IMF Country Report No.

24/5

UNION OF THE COMOROS

SELECTED ISSUES
January 2024
This paper on the Union of the Comoros was prepared by a staff team of the
International Monetary Fund as background documentation for the periodic consultation
with the member country. It is based on the information available at the time it was
completed on December 1, 2023.

Copies of this report are available to the public from

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© 2024 International Monetary Fund

 UNION OF THE COMOROS
SELECTED ISSUES
December 1, 2023
Approved By Prepared by Ibrahim Ahamada, Guy Dabi Gab-leyba, Laila
The African Drissi Bourhanbour, Pegdewende Nestor Sawadogo, and Rima
Department Turk (all AFR) with contributions from Benjamin Robert Kett
(SPR, former AFR). The Selected Issues Papers benefitted from
helpful comments from IMF departments.

CONTENTS

COSTING AND FINANCING OF SOCIAL DEVELOPMENT GOALS IN COMOROS_________ 4

A. Executive Summary ______________________________________________________________________ 4
B. Context __________________________________________________________________________________ 4
C. Costing Model for Social, Human Capital, and Infrastructure SDGs ______________________ 5
D. Financing for the SDGs _________________________________________________________________ 11
E. Policy recommendation _________________________________________________________________ 14

FIGURES
1. Status of SDGs, 2023 _____________________________________________________________________ 5
2. SDS: Selected Education Costing Indicators 2020 ________________________________________ 6
3. Selected Health Indicators _______________________________________________________________ 7
4. SDS: Selected Health Costing Indicators 2020____________________________________________ 8
5. SDS: Selected Access to Electricity Indicators 2020 _______________________________________ 9
7. SDS: Selected Water Supply Indicators __________________________________________________ 10
8. Infrastructure Capital ____________________________________________________________________ 11
9. Human Capital Accumulation ___________________________________________________________ 12
10. Total Revenues Under the ECF Consistent Scenario ___________________________________ 13
11. General Government Debt _____________________________________________________________ 13

TABLE
1. Summary of Additional Expenditures by 2030 __________________________________________ 10

References_________________________________________________________________________________ 16
UNION OF THE COMOROS

TRADE LIBERALIZATION AND TAX REVENUE MOBILIZATION IN COMOROS _______________ 17

A. Executive Summary ___________________________________________________________________________ 17
B. Context _______________________________________________________________________________________ 17
C. Overview of WTO Accession and the Comorian Progress _____________________________________ 19
D. Advantages and Challenges of the WTO Accession ___________________________________________ 21
E. Estimation of Import Demand Elasticity _______________________________________________________ 24
F. Revenue Replacement Following Trade Liberalization _________________________________________ 26
G. Policy Options and Concluding Remarks______________________________________________________ 27

FIGURES
1. Trade Tax Revenue-GDP Ratio in Comoros and Comparable Countries _______________________ 18
2. Comparative Evolution of Imports Tariffs and Trade Tax Revenue in Selected Small
Satates __________________________________________________________________________________________ 19
3. Process of Accession to the WTO _____________________________________________________________ 20
4. Overall Revenue Loss with Respect to Various Import Demand Elasticity Assumptions _______ 25

TABLES
1. Gravity Model Estimates ______________________________________________________________________ 25
2. Effects of Trade Tax on Domestic Tax Revenue in Small States ________________________________ 26

APPENDIX
I. List of Variable and Countries__________________________________________________________________ 31

References_______________________________________________________________________________________ 29

STATE-OWNED ENTERPRISES: OIL AND GAS IN COMOROS _________________________________ 32

A. Executive Summary ___________________________________________________________________________ 32
B. Introduction___________________________________________________________________________________ 32
C. Principal Imports by SCH______________________________________________________________________ 33
D. SCH’s Contribution to Government Revenue _________________________________________________ 34
E. Pricing structure and impact on SCH losses ___________________________________________________ 36
F. Fuel subsidies _________________________________________________________________________________ 40
G. SCH financial position ________________________________________________________________________ 42
H. Recommendations ____________________________________________________________________________ 44

FIGURES
1. Brent Crude Oil Prices _________________________________________________________________________ 32
2. Imports in Millions of Liters ___________________________________________________________________ 33
3. Import Cost per Liter __________________________________________________________________________ 34
4. Comparative Price Trends _____________________________________________________________________ 38
5. Fuel Prices in August 2023 ____________________________________________________________________ 39

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6. Distribution of Benefits of Fuel Subsidies in Sub-Saharan Africa ______________________________ 42

TABLES
1. SCH Activities _________________________________________________________________________________ 33
2. Revenue from SCH. ___________________________________________________________________________ 35
3. Non-TIPP Taxes Dividends Paid by SCH as % of Totals Paid by SOEs__________________________ 35
4. TIPP in KMF Billions according to Different Sources, 2022_____________________________________ 36
5. Union of the Comoros: Price (5) and TIPP per Liter ____________________________________________ 37
6. Elasticities: Repercussions of June 2022 Price Changes Calculated for the
Period 2021-2022 _______________________________________________________________________________ 39
7. Evaluation of Losses ___________________________________________________________________________ 40
8. Evaluation of Non-TIPP Losses in Cost Prices _________________________________________________ 40
9. Fuel Price Subsidy as % of GDP _______________________________________________________________ 41
10. Cost of Subsidy Represented by Forgone TIPP on Diesel Sold to SONELEC __________________ 41
11. Ratio between Energy Expenditures by the Wealthiest Household and the Poorest
Households in Sub-Sharan Africa ________________________________________________________________ 41
12. SCH Debt Indicators on December 31, 2022 _________________________________________________ 42

References_______________________________________________________________________________________ 48

PROMOTING FISCAL GOVERNANCE IN COMOROS BY ENHANCING TRANSPARENCY AND

CITIZEN PARTICIPATION ______________________________________________________________________ 49
A. Executive Summary ___________________________________________________________________________ 49
B. Context _______________________________________________________________________________________ 49
C. Challenges in Fiscal Transparency and Citizen Participation ___________________________________ 51
D. Recommendations ____________________________________________________________________________ 55

FIGURES
1. Relation Between Fiscal Transparency and Relevant Other Variables __________________________ 50
2. Ranking of Comoros Compared to Relevant African Countries in Terms of Fiscal
Transparency and Public Participation in 2021 __________________________________________________ 53
3. Debt Reporting Heat Map: 2021 ______________________________________________________________ 55
4. Proposed Reform Timetable Calendar to Improve Fiscal Transparency and Public
Participation in Fiscal Process____________________________________________________________________ 57

TABLES
1. Evolution of IBP Index in Comoros ____________________________________________________________ 51
2. Publication of Documents Related to the Fiscal Process in Comoros __________________________ 52

References_______________________________________________________________________________________ 59

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COSTING AND FINANCING OF SOCIAL DEVELOPMENT

GOALS IN COMOROS1
A. Executive Summary

Comoros is committed to achieve Social Development Goals, but progress has been limited. The
substantial cost of achieving SDG, 18.8 percent of 2030 GDP, is due to the country’s very low starting
point and the inherent difficulties associated with its small size – that limited economies of scale in
delivering public services. The persistently very weak domestic resources are another reason for the
substantive cost of achieving SDGs. The ongoing commitments of the authorities in the ECF program,
with a focus on enhancing domestic revenue mobilization is a key to achieve better outcomes in this
area. The fiscal space generated by the program could be both used to restore debt sustainability and
to accelerate the achievement of SDGs in Comoros.

B. Context

1. Comoros is committed to achieving the Sustainable Development Goals (SDGs), but

progress has been limited. In the 2023 SDGs ranking, Comoros stands at 154 out of 166, and is the
lowest ranked among small developing states. The evaluation reveals limited progress in 60 percent
of the SDGs, with 26.7 percent showing a decline. Life expectancy, standing at 67.4 years, falls below
the SDG red threshold 2 of 70 years, positioning Comoros among countries with lower life
expectancy rates globally (Figure 1). Access to improved water sources is limited, with 25 percent of
the population lacking such access, and with no progress since 2007. Comoros faces significant
difficulties in establishing an efficient solid waste management system, jeopardizing environmental
sustainability and public health.

2. Comoros has made limited progress in reducing poverty in recent years. The nation's
poverty rate stands at 36 percent. 3 During the COVID-19 pandemic, Comoros managed to lower its
poverty rate mainly due to increased remittances and the successful implementation of the World
Bank-funded cash transfer programs. However, the negative consequence from COVID-19 may
materialize later on human capital accumulation as the most recent statistics have shown a lower
school enrollment rate in 2022-23 and a lower vaccination rate during the pandemic.

1 Prepared by Laila Drissi Bourhanbour. Helpful support provided by Mogues Tewodaj, Bounader Lahcen and Kim

Yujin.
2 The term "red threshold" refers to a critical level or limit that, if surpassed, indicates inadequate progress or failure

to meet a specific target or indicator within the SDGs methodology.

3 Poverty headcount ratio at $3.65/day (2017 PPP, percent)

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Figure 1. Union of the Comoros: Status of SDGs, 2023

Source: SUSTAINABLE DEVELOPMENT REPORT 2023

3. This paper uses two models—a costing model and a financing model—to illustrate the
large costs of reaching some of the SDGs related to social, human capital and infrastructure
by the target year of 2030 and to highlight particular cost drivers. The cost to achieve the SDG
outcomes of high-performing peers is about 18.8 percent of 2030 GDP. If the authorities tried to
achieve the SDGs by 2040, the additional annual cost is estimated between 5.7 and 7.6 percent of
GDP per year depending on the policy scenario.

C. Costing Model for Social, Human Capital, and Infrastructure SDGs

4. The costing methodology requires comparing Comoros with peer countries. The per
capita costs of public goods tend to be higher in small countries, where a limited taxpayer base
must cover these expenses. For example, small developing states on average allocate a higher
proportion of their GDP to education and health, standing at 9.8 and 7.2 percent respectively
compared to the world average of 6.5 and 6,9 percent. Given this, this study considers in Comoros’
peer group the best performers among the small developing states (SDS) to provide a more
accurate assessment of the costs of achieving SDGs 4.

4 The sample is chosen among the SDS of the WB and the IMF: Antigua and Barbuda, Bahamas, The, Barbados, Belize,

Bhutan, Botswana, Brunei, Darussalam, Cabo Verde, Comoros, Djibouti, Dominica, Equatorial Guinea, Eswatini, Fiji,
Gabon, Gambia, The. Grenada, Guinea-Bissau, Guyana, Jamaica, Kiribati, Lesotho, Maldives Mauritius, Micronesia,
Marshall Islands, Namibia, Nauru, Palau, Samoa, Seychelles, Solomon Islands, St. Kitts and Nevis St. Lucia, St. Vincent
and the Grenadines, Suriname, São Tomé and Príncipe, Tonga, Timor-Leste, Trinidad and Tobago, Tuvalu, Vanuatu.

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Education

5. Progress in achieving better education outcomes remains limited. The 2023 SDG
evaluation does not include the assessment of the “SDG4 quality of education” due to missing data
(see Figure 1). The most recent data, going up to 2018, indicate that within the SDS, Comoros is
ranked second to last regarding access to pre-school and net enrolment in primary education. These
data do not capture the impacts of Cyclone Kenneth in 2019, which destroyed or partially destroyed
38 percent of the country's classrooms and school closures during the COVID-19 pandemic. Indeed,
following the pandemic, the Ministry of Education noted a significant drop in enrollment rates for
pre-primary and primary levels 5, consistent with UNICEF's warnings about extended school closures
discouraging children from returning to school.

Figure 2. SDS: Selected Education Costing Indicators 2020

Source: IMF SDG Costing Tools, 3rd Edition (2022)

6. Educational expenditure in Comoros is among the lowest in SDS, amounting to 3.8

percent of GDP, while household contribution to education spending is similar to the SDS average
(33.5 percent compared to 33.9 of total spending on education). Comoros boasts a favorable
student-to-teacher ratio of 15.6 compared to the high-performing SDS' average of 18.6,
overperforming the international standards. However, teacher wages in Comoros, 1.8 of the GDP per
capita, stand at only half of the SDS average, which may negatively affect teachers’ motivation and,
consequently, education quality. Moreover, capital spending on education in Comoros only stands
at 36 percent of the average SDS composition, which could hinder the availability of suitable
infrastructure and educational facilities.

7. Additional spending needs to achieve SDG4 (education) by 2030 are estimated to be

about 4.2 percent of 2030 GDP. The required spending reflects both a need to increase the
teacher wage bill to improve teacher productivity and to raise capital spending for school
construction and infrastructure improvement, such as the availability of bathrooms, electricity,
drinking water, and school boundary walls. Two mitigating factors have helped contain these
expenditures:

5 Rapport final des consultations nationales en préparation du sommet sur la transformation de l’éducation (2022).

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(i) Aligning the currently favorable student-to-teacher ratio to the average of the SDS would not
require hiring more teachers. Keeping the current ratio would have raised the additional
financing by 0.4 percent of GDP. This favorable ratio is most probably attributed to a “ghost
workers” presence in the education system. Authorities are actively working to address this
concern within the ongoing ECF program.

(ii) The demographic dividend resulting from a lower proportion of children requiring enrollment in
schools translate into a saving of 0.5 percent of GDP.

Health

8. Health outcome indicators have improved but remain well below their thresholds. Life
expectancy improved by five years between 2000 and 2019, but at 67 years it remains well below the
green threshold 6 of 80 years and all the mother and child indicators, despite improving, are still
exceeding the green threshold (Figure 3). While the COVID-19 pandemic has claimed relatively
fewer victims in Comoros, it remains to be seen if there will be long-run consequences related to the
low vaccination rate.

Figure 3. Union of the Comoros: Selected Health Indicators

Source: IMF SDG Costing Tools, 3rd Edition (2022)

9. Health spending in Comoros aligns with the average among SDS. However, the ratio of
doctors per 1000 habitants is among the lowest in the sample. Spendings primarily reflects a
higher-than-average private expenditure: 66.4 percent of total health spending. However, this high
level of private spending does not necessarily correlate with superior health outcomes. It is largely
driven by health spending abroad, stemming from a shortage of high-quality domestic health
services. This was one of the motivations for the government to embark on the major project to
construct the El Maarouf national hospital, which has been the main driver of higher infrastructure
spending in the health sector.

10. The additional spending needs in health care are about 4.3 percent of 2030 GDP. To
achieve higher performance in the health SDG, the number of doctors should be increased tenfold.

