2022 Comoros Public Expenditure Review Addressing Fiscal Challenges to Foster an Inclusive Growth Report no.: AUS0003203 2022 Comoros Public Expenditure Review Addressing Fiscal Challenges to Foster an Inclusive Growth January 2023 Macroeconomics, Trade and Investment Global Practice © 2023 The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved. This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Attribution—Please cite the work as follows: “World Bank. 2023. 2022 Comoros Public Expenditure Review. © World Bank.” All queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Cover photo credits: Nextez, Moroni, Comoros. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Acknowledgements iii Acknowledgements The preparation of the 2022 Comoros Public Expenditure Review (PER) was led by Steve Loris Gui-Diby (Senior Country Economist) and based on different background papers. Jean-Marc Philip (Consultant) and Mario Dehove (Consultant) prepared the background papers on the state of public financial management and state-owned enterprises in Comoros, respectively, while Kady Synthia Keita (Consultant) and Mamadou Tanou Balde (Consultant) prepared the background papers on domestic resource mobilization and the trends and composition of public expenditures, respectively. Moreover, Julien Bandiaky (Consultant) prepared the background papers on public investment management; Pia Schneider (Lead Economist) prepared the health chapter; and Joana da Mota Monteiro (Consultant) prepared the background paper on the macroeconomic fiscal framework. Eglantine Marcelin (Consultant) and Ana Campos Garcia (Lead Disaster Risk Management Specialist) prepared the chapter on disaster risk management. Mohamed Said Ali (Consultant) helped to collect data for the overall PER, Aws Al-Rawashdeh (Intern) prepared research analyses on supreme audit institutions, and Hrisyana Stefanova Doytchinova (Consultant) performed research analyses on public investment and domestic resource mobilization. The team benefited from the contribution of Massimo Mastruzzi (Senior Economist) and Francisco Vazquez Ahued (Consultant) to analyze data and identify key challenges, and from inputs from Manuel Jose Garcia Santana (Senior Economist), Federico Ivan Fiuratti (Consultant), and Steven Michael Pennings (Economist) on long-term growth projections. Eliane Razafimandimby Ramiandrison (Senior Health Specialist) and Rija Lalaina Andriantavison (Health Specialist) provided inputs for the health chapter. Jose Luis Diaz Sanchez (Senior Economist) contributed to the report preparation at an early stage. Colleagues in Moroni, Antananarivo, and Washington DC, including Sitti Fatouma Ahmed, Matoiri Boina Ramlat, and Nani A. Makonnen, facilitated the research process, coordinated mission travels, and supported the preparation and dissemination of the report at different stages. Oscar Parlback edited the report, and Budy Wirasmo Nichlany typeset it. The team thanks the government and the technical teams of the various administrations of the Union of the Comoros for their cooperation and collaboration. The team also extends their appreciation to various World Bank colleagues for their contributions to the preparation of the PER, including Florian Blum (Senior Economist), Fabienne Mroczka (Senior Public Sector Specialist) and Karima Ben Bih (Senior Disaster Risk Management Specialist), who were peer reviewers at the concept or the decision stage, Ibrahim El Ghandour (Public Sector Specialist), Paulo Guilherme Correa (Program Leader), and Boubacar Sidiki Walbani (Resident Representative). The report was prepared under the overall supervision and guidance of Idah Z. Pswarayi- Riddihough (Country Director), Asad Alam (Regional Director), Mathew A. Verghis (Former Practice Manager), and Marco Hernandez (Practice Manager). 2022 COMOROS iv Contents PUBLIC EXPENDITURE REVIEW Contents Acknowledgementsiii Abbreviations and Acronyms xi Executive Summary 1 Accelerate Reform Implementation to Increase Domestic Resource Mobilization 2 Improve the Monitoring and Execution of Social Expenditures to Enhance Socioeconomic Outcomes 2 Improve the Planning of Public Investment to Increase Public Investment Expenditure Efficiency 3 Increase Transparency and Enhance Internal and External Budget Execution Control to Strengthen the Public Financial Management System 3 Improve the Execution of Public Procurement and Expenditure Planning to Enhance Public Health Expenditure Efficiency 4 Update the Legal Framework and Enhance Monitoring to Reduce Fiscal Risks from State-Owned Enterprises 4 Increase the Capacity to Assess Risks and Vulnerabilities and Improve Transparency in Budget Allocation and Execution to Enhance DiRM 5 Overview7 Macroeconomic Context 7 Accelerating the Implementation of Reforms Would Help to Increase Domestic Resource Mobilization 10 Better Spending and Re-prioritization Are Needed to Enhance Socio-Economic Outcomes 11 Enhancing Project Planning Could Increase Public Capital Expenditure Efficiency 11 Strengthening the Public Financial Management System through Increased Transparency, and Enhanced Internal and External Control on Budget Execution 13 Public Health Expenditures Efficiency Could Be Further Improved 14 Better SOE Governance to Reduce Fiscal Risks Requires an Updated Legal Framework and Enhanced Monitoring 15 Better Assessing Risks and Vulnerabilities, and Improving Transparency in Budget Allocation and Execution Would Result into Enhanced Disaster Risk Management 16 Chapter I: Macro-Fiscal Context 28 I.1 Modest Economic Expansion Driven by Consumption 28 I.2 Heavy Reliance on External Partners and Limited Public Service Delivery: Two Features of the Fiscal Policy 29 I.3 Improving State Owned Enterprises Governance and Public Financial Management for Better Outlooks and Mitigated Risks 32 Domestic Revenue Mobilization Chapter II:  36 II.1 There is high potential to increase tax revenues that currently rely heavily on indirect taxes 37 II.1.1 Corporate income taxes are the main source of direct taxes, but their collection is inefficient 39 II.1.2 Excise revenues have been a major source of indirect tax revenue, but they remain below potential levels 41 II.2 Nontax revenues are volatile and have been declining since 2018 44 II.3 There is a need to strengthen the tax administrations 45 II.4 Policy Options to Enhance Domestic Resource Mobilization in Comoros 47 II.4.1 Strengthening the capacity of the tax and customs administrations is a core element of the strategy48 II.4.2 Better enforcement of tax policy could generate revenues and reduce revenue volatility 49 ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Contents v Trends and Composition of Public Expenditures Chapter III:  53 III.1 Public Expenditures Significantly Increased but Remained Below Peers’ Levels 53 III.2 Fiscal Rigidity Remains Important Despite an Increase in Capital Expenditures 55 III.2.1 Public Capital Expenditures Increased Significantly 55 III.2.2 Current Expenditures Declined but Remained Dominated By Wages 56 III.2.3 Capital Expenditures are Volatile and Dominated by Externally Funded Financing 60 III.3 Social Public Expenditures Could Be Increased to Reach Levels Recorded in Peer Countries 61 III.4 There are Opportunities to Improve Budget Execution in Social Sectors 63 III.5 Policy Options 64 Public Investment: Trends, Composition, and Management Chapter IV:  67 IV.1 Volatility and External Funding Characterized the Increase in Public Capital Expenditures 67 IV.2 There Are Opportunities to Improve Public Investment Management Across the Cycle 69 IV.2.1 Planning Sustainable Levels of Public Investment Remains Challenging 69 IV.2.2 Procedures to Allocate Resources to Sectors and Projects Could Be Enhanced 71 IV.2.3 The Delivery of Productive and Durable Public Assets is Hampered by Weak Procurement Practices, Monitoring and Oversight 73 IV.2.4 Public Investment Management and Public Asset Management Could Be Improved by Mainstreaming Climate Change 75 IV.3 Public Investment Efficiency Could Be Further Increased 77 IV.4 Policy Options 79 Overview of Public Financial Management Chapter V:  82 V.1 Fiscal Transparency Can Be Improved As… 83 V.2 There is a Need to Prepare Fiscal Risk and Public Asset Management Report 85 V.3 Better Forecasting and Enforced Budget Processes Are Required to Design an Adequate Policy-Based Fiscal Strategy 85 V.4 Predictability and Control in Budget Execution Could Be Improved by… 88 V.5 Standardization and Exhaustiveness Are Needed for Better Accounting and Reporting 91 V.6 Increasing the Autonomy of the Supreme Audit Institution is Needed 92 V.7 Policy Options 94 Health Expenditure Management Chapter VI:  96 Introduction 96 VI.1 Comoros Has A Growing Population with a Changing Disease Burden 96 VI.2 Total Health Spending Increased with Higher Funding from All Sources 98 VI.2.1 Government Health Spending Increased But Low Budget Execution for Non-Wage Expenditure Contribute to High Patient Payments 99 VI.2.2 Pharmaceutical Management is Underfunded leading to Small Quantity Procurement and High Prices for Patients 102 VI.2.3 High Absenteeism Rates, Unemployment and a Drop in Nursing Students Point to Health Workforce Management and Planning Issues 104 VI.3 Low Health Service Use Resulted in Low Staff Productivity, Costly Use of Emergency Care, and High Patient Payments for Overseas and Specialized Treatment 106 VI.4 El Maarouf National Hospital Needs to be Carefully Managed to Prevent Idle Capacity and Distortions for the Sector 107 VI.4.1 The Private Health Sector Is Unregulated and Not Monitored 109 2022 COMOROS vi Contents PUBLIC EXPENDITURE REVIEW VI.5 Policy Options 110 State-Owned Enterprises in Comoros Chapter VII:  116 VII.1 State-Owned Enterprises: Overview and Institutional Framework 116 VII.2 A Revision of the Legal and Regulatory Framework is Warranted to Improve SOE Governance 120 VII.3 The Ownership and Oversight Function is Weakened by the Current Regulations, and Informal Practices 121 VII.4 The Current Regulations Do Not Allow a Professionalization of the Board of Directors  122 VII.5 There is A Need to Redesign the Procedures for the CEO appointment, and to Rebalance the CEO Autonomy in Staff Recruitment  124 VII.6 There Is a Need to Increase the Effectiveness of Performance Monitoring 127 VII.7 Enhanced Data Quality and Coverage Could Help Strengthening Transparency, Reporting, and Disclosure for Better Governance 128 VII.8 The Performance of State-Owned Enterprises Deteriorated Between 2017 and 2020 130 VII.9 Policy Options 134 Chapter VIII: Disaster Risk Management 136 VIII.1 Comoros is exposed to natural and climate change-related disasters 136 VIII.2 While the government has incorporated climate change at the strategic level, several recommendations have not yet been implemented 138 VIII.3 Legal and Institutional Framework 138 VIII.3.1 The legal framework is limited and derived from different legislations 138 VIII.3.2 Institutional Arrangements 139 VIII.4 There is a need to design and implement financing mechanisms for disaster management 139 VIII.5 A risk-sensitive budget review shows that the DiRM cycle is skewed toward disaster response 142 VIII.6 Conclusion and Policy Options 143 Bibliography 145 Appendix 146 Appendix Annex 1. Direct Tax Instruments 146 Annex 2. Indirect Tax instrument: Taxes on International Trade and Transactions 147 Annex 3. Indirect Tax Instrument: Excise Duties 147 Annex 4. Indirect Tax Instrument: Taxes on Goods and Services 148 Annex 5. Indirect Tax Instrument: Other Taxes 149 Annex 6. Nontax Instruments 149  ealth expenditures by sources in KMF and in % of total health expenditures, 2015 and 