the requirement to hold (at least) quarterly meetings of the Budgetary Committee, made up of representatives of the Union and the three islands, will be strictly adhered to. Budget execution reports will also be prepared on a monthly basis and disseminated to the executive branches of the Union and the three islands. . 2.4 Strict implementation of the revenue-sharing agreement between the Union and the islands and better expenditure management should result in a more predictable cash flow that will facilitate timely payment of domestic obligations and help avoid the accumulation of new domestic arrears. Significant measures have been taken to improve revenue mobilization. Thus, the following measures were taken in the customs department: (i) implementing the ASYCUDA++ system in the islands of Ngazidja and Anjouan and extending it to all customs centers nationwide, especially in postal parcel units and airport brigade units; (ii) establishing an exemptions control committee tasked with reducing exemptions by 40 percent from their 2007 level, in strict observance of the relevant Vienna

ANNEX.1 Page 6 / 8

Convention; and (iii) taking steps to remove the presumptive tax on containers and including the measure in the 2009 budget law. In addition, a single taxpayer identification number (NIF) system was established and, after a census of large taxpayers, the Directorate General of Taxation (DGI) has refocused the activities of the Corporate Tax Unit on the exclusive monitoring of large taxpayers’ tax obligations. The government plans to increase the unit’s operating budget. The DGI will spare no effort to establish a system to ensure tax compliance and collection. Finally, a joint Customs-Taxation committee has been created to improve collaboration between the two administrations. 2.5 With respect to expenditure management, the government is determined to slow down the rapid growth of primary expenditures observed in recent years in order to bring the government’s financial obligations to a level that is more compatible with available resources. As a result, the government has frozen civil service recruitments since August 8, 2008, and has launched full computerization of wage payments. It will also pursue the reduction in the number of ministerial portfolios in the Union and the Islands from 35 to 26. On the other hand, the Union government has determined the optimal size of each administration and has adopted organic frameworks applicable to all ministries. Consequently, current primary expenditures will be limited and domestically-financed investment expenditures will be maintained at 0.7 percent of GDP. To ensure greater control of goods and services expenditures, the government has issued a decree freezing all non-essential missions abroad. The implementation of the civil service reform programme is coordinated by the High Authority for the Public Service, which became operational in early 2007. This authority’s responsibilities include preparing the institutional and legal framework of the public service reforms, coordinating all public entities, and effective monitoring of Union-wide implementation of administrative and financial management procedures. 2.6 To clean up the fiscal situation, the government will order an audit and prepare a domestic arrears clearance strategy before the end of the current year with donor assistance. The terms of reference of the audit have been finalized and the European Union is ready to finance it. In addition to the government’s debt to private sector enterprises, the audit will cover obligations between the Treasury and public enterprises. 2.7 To ensure transparency and good management, the government commits to rapidly adopt a number of regulatory instruments governing public finance management in accordance with the provisions of Framework Law No. 05-11/AU of 17 June 2005, which is the organic law on government financial operations. These instruments cover, inter alia: (i) the creation of Treasury committees; (ii) the Manual of Budgetary Procedures; (iii) the harmonized budget classification for the Union; (iv) the regulation of government expenditures, the classification of supporting documents for public expenditures; (v) the General Instruction governing the operation of the new chart of accounts; (vi) the adaptation of public accounting rules to the new chart of accounts. C. Monetary Polic 2.8 Monetary policy will continue to be managed within Comoros’ membership in the franc zone, which has enabled the government to contain inflation and maintain a stable exchange rate and an adequate level of foreign reserves despite major fiscal imbalances. The government is committed to the independence of the central bank in the conduct of monetary and credit policy. This is necessary to preserve macroeconomic stability and to support the

ANNEX.1 Page 7 / 8

exchange rate regime in a context of increased liberalization of financial markets and interest rates. The central Bank will continue its efforts to enhance the effectiveness of the financial system and to strengthen banking supervision. In order to promote competition, it has granted licenses for the opening of two new foreign commercial banks specializing in the funding of productive sectors. The BCC will endeavor to contain the risks that may arise from the activities of these new foreign institutions by strengthening the terms of cooperation with their home country supervisors. In keeping with the July 2004 decree authorizing it to supervise microfinance institutions (MFIs), the central bank will reinforce the supervision program for these institutions, which have experienced rapid growth in recent years. The National Financial and Postal Services Corporation (SNPSF) will take steps to limit the credit risk pertaining notably to its lending to public enterprises and the Treasury; it will endeavor to extend the new postal checking service to a larger public.

D. Structural Reform Agenda: Increasing Procurement Transparency 2.9 The government’s objective in public procurement reform is to provide Comoros with a modern institutional and legal framework that complies with best international practices and with the guidelines of COMESA, which the country is a member of. The current public procurement system is based on the provisions of Decree No. °05-077 of 1 August 2005 establishing the Public Procurement Code. The assessment of this Code, 3 years after its adoption, reveals incoherence, contradictions, and inadaptability to the institutional, political, administrative and socio-cultural framework of the country. Consequently, it needs to be revised. Certainly, within the framework of reforms undertaken by the government, a Public Procurement Directorate was created by Decree N° 09-022/PR of 7 March 2009 establishing the organic framework of the Ministry of the Economy, Finance, Budget, External Trade and Women’s Entrepreneurship. However, this new structure can only achieve its mission if the new regulatory framework is put in place, namely: the Law or Order establishing the Public Service Procurement Code, the implementing decrees and orders, the standard book of specifications and the manual of procedures. In this regard, the government will quickly set up a Public Procurement Reforms Monitoring Committee whose mission will be to propose and coordinate the activities necessary for the full implementation of the reform. This committee will prepare an action plan, and to ensure successful implementation of works, use international expertise if necessary. The terms of reference of this committee will be fully defined at the right moment. E. Reform Strategy and Action Plan 2.10 The government realizes that what is most important for the country is not the fact that studies were conducted on public finance management performance, but rather to effectively undertake afterwards, the necessary reforms to eliminate the weaknesses noted, following an established schedule. To this end, the government will determine the objectives, the purpose and the pace of the reforms and will envisage measures to mitigate possible resistance to their implementation. This will involve preparing a national strategy, reform priorities and an action plan to improve the efficiency and quality of the public finance management system.