6 An indicator is green if it meets the target of the SDG methodology.

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The number of other medical personnel, currently far below the high-performing countries, should
be tripled from its current level. The only cost-mitigating factor here is the doctors’ wages that could
be limited to 7.3 instead of 9.6 percent of per capita GDP, as in high performers. However, the last
WB report on public expenditure 7 point to a very low productivity of staff in the health sector both
in the public and private sector 8 as manifested from the very low service use. Tackling this issue
could be the most important cost-mitigating factor.

Figure 4. SDS: Selected Health Costing Indicators 2020

Source: IMF SDG Costing Tools, 3rd Edition (2022)

Electricity

11. While access to electricity is close to the average of the SDS, the per capita electricity
consumption is the second lowest in the sample. Inadequate infrastructure for power generation
and distribution leads to frequent power cuts and an unreliable energy supply. Despite an installed
generation capacity of approximately 44 MW, utilization is hampered by operational limitations and
inadequate maintenance practices. Consequently, the country's energy consumption stands merely
at 0.2 ton of oil equivalent per capita, significantly below its potential. The sector faces a structural
challenge due to insularity and the small size of the market which does not promote economies of
scale. The cost of electricity in Comoros is among the highest in Africa (0.30 US$/kWh), mainly due
to the inefficiency and amortization of the diesel generators. The high production costs are
exacerbated by energy losses during the distribution exceeding 50 percent, the highest metrics of
such losses on the continent. The lack of cost recovery, with merely about one-third of invoiced
energy bills recuperated, constrain the national electricity company's financial situation, hindering its
capacity to invest in infrastructure upgrades and expansion.

12. Although Comoros has the potential for renewable energy, especially solar and wind,
the utilization of these resources is still embryonic. Following the community’s rejection of a
heavy fuel oil project in 2015, investments have focused on clean energy, reflecting both global

7 World Bank. 2023. 2022 Comoros Public Expenditure Review.

8 “A health professional in a public facility sees, on average, fewer than 2 patients a day. Productivity is slightly higher
in the private sector, where providers see, on average, 4 patients per day, which is still extremely low. Similarly, the
country’s 587 midwives assisted 15,061 maternal deliveries in 2020, representing about 2 deliveries per midwife per
month.” World Bank (2023).

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trends and local preferences for sustainable energy solutions. The two first solar energy stations9
were implemented by two independents private producers and have added 5 MW to the total
energy capacity of the country but they have very high operating costs due to inadequate
technology.

Figure 5. SDS: Selected Access to Electricity Indicators 2020

Source: IMF SDG Costing Tools, 3rd Edition (2022)

13. To achieve SDG7 by 2030, the associated cost is estimated at 3.7 percent of GDP per
year. This estimate reflects the expansion of electricity access from the current 86.7 percent to 100
percent of the population and elevating the average electricity consumption per user from 88.3 kWh
to 1,463.9 kWh, aligning with the average consumption of the sample group. The investment costs
per kW of energy produced, which include expenses for generation, transmission, and distribution
correspond to investment cost of the ongoing solar energy project of World Bank's. Thus, the
additional costs factor in cost of solar energy.

Road and Water

14. The road network in the Comoros is relatively limited, both in terms of coverage and
quality. Major towns and ports are connected by main roads, but many of them are in need of
maintenance and upgrade. Paved roads are concentrated primarily in urban areas, while rural
regions are often serviced by unpaved tracks that can become impassable during the rainy season.
The narrow and winding nature of many roads, combined with occasional steep terrains, makes
travel time-consuming. Poor quality infrastructure, mostly roads, and related services constitute one
of the main constraints to economic diversification in Comoros. The rehabilitation and, to a lesser
extent, extension of the national road network will contribute to the development of the tourism
and fishing sectors identified as potential growth poles for the national economy. Increasing rural
access from the currently low 24.3 percent to 75 percent by 2030 will require investing the

9The first station started operation in 2020 in Anjouan Island, and the second 2021 in Grand Comores. The second
project was financed on online lending platform.

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equivalent of 4.7 percent of GDP every year from now to 2030 on about 838 additional kilometers of
all-weather roads which is more than doubling the current network.

15. In the 2023 National voluntary report on SDGs achievement10, Comoros acknowledged
substantial barriers in achieving SDG6 targets as universal access to drinking water is very low
at 15 percent. The level of access has not improved since 2012 and access to sanitation facilities is
almost non-existent. Compared to the sample of peer SDS, the performance of Comoros is among
the lowest regarding the safely managed water supply at home (see figure 7). The inherent scarcity
of water resources in the archipelago is further exacerbated by stormy episodes and rising sea levels
due to climate change, leading to saline intrusion and water turbidity after storms. Aiming to
provide safely managed water and sanitation for all would require investing the equivalent of 1.92
percent of GDP every year from now to 2030.

Figure 7. SDS: Selected Water Supply Indicators

Source: IMF SDG Costing Tools, 3rd Edition (2022)

Total Costing

16. Taken together, the cost for Comoros to achieve the human capital and infrastructure
SDG outcomes of high performing peers by 2030 is 18.8 percent of GDP per year. This exercise
highlights the Table 1. Union of the Comoros: Summary of Additional Expenditures
exceptionally low by 2030
starting point and (% of GDP)
extraordinary Education 4.2
spending that would Health 4.3
be required to meet
Road 4.7
the SDGs by 2030 as
Water and Sanitation 1.9
well as persistent
very weak domestic Electricity 3.7
resources. This kind Total 18.8

10Commissariat General au plan (2023). Rapport national volontaire sur la mise en œuvre des ODD en Union des
Comores.

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of spending is out of reach for the country, given limited resources and debt sustainability
considerations. In the next section, we consider feasible macroeconomic and financing scenarios and
explore the timeframe over which SDGs could be reasonably achieved in Comoros.

D. Financing for the SDGs

17. Although it is unlikely that Comoros could achieve the human capital and
infrastructure SDGs by 2030, there are scenarios under which such progress could be achieved
over a longer timeframe. The SDG financing tool (Benedek, et al, 2021) is a framework that helps
to identify such scenarios. It evaluates the financing needed to achieve the SDGs in a
macroeconomically consistent and dynamic setting. The tool allows the user to take as given the
SDGs’ needs as outlined in the previous section and assesses the economy’s capacity to generate
alternative financing options, including domestic revenue mobilization, private sector funding, and
support from the international community. In particular, the framework gauges whether and how
the SDGs can realistically be achieved by 2030 and, if not by 2030, then by when. It then uses
different scenario assumptions to determine how large the remaining financing gap is, on average,
between the current and target years. The tool is dynamic, with projections up to 2053, and with a
production function that assures that output is consistent with spending on human capital
(education and health) and physical capital (roads, electricity, and water and sanitation). The
simulations include a set of accounting identities throughout the real, fiscal, and external sectors to
ensure macroeconomic consistency. 11

18. We explore two scenarios: the non-program and the ECF scenarios:

• The non-program scenario Figure 8. Union of the Comoros: Infrastructure Capital

reflects the macroeconomic (In percent of GDP)
assumptions at the completion
of the Staff-Monitored Program
(IMF Country Report No.
23/143). Under this scenario, a
gradual fiscal consolidation
would start in 2024, reducing
the deficit by about 3.5 percent
of GDP by 2027. But substantial
financing gaps would emerge
in 2023 and public external Source: IMF-SDG financing tool
debt rises to around 40 percent
of GDP over the medium term, reflecting low expected revenue, the restructuring of SNPSF, and
debt service obligations from non-concessional borrowing. Under this scenario, Comoros would

11Few caveats should be acknowledged. First, as is the case in exercises using dynamic models, the model results are
sensitive to the assumptions. As such, the model results should be regarded as illustrative only. Second, the model by
design provides an estimate of the financing needed to support the estimated costs to achieve the SDG thresholds
but is not a policy prescription.

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not be expected to reach the SDGs by 2053 (the final year considered by the financing tool).
Alternatively, the country could achieve the SDGs by 2040, with additional annual spending of
7.6 percent of GDP per year.

• The ECF scenario builds on the SMP

scenario by assuming a Figure 9. Union of the Comoros: Human Capital
progressively higher tax revenue by Accumulation
0.3 percent of GDP each year, during (In percent of GDP)
2023-43, from the very low level of
8.6 percent in 2023 to 14.6 in 2043.
The increase is achieved through: (i)
phasing out of tax exemptions,
commencing with the elimination of
the sales tax exemption for
construction materials, (ii)
enhancing the efficiency of large
and medium taxpayers' units, (iii)
expanding the taxpayer base by 10
percent within the large and Source: IMF-SDG financing tool
medium taxpayer offices and (iv)
strengthening risk management within the Customs administration and finalizing the customs
procedures framework. The active program scenario affords the authorities greater fiscal space,
that is used both to restore the debt sustainability and to build human and capital infrastructure
(see figure 8 and 9). Under this scenario, it would still be impossible to reach the SDG before
2053 but the cost to achieve the SDGs by 2040 decline to 5.7 percent of GDP per year.

19. The remaining financing gap from the ECF consistent scenario could be mainly fill with
grant and concessional financing to achieve the SDG by 2040 while maintaining debt
sustainability (figure 10 and 11):

• Education: the sector used to mobilize around 1.4 percent of GDP as annual financing in the
form of grants 12. Despite the challenges linked both to Kenneth cyclone and the COVID-19
pandemic, grant mobilization has remained sluggish, constrained mainly by the capacity
absorption of the country. Recently a local group of education partners 13 has committed to help
Comoros achieve the SDG4. It is expected that the financing will be as in the past only grants.

• Health: Prior to the COVID-19 pandemic, the sector resource mobilization from partners was
limited to 0.6 percent of GDP. This contribution jumped to 1.7 percent in 2020 and 3.4 percent in
2021. It is expected that partners’ support to Comoros will continue especially from the multiple
UN system agencies as well as World Bank and Agence Française de Développement (AFD).

12 Data on grants are from OECD (2023), "Detailed aid statistics: Official and private flows", OECD International

Development Statistics (database), https://doi.org/10.1787/data-00072-en.

13 June 2023. The group include AFD, UNICEF, World Bank, Dubai Care.

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Beside the ongoing disbursements for the El Maarouf Hospital included in the baseline,
remaining additional cost would be financed by grants.

• Road: Grant financing to this sector is limited (0.3 percent of GDP per year). However, the sector
benefits from concessional loan mainly from African Development Bank (AfDB) and Saudi Arabia.
So, this sector is expected to benefit from small additional concessional loans and additional
contribution from the private sector. According to anecdotal information the involvement of the
diaspora in the infrastructure of the villages including roads is crucial (remittance is around 21.5
percent of GDP in 2022).
Figure 10. Union of the Comoros: Total Revenues
• Water and sanitization: Significant
Under the ECF Consistent Scenario
improvement of the situation
(In percent of GDP)
could be expected from the UNDP
project aiming to ensure climate
resilient water supplies on the
islands. With a budget of
approximately USD 60.75 million
as grants financing, the project
seeks to bolster the resilience of
water supply infrastructure for
drinking and irrigation and directly
benefit around 470,000 residents.
In addition, 800,000 individuals are
projected to reap the rewards of Source: IMF-SDG financing tool
enhanced national and sub-
national climate-resilient water Figure 11. Union of the Comoros: General
governance in Comoros. Government Debt
(In percent of GDP)
• Energy: The major ongoing
project, the Comoros Solar Energy
Access (CSEA), is financed by the
World Bank, with an ambition to
bolster the national energy grid
with an additional 9MWc 14 of solar
energy and a 19MWc storage
mechanism. The project has a total
cost of USD 40 million, with half of
the funding provided as a grant
and the other half as a loan on
Source: IMF-SDG financing tool
IDA terms. Additionally, the

14MWc is the equivalent of MW for solar energy. MW is a general unit of power, while MWc is specific to the peak
capacity of solar photovoltaic technology. The "c" in MWc stands for "peak," indicating that it is a measure taken
under optimal conditions.

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UNDEP is currently developing another project focused on geothermal energy, which aims to
provide a sustainable long-term solution for energy provision in Comoros. Based on available
information, it is highly likely that the project will be fully funded by grant from a range of
official donors, including the European Union (EU), Agence Française de Développement (AFD),
and the Fonds d’Energie Durable pour l’Afrique.

Figure 12. Union of the Comoros: GDP per Capita

20. Closing the financing gap by
(In USD 2022)
2040 will also require additional
efforts from the authorities. The scope
for improvements in the efficiency of
public spending is significant, the fiscal
space created by fiscal reforms can be
directed toward spending in SDG
sectors. Private investments could also
fill the gap, in the alternative scenario.
Private investments, especially in the
villages would also help to achieve the
SDGs; in the alternative scenario, we
assume an additional spending from
private investments of 2 percent of GDP,
which would be possible thanks to the
high influx of remittances (21.5 percent
Source: IMF-SDG financing tool
of GDP in 2022) and the higher level of
GDP per capita (figure 12).

E. Policy recommendation

21. The foregoing exercises highlight the very large gaps towards the SDGs for Comoros
and the urgent need to begin addressing them to improve the livelihoods of the Comorian
population. While it is unlikely that Comoros would be able to attain the SDGs by 2030 or even
2040, it is crucial that actions are taken:

• Enhancing efficiency in delivering public services is crucial. Addressing longstanding challenges

such as ghost employees and absenteeism, particularly in education and health sectors stands
out as a significant factor in mitigating costs.

• For the energy sector, a comprehensive strategy is needed to achieve the SDG07 “Affordable
and clean energy”. This strategy needs to be developed with the assistance of international
experts and partners as the level of complexity in this sector is very high including in contract
negotiation and planification.

• Domestic policies must prioritize creating fiscal space for investments in human capital and basic
infrastructure. Under the authorities' economic program supported by the ECF, this includes

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sound macroeconomic management, domestic revenue mobilization, and responsible financing

strategies.

• Close engagement with international partners can further mobilize budget support and project
financing for priority areas. Given the fragile context and already elevated debt sustainability
risks, grant financing is the more appropriate form of support.

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References

Benedek, D; E. Gemayel, A. Senhadji, and A. Tieman. “A Post-Pandemic Assessment of the

Sustainable Development Goals.” Fiscal Affairs Department, International Monetary Fund,
2021.

Carapella, Piergiorgio, Tewodaj Mogues, Julieth Pico-Mejía, and Mauricio Soto (2023). “How to
Assess the Spending Needs of the Sustainable Development Goals: The 3rd Edition of the
IMF SDG Costing Tool,” IMF How-To-Notes Series. International Monetary Fund, Washington
DC.

Commissariat General au plan (2023). Rapport national volontaire sur la mise en œuvre des ODD en
Union des Comores.

Gaspar, Vitor, David Amaglobeli, Mercedes Garcia-Escribano, Delphine Prady, and Mauricio Soto.
“Fiscal Policy and Development: Human, Social, and Physical Investment for the SDGs.”
International Monetary Fund, 2019.