2019 Annex 7. H 150  otal recurrent health spending financed by all sources, by type of care, in KM 2015 and 2019 Annex 8. T 150  overnment health expenditures, by recurrent and capital, in KMF, 2015–2020 Annex 9. G 150 Annex 10. Government health budget and actual expenditures, in KMF, 2018 and 2020 151 Annex 11. OCOPHARM Financial Report, in KMF and US$, January–October 2021 151 Annex 12. Financial Impact of the El Maarouf hospital investment in Comoros, in million US$ 152 ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Contents vii Boxes Box 1. Vicious circle of fiscal policy and development in the Comoros 32 Box 2. From Consumption Tax to VAT: Advantages and Prerequisites for a Successful Transition in Comoros 43 Box 3. Project Selection in Comoros 73 Box 4. Global Experience on SAI Financial Autonomy and Staffing 93 Box 5. Experience with PPPs in Lesotho’s Health Sector 110 Box 6. Distinctive Characteristics of PICEs 119 Box 7. Composition of SOEs’ Board of Directors According to the 2021 Decree 123  omposition, Functioning, and Mandate of the Supervision Committee of Public Enterprises Performance Box 8. C 127 Box 9. Comores Telecom’s Accounting Anomalies Identified by the Auditors in 2019 129 Box 10. The Impact of 2019 Cyclone Kenneth on Public Finances 137 Figures  iscal Pathways for Better Socio-Economic Outcomes in Comoros F 6 Figure A. Overall Fiscal Balance and Grants, 2010–20 7 Figure B. Current Expenditures, 2010–20 7 Figure C. I mpact of Public Financial Management (PFM) Reforms on Fiscal Performance in Comoros 9 Figure D. I mpact of Improved Public Spending Efficiency on Long Term Growth in Comoros 9 Figure E. Total Revenues and Grants, 2011–2020 10 Figure F. T  otal Revenues and Grants in Comoros and Peer Countries, 2016–2019 10 Figure G. T  otal Public Expenditure in Comoros and Peers, 2016–20 11 Figure H. P  ublic Investment and Fiscal Balance, 2010–21 12 Figure I. S hare of Public Investment by Source of Financing, 2010–20 12 Figure J. P ublic Investment Efficiency Scores in Comoros and Comparators, 2010–2020 12 Figure K. S  upreme Audit Institution Independence Index, 2021 14 Figure L. G  overnment Health Expenditures by Country, 2018–20 15 Figure M. Fiscal Pathways for Better Socio-Economic Outcomes in Comoros 17 Figure 1. R  eal GDP Growth and GDP per Capita Growth, 2011–20 28 Figure 2. D  emand-Side Contributors to Growth, 2011–20 28 Figure 3. Sectoral Decomposition of Growth, 2011–20 29 Figure 4. Overall Fiscal Balance and Grants, 2010–20 30 Figure 5. Current Expenditures, 2010–20 30 Figure 6. H  uman Capital Index and Secondary School Enrollment, 2020 30 Figure 7. L  earning Gap and Expected Years of Schooling, 2020 30 Figure 8. Logistics Performance Index, 2018 30 Figure 9. S  hare of the Population with Access to Electricity, 2019 30 Figure 10. T  rend and Composition of Public Debt, 2011–20 31 Figure 11. Public Debt in Comoros and Peers 31 Figure 12. PPG External Debt under Alternatives Scenarios, 2021–31 34 Figure 13. I mpact of Public Financial Management (PFM) Reforms on Fiscal Performance in Comoros 35 Figure 14. I mpact of Improved Public Spending Efficiency on Long Term Growth in Comoros 35 2022 COMOROS viii Contents PUBLIC EXPENDITURE REVIEW Figure 15. Total Revenues and Grants, 2011–2020 36  otal Revenues and Grants in Comoros and Peer Countries, 2016–2019 Figure 16. T 36  omestic Revenue by Major Category, 2011–20 Figure 17. D 37  ax Revenue in Comoros and Peer Countries, 2016–19 Figure 18. T 37 Figure 19. Tax Revenue and Execution Rate, 2011–20 38 Figure 20. Direct and Indirect Tax Revenue, 2011–20 38  ax Revenue Buoyancy in Comoros and Peers, 2011–19 Figure 21. T 38  ax Revenue Capacity and Gap in Comoros and Peers, 2016–19 Figure 22. T 38 Figure 23. Trends in CIT Revenues, 2011–20 40  IT Revenues Collected in Comoros and Selected Peers, 2016–19 Figure 24. C 40  IT Efficiency and CIT Rate in Comoros and Selected Peers Figure 25. C 40 Figure 26. Trends in PIT Revenues, 2011–20 41  IT Revenues Collected in Comoros and Selected Peers, 2016–19 Figure 27. P 41  IT Efficiency and Highest Marginal PIT Rate in Comoros and Selected Peers Figure 28. P 41 ndirect Taxes in Comoros in 2016–20 by Major Category Figure 29. I 42  xcise Revenues in Comoros and Selected Peer Countries, 2016–19 Figure 30. E 42  axes on Goods and Services in Comoros and Selected Peers, 2016–19 Figure 31. T 42  axes on International Trade in Comoros and Selected Peers, 2016–19 Figure 32. T 42 Figure A-2. T ax Collection in Comoros and Peer Countries 43  ontax Revenues Collected Compared to Targeted Revenues, 2011–20 Figure 33. N 45  ontax Revenues in Comoros and Peers, 2016–19 Figure 34. N 45  omestic Tax on Petroleum Products, 2012–21 Figure 35. D 46 Figure 36. Total Public Expenditure, 2010–20 54  otal Public Expenditure in Comoros and Peers, 2016–20 Figure 37. T 54 ncrease in Public Expenditure in Comoros and Peer Countries, 2020 Figure 38. I 55  ontribution to the Decline in Public Expenditure, 2020 Figure 39. C 55 Figure 40. Public Expenditure Composition, 2010–20 56 Figure 41. Evolution of Public Wages, 2010–20 57  ublic Wage Bill in Comoros and Peers, 2016–20 Figure 42. P 57  volution of Current Transfers, 2010–20 Figure 43. E 58  urrent Transfers by Key Economic Sector, 2016–20 Figure 44. C 58  ransfers and Subsidies in Comoros and Peer Countries, 2016–20 Figure 45. T 58  oods and Services Expenditures in Comoros and Peer Countries Figure 46. G 59  oods and Services Expenditure Dynamics, 2010–20 Figure 47. G 59  oods and Services Expenditure by Sector, 2016–20 Figure 48. G 59 Figure 49. Interest Payments, 2010–20 60 nterest Payments in Comoros and Peer Countries Figure 50. I 60 Figure 51. Capital Spending, 2010–20 60  omestically Financed Capital Expenditure by Sector, 2016–20 Figure 52. D 61  apital Expenditures in Comoros and Peer Countries in 2016-20 Figure 53. C 61 Figure 54. Public Expenditure by Function, 2016–20 61  ducation Expenditures in Comoros and Peers, 2016–20 Figure 55. E 62  ealth Expenditures in Comoros and Peers, 2016–20 Figure 56. H 62  nvironment Expenditures in Comoros and Peers, 2016–20 Figure 57. E 62  ocial Protection Expenditures in Comoros and Peers, 2016–20 Figure 58. S 62 Figure 59. Expenditure Execution Rate, 2016–20 63  urrent Expenditure Execution Rate, 2016–20 Figure 60. C 63 ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Contents ix  xpenditure Execution by Administrative Classification Figure 61. E 64  xpenditure Execution by Functional Classification in 2016–20 Figure 62. E 64  ublic Investment and Fiscal Balance, 2010–21 Figure 63. P 68  hare of Public Investment by Source of Financing, 2010–20 Figure 64. S 68  xecution Rate of the Foreign Financed Investment Program, 2016–20 Figure 65. E 68 Figure 66. Allocation of Foreign Financed Investment Budget by Sector, 2016–20 69  ntry Points for Mainstreaming Climate Change in Public Investment Management and Public Asset Figure 67. E Management 76 Figure 68. Access to Electricity 77 Figure 69. Mortality Caused by Road Traffic Injuries 77  ut-of-School Rate for Children of Primary School Age Figure 70. O 78 Figure 71. Under-Five Mortality Rate 78  eal GDP Growth: Budget Law Projections vs. Recorded, 2016–21 Figure 72. R 85  irements and Transfers as a Share of Approved Budget, 2016–20 Figure 73. V 90  upreme Audit Institution Independence Index, 2021 Figure 74. S 92 Figure 75. Comoros Population Pyramid, 2020 and 2050 97 Figure 76. Top 21 Causes of Age-Standardized Deaths, 2020 and 2040 98  otal Health Expenditures as a share of GDP, 2015 and 2019 Figure 77. T 99 Figure 78. Total Health Expenditures by Source 99 Figure 79. Government Health Expenditures 100  overnment Capital and Recurrent Health Expenditures Figure 80. G 100  overnment Health Expenditures by Country, 2018–20 Figure 81. G 100  ealth Budget Execution Rates, 2018 and 2020 Figure 82. H 100 Figure 83. Transfers to Hospitals, 2020 102  hysicians per 1,000 People, 2017 Figure 84. P 105  omoros’ Health Workers, 2017 Figure 85. C 105 Figure 86. Projected Government Health Expenditures 108  umanitarian Assistance from Development Partners Figure 87. H 141 Tables Table 1. Policy Options to Enhance Public Expenditure Efficiency and Create Fiscal Space 18 Table 2. Composition of Comorian Government Revenue 39 Table 3. Policy Options to Improve Domestic Revenue Mobilization 51 Table 4. Policy options to improve public expenditure’s reliability and execution 66 Table 5. Maintenance Costs 72 Table 6. Public Sector Investment Performance Efficiency in Comoros and Selected Countries 78 Table 7. Policy Options to Improve Public Investment Management 79  ransmission Dates of Budget Circular to Prepare the Budget Law Table 8. T 86 Table 9. Dates for Transmitting the Budget to Parliament and Approval 87 Table 10. Public Procurement Contracts, 2017–20 89 Table 11. Policy Options to Improve Public Financial Management 94 Table 12. Total and Recurrent Health Expenditures by Region, 2015 and 2019 99 2022 COMOROS x Contents PUBLIC EXPENDITURE REVIEW Table 13. Government Health Expenditures by Economic Classification, 2018 and 2020 101 Discrepancies in Government Recurrent and Capital Health Expenditures, 2020 Table 14.  101 Table 15. Government Recurrent Health Expenditures, 2020 102 Table 16. Government Expenditures by Pharmaceutical Agency, 2020 104 Table 17. Types of Public-Private Collaboration Models in Health Care 109 Table 18. Policy Options to Improve Health Outcomes 115 Table 19. Value Added of Selected SOEs, 2018–20 116 Table 20. List of SOEs in Comoros, 2018–20 117 Table 21. Comparison of Key Financial Indicators of MA-MWE and SONELEC (KMF million) 120 Table 22. Price Systems for Selected Comorian SOEs 125 Table 23. Evolution of Staff Costs, 2017–2020 126 Table 24. Comparison of Taxes and Duties for Selected SOEs, 2018–20 129 Table 25. Financial Performance Indicators for Selected SOEs, 2017–20 130 Table 26. Debt, Claims, and Liquidity of Selected SOEs 132 Table 27. Fiscal Transactions between SOEs and the State, 2018–20 133 Table 28. Policy Options to Improve State Owned Enterprises Governance 134 Table 29. Natural Disasters and Losses in Comoros, 1980–2022 137 Table 30. Account Status of the Natural Disaster Risk Reduction Fund 140 Table 31. DGSC Operating Expenses 141 Table 32. Disaster Risk Management Total Expenses under Domestic Financing 142 Table 33. Average Allocated Marked DRR Budget across the DiRM Cycle, 2016–2020 143 Table 34. Policy Options to Enhance Disaster Risk Management 144 ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Abbreviations and Acronyms xi Abbreviations and Acronyms ADC Aéroport des Comores IFMIS Integrated financial management AGID General Administration of Taxes and information system Domains, Administration Générale des IGF General Inspection of Finance Impôts et des Domaines IMF International Monetary Fund ANPI Agence Nationale pour la Promotion des LOFE State Financial Operations Law Investissements MOH Ministry of Health APC Autorité portuaire des Comores MTEF Medium-term expenditure framework ARMP Public Procurement Regulatory Authority, NCD Noncommunicable disease Autorité de Régulation des Marchés Publics NCPC National companies with public capital BCC Central Bank of the Comoros, Banque NHA National Health Accounts Centrale des Comores OCOPHARMA Comorian Office of Pharmaceutical Products CC Comores Câbles ONICOR Office nationale d'importation et de CGP General Planning Commissariat, commercialisation du riz Commissariat General au Plan OOP Out-of-pocket CMP Public Procurement Code PCE Emerging Comoros Plan, Plan Comores CRD Dispute settlement committee Emergent CSPEP Supervision Committee of Public