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III. REFORM PROGRAM MONITORING 3.1 The institutional framework for managing, coordinating and monitoring the reform program, will be the one agreed with the International Monetary Fund and other donors. This framework will comprise three levels: (i) An Inter-ministerial Committee chaired by the Ministry of Finance of the Union and comprising the Ministries of Finance of the three islands; (ii) A technical Committee, in this case, the Budgetary Committee comprising the Secretary General of the Union’s Ministry of Finance, the Director of Budget, the General Directors of Customs, and of Taxation, the General Payer and their counterparts in the islands as well as anybody else whose skills are deemed necessary; and (iii) a permanent Secretariat for the daily monitoring of the programme, in this case, the Permanent Technical Secretariat for Monitoring economic and financial reforms (CREF) created by decree on 11 February 2007. We believe that the selection of only one implementation and monitoring structure for the programme addresses concerns about harmonizing the procedures of the different partners and the efficiency of aid. Sincerely, The Minister of Finance

ANNEX II Page 1 / 3

MATRIX OF MEASURES

AREA OBJECTIVES MEASURES ALREADY TAKEN MEASURES TO BE TAKEN TIMEFRAME Institutions

responsible A. - Component 1. Improvement of public finance management

A.1- CREDIBILITY OF THE BUDGET A.1.1 Sectoral composition of real expenditures compared to original budget A.2 COMPREHENSIVENESS AND TRANSPARENCY OF THE BUDGET A.2.1 Public access to key budget information A.3 BUDGET CYCLE A.3.1 Preparation of government budget A.3.2 Effectiveness in collection of tax and customs duties A.3.3 Monitoring and management of cash, debts and guarantees

- Avoid, in budget execution, exceeding the credits allocated to entities - Ensure transparency in public finance management vis-à-vis the public - Rigorously adhere to budget procedures - Make the liabilities and obligations of taxpayers more transparent and improve efficiency in customs and tax revenue collection - Improve monitoring of cash management - Improve the public finance

- Establishment in 2007 of the Reform Monitoring Committee (CREF) to ensure the monthly transmission of data on the budget transactions of each island for monitoring, analysis and consolidation - Information on the budget law is available at the Ministry of Finance and the account verification reports are also available at the CVC - A manual of budget procedures has been prepared and will shortly be adopted by decree - Establishment since April 2008 of a Collections Committee in Anjouan to take over outstanding liquidation files owing to the crisis - Establishment of mixed teams for control and collection - Establishment of Budget Committee comprising the heads of finance of the 4 entities

- Pursue the monthly meeting of budget directorates of the four entities under the aegis of the CREF - Develop the website of the Ministry of Finance -.Disseminate key budget information through print and audiovisual media - Each year, systematically prepare the macro-economic policy letter, including the budget ceilings - Operationalize the ASYCUDA++ system in Mohéli, in the Parcel Post Services and in the airport brigade units to allow autonomy in customs procedures and traceability of receipt payments - Operationalize the mixed brigades in order to pool revenue control and collection resources - Adopt the Decree establishing the Treasury Committee - Adopt the decree relating to the manual of budget procedures - Adopt the decree establishing the harmonized budget nomenclature of the Union of Comoros - Adopt the Manual of Procedures aimed at the Comoros General Treasury - Adopt the decree relating to the regulation of public expenditures

2009-2010 even beyond 3rdquarter 2009 1st quarter 2010 Continued as of 2010 4th quarter 2009 1er half of 2010 4th quarter 2009 idem 1st half 2010 3rd quarter. 2009

CREF and Budget, Treasury, Customs and Taxation Directorates of the four entities Ministry of Finance idem Ministry of Finance Ministry of Finance (DGD-DGI) Ministry of Finance (DGD, DGI) Ministry of Finance Idem idem

ANNEX II Page 2 / 3

AREA OBJECTIVES MEASURES ALREADY TAKEN MEASURES TO BE TAKEN TIMEFRAME Institutions responsible

A.3.4 Accounting, information recording and financial reporting A.3.5 Competition, optimal use of resources and controls in procurement A.3.6 Efficiency of internal auditing system A.3.7 External verification scope, nature and monitoring:

accounting system - Ensure transparency in government transactions - Strengthen internal controls and effectively combat financial and economic misappropriation of funds - Refocus the activities of the CVC on external control

- As of 31 December 2008, no specific measure had been taken by the government to address this lack of accounting reports and documents, thus the risk of information storage loss are real. - Adoption, in 2005, of Decree N° 05-077/PR of 1 August 2005 on the Procurement Code - Following the revision of this code, the legislative instruments governing procurement are being finalized by a team of national experts. - No concrete measure has been taken to establish a sound and reliable internal control system - The Financial Control Directorate, which is the sole ex-ante internal control body, currently falls under the Budget General Directorate. This administrative position makes the independent judgment of the Financial Controller an illusion. -. Order N° 00-07/CE of 5 April 2000 confers on the CVC the roles of General State Inspectorate and External Control Body