Sachs, J.D., Lafortune, G., Fuller, G., Drumm, E. (2023). Implementing the SDG Stimulus. Sustainable
Development Report 2023. Paris: SDSN, Dublin: Dublin University Press, 2023.
10.25546/102924

World Bank. 2023. 2022 Comoros Public Expenditure Review.

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 UNION OF THE COMOROS

TRADE LIBERALIZATION AND TAX REVENUE

MOBILIZATION IN COMOROS1
A. Executive Summary

Trade liberalization could be associated with higher or lower trade tax revenue. For countries that rely
heavily on trade tax as a source of revenue mobilization, trade liberalization could potentially lead to
lower revenue. To mitigate the revenue losses in the context of Comoros’s ongoing WTO accession
process, immediate policy options could include removing tax exemptions and strengthening tax
revenue administration to improve tax collection and combat tax fraud. The policy options over the
longer term could include increasing domestic direct taxes to replace trade taxes and adopting a more
efficient goods and service taxation system. Finally, any revenue replacement strategy would not yield
results without the lynchpin of sound macroeconomic and governance policies.

B. Context

1. Trade liberalization brings many advantages for countries by increasing consumer

choice and welfare, economic growth, and efficiency of resources allocation. Evidence of this
abounds in the literature, including some as follows. Sachs and Warner (1995) demonstrate that
trade openness is associated with higher economic growth in many developing countries over the
1970-1989. This finding supports Dollar (1992) who argue that trade liberalization strongly improves
economic growth in a large sample of 95 developing countries over the period 1976-1985. Similarly,
Edwards (1992) examines cross-sectional data for 30 developing countries from 1970 to 1982 and
finds a strong positive correlation between trade liberalization and growth. Wacziarg and Welch
(2008) also demonstrate that trade liberalization fosters economic growth in developing countries
partly through its positive effect on investments. Relying on a sample of developing countries, Dollar
and Kraay (2001) show that trade liberalization leads to faster growth and poverty reduction in
developing countries. Finally, Frankel and Romer (2017) show that trade liberalization robustly and
positively affect income even though this effect is only moderately statistically significant.

2. However, trade liberalization alone is not enough to improve economic growth

(Krueger, 1998; Chang et al., 2005). Trade liberalization must be supported by sound
macroeconomic policies as well as strong institutions in order to have a positive impact on
economic growth. As highlighted in Vamvakidis (2002), the positive effect of trade liberalization on
growth also appears to depend on the period over which the liberalization took place, with positive
and significant association with growth in 62 countries over the period 1970-1990 but not during
1950-1970.

3. Trade liberalization could also be associated with higher or lower trade tax revenue,
depending on the initial effective levels of tariffs and the elasticity of import demand. The

1 Prepared by Pegdewende Nestor Sawadogo (AFR) with contributions from Benjamin Robert Kett.

INTERNATIONAL MONETARY FUND 17

UNION OF THE COMOROS

evidence for the impact on government revenues of reduced border taxes is mixed, with some
research pointing to an initial decrease in revenues which are only made up for after several
transition years. Ebrill et al. (1999) show that tariff reduction leads to higher trade tax revenue if the
initial tariff rate is high 2because the price elasticities of imports are not constant. Similarly, tariff
reduction may boost tax revenue collection by reducing tax fraud. Trade tax revenue also depends
on the price elasticity of demand for imports. Both Ebrill et al (1999) and Agbeyegbe et al (2006),
show that a higher price elasticity of demand for imports could lead to higher trade tax revenue if
the volume of imports increases following trade liberalization. Over the long term, the revenue
losses may be relatively low. For instance, the benefits of trade liberalization tend to be more
important over the long term given that structural changes (industrialization, technologies
advancements, etc.) are important drivers of economic growth. Accordingly, the elasticities for
import demand tend to be higher over the long term given the potential positive effects of trade
liberalization on economic growth.

4. For countries that rely heavily on trade tax as a source of revenue mobilization,
trade liberalization
could potentially Figure 1. Union of the Comoros: Trade Tax Revenue-GDP
lead to lower Ratio in Comoros and Comparable Countries
revenue. Trade taxes
constitute an
important component
of tax revenue in
developing countries,
particularly in small
developing states
(SDS), given these
countries’ high
dependence on
international trade. Source: IMF Staff.

The strong reliance of SDS on trade tax may be explained by the small market size, the lower
international competitiveness, and the narrow tax base 3. Limited institutional capacity (weak
supervision of the staff, weak management, vulnerability to corruption) may also explain the
strong reliance on trade taxes which are relatively easier to administer. For SDS, trade
liberalization and reductions of trade taxes have been associated with lower trade tax revenue
(Peters, 2002; Agbeyegbe et al., 2006) and could pose a significant challenge for revenue
mobilization. In Comoros, while the average trade tax to GDP ratio (3.69 percent over 1990-
2022) has been among the lowest among the Sub-Saharan African SDS, the trade tax represents
a major share of total tax revenue in the country (average of 53.94 percent over 1990-2022,

2 They also show that trade liberalization raises trade tax revenue by reducing tariff dispersion (lowering the higher

tariffs and increasing the lower tariffs rates).

3 The high level of informality, the higher dependency ratio, and the strong reliance on agriculture sector, which is

difficult to tax, lead to a narrow tax base in developing countries.

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 UNION OF THE COMOROS

Figure 1). Figure 2 shows the evolution of imports tariffs and trade tax for selected small states
(comparable to Comoros) that have acceded the WTO and seen lower trade tax revenues along
with the lower import tariffs rates.

Figure 2. Union of the Comoros: Comparative Evolution of Imports Tariffs and

Trade Tax Revenue in Selected Small States

Source: IMF Staff.

5. This paper evaluates the potential impact on trade tax revenue in Comoros in the
context of its ongoing accession to the WTO. It also discusses trade tax revenue replacement by
domestic tax revenue and suggests some policy options to mitigate the potential negative effects of
trade liberalization on tax revenue in the country. The rest of the paper is organized as follows:
Section 2 presents an overview and progress of Comoros accession to the WTO. Section 3
summarizes the advantages and potential revenue loss from Comoros accession to the WTO.
Section 4 describes the estimates of import elasticities based on the gravity model. Section 5
discusses trade tax revenue replacement strategies. Section 6 suggests some policy options and
concludes.

C. Overview of WTO Accession and the Comorian Progress

6. The WTO currently has 164 member countries and 24 more are in the accession
process, including Comoros. 4 Joining the organization necessitates signing up to a wide-ranging
set of rules which aim to create a balanced playing field with respect to trade competition between
countries, as well as to make trade policy predictable and transparent. The accession process has
numerous steps which can be exigent and necessarily take time. 36 countries have acceded since the

4Number of member countries: WTO ¦ Members and Observers. Acceding countries: WTO | accession - Summary
Table of Ongoing Accessions.

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UNION OF THE COMOROS

founding of the WTO in 1995, with the time taken varying from two years and ten months to 15
years and five months. 5 Some countries have still not successfully acceded despite having opened
applications in 1995. The process, presented in Figure 3, consists primarily of negotiations between
existing members and the applicant, meaning conditions for entry can vary by country, and current
members have the final decision to approve accession. The process begins with the establishment of
a country-specific Working Party, consisting of representatives from existing members and the
acceding government, before moving to multilateral and bilateral negotiations which occur
concurrently. The negotiations result in three documents: a draft working party report, a draft goods
schedule, and a draft services schedule, which are then adopted by the Working Party before being
voted on at the annual Ministerial Conference (needing a two-thirds majority of members). 6

7. The WTO contains provisions for Least Developed Countries (LDCs) meant to
streamline the accession process. Comoros is one of eight LDCs currently in the process of
accession. 7 The Marrakesh Agreement (establishing the WTO) states in Article XI that “the least-
developed countries recognized as such by the United Nations will only be required to undertake
commitments and concessions to the extent consistent with their individual development, financial
and trade needs or their administrative and institutional capabilities.” 8

8. Comoros started the accession process in February 2007 and is working to conclude
both multilateral and bilateral negotiations. The Working Party was established on October 9,
2007, with the first formal
meeting occurring in Figure 3. Union of the Comoros: Process of Accession to
December 2, 2016 and the the WTO
most recent formal (Comorian progress in blue)
meeting having taken
place on October 5, 2023.
Multilateral negotiations
are concentrated
principally on the
domestic legislative
reforms that are required
to bring Comoros in line
with the rules of the WTO,
while bilateral
negotiations focus on the Source: WTO

rules for access to the Comorian market for both goods and services from foreign producers.

5WTO | Handbook on Accession to the WTO - CBT - The accession process - the procedures and how they have
been applied - Introduction - Page 1
6 Article XII of the Marrakesh agreement speaks to accession: WTO | legal texts - Marrakesh agreement
7 The list of LDCs is taken from the UN definition: Sub-Committee on Least-Developed Countries (wto.org)
8 wto_agree_art11_oth.pdf

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D. Advantages and Challenges of the WTO Accession

9. The WTO objective is to help its members use trade as a means to raise living
standards, create jobs and improve people’s lives. This objective is underpinned by several
fundamental principles: non-discrimination between trading partners and between domestic and
foreign products or services; opening trade; predictability and transparency; fair competition;
support for LDCs; protection of the environment; inclusion (with respect to women and small
businesses); partnerships with civil society and businesses; and digital trade 9. The IMF aims to
facilitate the expansion and balanced growth of international trade, and to contribute thereby to the
promotion and maintenance of high levels of employment and real income and to the development
of the productive resources of all members as primary objectives of economic policy. The WTO and
the IMF collaborate on many levels including consultation, coordination, training/technical
assistance, and on funding assistance related to trade liberalization 10. Further, the IMF’s role in
ensuring a stable international financial system supports international trade, while smoothly flowing
trade helps contain the risks of balance of payments and financial crises.

10. WTO membership can confer numerous benefits on members. First, membership allows
access to foreign markets for a country’s exports under WTO rules. These include elements such as:
non-discrimination relative to domestically produced goods and services, which allows fair
competition for exports; and “Most Favored Nation” treatment, which means that WTO members
face the lowest tariffs on offer (outside of a preferential trade agreement). Second, membership
provides a predictable rules-based system of trade which reduces risk for the private sector (both
foreign and domestic) and thus can promote investment. Third, members have access to a dispute
settlement mechanism where they can bring claims of unfair treatment to be resolved in an orderly
manner. Fourth, membership provides support (particularly for LDCs) for improving the legal and
institutional framework for trade, bringing countries up to best practice and increasing efficiency.
Fifth, it protects countries against unfair competition from other countries’ exports, for example,
through limiting government subsidies to exporting firms.

11. For some countries including Comoros, the direct benefits from accessing other
markets may be relatively limited. As an LDC, Comoros currently benefits from unilateral (i.e., no
requirement of reciprocation by Comoros) preferential access to a number of large markets: the
European Union through the “Everything But Arms” (EBA) policy; the United States through the
African Growth and Opportunities Act (AGOA); China through duty-free treatment for LDCs; 11 Korea
through the preferential tariff for LDCs; and numerous others. 12 Comoros is also working towards
integrating into the African Continental Free Trade Area, as well as the Common Market for Eastern

9 WTO | What is the WTO? - What we stand for

10 The IMF and the World Trade Organization
11 DUTY-FREE TREATMENT FOR LEAST DEVELOPED COUNTRIES - CHINA (wto.org)
12 There are a total of 24 countries/regions globally offering preferential access to Comorian exports, including the

majority of the world’s largest markets.

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UNION OF THE COMOROS

and Southern Africa (COMESA) both of which greatly increase its potential for exporting tariff free
even without WTO membership.

12. The largest benefits from the WTO accession for Comoros are likely to come from the
upgrading of Comorian legal and institutional frameworks for trade. Such alignment with
international standards confers its own set of benefits. Rules-based systems promote transparency
and ease of doing business that could in turn encourage foreign and domestic investment and
export diversification. Within the multilateral framework, Comoros as a small country would have the
same bargaining power and be subject to the same rules as other members, protecting the country
from potential impositions of disadvantageous trade practices by large trading partners.

13. Reductions in, or eliminations of, certain border taxes can pose particular challenges.
Bilateral WTO negotiations will not likely dramatically impact Comorian customs duties, in part due
to the fact that integration into the COMESA customs union already requires adopting the fixed
common external tariff (CET). However, the elimination of “Other Duties and Charges” (ODCs) at the
border is likely to be a requirement for accession. This requirement is based on the principles of
simplicity and transparency of trading regulations for importers and exporters, as well as avoiding
having nominally low tariffs while charging much higher rates on imports in practice. The Comoros
government has in principle committed to eliminate the “Other Duties and Charges” (ODCs) upon
the country’s accession to the WTO 13.

• ODCs in Comoros amount to around 3.5 percent on most imported goods, and with the
possibility of totaling KMF 3.7 billion (USD 8 million) each year in government revenues. 14
The charges include: a Regional Cooperation Tax (TCR) of 1 percent earmarked for paying
contributions to regional and international institutions; a 1 percent tax on all products except
ordinary rice and petroleum to support the Chamber of Commerce, Industry and Agriculture
(CCIA) and to provide maintenance of warehouses/depots for imports; an import trade tax
(patente d’importation, PI) at 1 percent for importers with a tax identification number and 10
percent for those without; and an advance tax payment (AI) of 1 percent that registered
taxpayers could deduct from corporate taxes at the end of the year.

o Empirical analysis points to a potential loss of roughly 3.86 percent of tax revenue, or
KMF 1.7 billion (USD 3.7 million), in the short-term once the potential for increased
import volumes is integrated. Using a standard import demand trade elasticity with
respect to tariffs sourced from gravity estimates (see next section), we calculate the increase
in import value associated with the elimination of these ODCs. Although the revenue losses
are expected to be visible in the short-term once the potential for increased import volumes

13 Underthe now outdated Order N° 21-060/MFBCB/CAB of November 29, 2021, all ODCs would be eliminated by
2025 with the specific provisions of the Order to be transposed into the Finance Laws of 2023, 2024 and 2025.
143 percent is calculated as the sum of the TCR, CCIA and PI taxes (see later in the paragraph). This assumes
importers have a tax identification number and are paying corporate taxes and hence receive the AI reimbursed at
the end of the year. The maximum rate for an importer without a tax identification would be 14 percent.

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is integrated, they could likely be lower in the long run to reflect structural changes and their
associated benefits for the country.