Enterprise PER Public Expenditure Review Performance PFM Public financial management CT Comores Télécom PIM Public investment management DEA Data envelopment analysis PIP Public investment plan DGSC National Directorate for the Control of PLC Public limited company Public Procurement and Delegation of PPP Public-private partnership Public Services, Direction nationale de QMMH Queen Mamohato Memorial Hospital contrôle des marchés publics et délégations SAI Account Section of the Supreme Court de service public SCH Société Comorienne des Hydrocarbures DiRM Disaster risk management SOE State-owned enterprise DNCMP National Directorate for the Control of SONEDE Société nationale d'exploitation et de Public Procurement and Delegation of production des eaux Public Services, Direction nationale de SONELEC Société nationale de l'électricité des contrôle des marchés publics et délégations Comores de service public SSA Sub-Saharan Africa DRR Disaster risk reduction THE Total health expenditures HIPC Heavily Indebted Poor Countries TSA Treasury Single Account WDI World Development Indicators Executive Summary 1 The Union of the Comoros is a small island in Eastern Africa which is characterized by a modest economic expansion and fiscal issues which have had an impact on long-term growth. GDP growth averaged 2.7 percent in 2011–2020, resulting in per capita GDP growth averaging 0.4 percent over the same period. The economy has been primarily driven by consumption, fueled by remittances and tourism receipts from the diaspora. Economic activity is undiversified, characterized by a small, largely informal, private sector with limited value addition. Its distance to world markets, the small size of the economy and the weak institutions resulted into high unitary costs across sectors, and the creatin of several state-owned enterprises (SOEs). Labor force participation, especially among women (which is about half that of men), has been remarkably low, and poor quality of education has persistently undermined the contribution of human capital to productivity growth, with overall total factor productivity nearly absent. The low human capital mirrors the need for the fiscal policy to be more inclusive and efficient to boost growth. Hence, this Public Expenditure Review (PER) aims at analyzing core elements of the fiscal policy and its implementation to improve public expenditure efficiency and create fiscal space with long term goal of supporting public service delivery, ensuring fiscal sustainability, and achieving an inclusive growth. Comoros faces several fiscal challenges that can be summarized as follows: › Low domestic revenue mobilization and heavy reliance on external grants which constrain the fiscal space available to attend development challenges. › Low and inefficient government expenditures which limit public service delivery. › Weak SOEs’ performance which weighs on fiscal sustainability due to increased fiscal risks. › High risk of debt distress due to weak macroeconomic performance, and the signature of non-concessional loans in 2017–21. Limited fiscal space to address development needs explains the country’s low human capital and poor quality of infrastructure that hamper efforts to increase productivity and private sector development. With a Human Capital Index score of 0.40 and a gross secondary school enrollment rate of 57.5 percent, Comoros’ level of human capital is low relative to peers. In addition, there is a learning gap of three years in Comoros that represents 37.5 percent of expected years of schooling, well above aspirational peers such as Mauritius and Seychelles. The country’s poor-quality infrastructure is highlighted by its low performance on the Logistic Performance Index, which is below the average observed in structural peers and lower-middle-income countries. In addition, due to low performing state-owned enterprises (SOEs) and weakening in economic performance, Comoros faces significant fiscal risks. State-owned enterprises make up an important part of the Comorian economy, but many suffer from low performance and weak oversight, resulting in significant fiscal risks. Unreliable fiscal revenues from SOEs and large contingent liabilities driven by their rapidly decreasing profitability create a substantial risk to debt sustainability. Finally, the overall risk of debt distress is high because of the increase in debt service obligations that follow the signature of large non-concessional loans and weakening economic performance. The analysis presented in this Public Expenditure Review (PER) supports the efforts of the Government of Comoros to enhance public expenditure efficiency, create fiscal space, and limit fiscal risks. The analysis is designed to focus on public investment management (PIM) and public financial management (PFM), identify reforms that could yield 2022 COMOROS 2 Executive Summary PUBLIC EXPENDITURE REVIEW fiscal and efficiency gains, and assess the governance of state-owned enterprises (SOEs). In fact, an increase in their efficiency—through better public investment management or allocation of resources—could yield between 0.03 and 0.15 percentage points of additional GDP growth between 2022 and 2050, and specific PFM reforms could help increasing fiscal performance by values ranging between 0.27 percent of GDP and 1.76 percent of GDP. The Public Expenditure Review also focuses on the health sector, including the implementation of the El Maarouf project, and on disaster risk management. Reforms, discussed in this Public Expenditure Review, through their impact on public service delivery and inclusive growth would reduce the country’s fragility. Accelerate Reform Implementation to Increase Domestic Resource Mobilization Comoros’ total government revenues have been below levels observed in peer countries during the past decade but strengthening the tax administrations and reducing tax exemptions could help boosting revenues. This situation is reducing the government capacity to provide public services that would help unleashing Comoros growth potential and addressing lingering development challenges. For instance, in 2016–2019, Comoros mobilized 16.8 percent of GDP, almost half the size in comparison to around 31.4 percent in small island peer countries. Comoros domestic revenues are heavily driven by indirect taxes which represent about 75 percent of tax revenues, but due to a weak tax administrations and unassessed tax exemptions, several tax instruments are not sufficiently effective. The effectiveness of the tax administration in collecting tax revenue is impeded by its large mandate which also encompasses property management, and difficulties in identifying and monitoring taxpayers, and access to integrated information on taxpayers, while the system of tax exemption lacks transparency, and there is no published data on tax expenditures. The tax administration is also involved in the registration of properties and provides public services on this matter. Key policy options include: (i) a reform of the tax administration to exclusively focus on tax matters and the improvement of the identification of taxpayers; (ii) the reduction and the improved monitoring of tax exemptions; and (iii) the automated exchange of information on taxpayers between the administration, and key stakeholders involved in the taxation cycle. Improve the Monitoring and Execution of Social Expenditures to Enhance Socioeconomic Outcomes Due to low total government revenues, total public expenditures have below levels observed in peer countries as Comoros’ government budget averaged 18.8 percent of GDP in 2016–20, much lower than the average of 33.7 percent of GDP for aspirational peers, which include Seychelles, Mauritius, Tonga, and Cabo Verde. This situation has limited the government capacity to provide public services that would help unleashing Comoros growth potential and addressing lingering development challenges. The fiscal rigidity, due to the still sizeable wage bill (56.7 percent of government revenues in 2020 in comparison with 64.8 percent in 2016), is declining but remains important. However, the budget allocated to attend social development challenges remains low, and under-executed, in comparison with other sectors. In fact, the budget execution in the social sector declined from 72.9 in 2016–19 percent to 64.9 in 2020 percent while it increased from an average of 67.2 percent in 2016–19 to 99.6 percent in 2020 in the economic and administrative management sectors. In addition, the budget allocated to social sectors is average 3.4 percent of GDP in 2016–20 while it reached about 7.8 percent of GDP in peer countries. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Executive Summary 3 Improve the Planning of Public Investment to Increase Public Investment Expenditure Efficiency While public investment was volatile but broadly increased between 2010 and 2020, their efficiency has been below levels in peer countries; limiting thus their ability to result into an inclusive growth. Fueled by external fundings, public investment increased from an average of 25.7 percent of total public expenditures in 2010–12 to an average of 36.8 percent in 2013–21. However, public investments were less efficient in Comoros than in peer countries as Comoros public investment efficiency score was estimated at 60.3 in2016–20 while it averaged 88.4 and 76.6 in aspirational and structural peers, respectively. Comoros score means that country could reduce its public investment spending by 39.7 percent and produce the same level of development outcomes. Public investment management in Comoros faces challenges related to the absence of a medium-term expenditure framework which would underpin budget preparation, the lack of systematic project appraisal, the need to have explicit selection criteria for investment projects, and a weak procurement function which is not adequately integrated in public investment management. Those results suggest that there is a need to improve the planning functions, ensure that investment is allocated to the right sectors, enhance monitoring mechanisms, and enforce the public procurement law to deliver productive and durable assets. Key policy options include: (i) the use of explicit project selection criteria to ensure the implementation readiness of projects; (ii) the mainstreaming of procurement and climate change issues in the project cycle to ensure value for money and sustainability; and (iii) the development of multi-year budget programming. Increase Transparency and Enhance Internal and External Budget Execution Control to Strengthen the Public Financial Management System The country’s public financial management system is inadequate to effectively implement government policies, and the overall system has not been improved since 2016. While it is acknowledged that public financial management (PFM) systems play an important role in the implementation of the fiscal policy and to improve fiscal performance, Comoros most recent public financial management assessment (in 2016) finds several issues in this real of public governance. This chapter aims at reviewing progress to improve the public financial management system between 2016 and 2022. It finds that the country’s public financial management system is not adequate to effectively implement government policies, and the overall system has not been improved between 2016 and 2022. Challenges facing the country’s public financial management system at different stages of the budget cycle include the facts that: (i) budget transparency and credibility are low as Comoros scored 0/100 in the latest Open Budget Index (OBI) assessment; (ii) control over budget execution is insufficient as no adequate internal audits have been performed in Comoros, the procurement function remained weak in 2016–21 (despite the recent development of an e-procurement platform and the promulgation of the procurement law in October 2022), and budget risk management is not adequately assessed; (iii) budget execution monitoring reports do not present the required level of depth and are not publicly disseminated; and (iv) there is a need to increase the autonomy of the Supreme Audit institution (SAI), and to ensure that issues (reported by the SAI) are addressed. For instance, Comoros ranks 101st out 122 countries in the 2021 Supreme Audit Institution Independence Index, and the supreme audit institution budget is equivalent to US$1.1 million but it is lower than a projected budget of US$2.18 million (based on global benchmarks). Key policy options include: (i) enhancing fiscal transparency by publishing fiscal data and report, and preparing citizen budget; (ii) improving public expenditure efficiency through the issuance of the bylaw related to the new procurement law, and the deployment of an e-procurement system, and its compulsory use; and (iii) creating an internal audit function within the ministry of finance, and enhancing the independence of the supreme audit institution. 