- Adopt the decree establishing the nomenclature for supporting documentation for public expenditure - Adopt the policy statement relating to the functioning of the new government accounting plan after the adoption of the decree establishing the accounting nomenclature - Adapt the public accounting regulation to the new plan by modifying the Order regulating public accounting. - Launch the process to revise the Procurement Code - Conduct a Study relating to the clarification of the missions of the control institutions - - Separate the Directorate of Financial control by creating a General Directorate of Financial Control - Same Study as the one relating to the clarification of the missions of the control organizations

idem idem 1st half 2010 idem 1st half of 2010 - 1st quarter 2010 - 2nd half 2010 2nd half 2010

idem idem Ministry of Finance (DGB) Ministry of Finance (DTCP) Ministry of Finance idem idem

ANNEX II Page 3 / 3

AREA OBJECTIVES MEASURES ALREADY TAKEN MEASURES TO BE TAKEN TIMEFRAME Institutions responsible

A.4 – STRATEGY AND ACTION PLAN

- Plan the implementation of reforms in the short, medium, and long terms - Streamline the implementation of reforms

- There is currently no strategy or action plan - Implementation of reforms done on an individual basis

Formulate and adopt the reform implementation strategy and action plan - Implement the strategy and action plan adopted

1st quarter 2010 2nd quarter 2010

Ministry of Finance and CREF Ministries and government bodies concerned

ANNEX 3 Page 1 / 2

RELATIONS WITH THE IMF Statement at the Conclusion of an IMF Staff Mission to Comoros Press Release No. 09/78 March 17, 2009 An International Monetary Fund (IMF) staff mission led by Mr. Mbuyamu Matungulu visited the Union of Comoros during March 7-17, 2009, to review performance under the Emergency Post-Conflict Assistance (EPCA) program and assess prospects for initiating discussions on a new arrangement under the Poverty Reduction and Growth Facility (PRGF). 1 At the conclusion of the mission, Mr. Matungulu, IMF Mission Chief for the Union of the Comoros, issued the following statement: “The mission met with HEM Ahmed Abdallah Mohamed Sambi, the President of the Union; the Presidents of the three island entities; the Minister of Finance of the Union; the Deputy Governor of the Central Bank of the Comoros; the Ministers of Finance of the three island governments; as well as representatives of the private sector, civil society, and the donor community. “Against a backdrop of deteriorating global conditions, real GDP growth increased modestly to 1 percent in 2008 from 0.5 percent in 2007, underpinned by activity in subsistence agriculture, donor-funded public works, and private sector construction. Average inflation was contained at 5 percent in 2008. A surge in imports due in part to high energy prices widened the external current account deficit to 9.2 percent of GDP after 6.7 percent in 2007, despite a hefty increase in worker remittances. “The authorities slightly exceeded their 2008 revenue target and improved control over the wage bill. However, the domestic primary budget deficit increased to 2.7 percent of GDP because of high energy and one-off security expenditures related to the military operation in Anjouan. Due to administrative delays, external assistance disbursements fell short of program expectations. As a result, accumulated net domestic and external arrears reached 1.7 percent of GDP, compared to a program objective of 0.5 percent of GDP. “Key measures under the structural reform agenda are being implemented, including the regular operation of the Budgetary Committee and institution of an automatic fuel price adjustment mechanism—although no price adjustment has been made since last November in view of currently low world oil prices. Also, as called for under the program, the authorities are computerizing the civil service wage payment roster, and working to expand the reform to all regional civil service entities.

ANNEX 3 Page 2 / 2

“Short-term prospects point to continuing sluggish economic activity in 2009, with real GDP growth unlikely to exceed 1 percent. The mission reviewed and encouraged the authorities to ensure close adherence to their 2009 budget law, which is consistent with the government’s medium-term macroeconomic objectives under the EPCA. “Adequate program performance through end-March 2009 would open the way to discussions on a three-year arrangement under the Poverty Reduction and Growth Facility. This would move Comoros closer to achieving debt relief eligibility under the Highly Indebted Poor Country and Multilateral Debt Relief Initiatives. The authorities concurred that embarking in a PRGF requires substantive progress in tackling major weaknesses in public expenditure management and in addressing existing external payments arrears. In the same vein, adequate assurances would also have to be in place to ensure that the 2009 financing gap will be closed. The authorities committed to expediting related contacts with concerned development partners. “Comoros’ economy continues to face daunting risks. In a difficult international context, decisive steps ought to be taken to preserve recent gains in national political reconciliation and institution building. This is essential to securing broad-based consensus on critical reforms for putting the economy on a path of sustained strong growth. At the same time, meeting the government’s fiscal targets will require vigilance on controlling expenditures, and determined efforts to raise revenue. In this respect, the mission stressed the need for continued adherence to the revenue sharing mechanism. “The mission is grateful for the very open and frank discussions with the authorities of Comoros, and for their hospitality.”1 The IMF provides emergency assistance to help member countries in the wake of natural disasters or armed conflicts in the form of loans with grace period of 3¼ years and maturity of 5 years. For a PRGF-eligible country like the Union of the Comoros, the interest rate is subsidized down to 0.5 percent per annum based on resources contributed by member countries. This subsidization has been provided since May 2001, in the case of the EPCA, and since January 2005 in the case of emergency assistance for natural disasters