Next Steps for Comoros

14. Comoros is considered among the most advanced countries on the path to accession,
but some hurdles remain. The requirements for accession, even for LDCs, can be demanding which
explains the extended time between the start of the Comorian accession process and today. Laws
must be adapted, and in some cases replaced, and domestic policies which protect or subsidize
certain companies/industries need to be adjusted. The drafting of the laws can require significant
technical assistance, and certain changes can face internal resistance due to domestic political
economy considerations. These efforts take both financial resources, for example to pay for experts,
and draw human resources away from other governmental initiatives. At the time of writing, both
the multilateral and bilateral negotiations are ongoing and need to be concluded in order to move
onto the next stage of the process.

• Regarding the multilateral process, several key trade-related laws remain to be drafted and
adopted into Comorian law, in part due to a need for technical assistance expressed by the
Comorian authorities (see below for more details). Several policies relating to tax collection and
trade in goods also need to be modified. Indeed, the remaining elements include: (i) the
adoption of the principle of equivalence agreements and other types of sanitary agreements, as
well as the principle of transparency, zoning and compartmentalization; (ii) the adoption of the
following laws: Veterinary Sanitary Police Act, draft decree on veterinary sanitary police and draft
law on veterinary public health; and (iii) draft regulations on policies affecting trade in goods.

• On the bilateral side, negotiations have been completed with almost all countries, but some
issues are yet to be finalized. The tariff schedule is largely concluded, in part due to limited
space for negotiation given Comoros in the process of integrating into the COMESA customs
union with a pre-defined common external tariff (CET). The terms of access to the Comorian
market for foreign services is also featured in ongoing discussions.

15. The Comorian authorities held a round table to solicit extensive support for technical
assistance on January 13, 2022. 15 Development partners and Comorian government officials came
together with aim of discussing the capacity building and technical assistance needs related to the
accession process. The needs outlined covered non-tariff barriers, trade facilitation, technical barriers
to trade, and the sanitary and phytosanitary (SPS) system. Representatives from the international
community indicated their readiness to work with the authorities on the identified needs.

16. The IMF continues to provide significant capacity development relevant to the
accession process. Organized through the Fiscal Affairs Department (FAD) and the Regional
Technical Assistance Center for Southern Africa (AFRITAC South – AFS), the IMF works intensively

15 WTO | 2022 News items - Comoros discusses accession, post-accession technical assistance with development
partners

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UNION OF THE COMOROS

with the Comorian customs authority. This support covers customs valuation, risk management,
post-clearance audit, legislation for the effective implementation of the customs code, and control
of excise regimes, and aims to be in line with the requirements for WTO accession where relevant.
The authorities’ engagement with the IMF under the Extended Credit Facility (ECF) also provides a
framework for strengthening revenue administration and tax policymaking capacities, which would
cushion the effect of trade tax reductions as a result of the WTO accession.

E. Estimation of Import Demand Elasticity

17. This section estimates the impact on the volume of imports associated with tariff
reduction. The estimate is done for small states, based on a standard gravity model. The estimation
strategy relies on the empirical gravity model for trade flows coined by Tinbergen (1962) and
theoretically developed by (Anderson, 1979; Anderson and van Wincoop, 2003; Anderson and van
Wincoop, 2003; Baier and Bergstrand, 2009). Following this literature, we include the importer and
exporter “multilateral resistance terms” (MRTs).

18. Using an OLS estimator, the effects of bilateral trade tariff on trade flows are
estimated from a standard gravity model from 1990 to 2021. The standard gravity model is
given by:

where Tradeijt represents the total imports (or exports) from country i to country j in year t. Xijt is a
set of control variables including standard gravity variables (i.e., bilateral tariff, and distance). The
bilateral tariff captures the effects of tariff barriers on trade flows. The distance variable represents
the distance between the most populated cities in partner countries These gravity variables capture
the effects of trade barriers on bilateral trade flows. We capture historical and cultural linkages
between trading partners by including a dummy variable which take the value of 1 if two partners
countries have a common language. We also include the gross domestic product (GDP) to proxy
economic development both for importer j and exporter i. di, dj, and dt are importer j, exporter i and
time t dummies, respectively. The paper uses data from two main sources, namely the CEPII 16 gravity
database (Conte et al., 2021) and the ESCAP 17[2]-World Bank trade cost database.

Empirical Results

19. Estimation results are shown in Table 1, with all control variables showing the
expected signs. Economic development proxied by GDP is a significant determinant of bilateral
trade. A strong economic activity significantly drives bilateral trade flows. Bilateral trade flows tend
to be greater across less distant partners as well as for partners that share the same official
language. Bilateral tariff is a significant (negative) determinant of bilateral trade flows. These results

16 Centre d'Études Prospectives et d'Informations Internationales.

17 Economic and Social Commission for Asia and the Pacific.

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 UNION OF THE COMOROS

are consistent with the

Table 1. Union of the Comoros: Gravity Model Estimates
literature on gravity models
since bilateral trade flows
between countries depend on
their wealthiness as well as
transportation costs (Kassa and
Sawadogo, 2021; Carrere, 2006;
Francois and Manchin, 2013).
The coefficient of interest is
that on bilateral tariff, which
provides the estimate for
import demand elasticity to
changes in tariffs.

20. The results for small

Source: IMF Staff
states are of particular
relevance for Comoros. Based on the above estimates, a 1 percentage reduction of tariffs in small
states (ODCs in the case of Figure 4. Union of the Comoros: Overall Revenue Loss with
Comoros) would increase Respect to Various Import Demand Elasticity Assumptions
import volume by 1.03 percent.
Applying this import demand
elasticity to the reduction of
ODCs to liberalize trade yields
an estimated revenue loss in
Comoros of around 1.7 billion
KMF (or 0.3 percent of 2023
GDP and 3.86 percent of tax
revenue).

Sensitivity Analysis

21. A sensitivity analysis is

performed, and the results
Source: IMF Staff
show that the revenue loss is Note: Following the literature on gravity models, we assume different levels of
negatively correlated with the import demand elasticities to potential assess the revenue loss. The revenue loss is
negatively correlated with the import demand elasticity since higher elasticities are
import demand elasticity. The
associated with lower revenue loss in Comoros. The revenue loss is zero when
potential revenue loss is import demand elasticity is equal to -3.82. Beyond this value, the positive effects of
assessed with respect to the tariffs reduction in terms of higher revenue collection outweighs its negative effects
in terms of revenue loss.
levels of elasticities for import
demand. Higher import demand elasticities are associated with lower revenue losses. The revenue
loss is zero when import demand elasticity is equal to -3.82. Beyond this value, the increase in
imports due to the lower tariffs outweighs the loss from tariff reduction and results in higher overall
revenue collection.

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UNION OF THE COMOROS

F. Revenue Replacement Following Trade Liberalization

22. This section assesses the potential for revenue replacement following trade tax
reduction in small states. The empirical evidence on trade tax replacement with domestic tax
revenue is mixed since some studies show that there is no evidence on trade tax replacement
(Baunsgaard and Keen, 2005) while others argue that there is possible replacement of trade taxes by
domestic tax revenue following trade liberalization (Keen and Mansour, 2010). Drawing upon this
literature and relying on a sample of 16 small developing states 18 which are members of the WTO
over the period 1990-2022, this paper estimates the effects of trade tax revenue on domestic tax
revenue. The estimated equation is as follows:

where DTit is domestic tax revenue for country i at time t, TTit is trade tax revenue, expressed in
percent of GDP, and Xit is a vector of control variables. Estimators used are fixed-effects and system-
GMM. The coefficient associated with trade tax is expected to be negative, implying that trade tax is
replaced by domestic tax revenue. Country and year dummies are also included.

23. The econometric results for SDS show no robust evidence that trade taxes would be
replaced with domestic tax revenue. The estimated coefficient of the control variables shows the
expected signs. GDP per capita growth and control of corruption are expected to positively correlate
with tax revenue given that Table 2. Union of the Comoros: Effects of Trade Tax on
strong economic growth Domestic Tax Revenue in Small States
enlarges the tax base and
improves tax revenue collection.
The share of agriculture to GDP
is expected to be negatively
associated with revenue
because agriculture is harder to
tax, particularly in developing
countries where the agriculture
sector is informal. The inflation
rate, FDI inflows, remittances
received, and the degree of
trade openness can positively or
negatively affect tax revenue.
Source: IMF Staff.
24. These results point to
the possible difficulty for Comoros in mobilizing domestic revenue to offset potential losses
in trade tax revenue following trade liberalization. The experience of other small states
highlights the importance of developing a strategy for alternative sources of revenue that would

18
The list of countries in the sample is shown in the Appendix (Table A2).

26 INTERNATIONAL MONETARY FUND

 UNION OF THE COMOROS

need to be implemented alongside accession efforts. The authorities currently have the window to
do so, as the transition period following the WTO accession will allow for a gradual reduction of
ODCs. Notwithstanding this transition period, it is important that a policy approach to replace
the revenue losses from abolition of ODCs is decided upon and legislation enacted to
implement any agreed new tax policy approach in advance of WTO accession.

G. Policy Options and Concluding Remarks

25. While trade liberalization can offer many benefits, it will be important for Comoros to
have a strategy to offset the potential drawbacks associated with lower tax revenue. Although
the empirical evidence for small developing states shows that replacement of lost trade tax revenue
following trade liberalization may be a challenge, Comoros’ small starting tax base offers a large
upside for domestic revenue mobilization. With careful planning, the country may well be able to
benefit from trade liberalization while also achieving higher domestic revenue. Three main policy
options could be designed to boost tax revenue collection in the country.

26. First and foremost, strengthening tax revenue administration to improve tax
collection and combat tax fraud is crucial. This could be done by strengthening the human
resources in charge of monitoring and by initiating administrative reforms including digitalization,
simplification of procedures to improve tax compliance. Enhanced revenue administration capacity is
a prerequisite for other tax reforms as it mitigates informality and tax fraud.

27. Second, policymakers should consider removing tax exemptions and increasing
domestic direct taxes to replace trade taxes. A first step could include: (i) limiting tax exemptions
by setting clear criteria to provide tax benefits and removing unjustified tax benefits, and (ii)
replacing some exemptions with cost-based incentives - such as accelerated capital cost allowances
and investment tax credits (see IMF et al., 2015). Increasing direct taxes could be considered as a
medium-term policy option. There are limitations to the resources that can be mobilized with direct
taxation given the potential difficulties for developing countries to collect these taxes (it is difficult
for example to identify the population/taxpayers and to enforce tax payment in the case of personal
income tax). However, this could be achieved with a sound tax policy design (such as the use of final
withholding at source and a simple presumptive income tax regime for small unincorporated
businesses) coupled with sufficient political will.

28. Third, mechanisms to replace the lost tax revenue should also include indirect taxes.
Immediate policy options could include introducing and/or increasing excise duties on certain low-
tax and non-taxed products (alcohol, tobacco, drugs, luxury products), and widening and developing
new tax bases. The policy options over the longer term could include the adoption of the VAT
system. Several studies find that indirect taxes offer untapped revenue potential in developing
countries. Chambas (2005) shows that VAT is the most appropriate among indirect tax instruments
because of its deductibility and its capacity to ensure greater economic neutrality. However, the
structure of the VAT is significantly more complex than the structure of the trade tax. The system is
susceptible to fraud if not underpinned by very strong administration capacity. A good design is
crucial to implement a sound VAT system. Some prerequisites are needed before the VAT can be

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UNION OF THE COMOROS

effectively implemented. These include, for example, the development of a single tax identifier
system to facilitate cooperation between the various tax authorities, a clear identification of the
structure in charge of managing the VAT system (VAT collection and VAT refund), upgraded tax
codes, and a robust IT system supported by the capacity to employ it.

29. Finally, any revenue replacement strategy would not yield results without the lynchpin
of sound macroeconomic and governance policies. Macroeconomic stability supported by
prudent fiscal and monetary policies ensures strong economic activity that in turn generates taxes. A
strong public governance framework would also improve the transparency and effectiveness of tax
spending which would further bolster economic activity while increasing citizens’ willingness to pay
taxes.

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International Monetary Fund, OECD, United Nations, & World Bank. (2015). Options for Low Income
Countries Effective and Efficient Use of Tax Incentives for Investment: A Report to the G-20
Development Working Group by the IMF, OECD, UN and World Bank.

Kassa, W., & Sawadogo, P. N. (2021). Trade Creation and Trade Diversion in African RECs: Drawing
Lessons for AfCFTA (No. 9761). The World Bank.

Kim, S. H., & Kose, M. A. (2014). Welfare implications of trade liberalization and fiscal reform: A
quantitative experiment. Journal of International Economics, 92(1), 198-209.

Krugman, P. (1991). The move toward free trade zones. Economic Review, 76(6), 5.

Ndikumana, L. (2001). Fiscal policy, conflict, and reconstruction in Burundi and Rwanda (No. 2001/62).
WIDER Discussion Paper.

INTERNATIONAL MONETARY FUND 29

UNION OF THE COMOROS

Peters, A., Secretariat, C. A. R. I. C. O. M., & Guyana, S. A. (2002). The fiscal effects of tariff reduction
in the Caribbean community. CARICOM Secretariat, 13, 1-38.

Pritchett, L., & Sethi, G. (1994). Tariff rates, tariff revenue, and tariff reform: some new facts. The
World Bank Economic Review, 8(1), 1-16.

Sachs, J. D., & Warner, A. (1995). Economic convergence and economic policies. NBER Working
Paper No. 5039

Sachs, J. D., Warner, A., Åslund, A., & Fischer, S. (1995). Economic reform and the process of global
integration. Brookings papers on economic activity, 1995(1), 1-118.

Tinbergen, J. (1962). Shaping the world economy; suggestions for an international economic policy.

Viner, J. (1950). The customs union issue. Stevens and sons, Londres.

30 INTERNATIONAL MONETARY FUND

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Appendix I. List of Variables and Countries

Table A1. Description of Variables, and Sources

Source: IMF Staff

Table A2: List of Small Developing States

INTERNATIONAL MONETARY FUND 31

UNION OF THE COMOROS

STATE-OWNED ENTERPRISES: OIL AND GAS IN

COMOROS1
A. Executive Summary

The Comorian state oil and gas company (Société Comorienne des Hydrocarbures, SCH) must contend
with increasing demand for energy in a context of high oil prices and an increasingly difficult financial
situation. In recent years, SCH’s share in government revenue has steadily declined. Despite the
increase in administered fuel prices in June 2022 at service stations, SCH’s losses are estimated at 2.5
percent of GDP in 2022. Moreover, fiscal costs from tax subsidies (including exemption from the
domestic oil and gas tax, TIPP) combined with subsidies from the underpricing of oil and gas products
totaled up to 3.2 percent of GDP in 2022. The state electricity company (SONELEC) received the largest
share of the subsidies. Urgent measures to stabilize SCH’s financial position, secure government
revenue, and ensure good governance practices for this public corporation are needed in the short
term. A plan to revise the subsidy policy in the energy sector is needed in the medium term.