2022 COMOROS 4 Executive Summary PUBLIC EXPENDITURE REVIEW Improve the Execution of Public Procurement and Expenditure Planning to Enhance Public Health Expenditure Efficiency The Public Expenditure Review identifies five key issues that need to be given immediate attention to improve the health of the population. First, government health spending has increased and mainly finances hospital care and the health wage bill, but households still pay for the lion’s share of health expenditures through high out-of-pocket payments. Inadequate public financial management in the health sector has resulted in very low budget execution and a lack of transparency in spending, including for the recently launched health insurance program. By 2020, government health expenditures reached 1.6 percent of GDP and 8.3 percent of general government expenditures, but weak budget management has resulted in consistently low health budget execution. In 2020, only 54 percent of the government’s health budget was executed, representing a marginal increase from 51 percent in 2018. Second, despite recent reforms, the pharmaceutical program is underfunded and combined with weak procurement has contributed to high stockout rates for essential medicines, service disruption, and high prices for patients. Third, the size of the health workforce has increased, but enrollment at the local nursing school has dwindled. Only half of health staff are on the government payroll, and more than half of them do not show up for work. Fourth, service use in public health facilities is extremely low, resulting in low staff productivity and high out-of-pocket payments for treatment abroad. Fifth, the government has embarked on a major reform to reconstruct the El Maarouf national hospital which would result into a substantial increase in health expenditures. Key policy options include: (i) finalizing the construction of El Maarouf hospital within the health system context, and designing a realistic budget to adequately staff and operate the hospital; (ii) using government health expenditures efficiently and investing in pharmaceutical procurement to improve health service delivery and population health; (iii) transforming health workforce management and education; and (iv) regulating the private health sector. Update the Legal Framework and Enhance Monitoring to Reduce Fiscal Risks from State-Owned Enterprises Comoros State-owned enterprises operate across different sectors, but their financial situation deteriorated substantially between 2017 and 2020 because of weak governance, and it increased fiscal risks. State-owned enterprises (SOEs) make up an important part of the Comorian economy and the government budget (About 43 percent of the government budget), but they are mostly low performing and weakly oversighted, creating significant fiscal risks. In fact, for eight state-owned enterprises with available data, total net income, although positive, declined from KMF 3,148 million in 2017 to KMF 927 million in 2020; and total taxes paid by SOEs to the central administration declined from KMF 39.4 billion in 2017 to KMF 7.2 billion in 2020. While acknowledging recent developments in the appointment and composition of SOE boards, Comoros needs to update its outdated legal and regulatory framework to improve transparency, oversight, and accountability. Additional efforts are required to develop an effective state- owned enterprises’ oversight function, design institutions that would allow a professionalization of boards, and enhance performance monitoring. This Public Expenditure Review finds that accounting data is scarce, poorly controlled, and not very reliable, and there are important discrepancies between data reported by SOEs and the Directorate of Budget. Finally, it is found that most SOEs do not have audited accounts (including without qualifications) from independent auditors even though some SOEs recorded a substantial increase of operational costs such as staff costs. Key policy options include: (i) enacting a new SOE law that would address the shortcomings identified in this Public Expenditure Review; (ii) issue and implement regulations on the application and compliance with accounting standards for financial reporting; and (iii) require SOEs to prepare restructuring or follow-up action plans, including the mandatory yearly auditing of state-owned enterprises’ financial statements. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Executive Summary 5 Increase the Capacity to Assess Risks and Vulnerabilities and Improve Transparency in Budget Allocation and Execution to Enhance DiRM The Union of the Comoros is exposed to a wide range of natural disasters but the Public Expenditure Review finds that disaster risk management is not explicitly documented in the national budget and its execution. The application of the OECD DAC DRR policy marker, find that in 2016–20, US$2.9 million was allocated to expenditures related to disaster risk management on average each year. This represents 2.57 percent of the national budget. Most of the expenditures were related to disaster response but were not explicitly reported or monitored. Key policy options include: (i) explicitly document risk reduction investments in the national budget to better assess the country’s disaster risk management investments; (ii) strengthen the National Disaster Risk Reduction Fund (budget line) through an improved fund allocation, management, utilization, and transparency; and (iii) strengthen collaboration between the Ministry of Finance and Budget, the Directorate General of Civil Security and the other key sectoral ministries involved in disaster risk management through a disaster risk management law that defines clear institutional mandates and financial resources. To have a fiscal policy which achieves an inclusive growth while being sustainable, the PER provide policy optionsto improve public financial management, enhance domestic resource mobilization, improve the efficiency of public health spending, and take steps to incorporate climate change and disaster risk management. Below is a selection of game- changing reforms and key priority actions: › Reduce tax expenditures and improve their monitoring by preparing a report as an annex to the budget proposal › Enact a law and issue the implementation decree to restructure the tax administration and remove its mandate property registration › Enhance fiscal transparency to build trust, including through the preparation of citizen budget › Issue the implementation decree of the new procurement law that provides for the digitalization of procurement transactions › Deploy the e-procurement system, and mainstream procurement within the budget execution › Enact a new law that would strengthen the independence of the supreme audit institutions › Use of explicit project selection criteria to ensure the implementation readiness of projects › Develop a medium-term fiscal framework, and a multi-year budget programming › Enact a new SOE governance law that incorporates latest developments in this realm › Issue a decree requiring the annual external audit of SOEs and the preparation of an action plan › Create a directorate within the ministry of finance for the oversight of state-owned enterprises › Enact a disaster risk management bill to enhance public spending efficiency through an integrated approach › Invest in a El Maarouf hospital based on the masterplan, the health system context, and a realistic operational budget 2022 COMOROS 6 Executive Summary PUBLIC EXPENDITURE REVIEW  Fiscal Pathways for Better Socio-Economic Outcomes in Comoros Pathway I : Pathway II : Pathway III : Achieving an Increase the Increasing Public Reforming Institutions Level of Government Revenues Expenditure Efficiency to Increase Resilience Enact a law and the bylaws to restructure the tax administration Issue a decree on the and remove its mandate on digitalization of procurement Enact a law on disaster property registration risk management Issue a decree requiring annual Reduce and better monitor external audits of state-owned tax expenditures entreprises, and the preparation of action plan Improve data foundations and fiscal transparency for better fiscal management Enact a law that will strengthen Enact a new law on state-owned the independence of the entreprises governance supreme audit institution Improve the preparation, Prepare medium-term budget execution and monitoring of Create a directorate within the social expenditures, including for framework and and define explicit ministry of finance for the oversight project selection criteria for public the El Maarouf Hospital of state-owned enterprises investment projects Source: World Bank staff.   