ANNEX 4 DEVELOPMENTS IN MDG 1990-2007

KEY MACRO-ECONOMIC AND FINANCIAL INDICATORS

2007 2008 2009 2010 AGGREGATES

(Annual change) National Income and prices Real GDP Consumer price index (annual average) Consumer price index (end period) Money and credit Net foreign assets Domestic credit of which: Credit to government Broad money Velocity (GDP/broad money) External Sector Exports f.o.b. Imports Term of trade (GDP Percent) Investment and saving Gross domestic investment Public Private Savings Public Private Government Budget Domestic revenue Total Grants Overall balance (cash basis) Financing Foreign Domestic Financing Gap External Sector Exports of goods and services Imports of goods and services Current account. including transfers Current account. excl. official and private transfers External debt end of period in % of GDP NPV in percentage of exports of B &S. External debt end of period in % of exports. Overall balance of payments (in millions $ US) Grants and loans in percentage of GDP Gross international reserves In millions of U.S. dollars (end year) In months of imports Real effective exchange rate (2000 base 100) Exchange rate US dollar (annual average) Nominal GDP in millions Comorian Franc)

0.5 4.5 2.2

5.0 6.0 -0.2 1.1 5.2

21.4 17.7 -20.3

10.4 6.1 4.2 3.7 1.4 2.3

12.7 7.6 22.3 -3.4

3.3 2.9 0.3 0.1

14.8 41.6 -6.7 -26.5

57.6 36.8

249.0

11.4 -6.0 8.3

118.2

7.3 129.0 358.9

167.1

Prog

0.5 5.9 9.6

0.8 11.9 31.6 7.1 5.2

6.4 13.9 -21.2

10.5 6.2 4.2 1.8 1.6 0.2

12.4 8.9 21.7 0.0

0.0 0.8 0.9 0.0

14.4 43.1 -8.7

-26.4

52.2 34.0 235.7

12.6 -10.0 9.1

113.1 5.8 … …

179.9

Proj

1.0 4.8 7.4

-1.5 19.7 23.4 -4.2 6.1

-55.5 16.3 -24.7

13.5 9.3 4.2 4.2 1.0 3.2

13.1 10.4 26.0 -1.3

1.4 0.3 1.1 -0.1

12.9 44.6 -9.2 -31.5

53.1 34.1

265.0

13.4 -10.0 11.1

109.4

5.5 135.0 334.5

178.0

Prog

1.0 4.9 0.3

0.8 -0.4 -3.5 7.2 5.2

7.6 2.0 17.1

12.8 6.4 6.4 2.2 -0.6 2.8

12.7 5.9 21.2 -3.4

-1.4 -1.1 -0.3 4.8

14.5 41.0 -10.5 -26.6

47.2 31.5 218.0

10.7 -2.8 6 ?1

113.6 6.3 … …

192.8

Proj

0.8 4.9 2.3

0.5 1.5 -4.1 3.1 5.9

4.4 2.8 12.1

12.3 5.8 6.5 3.8 1.4 2.4

13.0 7.3 21.5 -2.5

-2.0 -1.5 -0.5 4.5

13.0 43.1 -8.5 -30.4

48.4 31.7

244.0

13.6 -6.4 7.5

111.4

5.9 … …

188.3

Projection

1.5 2.4 2.5

0.6 5.2 0.7 6.2 5.9

4.7 5.4 -2.5

13.9 6.7 7.1 4.6 0.1 4.5

13.3 6.1

21.6 -2.4

-1.3 -0.9 -0.3 3.7

13.1 42.9 -9.3 -29.9

44.4 29.9 237

11.5 -20.6 6.3

112.1

5.6 … …

200.0 Source: IMF Aide-Mémoire 17 March 2009

ANNEX 5

LIST OF REFERENCE DOCUMENTS 1. Interim Country Strategy Paper for the Comoros, 2009-2010 2. Poverty Reduction and Growth Strategy Paper, 2006-2009 3. Public Expenditure and Financial Assessment (PEFA) 2007 4. ide-Mémoire of ADB PAREGF and PRCI Preparation Mission (February 2009) 5. IMF Report No. 09/42 of February 2009 6. Aide-Mémoire of the IMF Mission of 17 March 2009 7. Operational Guidelines on the Fragile States Facility 8. Reform Support Operations (ADB, August 2008) 9. Report on Public Resource Management in the Comoros (European Union) 10. Renforcement des administrations fiscale et douanière (Strengthening Tax and

Customs Administration) by P. FOSSAT and S. GUNNOO 11. Diagnosis of the Customs Department in the Comoros, March 2005 12. 2007 Annual Report of the Central Bank of the Comoros

TECHNICAL ANNEXES

TECHNICAL ANNEX 1

Page 1 / 8

REPORT ON PUBLIC FINANCE MANAGEMENT PERFORMANCE

FINAL REPORT

Contract No. 2007/139786

PEFA STUDY

Analysis of the macro-economic situation and of public finance management and its monitoring mechanisms

Support to the Delegation of the European Commission in the Union of the Comoros for

the preparation of PEFA (Budget performance measurement framework)

By

Mr. Jean-Marc PHILIP, Mr. Jean François BAUER and Mr. Dominique FREMONDIERE

Submitted by

ACE, Asesores de Comercio

Exterior, S.L. (Spain)

In collaboration with

AGMIN (Italy)

The contents of this publication are the sole responsibility of the contractor of Lot 11: ACE, Asesores de Comercio Exterior

S.L. in consortium with AGMIN.