B. Introduction

1. Comoros is among the countries that do not automatically adjust fuel prices to
international oil prices. Figure 1. Union of the Comoros: Brent Crude Oil Prices
Until 2022, the prices
charged by SCH were high Brent Crude Oil Prices
enough to generate relatively
140
substantial profits, making it 120
the leading state-owned 100
enterprise (SOE) in terms of 80
60
contribution to tax revenue 40
(almost 20 percent of the 20
country’s total tax revenue in 0
2021) and payment of
dividends (close to one-third
of dividends paid by SOEs).
Source: Crude Oil Prices - 70 Year Historical Chart | MacroTrends
The sharp rise in the price
per barrel in 2022, the result of the conflict in the Ukraine, forced the authorities to abruptly raise
pump prices in June 2022. But these adjustments could not prevent the substantial losses posted by
SCH during 2022. This situation, combined with other governance issues at all SOEs and at SCH in
particular call for urgent fiscal consolidation measures, comprehensive reform of subsidies applied in
the Comorian energy sector, and a focus on good international practices in SCH governance.

1 Prepared by Ibrahim Ahamada under the supervision of Rima Turk.

32 INTERNATIONAL MONETARY FUND

 UNION OF THE COMOROS

2. This paper reviews in detail the oil and gas situation in Comoros. It quantifies the
influence of SCH in economic activity in terms of volume of imports (Section C) and contribution to
government revenue (Section D). The analysis of the pricing structure at SCH reveals heavy losses
(Section E), giving rise to costly subsidies by the government (Section F). In light of the financial
difficulties faced by SCH (Section G), short- and medium-term recommendations are proposed for
effective reform of subsidies in the energy sector (Section H).

C. Principal Imports by SCH

3. SCH holds a monopoly on the import of petroleum products in Comoros. It distributes

diesel fuel to SONELEC; it delivers
gasoline, diesel, and kerosene to private Table 1. Union of the Comoros: SCH Activities
service stations; it supplies the general 1. Distribution of gasoline and diesel fuel for transport
government, including the army, with 2. Distribution of diesel fuel to SONELEC
fuel; and it also handles the delivery of 3. Supply of household kerosene to service stations
aviation fuels. The bulk of imported 4. Distribution of aviation fuel (Jet A-1)
diesel fuel is absorbed by SONELEC (54 5. Domestic gas production (recently)
percent) while 88 percent of all imported
kerosene is channeled to domestic use, essentially by poor households, for cooking and lighting.
Petroleum storage capacity represents roughly 45 days’ consumption, which requires on average six
to eight petroleum shipments per year to Comoros. The islands Ngazidja and Anjouan receive
shipments directly from oil companies, while Mohéli is supplied by small boats coming from the
other islands.

4. Demand for fuel in Comoros is growing at an ever-faster pace. The volume of oil and
gas imports is estimated to have increased by roughly 24.5 percent between 2018 and 2023 (Figure
2). Imports observed in 2022 and Figure 2. Union of the Comoros: Imports in
anticipated in 2023 have increased Millions of Liters
successively since 2021 (+14 percent in 120.00 60.00

2022 compared to 2021, and +11.5 100.00 50.00

percent in 2023 relative to 2022). This

2 80.00 40.00

increase is explained in part by the 60.00 30.00

increased number of automobiles on 40.00 20.00

Comorian roads. 20.00 10.00

0.00 0.00
5. SONELEC alone absorbs a 2018 2019 2020 2021 2022

significant and increasing share of Gasoline Diesel - Tourism Diesel - SONELEC

imported oil and gas. Of the more than

Household kerosene Kerosene Total in KMF, right

100 million liters of oil and gas imported Source: SCH.

annually on average during the last five
years, diesel delivered to SONELEC represents 20 percent of the total; household kerosene, 25

2 Data provided by SCH for 2023 are not stable and indicate that imports increased between 5 percent and 12

percent between 2022 and 2023.

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UNION OF THE COMOROS

percent; diesel fuel for transport, 24 percent; gasoline, 20 percent; and jet fuel, 3 percent.
Morerecently, SONELEC purchases of diesel fuel jumped significantly, from 28.4 million liters in 2021
to an anticipated 35.6 million liters in 2023, or an increase of more than 25 percent. The impact of
the introduction of solar-powered electricity plants is not yet visible, as SONELEC demand for fossil
fuels has yet to show signs of slackening.

6. Amid strong demand for energy, oil prices have soared. The cost of oil and gas imports
nearly doubled between 2018 and 2022 (Figure 3) and the energy bill continues to increase. The
average annual cost (roughly KMF 23 billion in recent years) is relatively high in regard to the
country’s total imports (over KMF 100 billion FOB on average during the same period). In 2022, the
cost of energy imports increased
abruptly, to 49 billion, representing Figure 3. Union of the Comoros: Import Cost per
nearly one-third the value of all imports. Liter
The increase was largely due to the war (In KMF)
in Ukraine. For a number of years, 500.00
energy supplies have been financed by 400.00
drawings from the Islamic Trade Finance 300.00
200.00
Corporation (ITFC). However, with the
100.00
spike in the Brent price, the ITFC funds -
no longer suffice to fully cover the fin 2018 2019 2020 2021 2022
ancing of imports, and SCH is Gasoline Diesel - Tourism Diesel - SONELEC Household kerosene Jet
now obliged to supplement the
Source: SCH.
financing of its purchases with other
sources of financing (equity, bank loans).

D. SCH’s Contribution to Government Revenue

7. SCH is the largest contributor of public revenue of all Comorian SOEs, accounting for
nearly 19 percent of domestic revenue in 2020 (Tables 2 and 3). It contributes to government
revenue by transferring:

• TIPP. Thie Taxe Intérieure des Produits Pétroliers (TIPP) is the largest component of SCH
contributions to government revenue. It is assessed on all products except diesel fuel sold to
SONELEC, household kerosene, and jet fuel. 3 The TIPP includes excise and consumption taxes. It
represented 87 percent or more of the tax revenue SCH transferred to the Treasury, or close to
18 percent of total tax revenue, in 2020.

• Corporate profits tax (IS). The IS is based on total profits generated by SCH, fixed at a rate of 35
percent. SCH paid up to 78 percent of the total IS paid by all SOEs in 2021.

3The TIPP is a single tax initially intended (according to the authorities) to represent all taxes normally assessed on
an enterprise. However, it was found that once the TIPP was applied, there was still room to apply traditional taxes;
hence the assessment of corporate taxes and wages and salaries tax.

34 INTERNATIONAL MONETARY FUND

 UNION OF THE COMOROS

• Wages and salaries tax (IGR). This tax is withheld at the source unless expressly exempted by
special provisions. The IGR liability represented up to 17 percent of total IGR at all SOEs in 2021.

• Dividends. SCH shares 50 percent of realized profits with the government. The dividends paid by
SCH represented up to 47 percent of total dividends paid to the government by all SOEs in
2020.

Table 2. Union of the Comoros: Revenue from SCH.

2020 2021 2022 2023: First half
Total SCH tax revenue in KMF 8,220,485,703 8,798,996,235 7,271,004,562 3,944,024,728
Domestic oil and gas tax (TIPP)
in KMF 7,166,370,067 6,024,906,600 6,077,607,730 3,909,440,250
Wages and salaries tax (IGR) in
KMF 72,715,636 74,089,635 77,347,249 27,724,119
Corporate tax (IS) in KMF 981,400,000 2,700,000,000 1,116,049,583 6,860,359
SCH nontax revenue for the
government (dividend), in KMF 931,000,000 - 611,548,145
Total SCH tax and nontax
revenue in KMF 9,151,485,703 8,798,996,235 7,882,552,707 3,944,024,728
SCH tax revenue as % of total
tax revenue 20.34 19.26 16.39 8.00
SCH nontax revenue as % nontax
revenue 11.46 - 5.11
Total SCH revenue as % total
domestic revenue 18.85 16.00 13.99 6.56

For reference, in KMF:

Tax revenue 40,411,000,000 45,695,000,000 44,357,000,000 49,321,000,000
Nontax revenue 8,127,000,000 9,288,000,000 11,970,000,000 10,782,000,000
Total domestic revenue 48,538,000,000 54,983,000,000 56,327,000,000 60,103,000,000
Source: Authorities.

8. In recent years, however, SCH’s

share in total government revenue has Table 3. Union of the Comoros: Non-TIPP Taxes
declined significantly. This appears to and Dividends Paid by SCH as % of Totals Paid by
be the result of two factors: (i) the overall SOEs
increase of domestic public revenue (+16 2023:
2020 2021 2022
First half
percent between 2020 and 2022), and (ii)
Wages and salaries tax 14.0 17.0 15.9 9.3
the significant decline of IS, which Corporate tax 27.0 78.0 60.4 2.96
confirms the financial difficulties SCH has Dividends 47.3 - 32.1 -
experienced in the last two years (IS paid
Source: Authorities
by SCH in the first half of 2023 is
negligible compared to previous years; see Table 3). The 2024 budget law provides for IS in the
amount of roughly KMF 2.7 billion, but this represents repayment of a tax liability from previous
years.

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UNION OF THE COMOROS

9. Moreover, the amount of taxes paid does not necessarily reflect SCH activities. For
example, the TIPP did not vary significantly between 2021 and 2022, although imports increased
significantly during that period (+24 percent for gasoline and +16 percent for diesel for transport).
Also, the IS paid in 2022 (KMF 1.1 billion) does not reflect the financial difficulties observed in the
same year (KMF 14.5 billion in losses), although it is likely that the IS paid in 2022 included
prepayments based on the 2021 tax situation.

10. The amount of TIPP varies Table 4. Union of the Comoros: TIPP in KMF Billions
substantially according to the according to Different Sources, 2022
institution that records the
Treasury, TOFE Customs SCH
amount of tax collected (Table
6.01 4.9 8.2
4). These variations demonstrate Source: Authorities
the need for the government to
secure this tax revenue.

E. Pricing structure and impact on SCH losses

11. The structure of oil and gas prices in Comoros is unique. In simplified form, the structure
of selling prices is as follows:

a) CIF price, per liter

b) TIPP, per liter

c) SCH operating cost, per liter

d) Cost price, per liter: (a) + (b) + (c)

e) Price charged by SCH to service stations, or selling price, per liter: set by the government

f) SCH margin, per liter: (e) - (d)

g) Service stations' margin, per liter: set by the government

h) Price charged by service stations, per liter: (e) + (g)

12. SCH generates profits on oil and gas products whose cost price is below the selling
price set by the authorities. The government administers the prices for SCH sales to private service
stations and SONELEC and for aviation transport. It also sets the prices charged by service stations
and SONELEC to end consumers. The prices imposed by the government may be above or below
the cost price, resulting in either a surcharge or subsidy for the end consumers.

13. The selling price adjustment has been discretionary until now. In fact, prices remained
unchanged from 2016 to June 2022. In light of the abrupt rise of the Brent price in early 2022, the
authorities substantially raised the prices of certain products in June 2022 (Table 5).

36 INTERNATIONAL MONETARY FUND

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Table 5. Union of the Comoros: Price (5) and TIPP per Liter
(In KMF)
Selling price before June 2022 Selling price after June 2022 TIPP
Gasoline 575 725 230 (211) * *
Diesel - Tourism 430 630 115 (95) * *
Diesel - SONELEC 315 315 -
Household kerosene 245 345 -
Jet 400 700 -
Source : SCH. * Reduced TIPP.

14. Until 2022, the prices set by the government enabled SCH to cover its costs, but recent
price adjustments have been insufficient. Before the international price increase, SCH was able to
cover import costs and even the cost price of most petroleum products. Figure 3 shows that:

• With the exception of household kerosene, all prices (CIF price and cost price) were on average
below the selling price until 2021.

• For gasoline and diesel for transport, the upward adjustment of selling prices in 2022 sufficed to
cover the CIF price but not necessarily the cost price.

• The June 2022 increases in the selling price of jet fuel easily covered the cost price.

• The June 2022 increase in the price of household kerosene applied by the authorities was
insufficient to cover the CIF price of the product. The difference between the selling price and
cost price is quite significant.

• The selling price of diesel fuel delivered to SONELEC was not increased in 2022 despite sharp
increases in the cost price. The gap between the prices remains quite substantial. And although
the price of fuel sold to SONELEC did not rise, the price of electricity was raised in June from 132
KMF/KWH to 198 KMF/KWH.

15. Selling price adjustments in Comoros do not reflect changes in international prices.
Table 6 shows that the price increases applied by the authorities in June 2022 would have captured
41 percent of the change in the CIF price of gasoline and 47 percent of the change of CIF price of
diesel, jet fuel, and kerosene if the adjustment had been made in early 2022. The adjustments would
have had a greater impact on the change in cost prices than the change in CIF prices. This is because
there was little or no change in the taxes included in the cost price.

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UNION OF THE COMOROS

Figure 4. Union of the Comoros: Comparative Price Trends

(In KMF/liter)

Gasoline Prices Diesel Prices

800 700
600
600
500
400
400
200 300
0 200
2020 2021 2022 100
CIF price 0
2020 2021 2022
Cost price
Selling price set by authorities (average used for 2022) CIF price Cost price Selling price; average for 2022

Price of Diesel Fuel Sold to SONELEC Price of Kerosene Sold to Households

600 600
400
400
200

200 0
2020 2021 2022
0 CIF price
2020 2021 2022 Cost price
CIF price Cost price Selling price set by authorities Selling price set by authorities (average used for 2022)

Price of Aviation Kerosene, Jet

,
600

400

200

0
2020 2021 2022

CIF price
Cost price
Selling price set by authorities (average used for 2022)

Source: SCH

38 INTERNATIONAL MONETARY FUND

 UNION OF THE COMOROS

Table 6. Union of the Comoros: Elasticities: Repercussions of June 2022 Price Changes
Calculated for the Period 2021-2022

Δ(selling price)/Δ(CIF price) Δ(selling price)/Δ( [] cost price)

Gasoline 41% 90%
Diesel - Tourism 47% 83%
Diesel - SONELEC 0% 0%
Household kerosene 47% 60%
Jet A1 87% 110%
Source: calculated by the authors.