Overview 7 Macroeconomic Context Modest economic growth in a context of social, political, and institutional weaknesses has hindered the expansion of Comoros’ per capita income in recent years, with Cyclone Kenneth and COVID-19 hampering the country’s growth. GDP growth averaged 2.7 percent in 2011–2020, resulting in per capita GDP growth averaging 0.4 percent over the same period. The economy has been primarily driven by consumption, fueled by remittances and tourism receipts from the diaspora. However, this growth model is unsustainable as it has a limited impact on job creation and poverty reduction, and it could increase the country’s fragility. Economic activity is undiversified, characterized by a small, largely informal, private sector with limited value addition. Labor force participation, especially among women (which is about half that of men), has been remarkably low, and poor quality of education has persistently undermined the contribution of human capital to productivity growth, with overall total factor productivity nearly absent. The combination of a sizeable informal sector and existing structural bottlenecks in domestic resource mobilization result in a heavy reliance of the budget on external grants and a substantial fiscal deficit (excluding grants). Comoros’ fiscal policy is characterized by low tax revenues, which averaged 7.5 percent of GDP in 2011–2020, a heavy reliance on external grants, and a substantial wage bill (Figures A and B). Between 2011 and 2020, the overall fiscal balance averaged 0.4 percent of GDP, with grants representing at least one-third of total government revenues. On the revenue side, tax revenues are undiversified, raised primarily through customs receipts (about half of total tax revenues), reflecting persistent weaknesses in taxpayer registration and the tax administration. Nontax revenues are volatile and suffer from increasingly underperforming state-owned enterprises (SOEs). Figure A. Overall Fiscal Balance and Grants, 2010–20 Figure B. Current Expenditures, 2010–20 percentage of GDP percentage of total revenues percent of domestic revenues 15 70 130 10 60 110 50 5 40 90 0 30 70 -5 20 50 -10 10 -15 0 30 10 11 12 13 4 5 16 17 18 19 10 11 12 13 4 15 16 17 18 9 20 20 1 1 1 1 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 J Overall fiscal balance (incl. grants) J Overall fiscal balance (excl. grants) ▬ Current expenditures ▬ Wages and salaries  100-line ▬ Grants (rhs) ▬ Current expenditures (percent of total revenues) Source: World Bank staff calculations using data from national authorities. Limited fiscal space to address development needs explains the country’s low human capital and poor quality of infrastructure that hamper efforts to increase productivity and private sector development. With a Human Capital Index score of 0.40 and a gross secondary school enrollment rate of 57.5 percent, Comoros’ level of human capital is low relative to peers. In addition, there is a learning gap of three years in Comoros that represents 37.5 percent of expected years of schooling, well above aspirational peers such as Mauritius and Seychelles. The country’s poor-quality infrastructure is highlighted by its low performance on the Logistic Performance Index, which is below the average 2022 COMOROS 8 Overview PUBLIC EXPENDITURE REVIEW observed in structural peers and lower-middle-income countries. Limited fiscal space to attend development challenges results from low domestic revenues and high fiscal rigidity with wages and salaries representing 56.7 percent of domestic revenues in 2020 (Figure B). After a sluggish economic expansion in 2019–2022, Comoros’ medium-term growth prospects are favorable but prone to global uncertainty. After averaging 1.3 percentage points in 2019–2022 because of the Kenneth cyclone, the COVID-19 pandemic, and the increased inflationary pressures due to Ukraine-Russia war and global value chain issues, growth is expected to rebound in 2023–2024 to an average of 3.6 percent if private consumption resumes, and major public investment projects are completed within this period. These projections are based on a broad-based return to normality in the tertiary sector and stronger demand for agricultural products. In the post-pandemic era, poverty is expected to remain at a high level at 39.8 percent in 2022, before it declines slightly to 38.4 percent by 2024. However, this is contingent on Comoros’ ability to contain the economic impact of soaring prices on the economy through the adoption of adequate government mitigating measures, including for state-owned enterprises (SOEs) and the financial sector. The most recent International Monetary Fund (IMF)-World Bank Debt Sustainability Analysis finds that Comoros’ public debt remains sustainable, but the overall risk of debt distress has moved from moderate to high.1 The change mainly reflects higher debt service obligations associated with the two recent large non-concessional loans that are of short maturity. Meanwhile, the baseline macroeconomic conditions that affect debt-related indicators have also deteriorated, driven by the integration of expected postal bank recapitalization costs into the macroeconomic projections, and by pandemic-related weakening in economic performance. As a result, three out of four external debt burden indicators breach their respective thresholds. Comoros continues to be susceptible to export and depreciation shocks, and more prolonged and protracted shocks to the economy would also present downside risks to the debt outlook. SOEs make up an important part of the Comorian economy, but many suffer from low performance and weak oversight, resulting in significant fiscal risks. Comorian SOEs operate across a variety of sectors (telecommunication, energy, utilities, and financial sector). SOE performance has been deteriorating in recent years, partly due to a lack of proper management and oversight. Unreliable fiscal revenues from SOEs and large contingent liabilities driven by their rapidly decreasing profitability create a substantial risk to debt sustainability. Indeed, the country’s SOE debt is high (estimated at 21 percent of GDP), and most of it is guaranteed by the State. Yet, the “true” amount of SOE debt is unclear, given the presence of unofficial and unaudited cross debts with the State and among SOEs. In addition, Comoros is subject to several natural disasters that could result into substantial fiscal costs for the reconstruction. With climate change, Comoros could be subject to more climate change disasters, such as the Cyclone Kenneth which hit the country in 2019, and this category of events would increase public spending pressures to face emergency and reconstruction costs. For instance, it is estimated that the total reported and modelled damages from the Cyclone Kenneth ranged between US$80 and US$118 million, which represent about 6.7–9.9 percent of GDP (in 2019). Similarly, in 2014, it was estimated that the average annual direct losses from earthquakes, floods and tropical cyclones was US$5.7 million while the 250-year return period loss from all perils could be estimated at US$150 million.2 1 A deterioration from the Debt Sustainability Analysis of the 2019 Article IV consultation. 2 World Bank (2019). Global Rapid Post Disaster Damage Estimation (GRADE) – Cyclone Kenneth in Comoros: Preliminary Report, World Bank: Washington DC. World Bank (2016). Comoros Disaster Risk Profile, World Bank: Washington DC. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Overview 9 mpact of Public Financial Management Figure C. I Impact of Improved Public Spending Figure D.  (PFM) Reforms on Fiscal Performance in Efficiency on Long Term Growth in Comoros Comoros percent of GDP percentage points 2.0 0.16 1.76 0.14 0.143 0.146 1.6 0.12 1.2 0.10 0.091 0.093 0.8 0.88 0.08 0.74 0.60 0.06 0.4 0.53 0.37 0.27 0.30 0.04 0 Availability of Precitability in Recording and Effectiveness 0.02 0.027 0.027 information on the availability management of of internal resources received of funds for cash balances, audit by service delivery commitment debt and 0 units expenditures guarantees 2022–2030 2031–2040 2041–2050 J Marginal changes J Substantial changes J D. GDP per capita growth J D. GDP growth Source: World Bank estimates based on Long Term Growth Model (LGTM) projections, and Gui-Diby (2022). Note: Marginal changes refer to an increase by 0.5 point of the PEFA score, and substantial changes refer to an increase of one point of the PEFA score. To cope with the above mentioned macroeconomic and social challenges, the Government of Comoros could implement several reforms that would help increase public expenditure efficiency and create fiscal space in the medium term. Given the current spending pressures due to increased inflationary pressures, there is a need to accelerate the implementation of reforms aimed at improving public financial management (PFM) and public investment management that would increase public spending efficiency and enhance public services delivery. Concerning public spending efficiency, an increase in their efficiency—through better public investment management or allocation of resources—could yield between 0.03 and 0.15 percentage points of additional GDP growth between 2022 and 2050 (Figure C). Recent empirical analyses establish a relationship between fiscal performance and selected PFM components such as: the predictability in the availability of funds for commitment of expenditures, recording and management of cash balances, debt and guarantees, effectiveness of internal audit and the availability of information on resources received by service delivery units. The impact of reforms in the above listed PFM areas ranges between 0.27 percent of GDP and 1.76 percent of GDP (Figure D). The analysis presented in this Public Expenditure Review (PER) supports the efforts of the Government of Comoros to enhance public expenditure efficiency, create fiscal space, and limit fiscal risks. The analysis is designed to focus on public investment management and PFM, identify reforms that could yield fiscal and efficiency gains, and assess the governance of state-owned enterprises (SOEs). The PER is organized into eight chapters, each of which concludes with specific recommendations. Chapter 1 presents the macroeconomic context; Chapter 2 discusses the status of domestic resource mobilization; Chapter 3 provides an overview of the trends and composition of public expenditures; Chapter 4 focuses on public investment expenditures by analyzing their trends, composition, management, and efficiency; and Chapter 5 deals with PFM. Chapter 6 makes the case for an increase in the efficiency of public health spending while informing the implementation of the El-Maarouf Hospital project to optimize the use of health-sector resources in the future; and Chapter 7 analyzes the situation of the country’s SOEs. Finally, Chapter 8 discusses issues related to disaster risk management in Comoros. 2022 COMOROS 10 Overview PUBLIC EXPENDITURE REVIEW Accelerating the Implementation of Reforms Would Help to Increase Domestic Resource Mobilization Comoros domestic revenue mobilization has been on a downward trend during the past few years, a decrease of 2.6 percentage points of GDP after a peak in 2017. While the 2017 exceptional revenues mobilization was primarily driven by temporary measures (and no major structural tax reforms), the underperformance mirrors weaknesses in the tax administration that has limited capacities, and confronting economic challenges which occurred in 2019 (Kenneth cyclone) and 2020 (COVID-19). Moreover, weak SOEs financial situations—due to structural and business cycle issues— are particularly weighing on tax revenue collection (corporate and personal income taxes), particularly direct tax revenues and overshadowing the small performances recorded in terms of non-public sector direct taxes collection and other indirect taxes (including excises). Comoros’ revenue effort is weak when compared to both structural and aspirational peers. The country’s revenue to GDP (10.5 percent of GDP) is well below levels recorded in structural (21.5 percent of GDP) and aspirational (30.3 percent of GDP) peers (Figure E and Figure F). Figure E. Total Revenues and Grants, 2011–2020 Total Revenues and Grants in Comoros and Figure F.  