And should not, in any case, be considered as representing the views of the European Union.

TECHNICAL ANNEX 1 Page 2 / 8

Summary of the evaluation The PEFA mission, comprising three experts from the European Union, visited the Union of the Comoros from 4 to 28 September 2008. The mission thanks the authorities for their warm welcome and excellent collaboration and for the availability of the Union of the Comoros civil servants. The discussions allowed the mission to gain a better understanding of the public finance management system in the Union of the Comoros and gain a global view of the institutional and strategic challenges the Union faces. The mission also discussed a number of short-term measures to be implemented to allow rapid internalization of the PEFA within the administration, based on the development of a budget database (using the data warehousing methodology implemented in enterprises as a decision support tool), as well as gradual improvement in indicators, allowing the government, once the Anjouan crisis is resolved, to envisage benefiting from direct budget assistance. The views expressed in this document are those of the authors and do not reflect the views of the authorities of the Republic of the Union of the Comoros or the European Union. Evaluation of public finance management performance Credibility of the budget Since the signing of the Staff Monitored Programme (SMP) with the IMF in February 2005, the Union of the Comoros budget is prepared under IMF supervision. The budget is therefore realistic and in general executed as intended, at least, on the whole, inasmuch as revenue barely cover wages and government operating costs. In contrast, the budget is not credible with respect to its sectoral decomposition. On the one hand, the monitoring of expenditure execution at the level of the entities does not produce data and reports that are transmitted to the central level; on the other hand, assessments of expenditure per sector (health, education, agriculture, etc.) within each entity show that actual expenditures differ significantly from commitments. Comprehensiveness and Transparency Monitoring of budget execution and of budget risks is very weak. Currently, there is only one Auditing Committee (Commission de vérification des comptes), but it is not operational. Financial and budget information is not accessible to the public, except for the General Tax Code, the Customs Code, the budget laws and some audit reports. However, the government aims to strengthen the capacity of senior internal auditors and to create conditions that allow external auditing of public finances.

TECHNICAL ANNEX 1 Page 3 / 8

National policy-based budgeting Budget preparation only takes into account economic and financial constraints. The budget is not established within a public policy elaboration framework. Nonetheless, the interim Poverty Reduction Strategy Paper (PRSP-I), revised in December 2005, comprises seven strategic pillars, including public finance management. The main objective of this document is the preparation of a medium-term expenditure framework (MTEF) within the next two years. One of the objectives of the PRSP is also to promote transparency in public finance management. Given the current institutional crisis in Comoros, it seems unlikely that budgeting based on national policies is an objective that can be achieved in the short-term. Predictability and control in budget execution The budget is executed in an orderly and predictable manner in as much as the country prepares its budget under IMF supervision, since the implementation of the Staff Monitored Programme (SMP) signed with the IMF in February 2005. In contrast, mechanisms that should allow control and monitoring of the use of public funds are extremely weak, and sometimes non-existent. Accounting, recording of information, and financial reporting The budget execution chain does not provide standard accounting records and sources of information produced, maintained and disseminated for purposes of decision making, budget management, and preparation of reports. There is “loss of [basic] information memory” on a level that is rarely observed in countries with similar levels of per capita income. Two points are particularly significant about this situation: first, there seems to be no database on awarded public contracts; Second, there is no budget review law that allows public expenditure consolidation and thereby comparison of commitments to achievements. The only official documents that can be used to assess forecasts in relation to achievements are the TOFE and the annual report of the central bank. In this regard, the mission had to consult the IMF Website to obtain the different TOFEs for 2004, 2005, and 2006 in order to reconstitute the information needed for the PEFA analysis, information that was not available within the Comorian administration. It is particularly surprising, considering the widespread availability of micro computing and the Internet, to note such loss of essential basic information. The reason given by the Comorian administration is the change in institutional structure; however, this explanation is unsatisfactory since the technical services remain operational and a database can be created with a simple spreadsheet program. Consequently, very important and simple improvements can be implemented if the Comorian administration chooses to internalize the PEFA.

TECHNICAL ANNEX 1 Page 4 / 8

External monitoring and auditing Provisions relating to the review of government finances and to monitoring measures by the officials concerned are not operational. In theory, the National Assembly has the appropriate supervisory authority to conduct effective external monitoring and auditing. In practice, it cannot conduct any effective control, primarily for the following reasons:

- It does not have sufficient operational resources to carry out its monitoring functions properly;

- The budget is generally presented to the National Assembly very late, such that the

latter does not have the time and human resources to discuss or propose amendments;

- When the budget is executed, the expenditures are generally not reconciled with the projected breakdown and the Ministry of Finance is often reluctant to provide the National Assembly with the explanations requested.