16. Despite this, oil and gas Figure 5. Union of the Comoros: Fuel Prices in August
prices in Comoros are relatively 2023
high. The June 2022 price (In $/liter)
increases imposed by the Source : GlobalPetrolPrices.com

authorities put gasoline and 2.5

diesel prices in Comoros (other 2

than in Mayotte) slightly above 1.5

those observed in neighboring 1

countries (Figure 5). 0.5

0
17. An in-depth analysis Comoros Cabo Verde Madagascar Mauritius Seychelles Mayotte

shows that SCH posted recent Gasoline Diesel fuel

and significant losses on sales

of diesel to SONELEC and household kerosene. Table 7 shows the pricing structure of the five
products sold by SCH to allow profits and losses since 2020 to be calculated by product. The
following findings emerge:

• In 2020, the cost prices were on average below the selling prices for the five categories of
products sold by SCH. This resulted in significant margins of roughly KMF 7.9 billion (1.5 percent
of GDP)

• In 2021, only the cost price of household kerosene was above the selling price on average, but
the margins generated by other products covered the losses posted on kerosene. In 2021, SCH
posted a net margin of roughly KMF 1.8 billion (0.3 percent of GDP).

• In 2022, losses totaled KMF 14.5 billion (2.5 percent of GDP). Note that all margins were negative
except for jet fuel (aviation fuel). The losses were particularly steep on diesel sold to SONELEC
(KMF 6.5 billion, 445 percent of losses) and kerosene (KMF 4.65 billion, or 32 percent of losses).
These two products alone represent 77 percent of recent SCH losses. These figures would be
much smaller if they accounted for sales of products taxed at a reduced TIPP rate (for example,
gasoline and diesel for tourism). If TIPP were excluded from the cost price, the costs would
represent roughly KMF 6 billion, or 1 percent of GDP (Table 8).

INTERNATIONAL MONETARY FUND 39

 UNION OF THE COMOROS

Table 7. Union of the Comoros: Evaluation of Losses

2020 2021 2022
Diesel Household Diesel Househo Diesel Househo
Gasoline SONELEC JET Gasoline SONELEC JET Gasoline SONELEC JET
fuel kerosene fuel ld fuel ld

Average CIF price in KMF/liter 177.7 180.5 180.5 169.1 169.1 243.2 227.0 227.0 220.1 220.1 398.62 452.61 452.61 410.61 410.61
Import tax 230.0 115.0 230.0 115.0 230.00 115.00
SCH operating cost (35+25=60)* 60.0 60.0 60.0 60.0 60.0 60.0 60.0 60.0 60.0 60.0 60.00 60.00 60.00 60.00 60.00
COST PRICE 467.7 355.5 240.5 229.1 229.1 533.2 402.0 287.0 280.1 280.1 688.62 627.61 512.61 470.61 470.61
SELLING PRICE before June 2022 575.0 430.0 315.0 400.0 245.0 575.0 430.0 315.0 400.0 245.0 575.00 430.00 315.00 400.00 245.00
SELLING PRICE after June 2022 725.00 630.00 315.00 700.00 345.00
UNIT MARGINS 107.3 74.5 74.5 170.9 15.9 41.8 28.0 28.0 120.0 -35.1
Quantities imported (millions of
22.76 28.11 33.00 3.61 26.49
liters) 22.2 27.4 32.1 3.7 27.4 18.3 24.2 28.4 3.5 25.7
Total sales (KMF billions) 12.8 11.8 10.1 1.5 6.7 10.5 10.4 8.9 1.4 6.3 14.80 14.90 10.39 1.99 7.81
Margins (KMF billions) 2.4 2.0 2.4 0.6 0.4 0.8 0.7 0.8 0.4 -0.9 -0.88 -2.74 -6.52 0.29 -4.65
Margin analysis % of GDP

*Operating costs are provided by SCH. They include the cost of transporting products to service stations and reimbursement for
evaporation.
Source: SCH and Authors.

Table 8. Union of the Comoros: Evaluation of Non-TIPP Losses in Cost Prices

2022

Household
Gasoline Diesel fuel SONELEC JET
kerosene
Average CIF price in KMF/liter 398.62 452.61 452.61 410.61 410.61
Import tax
SCH operating cost (35+25=60) 60.00 60.00 60.00 60.00 60.00
Cost price 458.62 512.61 512.61 470.61 470.61
Selling price before June 2022 575.00 430.00 315.00 400.00 245.00
Selling price after June 2022 725.00 630.00 700.00 345.00
Unit margins
Quantities imported (millions of liters 22.76 28.11 33.00 3.61 26.49
Total sales (KMF billions) 14.80 14.90 10.39 1.99 7.81
Net margin (KMF billions) 4.36 0.49 -6.52 0.29 -4.65
as % of GDP
Source: SCH and Authors.

F. Fuel subsidies

18. Losses posted by SCH result in subsidies due to underpricing of petroleum products.
SCH does not receive a government subsidy in connection with its investments or its operating
costs. However, as indicated above, SCH can find itself selling some of its products at a loss. In such
cases, those losses can be considered fuel price subsidies for SCH's customers, or subsidies for
underpricing. The subsidies could have impacts on SCH's financial position and/or tax revenue. For a
closer analysis, we will consider subsidies before and after taxes (IMF, April 2013):

Total fuel subsidy = ∑𝑘𝑘 ∆𝑃𝑃(𝑘𝑘)𝑉𝑉(𝑘𝑘) (1)

∆P(k) represents the difference between the selling price of petroleum product k (k = gasoline,
diesel for transport, diesel for SONELEC, household kerosene, and jet fuel) and the respective cost
price. The volume consumed is V(k). The calculated subsidy will be considered the "after-tax
subsidy" if the cost price includes TIPP. The calculated subsidy will be considered the "pre-tax
subsidy" if the cost price does not include TIPP. This calculation methodology takes account of
offsets in terms of costs between subsidized and non-subsidized products. The fuel price is

40 INTERNATIONAL MONETARY FUND

 UNION OF THE COMOROS

subsidized if expression (1) is negative (there is a surcharge to consumers if the expression is

positive)

19. Collectively, subsidies linked to underpricing of petroleum products represented 2.5

percent of GDP in 2022, or roughly
Table 9. Union of the Comoros: Fuel Price Subsidy
KMF 14.5 billion (Table 9). Roughly 45
as % of GDP
percent of the subsidy (KMF 6.52 billion)
(Negative amounts)
profited SONELEC directly, and 32
2020 2021 2022
percent concerned underpricing of
Margin before TIPP 3.1 1.6 -1.05
household kerosene (KMF 4.65 billion), Margin after TIPP 1.5 0.3 -2.51
see Table 6.
Source: Authors.

Table 10. Union of the Comoros: Cost of Subsidy Represented by Forgone TIPP on Diesel
Sold to SONELEC
(TIPP at 115/liter)
2020 2021 2022
Total TIPP subsidy, KMF 3,696,403,761 3,265,330,960 3,794,515,054
as % of TIPP collected 51.6 54.2 62.4
As % of tax revenue 9.1 7.1 8.6
For information, if the subsidy were partia 3,053,550,933 2,697,447,315 3,134,599,393
Source: SCH.

20. In addition to underpricing, the de facto exemption from TIPP results in tax subsidies
representing close to 1 percent of GDP. The government also contributes to the price subsidy by
foregoing TIPP on diesel fuel sold to SONELEC and on household kerosene. Theoretically, there will
also be subsidies associated with the application of the reduced TIPP, but according to the
authorities, the reduced TIPP is not applied in practice. By foregoing TIPP on diesel fuel sold to
SONELEC, the government loses from 51 percent to over 60 percent of TIPP collected each year
(Table 10), representing on average slightly more than 8 percent of annual tax revenue. In 2022, tax
subsidies on fuel delivered to SONELEC totaled close to KMF 3.8 billion, or 8.6 percent of tax
revenue (0.8 percent of GDP).

Table 11. Union of the Comoros: Ratio between Energy Expenditures by the Wealthiest
Households and Poorest Households in Sub-Saharan Africa
Expenditure, Expenditure, Electricity
Diesel expenditure
gasoline kerosene expenditure
Ratio (Q5/Q1) 20 27.4 1.8 17
Source: IMF, April 2013.

21. It appears that the fuel subsidies mainly benefit the most well-off households rather
than the most vulnerable. There are no statistics on the distribution of oil and gas consumption in
Comoros according to income level. Studies have shown, however, that in sub-Saharan Africa (SSA)
(Table 11), the richest households may spend 27 time more on gasoline than poorer households
(ratio of the fifth to first income quintile, Q5/Q1). Also, roughly 45 percent of fuel subsidies benefit

INTERNATIONAL MONETARY FUND 41

UNION OF THE COMOROS

households in 20 percent of the highest income

brackets, while households in the 40 percent of Figure 6. Union of the Comoros:
Distribution of Benefits of Fuel Subsidies in
lower income brackets (first and second
Sub-Saharan Africa
quintiles) received only about 20 percent of
(In percent)
subsidies (Figure 6). As a result, it is the
wealthiest households that profit the most from 7.8
universal fuel subsidies. With respect to 11.5
44.2
kerosene, it also seems to benefit lucrative 15.3
activities (not only vulnerable households) such
21.2
as fishing boats to which none of the taxes apply.

G. SCH financial position

Q1 Q2 Q3 Q4 Q5
22. SCH’s financial position is vulnerable.
Source: FMI, 2013.
According to figures provided by the authorities,
SCH receivables covered only roughly 40 percent of its liabilities at the end of 2022. Liabilities
represented roughly 56 percent of SCH total sales at end-2022 (Table 12). Most (46 percent) of the
liabilities are owed to financial institutions (ITFC and Exim Bank), one-third are tax liabilities, and 21
percent represent prior dividends not paid to the government. 4 The accumulation of tax arrears and
debt representing unpaid dividends also helped to finance fuel deliveries.

Table 12. Union of the Comoros: SCH Debt Indicators on December 31,
2022.
As % of total debt As % of total sales
Liabilities to financial institutions 46 26
Tax liability 33 18
Dividend liability 21 12

Source: SCH.

23. SCH's financial position is further weakened by its interconnection with SONELEC.
Most of SCH receivables (over 85 percent) are held with SONELEC. In view of SONELEC's persistent
quasi-fiscal deficits (see box below), SONELEC continues to contribute negatively to SCH
performance.

Box 1. National Electric Company (SONELEC) Quasi-Fiscal Deficit

SONELEC, which is wholly owned by the government, handles the production, distribution, and commercialization
of electric energy in Comoros. The production is almost entirely thermal. SONELEC currently produces
approximately 125,000 MWH per year. Since end-2020, SONELEC has supplemented its energy production with two
independent producers of solar energy, each contributing 3 million GWH on Grande Comore. Another project is
under way to instruct a 6 million GWH solar plant, so that a total of 12 million GWH is expected by 2024 on Grande

4 For a long time, SCH has financed its deliveries with the ITFC. But with the rise of the Brent price in 2022, drawings

from the ITFC were supplemented with financing from other financial institutions (Exim Bank)

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Box 1. National Electric Company (SONELEC) Quasi-Fiscal Deficit (continued)

Comore. Two solar plants, each contributing a total of 6 million GWH, are also under way in Anjouan. And demand
in Mohéli is fully covered by the 1 million GWH already distributed.

SONELEC is theoretically subject to consumption tax and corporate tax. Despite considerable financial support from
the government in the form of various subsidies, SONELEC operates with regular substantial deficits. For example,
the financial statements indicate negative annual earnings of -KMF 2.2 billion in 2021 (17 percent of total sales) and
-KMF 3.3 billion in 2022 (22 percent of total sales).

Electricity rates in effect, which are well below the elevated production costs, substantial outstanding invoices,
significant production losses, and numerous instances of embezzlement, such as frequent thefts of diesel fuel (see
August 24, 2020 Gazette des Comoros; June 20, 2023 Al Watan), contribute significantly to SONELEC's continual
deficit.

In view of its regular deficits, SONELEC is obliged to prioritize spending, in particular the irreducible and substantial
cost of maintaining its generators. In 2023, it will conduct a general review of 11 generators at a cost of more than
KMF 100 million per generator, to be borne by the government.
Prices are not automatically adjusted but are negotiated between SONELEC and the government. The most recent
electricity rate increase occurred on June 6, 2022. Rates increased from 132 KMF/KWH to 198 KMF/KWH, which is
still insufficient to cover SONELEC's elevated production costs, roughly 350 KMF/KWH, even though the price of
fuel sold to SONELEC did not increase.
Direct subsidies provided by the government include:

• Investments (purchase, maintenance of generators)

• Operating subsidy (ex-free diesel fuel, cash payment by the government of part of the diesel fuel needed to
operate generators)
• Tax-free fuel (TIPP)

• Consumption tax: reduced rate of 3 percent as opposed to 10 percent

• Exemption from customs taxes and duties

• The price of fuel sold to SONELEC may be below the CIF cost
• Minimal corporate tax: Rarely paid (although payable)

Quasi-fiscal deficit (QFD). Analyses of subsidies in the electricity center often refer to a unified indicator to capture
explicit subsidies (formal subsidy relating to underpricing) and implicit costs (outstanding invoices, losses in the
electricity distribution network, etc.). This indicator provides an idea of electricity production companies' deficit
covered almost entirely by the government. The QFD is calculated as follows: QFD =K(P*-P) + KP(1-r) +KP(L-L*),
where

K is the total quality of electricity invoiced to all categories of consumers,

P* is the average cost of production of one GWH of electricity, including capital asset depreciation,
P is the average effective rate per KWH charged by the electricity company,

r is the invoice collection rate

L represents the distribution loss as a percentage of total electricity consumption, and

L* is the normal rate of distribution losses (10 percent in SSA, according to specialists)
Thus K(PI-P) represents losses due to tariff subsidies, KP(1-r) are losses due to non-collection, and KP(L-L*)
represents losses due to network inefficiency. Figure 1 shows that Comoros were already among the countries with
a large QFD (4.1 percent of GDP), and Table 1 shows that the situation deteriorated further in 2021 (4.6 percent of
GDP) and 2022 (5.2 percent of GDP).

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Box 1. National Electric Company (SONELEC) Quasi-Fiscal Deficit (concluded)

Box Figure 1. Quasi-Fiscal Deficit as Percent Box Table 1. SONELEC Quasi-fiscal Deficit, 2021
of GDP. and 2022.
2021 2022
7
6 K, in KWH 97,092,501 126,275,346
5
4 P*, in KMF 350 350
3
2 P, in KMF 132 198
1
0 r 0.77 0.77
L 0.3 0.3
L* 0.1 0.1
QFD in KMF 26,677,136 29,944,935,622
Source: World Bank, 2016. QFD as % of GDP 5 5.2
Source: IMF staff calculations.

H. Recommendations

In the Short Term

24. The recommendations for short-term reforms aim to help reduce SCH cash flow
pressures:

• Develop a credible plan to clear the SONELEC debt to SCH. This will significantly ease SCH cash
flow pressures, given that the SONELEC debt accounts for the largest share of SCH receivables.