Peer Countries, 2016–2019 percent of GDP percent of GDP 30 45 40 25 35 30 20 25 15 20 15 10 10 5 5 0 s nd n os s ci e ji e oa ga le iu in om rd Fi la o pe s or n m Is lom el rit Ve To 0 Pr T Sa m h au & ao yc bo Co So M 11 12 13 14 15 16 17 18 19 20 Se S Ca 20 20 20 20 20 20 20 20 20 20 J Revenues J Grants  Average 2011–15 ▬ Average 2016–20 J Revenues J Grants Source: National authorities, IMF, and World Bank staff estimates. Strengthening tax and customs administrations capacities and merely effectively enforcing the country’s tax policy/ reforms could help the country close its tax gap. The first stage of the strategy could focus on streamlining the mandate of the tax administration only on its tax function while transferring the property mandate to another ministry, and on finalizing the identification and monitoring of taxpayers (particularly large-medium companies and SOEs) added to the implementation of a performance culture in tax administration will be critical in this strategy. Furthermore, the country could enhance its domestic revenues mobilization by improving the management of the tax base and the identification of taxpayers, ensuring the full transfer of the collection of excise revenues on petroleum products from SCH (Société Comorienne des Hydrocarbures) to customs, having an effective use of the digital systems that are being deployed (SYDONIA for the tax administrations and cash-registers for major consumption tax collectors), and reviewing, reducing, and closely monitoring tax expenditures (exemptions). In addition, an improvement of the trust—through among others enhanced transparency—in the government could help improve domestic resource mobilization. The effective success of this strategy will require obtaining a buy-in of all stakeholders (policymakers, revenue administration, and private/ public sectors). ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Overview 11 Better Spending and Re-prioritization Are Needed to Enhance Socio-Economic Outcomes Comoros public expenditures are low compared to peer countries, but they exhibit an important fiscal rigidity. The Government of Comoros spends relatively less than its counterparts in peer countries. The government’s total spending was, on average, only about half of that of peers in 2016–20 (Figure G). During this period, Comoros’ government budget averaged 18.8 percent of GDP, much lower than the average of 33.7 percent for aspirational peers, which include Seychelles, Mauritius, Tonga, and Cabo Verde. While capital expenditures increased, they are mainly financed by development partners, and Comoros budget still exhibits a substantial fiscal rigidity. Current expenditures still absorbed more than half of total public expenditures and around 115 percent, on average, of total government revenues (excluding grants), of which 103.9 percent come from primary current expenditures, between 2016 and 2020. In addition, the share of the wage bill still represented 53.3 percent in 2020 albeit on a declining trend. Public spending efficiency is low because the budget Figure G.  Total Public Expenditure in Comoros and allocation and execution are skewed toward general Peers, 2016–20 sectors, and the poor data quality as well as the volatility percent of GDP of investment are likely to reduce the impact of the fiscal 80 policy on socio-economic outcomes. In Comoros, public 70 expenditure dedicated to development and resilience is 60 50 low, while general public services expenditure absorbs 40 a significant share of total expenditure. General public 30 services averaged 46.2 percent of total expenditure in 20 2016–19, before declining to 31.3 percent in 2020. 10 Economic affairs-related expenditure (e.g., agriculture, 0 nd n s os oa ci e ji s e a te fishing, transport, and communication), which are critical lle iu ng in om rd Fi la o pe s es or m Is m rit Ve he To Pr T -L Sa o m au l & Sao yc or bo Co So for the country’s socioeconomic development, have M Se m Ca Ti been on a downward trend since 2017—ranging from Source: World Bank staff calculations based on data from national authorities. 24.8 percent of total expenditure in 2017 to 10.7 percent in 2020. Expenditures critical to the socioeconomic development of the country are under-executed, while other administrative and sovereign expenditures perform well. For expenditures dedicated to island administrations, sovereign and pooled expenditures had a budget execution rate of 96 percent in 2016–19, much higher than an average of 69.6 percent for spending in the social, production, and economic sectors. The limited impact of public expenditures on socio-economic outcomes can also be explained by the high volatility of public investment—that are mainly financed by external partners—and weak statistics. In fact, except for the functional classification where disaggregated fiscal statistics are not available, the data used in this Public Expenditure Review covers the Union of the Comoros and its three islands for major aggregates. However, differences in budget classification compared to international standards, changes in budget classification between years, along with the absence of a harmonized, centralized, and fully operational Integrated Financial Management System (IFMIS) at the national level, rendered data compilation challenging. Enhancing Project Planning Could Increase Public Capital Expenditure Efficiency Public investments have been volatile and increasing over the last years. Total capital expenditures increased by 54.8 percent between 2010–15 and 2016–20, ranging from an average of 4.7 percent to 7.2 percent of GDP. Although they are primarily financed by foreign partners (78 percent, on average), the government’s contribution to financing public investments increased significantly between 2017 and 2019 (29.1 percent, on average), ending three years of low 2022 COMOROS 12 Overview PUBLIC EXPENDITURE REVIEW contribution (15 percent, on average, in 2013–16). The decline in investment in 2020 was due to the postponement of domestically financed capital expenditure projects worth around 1 percent of GDP. Accordingly, the volatility in public investment is primarily driven by domestically financed investments and the unpredictable execution rate of foreign financed investment projects. While the country’s domestically and foreign financed public investment ratio (7.2 percent of GDP, on average, in 2016–20) is lower than the level recorded in structural peers such as Timor-Leste (21.1 percent of GDP) and Solomon Islands (9.0 percent of GDP), it is higher than the average of aspirational peers (4.9 percent, on average, in 2016–20). However, Comoros lags behind all peer countries in terms of domestically financed capital expenditures. Public Investment and Fiscal Balance, Figure H.  Share of Public Investment by Source of Figure I.  2010–21 Financing, 2010–20 percent of GDP percentage points 9 3 100 8 2 90 7 1 80 70 6 0 60 5 -1 50 4 -2 40 3 -3 30 2 -4 20 1 -5 10 0 -6 0 10 11 12 13 14 15 16 17 18 19 10 11 12 13 14 15 16 17 18 19 20 21 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 J Public investment ▬ Fiscal balance J Domestic J Foreign Source: World Bank staff estimates based on data from national authorities and the IMF. Comoros needs to improve its planning functions as its Figure J.  Public Investment Efficiency Scores in public investment efficiency score, while improving, Comoros and Comparators, 2010–2020 remains below levels recorded in peer countries. Public 120 investment expenditures have generally contributed to 100 higher levels of development outcomes in peers than 80 in Comoros, as all peer countries have been using their 60 resources more efficiently (Figure J). Between 2016 and 40 2020, Comoros’ investment efficiency score of 60.3 20 implies that the country could reduce its public investment 0 s om pi ets s os s ld rs ie er te spending by 39.7 percent and produce the same level of ie ng ee or or om on lo rk ta pe s W lp m ec ve a ls on al de m Co na al development outcomes. To support the implementation of ur ec d ing Sm tio ct ed anerg ru ra nc pi St the national development plan (Plan Comores Emergent Em As va Ad - PCE 2020–2030), which is a medium- and long-term J 2010–2015 J 2016–2020 strategic framework, the government could develop a Source: World Bank staff estimates based on Data Envelopment Analysis (DEA). medium-term expenditure framework (MTEF) prior to Note: Efficiency scores are based on data envelopment analyses performed on a consistent set of countries observed in 2010–2015 and 2016–2020. A budget execution and design the PCE-associated results high score means that resources are better used than in other countries. framework. Coordination between central and subnational government entities could be further strengthened beyond the development of regional development plans by: (i) assessing contingent liabilities from public investment projects implemented at the subnational level or through public-private partnerships (PPPs); and (ii) publishing subnational government capital spending plans alongside central government investment plans. Establishing a standardized project appraisal methodology and publishing results could help to better plan public investments. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Overview 13 The Government of Comoros could ensure that public investment is allocated to the right sectors. The development of a medium-term expenditure framework would allow the authorities to create capital spending targets for domestically and externally financed projects in the medium term. Furthermore, improving budget documentation to include multiyear commitments would reduce the risk of underfunding domestically funded investment projects. The government also needs to ensure the exhaustiveness of the public investment plan (PIP) and include detailed information on both externally and domestically (currently not included) funded projects in the public investment plan. While available data suggest that investment maintenance is mainly financed by external partners, there is still a need to develop a standardized methodology to determine project maintenance costs. Project selection could be further improved by defining a list of core explicit selection criteria that would be applicable to all projects, defining explicit additional sectoral criteria, and designing indicators to guide decisions on whether a project should be included in the public investment plan. The authorities need to improve monitoring mechanisms and enforce the implementation of the procurement law to deliver productive and durable public assets. Effectively integrating public procurement functions into the budget execution process would help to adequately implement the current public procurement law and associated regulations and create a pro-competition and transparent framework. Strengthening the Public Procurement Regulatory Authority, created based on the procurement law, would help the authorities respond to complaints filed by bidders and foster effective competition in the provision of public goods and services. Comoros would benefit from enhanced collaboration between central and regional government administrations to monitor and oversee the execution of the public investment portfolio. In the medium to long term, registering public assets and developing patrimonial accounting would be essential to monitor public assets. Strengthening the Public Financial Management System through Increased Transparency, and Enhanced Internal and External Control on Budget Execution The country’s PFM system is inadequate to effectively implement government policies, and the overall system has not been improved since 2016. Challenges facing the country’s PFM system at different stages of the budget cycle include the fact that: (i) budget transparency has further deteriorated while budget credibility is low; (ii) control over budget execution is insufficient, and budget risk management is not assessed; and (iii) external and internal audit functions as well as legislative scrutiny could be substantially improved to enhance accountability in the implementation of fiscal policy. PFM deteriorated significantly between the completion of the 2016 Comoros PEFA assessment and April 2022, and the Ministry of Finance does not have a website that the public can use to access relevant fiscal and budget information. There is a need to improve budget transparency and credibility to ensure policy makers and external stakeholders have access to improve fiscal management and reduce sovereign risks. Budget transparency and credibility are low in Comoros, as deviations from approved budgets are substantial. Budget documentation and presentation as well as access to fiscal data are inadequate to properly inform policy makers and external stakeholders. Comoros scored 0/100 in the latest Open Budget Index (OBI) assessment, a deterioration compared to the results of the previous assessment (4/100). For instance, information on the different steps of the budget cycle is incomplete, and none of the reports produced by the public administration are accessible to external stakeholders. There is a need to accelerate the implementation of some reforms that aim to ensure compliance with international classifications. Efforts should be made to improve budget classification and reporting and ensure the completeness of budget documentation accompanying the draft budget, including information on future commitments, the long-term sustainability of public finances, and extrabudgetary accounts (for which operations have not been reported on since 2016). 