In conclusion, in practice external scrutiny and auditing are carried out only under the IMF programme. However, the IMF is only concerned with ensuring that budget deficits do not continue to increase, and that the government is making efforts to clear arrears. Even though it puts pressure on the government to take measures to improve budget performance, it does not exercise effective control on the government. Assessment of weaknesses in public finance management Within the context of fiscal decentralization, the poor coordination between the different entities of the Union of the Comoros has been the cause of the problems experienced by the new government. The institution of decentralization was certainly an important element in the national reconciliation process; however, its implementation has led to a redundancy in duties and functions,5 without clear definition of the hierarchical and organizational relationships. This complex situation would have required a much more efficient organization and mode of functioning, for fear of encountering the challenges that have become increasingly obvious in recent years, and that the Government of the Union has not yet been able to avoid. Thus, the president and ministers of the Union have difficulty effectively carrying out the duties conferred on them. It is obvious that this problem in itself does not stem from the decentralization process in the Union of the Comoros, (since decentralization has proven to be effective in a good number of countries), or even from the incomplete nature of the constitution which should be rendered more operational by laws or decrees. The difficulty stems mainly from lack of cooperation between the different entities as well as between the government and external control organizations, resulting in the absence of transmission and of transparency in budgetary information.

5 For example, the President of the Union, but also a president for each island, a minister of finance of the Union, and a

minister of finance for each entity, etc.

TECHNICAL ANNEX 1 Page 5 / 8

In fact, the desire to cooperate is measured especially by the level of information

transfer that can be observed between different stakeholders. It is precisely the lack of transfer and storage of basic information, allowing the recovery of information à posteriori, that the mission considered the weakest link in the budget execution process in the Comoros and that even hinders Union government officials from effectively carrying out their duties. In addition to these institutional, organizational, and operational problems, the civil service is also extremely large, but inefficient, and is unable to spontaneously produce consolidated data relating to public expenditure execution. Furthermore, as underscored in the PEFA, there is a serious lack of transparency in the monitoring of expenditure execution, as well as very unsatisfactory measures to improve tax recovery6 and to reduce public spending (especially at the payroll level). The current institutional situation in the Comoros is thus critical. Owing to the inefficient implementation of the decentralization process, cooperation between the islands has deteriorated instead of being stepped up and government functions have been ‘de-unified’7. The impact of this situation on public finances is reflected in both government revenue and expenditures. Tax collection is more and more inefficient and budget execution monitoring weaker and weaker. With better organization and more efficient budget execution control, government revenue collected could be much higher than the current level and public expenditures would be less likely to soar, as was the case with salaries during the election period. The revenue-sharing mechanism is also a cause of frustration for the entities, with each questioning the 30 percent deducted by the Union for joint expenses. The President of Moëli Island indicated to the mission that the island received only a very small part of revenue, without the real needs of the island taken into account. Civil servants at the Ngazidja Treasury complained that the island was the “big loser” in the revenue-sharing mechanism. Anjouan civil servants have declared that globally, the island does not receive more than what it would transfer to the Union—which is confirmed by calculations. Yet, initially, the revenue sharing mechanism was discussed and validated by all the entities (islands and the Union). It therefore seems difficult to understand the frustration at the island level, since the islands were parties to the negotiation. This frustration may, however, stem from feelings about the inefficiency of the Union government in its management of public finances, and, even more generally, its current economic policy. On the strength of this negative impression, the autonomous islands may base their arguments on purely accounting calculations that are not advantageous to them. The main impact of the weak public finance management is that the level of deductions on revenue carried out by the Union, combined with lack of efficiency and of observable results in redistribution do not encourage the entities to work with the Union, or to effectively collect or transfer taxes and dues collected.

6 In particular, at the level of customs, public enterprises, and the income tax of major taxpayers 7 This situation has seriously deteriorated between Anjouan and the Government of the Union with the crisis that has

been going on since May 2007.

TECHNICAL ANNEX 1 Page 6 / 8

This situation is not specific to the Union of the Comoros. It has occurred several times in different federations, such as in the autonomous republics of the Russian Federation. It is worth noting that one of the ways in which political stability is maintained in India is the fact that the regions receive significant transfers of funds from the federal government. This is not the case in the Comoros. Reform planning and implementation prospects Since the end of the secession period that started in 1997 and ended in 2001 with the adoption of a new constitution, the Comoros has undergone significant political and institutional changes. These include implementation of the principles of the 2001 constitution, installation of new revenue collection and sharing mechanisms, presidential elections at the Union level in 2006, formation of the Union Government, presidential elections at the Island level in 2007, and the formation of a government in each entity. This situation is all the more saddening because, after the overspending during the electoral period, the policy of the new Union Government was both voluntary with respect to inter-island cooperation and cautious in terms of budget management. The government seemed eager to launch reforms to stimulate economic growth and reduce poverty, in accordance with the Staff Monitored Programme (SMP) signed with the IMF in February 2005. The implementation of this programme was expected to result in the conclusion of a three-year PRGF-supported economic programme with a view to benefiting from the HIPC Initiative and MDRI (Multilateral Debt Relief Initiative) under the HIPC Initiative, and to thus benefit from a significant reduction in its external debt (calculated at the end of 2005 at USD 266 million, or 72 percent of GDP). Improvement in transparency and in budget management efficiency would have also allowed the Comoros to change from exceptional budget support (for example, disbursement, by the European Union, of two tranches of the four months of salary arrears owed to education sector staff) to direct budget support, which countries like Niger, Madagascar, Mali, Burkina Faso, Chad, and Senegal are already benefiting. However, the disorganization in administrative services and overspending recorded during the first quarter of 2006 once more delayed the conclusion of a PRGF-supported IMF programme. The last IMF mission to the Comoros in October 2006 acknowledged the expressed will of the Comoros Government to improve financial governance and combat corruption. However, the mission also noted budget overspending and underscored the extremely weak capacities of the new administration. The IMF was also worried, and rightly too, about the instability that would result from presidential elections in the islands in 2007. Owing to the political instability, the IMF has not conducted any new mission to the Comoros since October 2006, although the SMP still seems to be active. At present, the unstable political situation hinders the implementation of a PRGF. The IMF has simply extended the SMP, which is mainly focused on rebalancing public finance management and reform of fiscal establishments. In 2006, debt relief prospects were not anticipated before 2009, but this date is likely to be postponed once more because of the new Anjouan separatist crisis since May 2007.