• Negotiate a credible plan to clear SCH’s tax and dividend liabilities to the government. These
debts represented 56 percent of SCH debt at end-2022.

• Raise the price of diesel fuel sold by SCH to SONELEC. This product receives a double subsidy: (i)
tax-free prices, and (ii) prices below the CIF prices.

• Put an end to fuel advances. SCH sometimes advances fuel to gas stations, to be paid after the
products are sold, often creating cash flow pressures. Consumers are often injured by these
conflicts because they must wait for the conflict to be resolved before they are able to buy fuel.

• Put an end to improper practices based on the use of deductions. SCH directly deducts the
amount of corporate tax and dividends from earnings by posting them to a third-party account.
SCH also pays the army a portion of the TIPP collected for maintenance payments (instead of
remitting it to the Treasury account at the central bank), in addition to providing the army with
fuel as payment in kind. The correct practice would be to require SCH to pay the full amount
owed for taxes and dividends to the Treasury before the government allocates those amounts to
other expenditure items.

25. The short-term reforms should also improve management and collections of tax
revenue generated by SCH. The revenue expected from SCH and provided in the budget should
reflect its profitability as determined under tax law. Revenue should no longer be dictated by

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government cash flow pressures but by the company's financial statements. Payments of corporate
taxes (KMF 1.16 billion) and dividends (KMF 0.611 billion) in 2022 do not reflect the significant losses
posted by SCH (roughly KMF 14.5 billion). To require SCH to pay more than it should undermines its
financial health and thus its capacity to pay more taxes in the future. However, the collection of tax
revenues should be secured, their accounting improved and the traceability of TIPP payments to the
Treasury strengthened (see paragraph 10 which shows significant discrepancies between customs,
TOFE and SCH figures).

26. To improve SCH governance in the short term, it should also:

• Ensure that the board of directors meets on a regular basis. The boards of directors of public
companies, including at SCH, were dissolved in 2016. Although SCH’s governance had been
centralized at the Ministry of Finance, its management is currently handled by one managing
director and his staff. SCH should hold regular meetings of a board of directors that includes
independent directors, and should produce audited financial statements in accordance with
international (OHADA) standards.

• Modernize the law governing public corporations. A proposed law was approved during an
interministerial meeting of the ministers in charge of public corporations, and is expected to be
presented to the legislature for approval.

• Begin publishing the SCH financial statements, including the government subsidies. This will
promote transparency and help improve the company's performance.

In the Medium Term

27. The recommendations for medium-term reforms aim to establish a plan for reform of
subsidies. Countries that have conducted effective reforms to control the volume of subsidies in the
energy sector have taken the following steps (IMF, April 2013):

• An in-depth analysis of subsidies should precede price reforms. A rigorous distributional incidence
analysis will facilitate the evaluation of costs, the procedures for distribution, and the impacts of
eliminating subsidies. Such a study would identify the principal beneficiaries of the subsidy for
household kerosene. In 2005, Ghana relied on the conclusions of an analysis of impacts on
poverty and social arrangements to convince stakeholders to accept reforms, enabling the
authorities to further increase fuels prices that had previously been raised in 2003. Such an
approach would allow the subsidies to be focused on the poorest and avoid the high costs
associated with universal subsidies. In Comoros, the involvement of the National Institute for
Statistics and Economic and Demographic Studies (INSEED) in such an analysis should be
beneficial, and the results should be communicated to the public to promote a general
understanding of the reforms' legitimacy. In Niger, the introduction of fiscal costs relating to
subsidies in the budget law made the population aware of the magnitude of the subsidies.

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• Consultation of the stakeholders (SONELEC, road transport union, consumer associations, etc.)
could help create a consensus in favor of the subsidy reforms. In Namibia, the national energy
board created a national task force in 1996 to consider the regulation of fuel prices.

• The stakeholders should agree on a credible timetable for the phases of the reform.

i. A gradual approach should be adopted in implementing reforms, particularly since the

various subsidies provided for SONELEC and the sale of kerosene have been in place
number of years. Such an approach will allow SONELEC to adapt gradually and give it time
to formulate measures to compensate the most vulnerable households. For example,
Namibia spread the reduction of fuel subsidies over several years after adopting an official
strategy by consensus on the deregulation of fuel prices. In Kenya, electricity subsidies were
eliminated over a period of seven to eight years after numerous rounds of negotiations with
stakeholders.

ii. The reforms could take place during periods of stability in the international economy,
allowing consumers and public authorities to adapt in an environment relatively free of
shocks. The June 2022 fuel price increase in Comoros was particularly difficult for the
population because it occurred in a context of high inflation, particularly for staple foods.

• The reforms should be preceded by a public outreach campaign.

i. Consumers are likely to demand information to justify the price increase, particularly given
the general perception of SCH as a prosperous company able to withstand shocks. However,
the public is unaware of the magnitude of SCH losses on sales of diesel fuel to SONELEC and
the taxes forgone by the government. A number of countries have conducted large-scale
outreach campaigns prior to launching energy subsidy reforms (Nigeria 2011-2012; Ghana
2005; Niger 2010).

ii. Consumers also expect credible, tangible mitigation measures. Since fuel price hikes affect
tariffs for transport used extensively by the poor population (students, persons from villages
working in the capital, etc.), they will expect to be compensated for the price increase. The
authorities should respond credibly, since they previously justified the use of fuel taxes to
finance the maintenance of roads that remain in very poor condition today.

• SCH should improve the quality of its services. Queues frequently form in front of service stations
regardless of international economic conditions, and the public cannot understand the lack of
investment in storage tanks. A number of protests over the quality of fuels also took place in
June and July 2022. These problems must be overcome before a consensus can be achieved on
the reform of fuel subsidies.

• Finally, measures should be developed to promote the longevity of the reforms:

i. Monitor and disseminate information on the use of the savings resulting from reduced
subsidies.

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ii. Depoliticize the price setting process by creating an independent office to administer energy
prices.

iii. Establish a transparent and systematic price adjustment mechanism.

28. Medium-term recommendations should also take into account the need to reform
SONELEC. In particular, the diesel supply system/mechanism of SONELEC should be reformed, so
that the burden does not fall solely on the SCH.

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References
African Development Bank, RDGE Department, "Energy Sector Support Project," Memorandum and
Recommendation for Supplemental Grant, May 2019.

Comores - Projet d’appui au secteur de l’énergie - Memorandum et recommandation de don

supplémentaire | Banque africaine de développement - Faire la différence (afdb.org)

Departmental Papers Volume 2013 Issue 002: Réforme des subventions énergétiques en Afrique
subsaharienne: expériences et enseignements (2014) (imf.org)

Francis Brachet and Alain Charlet, Legal Drafting Mission, Technical Report, AFS/LEG, IMF, July 2023

JB Gros, M. El Omari, B. Imbert, M. Dehove, T. Kurkdjian, ‘’Gestion des risques budgétaires et

entreprises publiques’’ [Fiscal risk management and public enterprises], Technical Report,
FAD/AFS, IMF, April 2013.

Masami Kojima and Chris Trimble, ‘’Vers une électricité abordable et des opérateurs viables en
Afrique’’ [Toward affordable electricity and viable operators in Africa], World Bank, 2016.

Trevor Alleyne and Mumtaz Hussain ‘’Réforme des subventions énergétiques en Afrique
subsaharienne, expériences et enseignements’’ [Reform of energy subsidies in sub-Saharan
Africa, experiences and lessons], African Department, International Monetary Fund, April
2013.

Vers une électricité abordable et des opérateurs viables en Afrique, World Bank Document

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PROMOTING FISCAL GOVERNANCE IN COMOROS BY

ENHANCING TRANSPARENCY AND CITIZEN
PARTICIPATION1
A. Executive Summary

This paper examines the issue of improving fiscal governance in Comoros through transparency and
citizen participation. It identifies gaps in the Public Financial Management (PFM) system and proposes
short-term actions, including additional information in budget proposals and publishing essential
documents. Medium and long-term measures involve incorporating tax expenditure quantification,
medium-term fiscal forecasts, and promoting public engagement. Collaboration among key
stakeholders is crucial. By implementing these recommendations, Comoros can achieve enhanced
fiscal transparency, increased accountability, and citizen participation in PFM.

B. Context

1. Fiscal governance plays a pivotal role in promoting economic stability and ensuring
good governance in a country. Effective fiscal management is crucial for sound budget execution,
controlling public debt, and optimizing resource allocation. By implementing sound fiscal policies
and transparent budgetary practices, governments can instill confidence among investors,
businesses, and citizens alike. Some empirical studies, such as Caldas Montes et al. (2019)
demonstrate the critical role of fiscal transparency in reducing public debt and improving
government effectiveness and spending efficiency. Prior to that, other empirical studies highlight the
importance of fiscal transparency in fostering effective policy formulation and budgetary risk
management, ensuring governments provide more accurate information to the public (IMF, 2012).
Enhanced transparency in managing public accounts significantly optimizes fiscal performance and
sustainability while mitigating corruption, market volatility, and strengthening economic forecasts
(Kopits and Craig, 1998; Islam, 2006; Alt and Lassen, 2006a, b; Glennerster and Shin, 2008; Kolstad
and Wiig, 2009; Peat et al. 2015; Arbatli and Escolano, 2015). Furthermore, improved fiscal
transparency would narrow credit spreads in 23 emerging economies, especially benefiting countries
with smaller and less liquid debt markets (Glennerster and Shin, 2008).

2. There is a positive correlation between fiscal transparency and government

effectiveness 2 and control of corruption in a country. The first chart shows the average of fiscal
transparency and overall government effectiveness. The results reveal that countries with high levels

1 Prepared by Guy Dabi Gab-leyba (AFR).

2 The Government Effectiveness indicator, part of the World Governance Indicator (WGI) , evaluates the quality of
public services, the civil service's capacity, its independence from political influence, and policy formulation quality.
To compute this, data from various sources are first aligned with six aggregate indicators, then standardized to a 0 to
1 range. A weighted average for each country is derived using an Unobserved Components Model (UCM),
considering source correlations. The final governance estimate used in this document ranges from -2.5 (weak) to 2.5
(strong) governance performance.

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of transparency in their fiscal practices also demonstrate strong government performance. The
second chart highlights the noteworthy correlation between improvements in fiscal transparency
and the degree of corruption control. Countries that have adopted measures to strengthen their
fiscal transparency have concurrently witnessed a reduction in corruption levels. This highlights the
fundamental role of transparency in mitigating corrupt practices and fostering effective governance.
The third chart compares the transparency indicator of the CPIA from the World Bank or the year
2021 3. It reveals that Comoros ranks among the lowest countries in Africa in terms of transparency,
accountability, and public sector corruption, with a score of 1.5 while the African average stands at
3.5. The last chart illustrates a decline in Comoros' score for transparency, accountability, and public
sector corruption, dropping from 2 in 2004 to 1.5 in 2021. This trend indicates a decrease in
transparency in Comoros, aligning with conclusions drawn from the IBP notation and the World
Governance Indicator. These dynamics emphasize the importance for policymakers and authorities
to prioritize fiscal transparency, leading to more accountable and efficient governance.

Figure 1. Union of the Comoros: Relation Between Fiscal Transparency and Relevant Other Variables
Relation between Fiscal Transparency and for Relation Between Fiscal Transparency and Control of
Government Effectiveness Corruption for World Governance Indicators (WGI)

Source: IBP database for fiscal transparency and World Source: IBP database for fiscal transparency and World Governance
Governance Indicators (WGI) for Government Effectiveness Indicators (WGI) for Control of Corruption

Transparency, Accountability, and Corruption in the Evolution of Transparency, Accountability, and

Public Sector in 2022 Corruption in the Public Sector

Source: CPIA Database of World Bank Source: CPIA Database of World Bank

3 The CPIA rating, which ranges from 1 (low) to 6 (high), measures the accountability of the executive branch,

particularly in financial matters. It evaluates the executive's responsiveness to various governing bodies and the
transparency of public affairs. Additionally, it examines the potential influence of vested interests on state operations.
Sourced from the World Bank Group's CPIA database, this rating focuses on the quality of a country's policies and
institutional setups, emphasizing internal factors over external influences. The CPIA aims to determine how well a
country's framework supports sustainable growth, poverty reduction, and effective use of development aid.

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C. Challenges in Fiscal Transparency and Citizen Participation

3. In Comoros, the Public Financial Management (PFM) system would benefit from
extensive reforms. The country’s PFM is organized by the amended version of the Law on the
Financial Operations of State (LOFE) released in 2012 under the supervision of the Ministry of
Finance. Over the past decade, two significant assessments of Public Financial Management (PFM)
have been conducted: a self-evaluation of the Public Expenditure and Financial Accountability (PEFA)
in 2016 and a more recent Public Expenditure Review (PER) by the World Bank in 2022. The World
Bank assessment reveals that the country's PFM system is inadequate for effectively implementing
government policies, and unfortunately, no overall improvement has been observed between 2016
and 2022. The identified challenges in the PFM system encompass issues such as low budget
transparency and credibility, insufficient control over budget execution and risk management, and
the lack of public dissemination of budget execution monitoring reports. Additionally, the draft
Settlement Law that allows the National Assembly to oversee the outcomes of the previous year's
execution before deliberating on the upcoming finance law credits and objectives is transmitted late
and in a fragmented manner to the Supreme Court's Accounts Section. These findings underscore
the substantial room for improvements to enhance the effectiveness and transparency of the
country's fiscal process.

Table 1. Union of the Comoros: Evolution of IBP Index in Comoros

Index (of 100) 2017 2019 2021

Fiscal transparency 8 0 0

Public participation 0 0 0

Budget oversight 33 35 33

Source: IBP Index 2017,2019 and 2021

4. The 2021 classification of the International Budget partnership (IBP) ranks Comoros
among the worst-performing countries in the world in terms of fiscal transparency 4 and
public participation (Table 1). The country’s fiscal transparency index achieved the highest score
of only 8 out of 100 in 2017 but has since fallen to zero despite some reforms implemented by the
Ministry of Finance. To improve on this front, the Ministry of Finance’s General Directorate of Budget

4 According to the 2018 IMF Fiscal Transparency Handbook, fiscal transparency relates to the information accessible

to the public about the government's fiscal policymaking process. This encompasses the clarity, reliability, frequency,
timeliness, and relevance of public fiscal reporting, along with the openness of this information. The Budget
transparency score, also known as the Open Budget Index, is IBP's measurement of fiscal transparency. It relies on a
rigorous and objective methodology that undergoes independent peer review. The survey includes 228 questions,
out of which 109 questions evaluate the public accessibility of the eight essential budget documents. These
documents collectively offer a comprehensive view of the generation, allocation, and expenditure of public resources
in the budget year. The score ranges from 0 to 100. For documents to be deemed "publicly available," they must be
published online within an appropriate timeframe, containing comprehensive and practical information consistent
with best practices.