2022 COMOROS 14 Overview PUBLIC EXPENDITURE REVIEW Comoros could strengthen control over its budget execution and adequately manage budget risks. While the government uses a Treasury Single Account (TSA) hosted at the BCC, Comoros would benefit from effective cash management (including a cash management plan) and the identification of potential accounts held outside the public accounting system. It is also crucial to fully incorporate public procurement into budget execution, as it remained weak in 2016–2021 and played a limited role in the execution of previous budget laws, reducing the likelihood of efficient public spending. To improve budget execution monitoring and better control spending, it is recommended that the government fully deploys and uses the integrated financial management information system (IFMIS) across administrations. Efforts are also needed to improve budget control, as it is weak, evidenced by both the level of expenditures paid outside the regular approval process and the changes made to the budget. Standardizing and increasing the coverage of budget execution monitoring reports is also necessary to support the implementation of fiscal policy. External and internal audit functions, as well as external Figure K.  Supreme Audit Institution Independence scrutiny, could be substantially improved to increase Index, 2021 accountability. There is a need to fully operationalize 10 the internal audit functions (IGF) to verify the quality and 9 8 compliance of internal controls, as no adequate internal 7 audits have been performed in Comoros, except in 2017, 6 5 which recorded a report on specific public establishments. 4 No further information about internal audit activities has 3 2 been disclosed, such as an annual report of activities 1 that would have been shared with the Account Section 0 Rw i s a ea os e ci e ti e da & Sao ge in lle of the Supreme Court (SAI). Concerning external audits, ric ag rd in om ou pe or a in at an Ve er he er Af ib Pr T Gu w m av av Dj yc Es h bo Co the supreme audit institution faces challenges to perform ut Se A ld Ca SS So or W audits, as financial reports from some public entities are Source: World Bank (2021). Supreme Audit Institutions Independence Index either not submitted or are transmitted after the legal 2021 Global Synthesis Report. EFI-Insight Governance. Washington DC: World Bank. deadline. The supreme audit institution’s independence is weakened by its limited budgetary freedom, and a revision of its institutional framework is warranted, including to align it to the 2018 Constitution. Pertaining to legislative scrutiny, Parliament has certain prerogatives to adjust the budget, including the ability to reallocate resources to programs it deems insufficiently funded. For instance, Comoros ranks 101st out 122 countries in the 2021 Supreme Audit Institution Independence Index, and the supreme audit institution budget is equivalent to US$1.1 million but it is lower than a projected budget of US$2.18 million (based on global benchmarks)(Figure K). This function could be improved by making sure that budget proposals are reviewed by Parliament’s finance committee and other sectoral committees, and there could be formal mechanisms for citizens to provide their views during the budget preparation and approval process. Public Health Expenditures Efficiency Could Be Further Improved The PER identifies five key issues that need to be given immediate attention to improve the health of the population. First, government health spending has increased and mainly finances hospital care and the health wage bill, but households still pay for the lion’s share of health expenditures through high out-of-pocket payments. Inadequate PFM in the health sector has resulted in very low budget execution and a lack of transparency in spending, including for the recently launched health insurance program. By 2020, government health expenditures reached 1.6 percent of GDP and 8.3 percent of general government expenditures, but weak budget management has resulted in consistently low health budget execution (Figure L). In 2020, only 54 percent of the government’s health budget was executed, representing a marginal increase from 51 percent in 2018. Second, despite recent reforms, the pharmaceutical program is underfunded ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Overview 15 and combined with weak procurement has contributed Government Health Expenditures by Figure L.  to high stockout rates for essential medicines, service Country, 2018–20 disruption, and high prices for patients. Third, the size percent of GDP of the health workforce has increased, but enrollment at 5.0 4.5 the local nursing school has dwindled. Only half of health 4.0 4.5 3.5 3.8 3.9 staff are on the government payroll, and more than half of 3.0 3.2 3.5 them do not show up for work, leading to high absenteeism 2.5 2.0 2.4 2.5 2.5 2.8 2.1 and concerns about access to patient care. Fourth, service 1.5 1.0 1.4 1.5 1.6 1.6 1.7 1.9 use in public health facilities is extremely low, resulting 0.5 0 in low staff productivity and high out-of-pocket payments Eswatini Seychelles Ghana LMIC Tanzania Comoros (2020) Madagascar SSA average Rwanda Mauritius Sao Tome & Principe Cabo Verde Caribbean Jamaica South Africa Dominican Rep. for treatment abroad. Fifth, and finally, the government has embarked on a major reform to reconstruct the El Maarouf national hospital. Building and operating this hospital would require a substantial increase in hospital Source: Direction Générale du Budget, Comoros 2020; WDI 2018 data for other countries. expenditure and in the number of health staff, which could lead to major disruptions in the provision of care across the system. Based on these findings, the Public Expenditure Review offers two set of recommendations for El Maarouf hospital and the broader health system. It recommends: (i) a phased approach to implement a smaller more efficient El Maarouf hospital based on a masterplan that positions the hospital within the health system and a tight fiscal context; and in parallel: (ii) measures to strengthen the health system, including investing in service delivery, using government expenditures efficiently, modernizing pharmaceutical procurement, transforming the health workforce and strengthening health education, and exploring opportunities to work with the private sector. To assess progress toward its strategic objectives, investing in reliable data and health analysis should be a top priority for the government. Better SOE Governance to Reduce Fiscal Risks Requires an Updated Legal Framework and Enhanced Monitoring Comoros has a substantial number of SOEs across different sectors that weigh heavily on the economy. SOEs are present in the trade and wholesale (e.g., rice and hydrocarbon products), transport, telecommunications, water and energy, banking, pharmaceutical, and communications (e.g., written press and news broadcasting) sectors. There are two major categories of SOEs in Comoros: (i) national companies with public capital (NCPC), which are public limited companies (PLCs) wholly owned by the government and governed by private commercial law; and (ii) public industrial and commercial establishments (PICEs), for which government control is exercised through public laws and regulations. Based on the close-to-exhaustive list of SOEs provided by the authorities (supreme audit institution, Ministry of Finance, and sector line ministries), there are thirteen SOEs in Comoros, and the value added of eight SOEs represented about 7.4 percent of GDP (nominal) in 2020. However, the value added is concentrated in four SOEs: SCH (48 percent), CT (18 percent), ONICOR (18 percent), and Société nationale de l’électricité des Comores (SONELEC) (10 percent). Law No. 06-001/AU, promulgated on January 6, 2006, (2006 SOE Law), along with Implementation Presidential Decree 07-151/ PR, signed in 2007 (2007 decree), provides the overall framework for categorizing, managing (e.g., board composition and appointment of chief executive officers [CEOs] and regional directors), and supervising SOEs in Comoros (during the past five years). While acknowledging recent developments in the appointment and composition of SOE boards, it is recommended that Comoros updates its outdated legal and regulatory framework to improve transparency, oversight, and 2022 COMOROS 16 Overview PUBLIC EXPENDITURE REVIEW accountability. A revised SOE law should provide enough guidance to adequately distinguish between public limited companies and public industrial and commercial establishments, better align efforts with the 2018 Constitution, and address issues related to conflict of interest, transparency, shareholder strategy and functions, and dividend policy. Implementation decrees should also be revised because some contain derogations that contradict other laws. Moreover, to better monitor SOE performance, improving SOE transparency would be essential as accounting information is scarce and poorly controlled, SOEs do not perform internal audits, external audit results suggest that accounts cannot be adequately ascertained, and there are important discrepancies between data reported by SOEs and the Directorate of Budget. Based on available data, it is found that the financial situation of Comoros SOEs deteriorated substantially in 2017–20. The Public Expenditure Review finds that there is a need to develop an effective SOE oversight function, and to design institutions that would allow the professionalization of boards, and enhance performance monitoring. The proposed new SOE law should provide explicit guidance on SOE supervision, and the subsequent implementation decrees should help to strengthen coordination and limit fragmentation in information exchanges and decision-making. In addition, the PER recommends providing the Ministry of Finance with an identifiable financial supervision role and the creation of a dedicated department within the ministry to oversee and supervise SOEs. The revised law and related regulation should provide guidance on the composition of SOE boards of public limited companies and public industrial and commercial establishments and the selection procedures for board members. The institutional framework should also clarify if the provisions regarding board composition are restrictive or whether they can be extended (within the limit of the total number of directors) to intuit personae appointments of independent directors outside the administrative field or sector-specific organizations. Finally, SOEs should be required