TECHNICAL ANNEX 1 Page 7 /8

In conclusion, the intentions of the new government have not translated into concrete actions because political and institutional problems seem to be too many and too serious to manage. These institutional problems have not only helped focus the attention of the government of the Union and of the entities but also led civil society (especially unions) to politicize, in an exacerbating manner, budget management issues (problems paying salary arrears) to the detriment of sustainable improvement of the budget and economic situation. This political exacerbation has triggered a process that seems to lead inexorably (if necessary corrective measures are not taken) to progressive reduction of central power to the benefit of entities, and to increasing dysfunction in the Comorian administration as a whole. The mission seriously hopes that the Comorian authorities succeed in completing the PEFA internalization process which they have committed to at the Union level, so as to initiate budget transparency that will, in the end, facilitate Comoros’ access to the PRGF and its eligibility for direct budget support. To produce a TOFE that will allow minimum budget monitoring, the administrative services of the different entities would simply have to forward an Excel spreadsheet to the Ministries of Finance when they meet once a month and such data would be consolidated in a data warehouse (on condition that the presentation is sector-based). In particular, simple monitoring procedures can be set up, beginning with preparation of a TOFE that clearly brings out, on the one hand, forecasts in the budget laws as well as real revenue, and, on the other hand, expenditures at the level of commitments, orders to pay and execution. Such a presentation of the TOFE would present, on commitment basis, order to pay basis, and cash basis, a comparative and temporal view of public deficits both at the consolidated level and per entity. Sectoral and administrative breakdowns would simply be added to this TOFE presentation to produce the first three PEFA indicators in an automated manner. Conclusion: The report clearly underscores the weaknesses in the monitoring of public finance execution in the Comoros and the difficulty of effectively implementing the decentralization mechanism that was set up in 2005. It also highlights the total lack of control of customs duties in the ports of Anjouan and Moheli. The public finance management system seems to be both over administered and inefficient. The fact that there is no system for reconciliation of revenue (in particular customs duties) and expenditure accounts in the Comoros is dangerous for the financial stability of the country and may likely adversely affect its eligibility for external debt relief and the possibility of obtaining direct budget support later.

TECHNICAL ANNEX 1 Page 8 /8

The administrative machinery needs to be streamlined and simplified and a system set up to strengthen collection of basic information and allow better evaluation of potential revenue from ports. The information collected should be better disseminated, in particular, on the websites of the different institutions. The dysfunction of the decentralization mechanism makes it impossible for the Union Government to effectively play its role of controller and regulator. This situation is of particular concern for the political and institutional stability of the archipelago, for no decentralization, whatever its structure, functions, anywhere in the world, without a superior control and regulatory authority.

TECHNICAL ANNEX II Page 1/ 2

SUMMARY TABLE OF PERFORMANCE INDICATORS

Indicator Brief explanation and important data used Grade

PI-1 Total real expenditure in relation to original approved budget

Total real expenditure variations in relation to the originally approved budget stood respectively at 2.12 percent in 2004, 2.67 percent in 2005, and 3.79 percent in 2006.

A

PI-2 Composition of expenditure compared to original budget

The expenditure pattern in relation to the original budget stood respectively at 10.26 percent in 2004, 13.74 percent in 2005, and 5.60 percent in 2006.

D

PI-3 Real income in relation to the original approved budget

Real income in relation to the original approved budget stood respectively at -7.97 percent in 2004, -3.17 percent in 2005, and -11.66 percent in 2006.

C

PI-4 Stocks and monitoring of payment arrears on expenditure

The stock of arrears exceeds 10 percent of real expenditures D+

PI-5 Budget classification The administrative and economic classification for preparation and execution is based on the SFP 2001 standards; no functional classification

C

PI-6 Comprehensiveness of information included in budget documentation

Three of the nine (9) pieces of information referred to are included in the budget documentation

C

PI-7 Importance of unreported central government operations

The level of unreported expenditures is between 5 and 15 percent of total expenditures for 2006 and 2007. The information contained in the budget reports on donor projects leaves a lot to be desired, but it covers loans and a portion of grants.

C

PI-8 Transparency in intergovernmental relations The horizontal allocation of all transfers to entities is based on clear rules. The islands do not have reliable information on their allocations before the start of the financial year. Data is consolidated monthly but not according to sectoral categories.

C

PI-9 Monitoring of global fiscal risk from other public sector entities

Monitoring of public enterprises and autonomous public administrations is largely incomplete. The budget situation of the islands is known monthly but the risks are not consolidated.

D+

PI-10 Public access to key budget information The only two elements made available to the public, in principle, are in buildings (Ministry of Finance and the Presidency) that are not widely accessible to the public.

D

PI-11 Organized and participatory nature of annual budget preparation process

The deadlines for preparation of detailed bills by ministries are inadequate. No ceilings per ministry in the circulars. The Council of Ministers intervenes just before submission to Parliament. During the last three years, the finance law has been voted less than two months after the start of the financial year.