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(GDB) would need to publish and respect a timely calendar of publication of documents related to
the fiscal process. While some of these documents are already produced, they are not available
online or produced within the specified timeframe considered by international standard in terms of
transparency. Table 2 provides a summary of the documents that are normally produced during the
budget process, and the challenges underlying the lack of fiscal transparency in Comoros. The
release of the Citizen Budget in 2023, which is a simplified version of a government's finance law, is
expected to improve the classification of the country in terms of fiscal transparency and public
participation 5.

Table 2. Union of the Comoros: Publication of Documents Related to the Fiscal Process in
Comoros
Document Availability online Challenge related to their
production
Pre-Budget Statement Not available Not produced
Executive's budget proposal Not available Produced for Internal Use Only
Enacted budget Not available Published Late1
Citizen budget Not available Published Late 2
In-year report Not available Produced for Internal Use Only
Mid-year review Not available Not produced
End-year report Not available Produced for Internal Use Only
Audit report Not available Produced for Internal Use Only
Source: Based on discussions with authorities and 2021 IBP report
1/ DÉCRET N°23-002 /PR PORTANT PROMULGATION DE LA LOI N°22-012/AU DU 27 DÉCEMBRE PORTANT LOI DE FINANCES
2023
2/ BUDGET CITOYEN 2023

5. Comoros lags behind most of its peer counterparts in terms of fiscal transparency
(Figure 2). The data underscores the urgent need for Comoros to make substantial improvements
in fiscal transparency to align with the global average and peer countries 6. Heterogeneity in the
scores reflects the varying degrees of transparency in the fiscal practices across countries, . A
limitation of this indicator is his reliance on perception, as the IBP's use of independent experts and
government representatives for questionnaire reviews introduces subjectivity into the results.

6. Comoros also sees a low score for public participation in the fiscal process, compared
to other peer countries 7. While some countries have made efforts to improve public engagement

5 Thatdocument is designed to be easily understandable by the public. It breaks down complex financial information
and government expenditures into clear and simple language, graphs, and charts, making it accessible to citizens
who may not have a background in finance or economics. The process of reviewing the 2023 index is ongoing and
the result should be published by end 2023.
6 Peers are Sao Tome and Principe, Timor-Leste, Solomon Islands, Tonga, Samoa, Fiji, Cabo Verde, and Seychelles, as
these shared similar features with Comoros.
7 The scale used to measure public participation ranges also from 0 to 100, with higher scores indicating higher levels

of public engagement in decision-making processes. The global average for public participation in 2021 was 14.

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in budgetary processes, Comoros continue to face significant challenges in fostering public

participation in fiscal decision-making. Based on discussions with authorities, ongoing efforts to
involve Non-Governmental Organizations and Civil Society Organizations (NGO/CSO) in the fiscal
process are evident. However, these initiatives face a significant challenge: they are not formally
documented or systematically incorporated into the fiscal framework. Notable developments in this
regard include: (i) the recent organization of a public-private dialogue; (ii) the establishment of a
formal partnership between the tax administration (AGID) and the Chamber of Commerce, as well as
other unions; and (iii) the creation of a joint committee consisting of customs officials and operators
to enhance dialogue and strengthen relationships.

Figure 2. Union of the Comoros: Scores of Comoros in Terms of Fiscal Transparency and
Public Participation in 2021
Fiscal Transparency Public Participation

Source: IBP report 2021

7. While the LOFE provides for public participation through the Budget Orientation
Debate, such debate has never been organized. This debate is a crucial aspect of the budgetary
process in many African countries. It serves as a platform for discussing the broad fiscal policies,
priorities, and strategies that will guide the government's budget for the upcoming fiscal year. This
debate typically occurs before the budget proposal is submitted to the legislative body for approval.
During the session, government officials, including the finance minister, present the economic
outlook, financial challenges, and proposed priorities for the next budget cycle. Discussions would
touch on key sectors such as education, healthcare, infrastructure, social programs, and economic
development. The goal is to provide an overview of the government's overall financial strategy and
the expected allocation of resources to various sectors. Members of the legislative body, often
including representatives from different political parties, can scrutinize the government's proposed
plans, question the priorities, and offer their insights and suggestions. This debate encourages
transparency, accountability, and public engagement in the budgetary process. Ultimately, the
insights gathered during the Budgetary Orientation Debate inform the final budget proposal that is

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presented to the legislative body for approval. This process ensures that the government's budget
aligns with the country's economic conditions, development goals, and the needs of the population.

8. The authorities' capacity to prepare the budget proposal needs to be strengthened.

Currently, the country lacks the production of macroeconomic projections for the budget year and
the subsequent two fiscal years and macro-fiscal sensitivity analyses, despite being mandated in the
preparation of an economic programming document as per Article 48 of the LOFE. This situation
arises from the absence of a comprehensive macro-fiscal model in Comoros, despite training
provided by the World Bank. Consequently, the budget proposal submitted to the National
Assembly lacks the necessary annexes mandated by the provisions of the LOFE. According to the
World Bank's 2022 Public Expenditure Review (PER), there is a need for enhancement in the
government's budget law documentation 8. Efforts need to be directed towards strengthening the
skills and capabilities of staff to develop budget proposals across various administrative units.

9. Weaknesses persist in budget monitoring and reporting, highlighting the urgent need
to enhance the capacities of stakeholders, particularly in debt and payment arrears
management. Concerning budget monitoring, the Ministry of Finance produces quarterly budget
execution reports and annual reports, which are currently accessible within the Ministry. Documents
related to debt stock and payment arrears are necessary attachments to the budget proposal as
stipulated by the provisions of the LOFE. However, in practice, similar to other relevant documents
that should be appended to the budget proposal, these documents are not generated due to
capacity constraints and a lack of coordination among stakeholders involved in debt contract
negotiations. The World Bank evaluates the country's debt management as inadequate, highlighting
significant delays in information availability within the Debt Unit of the Ministry of Finance. The
Public Debt Reports Heatmap evaluates dissemination practices of public debt in IDA countries,
addressing: (i) dissemination of debt statistics; (ii) publication of key debt management reports; and
(iii) other debt data including contingent liabilities. This assessment utilizes information from
national authorities’ websites and expects governments to regularly release debt statistics online to
maintain transparency standards for citizens and investors. The results are represented in a heatmap,
showcasing strengths and weaknesses by country and indicator, ranked from low (red) to high
(green) based on set criteria. Figure 3 illustrates that Comoros should improve its management in
terms of debt data accessibility, instrument coverage, sectoral coverage, information on recent
contractual loans, periodicity, time range, debt management strategy, annual borrowing plan, and
other debt statistics/contingent liabilities. Indeed, the debt management of the country does not
exercise central oversight over borrowings contracted by the government, owing to insufficient
capacities and lack of coordination among parties involved in debt negotiations. Furthermore, the
debt database remains outdated, a consequence of recurring external arrears and frequent
renegotiations of debt contracts.

8 Indeed,the only document provided with the budget proposal include an explanatory memorandum, a budget
presentation note, an annex tables on revenue and expenditure forecasts, macroeconomic assumptions include
estimates of economic growth, inflation, and the projected budget deficit i.e., primary balance and the overall
balance based on authorization. Meanwhile, details on financing are not provided.

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Figure 3. Union of the Comoros: Debt Reporting Heat Map: 2021

Source: World Bank.

The World Bank's Public Debt Reporting Heatmap is limited due to assessment criteria being subject to interpretation, leading to
potential subjectivity and inconsistency in evaluations across different countries.

D. Recommendations

10. The Ministry of Finance, specifically the GDB, is faced with the imperative to undertake
a comprehensive range of reforms in both the short and long term. These reforms are crucial
for sustainable fiscal practices. The findings of the PER highlight the pressing need to swiftly
implement a series of measures to address immediate challenges. Additionally, they emphasize the
importance of formulating and implementing long-term strategies to enhance fiscal transparency
and improve the efficiency of budget allocation and execution. Figure 4 provides a roadmap to
navigate immediate challenges and forge a sustainable fiscal future. By undertaking these essential
short-term and long-term reforms, the ministry can build a robust and responsive financial system
that aligns with national priorities and fosters inclusive and sustainable development.

11. In the near term, the presentation of the budget proposal and the enacted budget law
should be revised to incorporate basic information which they do not currently contain. This
includes providing clarity on expenditures and revenues at level two of the GFS classification;
information regarding deficit financing; the debt stock for the current fiscal year; and information
about special accounts. The inclusion of these additional basic budget elements would already
constitute an important first step in enhancing Comoros’ PFM process.

12. Measures should be taken to improve the tracking of and reporting on budget
execution. To strengthen the TOFE production process, a committee clearly tasked with tracking
budget execution and producing a timely report on it needs to be appointed and empowered to
carry out these responsibilities. This would ensure that the committee is legally empowered to
collect relevant information from various agencies within a specified timeframe. As is common
practice in other countries, such a committee should be housed at the Treasury where much of the
information on revenues and expenditures is collected. The shortcomings in TOFE production are

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primarily attributable to significant challenges in the Treasury function, particularly stemming from
the absence of the General Directorate of the Treasury and weaknesses in the accounting system,
which substantially affect the production of financial information.

13. To enhance transparency, the authorities should gradually start publishing the various
documents supporting the budget process. The publication of certain documents, such as the
annual executive budget proposal, enacted budget law, in-year execution report, annual budget
execution report, and the Supreme Audit Institution (SAI) report on the annual financial report are
already required by the LOFE 9, although none are currently published. As shown in Table 2, one of
the crucial aspects of fiscal transparency involves the prompt online publication of documents
related to the fiscal process. To achieve this objective, efficient coordination between the GDB and
the department responsible for managing the Ministry's website is necessary. Several countries in
Africa have established dedicated open budget platforms for sharing such data, leading to
substantial improvements in their transparency scores 10. Such an approach could be explored by
Comoros, especially considering that many development partners can provide support for such
initiatives.

14. Over the longer term, budget documents, particularly in the budget proposal, would
need to incorporate other essential elements. These include the quantification of tax
expenditures, documents outlining medium-term fiscal forecasts, and comprehensive presentations
on the implications of new policy initiatives and significant public investments on revenues and
expenditures. Additionally, the budget documentation should include more well-founded and
detailed macroeconomic assumptions, underscoring the need to develop macro forecasting
capacity. Comoros should establish or procure an integrated macroeconomic forecasting model for
formulating a medium-term fiscal framework and a medium-term expenditure framework. These
tools constitute the basis for the elaboration of multi-year budget and economic programming
document which is discussed during the Budget Orientation Debate according the LOFE (see
below) 11. Furthermore, special reports on State-Owned Enterprises (SOEs) and extra-budgetary
entities must also be integrated to enhance transparency and oversight.

15. Moreover, to advance public participation in PFM in Comoros, effective collaboration

and prioritized actions among key stakeholders are essential. Among these stakeholders, the
Ministry of Finance bears a significant responsibility. To foster greater public engagement, the
Ministry's recommendations encompass piloting mechanisms that involve the public in budget
formulation and implementation processes12. Furthermore, the Ministry should take proactive steps
to connect with vulnerable and underrepresented communities by partnering with civil society
organizations that represent them. By encouraging active participation and inclusivity, Comoros can
strengthen public participation in this fiscal process. Comoros's Union Assembly also holds

9 According to the provision of Article 45 of the LOFE.

10 http://datastandardshelp.imf.org/knowledgebase/articles/792072-opendata-platform-odp

11 (1) see the provision of the 2nd paragraph of Article 48 of the LOFE.
12 Chamber of Trade, Union organizations, NGO/CSO specialized in economics matters.

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 UNION OF THE COMOROS

significant responsibility in fostering public participation. To achieve this, the Assembly should allow
members of the public and civil society organizations to testify during its hearings on the budget
proposal before its approval. That reform could be implemented easily by organizing the Budget
Orientation Debate.

16. Furthermore, the Accounts Section of the Supreme Court in Comoros should prioritize
actions to improve public participation. It can achieve this by establishing formal mechanisms for
the public to contribute to the development of its audit program and participate in relevant audit
investigations. By involving citizens in the audit process, transparency and accountability can be
enhanced.

Figure 4. Union of the Comoros: Proposed Reform Timetable Calendar to Improve Fiscal
Transparency and Public Participation in Fiscal Process

Source: 2022 World Bank Public Expenditure Review and discussions with authorities

17. Several partners, including the IMF, are providing support to the GDB to implement
budget program reform and fiscal transparency, but funding gaps remain for some PFM
reforms. Comoros has benefitted from the Fund’s capacity building support in PFM reforms,
focusing on the production of the TOFE and the draft SOE law to improve the government’s
oversight of SOEs and reduce fiscal risks 13. In collaboration with several government entities,

13 IMFAfritac South carried out a technical assistance mission aimed at outlining specific actions related to the
implementation of the amended version of the LOFE. This mission pinpointed 61 actions grouped under 19 axes.
Only a few of these actions have garnered funding, underscoring the pressing need for further technical and financial

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UNION OF THE COMOROS

UNICEF's notable partnership with the General Directorate of Budget was prominent, particularly in
crafting the 2023 citizen budget. Working closely with partners, including the Ministry of Finance
and the Assembly, UNICEF played an essential role in ensuring the participation of the Civil Society
Organization, Citizen Initiative on Budget Transparency, during the 2023 budget review conferences'
fiscal process. Other partners have contributed to the production of the Citizen Budget and budget
program reform. However, despite all these efforts, further activities crucial to the comprehensive
overhaul of the PFM system. These activities may include capacity-building efforts, technical
assistance, and the adaptation of the information system 14. Despite the efforts made by existing
partners, the GDB requires further financial backing to address the complexities and challenges
associated with public finance reform effectively. Sustained financial support from others developing
partners is essential to facilitate the successful implementation of comprehensive reforms, which will,
in turn, lead to more transparent, efficient, and accountable financial practices within the
government. By doing so, the GDB can drive substantial improvements in fiscal management,
bolster economic growth, and effectively utilize public resources to address critical social and
developmental needs.

support. Successfully executing these measures is pivotal for enhancing Public Financial Management (PFM) in
Comoros, enabling the country to achieve its socio-economic development goals.
14 Adapting the current SYMBA information system will enable its modification to facilitate the transition to the
program budget scheduled for 2028. This will also involve ensuring integration with other information systems such
as GISE for salary management purposes.

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