D+

PI-12 Multi-year perspective in budget planning and public expenditure policy

Budget estimates are presented on the basis of economic classification. An analysis of the viability of the external debt servicing was done in the last three years. There is a strategic health document although it is not included in the budget. The PIP and operating budget are prepared separately.

D+

PI-13 Transparency in taxpayer obligations and liabilities

The administrations have unlimited discretionary power. Difficult access to incomplete and costly information. There is a redress procedure, but it does not ensure transparency, efficiency, and equity.

D+

PI-14 Effectiveness of measures for taxpayer registration and for assessment of taxes and customs duties

The registration system is controlled annually, but sanctions are not effective. Penalties are ineffective. Controls (especially customs controls) are not carried out systematically.

D+

PI-15 Effectiveness in collection of tax and customs duties

No reliable data provided, but the collection rate seems to be below 60 percent. Transfers of collections to the Treasury at least each month, except for transfers from big public enterprises outside the normal procedure. No reconciliation of liquidations and arrears.

D

PI-16 Predictability in the availability of funds for commitment of expenditures

No cash flow plan. Ministries do not have reliable information on the effective availability of resources during commitment of expenditures. Significant budget adjustments during the financial year are relatively frequent.

D

TECHNICAL ANNEX II Page 2/ 2

PI-17 Monitoring and management of cash, debts and guarantees

Reconciliation of the external debt each year. No consolidation of bank balances owing to the structure of the revenue sharing system. Loans and guarantees are approved by a body, but without a defined policy.

D+

PI-18 Effectiveness of payroll controls

Files are not reconciled and their integrity is compromised. Updates are more than three months late; retroactive adjustments are many. No auditing of files during the last three years.

D+

PI-19 Competition, optimal use of resources and controls in procurement

No data on public contracts. No registration and claims processing mechanisms.

D

PI-20 Effectiveness of internal controls for non-salary expenditure

Commitment control measures exist; they are partially effective but do not cover all expenses, and are frequently violated. Other areas (service provision) lack fundamental procedures Systematic application of simplified procedures and the basic rules are not respected.

D

PI-21 Effectiveness of the internal auditing system

The internal audit system is not operational. D

PI-22 Regularity and respect of accounts reconciliation operations

Bank reconciliations are not carried out. No reconciliation and adjustment of advance accounts.

D

PI-23 Availability of information on resources received by service delivery units

The systems do not produce information. No survey conducted on this point.

D

PI-24 Quality and respect of budget execution reports produced during the year

Quarterly reports on payment order basis only and without data according to administrative classification. Quarterly reports produced in eight weeks. Statistical and non-accounting data; weaknesses are not reported.

D+

PI-25 Quality and timeliness of annual financial statements

The administration does not prepare annual consolidated statements. Annual financial statements produced are available six months from the end of the financial year. The statements have been prepared using the same format since 2006. The accounting standard is known.

D+

PI-26 Scope, nature and monitoring of external audit

More than 50 percent of expenses are verified according to accepted standards and significant problems are raised. The reports are submitted to Parliament less than 8 months after receipt by the CVC. No proof of monitoring of recommendations.

D+

PI-27 Review of the annual budget law by the legislative authority

Parliament exercises control on aggregates and not on budget policies and priorities. There is no formal review procedure. Parliament has only one month for review. Amendment rules exist but they have no limits.

D+

PI-28 Review of external audit reports by the legislative authority

Parliament does not acknowledge receipt of reports, thus no hearing or monitoring.

D

TECHNICAL ANNEX 3 CONSOLIDATED TABLE OF GOVERNMENT FINANCIAL OPERATIONS (TOFE) (in KMF million)

2007 2008 2009 2010 AGGREGATES

Revenue and grants Revenue Grants Net expenditures and loans Current expenditures Capital expenditures Primary balance Overall balance (payment order) Change in net arrears and rescheduling Overall balance (cash basis) Errors or omissions Financing Foreign (net) Drawings PIP identified Amortization Exceptional financing Ongoing foreign debt discussion Arrears (principal) Domestic (net) Bank financing Central Bank Of which IMF Of which Reimburs. ADB arrears Of which Advances Non-bank financing Financing need (+ = under financing) Memorandum items Nominal GDP

33 945 37 314 27 040 10 274 -3 662 -3 369 -2 289 -5 657 213 5 444 4 867 1 009 -2 169 12 190 0 -6 162 577 101 -10 0 0 -10 476 0 167126

Prog 38 332 38 978 27 735 11 243 -4 803 -646 578 -68 0 68 -1 478 375 -2 515 0 364 298 1 546 1 783 1 783 1 762 0 21 -238 0 178038

Proj 41 965 46 338 29 855 16 483 -4869 -4 373 2 132 -2 241 -211 2 452 536 1 088 -2 164 0 766 846 1 916 1 320 1 320 1 826 0 0 596 0 176334

Prog 35 803 40 801 28 498 12 303 -3 180 -4 998 -1 574 - 6572 0 -2 650 -2 151 402 -2 255 0 0 -298 -499 -261 -261 0 0 -261 -238 9 221 192824

Proj 38 271 40 513 29 509 11 004 --3 074 -2 241 -2 478 -4 719 0 -3 735 -2 767 397 -2 534 0 216 -846 -968 -284 -284 0 0 -284 -684 8 454 188261

Proj 38 809 42 997 29 547 13 450 -2 337 -4 189 -640 -4 829 0 -2 532 -1 893 422 -2 314 0 0 0 -639 45 45 0 0 45 -684 7 361 200 017