by law to develop a strategic vision and outline medium-term goals, and performance contracts should be signed between SOEs and the State to make sure SOEs achieve their objectives, including financial targets, and ensure financial soundness. Better Assessing Risks and Vulnerabilities, and Improving Transparency in Budget Allocation and Execution Would Result into Enhanced Disaster Risk Management The Union of Comoros (UoC) is exposed to a wide range of natural disasters and one of the most vulnerable countries to climate change, which adversely affects its development and exacerbates existing social and economic vulnerabilities. Comoros is the 33rd most vulnerable country in the world.3 Disasters not only directly lead to human and capital losses they also reduce economic activity and growth potential. Therefore, a deliberate approach to the public financial management of disasters is becoming increasingly important to mitigate their adverse fiscal, social, and economic impact This Public Expenditure Review (PER) finds that disaster risk management is not explicitly documented in the national budget and its execution. The application of the OECD DAC DRR policy marker, find that in 2016–20, US$2.9 million was allocated to expenditures related to disaster risk management on average each year. This represents 2.57 percent of the national budget. Most of the expenditures were related to disaster response but were not explicitly reported or monitored. To strengthen the public financial management of disasters, authorities could consider to (i) explicitly document risk reduction investments in the national budget to better assess the country’s disaster risk management investments; (ii) strengthen the National Disaster Risk Reduction Fund (budget line) by improving fund allocation, management, utilization, and transparency; and (iii) strengthen collaboration between the Ministry of Finance and Budget, the Directorate General of Civil Security and the other key sectoral ministries involved in disaster risk management. 3 Notre Dame GAIN Country Index: https://gain.nd.edu/our-work/country-index/rankings/ ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Overview 17 Figure M. Fiscal Pathways for Better Socio-Economic Outcomes in Comoros Pathway I : Pathway II : Pathway III : Achieving an Increase the Increasing Public Reforming Institutions Level of Government Revenues Expenditure Efficiency to Increase Resilience Enact a law and the bylaws to restructure the tax administration Issue a decree on the and remove its mandate on digitalization of procurement Enact a law on disaster property registration risk management Issue a decree requiring annual Reduce and better monitor external audits of state-owned tax expenditures entreprises, and the preparation of action plan Improve data foundations and fiscal transparency for better fiscal management Enact a law that will strengthen Enact a new law on state-owned the independence of the entreprises governance supreme audit institution Improve the preparation, Prepare medium-term budget execution and monitoring of Create a directorate within the social expenditures, including for framework and and define explicit ministry of finance for the oversight project selection criteria for public the El Maarouf Hospital of state-owned enterprises investment projects Source: World Bank staff. 2022 COMOROS 18 Overview PUBLIC EXPENDITURE REVIEW Table 1. Policy Options to Enhance Public Expenditure Efficiency and Create Fiscal Space [P] refers to priority actions Short-term measures (less than 2 years) Medium-term and long-term measures (2+ years) A. Domestic Resource Mobilization A.1 Strengthening internal revenue administration capacity A.1.1. Optimize the tax administration (AGID) identification and monitoring taxpayers › Improve the identification of taxpayers, particularly › Ensure that at least 25 percent of large and medium large and medium taxpayers. (P) businesses are subject to targeted spot checks. › Initiate targeted spot checks for large and medium › Initiate documentary checks to ensure in particular the taxpayers. (P) regular payment of the personal income tax, corporate income tax and consumption taxes; particularly for SOEs and other large taxpayers. A.1.2. Strengthen the tax administration capacity to improve its efficiency › Improve, the management, control, and collection skills › Put in place a recruitment and continuing training of staff in the Directorate general of large companies plan adapted to the medium-term needs of the (DGE). administrations. › Organize training to help staff appropriate the new digital systems acquired as part of modernization to be able to use them optimally. (P) A.1.3. Modernize the tax administration to increase tax revenues › Ensure the use and perfect integration of new systems › The process of automating tax procedures, which began deployed to the SIGIT system. with the deployment and generalization of SIGIT, should be reinforced by a system of automatic declaration of › Harmonize the various digitization projects to taxable resources and their payments. guarantee their interoperability. › Set up internal control and support mechanisms to ensure compliance with SIGIT procedures and the operation of all functions › Enact a law and issue the related implementation decree to restructure the tax administration. (P) A.2 Strengthening customs revenue administration capacity A.2.1. Modernize procedures to ensure efficiency of customs administration › Supplementing the Customs Code with implementing legislation and instructions on customs clearance procedures. A.2.2. Prevent forgone revenues › Strengthening immediate and post-clearance › Integrating into the Customs Code a special purpose monitoring of exemptions. (P) exemption regime that requires beneficiaries of preferential taxation to report their use and › Establishing a clear and detailed system for classifying consumption of exempted goods annually. exemptions. (P) › Initiate documentary checks to ensure the regular payment of the excises particularly on tobacco and alcohol. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Overview 19 Table 1. Policy Options to Enhance Public Expenditure Efficiency and Create Fiscal Space [P] refers to priority actions Short-term measures (less than 2 years) Medium-term and long-term measures (2+ years) A.2.3. Improve staff management and training to strengthen the capacity of the customs administration › Remove operational functions from the scope of › Put in place a recruitment and professional training competence of central services. plans for all customs agents. › Revise staffing levels and redeploy staff based on needs identified through intelligence, risk assessment, or customs investigations. › Organize operational training sessions A.2.4. Strengthen risk management and securing revenues › Implement internal controls and decision-making › Leverage SYDONIA World to set up a national litigation information systems with a focus on the most sensitive application. procedures. › Define the nature and method of managing litigation entries used by the services; organize the circuit of litigation cases and invite the heads of customs centers to produce regular litigation reports (monthly or quarterly). A.3 Better Enforcement of the Tax Policy A.3.1. Limit (or recover) revenue losses › Effectively grant the custom administration, the › Prepare a report on tax expenditures as an annex to the exclusive right to collect the tax on petroleum products. budget law. › Reduce unjustified and discretionary customs exemptions. (P) › Implement the arrears recovery plan. A.3.2. Enforce tax procedures and modernizing the revenue administration › Improve the land register and taxpayer registration. › Strengthening the oversight of SOEs to increase their tax compliance. › Automate the sharing of information on taxable income between private and public entities and the tax and customs administrations. A.3.3. Increase tax compliance › Simplify tax and customs rate structures while › Publish detailed fiscal data in a timely manner and streamlining procedures to reduce the number of implementing policies that promote visible links transactions associated with tax payments. between government spending and the delivery of public goods and services. › Roll out information campaigns to increase tax compliance. › Leverage low-end technologies to support tax compliance (SMS tax reminders, mobile tax payments, tax revenue mobile applications, etc.). 2022 COMOROS 20 Overview PUBLIC EXPENDITURE REVIEW Table 1. Policy Options to Enhance Public Expenditure Efficiency and Create Fiscal Space [P] refers to priority actions Short-term measures (less than 2 years) Medium-term and long-term measures (2+ years) B. Public expenditures B.1. Improve budget reporting and reliability of public expenditures data › Reclassify undefined budget items and reduce allocations to items labeled “other”, including “common expenses”. › Enhancing data collection and reporting at the subnational level while also providing disaggregated spending data at the subnational level. › Adopt an improved budget classification to be implemented at the national level. (P) B.2. Establish adequate procedures to achieve an adequate budget execution for social sectors. › Prioritize funding release to service delivery units in health and education sectors. (P) › Publish quarterly reports on budget execution and annual statements of government financial operations. (P) › Increase budget allocation and execution for capital and maintenance expenditures. C. Public Investment Management C.1 Planning Sustainable Levels of Public Investment C.1.1. Introduce medium-term budgeting › Introduce multiyear budget programming with › Pilot the MTEF in two selected ministries (education and the establishment of a medium-term expenditure health). framework MTEF. (P) › Deploy the MTEF in the remaining ministries, and relevant public administrations. C.1.2. Implement national and sectoral planning › Ensure alignment of the public investment program with the Plan Comores Emergent (PCE) Priority Action Plan (PAP) and sectoral plans. › Design a results framework for the PCE. C.1.3. Improve the coordination between central and other government entities › Regional planning directorates should submit to the › Create a dedicated unit at the CGP responsible for CGP at least bi-annual reports on the implementation systematically evaluating major projects from the of externally and domestically financed projects for the viewpoint of long-term fiscal sustainability, including Islands. long-term liabilities and fiscal risks such as explicit and implicit contingent liabilities. › Produce assessment reports that identify mitigation measures for accepted fiscal risks if a project is proposed for approval. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Overview 21 Table 1. Policy Options to Enhance Public Expenditure Efficiency and Create Fiscal Space [P] refers to priority actions Short-term measures (less than 2 years) Medium-term and long-term measures (2+ years) C.1.4. Conduct project appraisals › Conduct appraisals of domestically and externally financed investment projects before their inclusion in the PIP. C.2 Ensuring Public Investment is Allocated to the Right Sectors and Projects C.2.1. Introduce multiyear budgeting for public investment › Create a three-year public investment program (PIP). C.2.2. Improve budget comprehensiveness and unity › Harmonize the PIP and budget preparation calendars. › Include capital projects of public enterprises and establishments in the PIP. › Include PPP projects in the PIP and future recurrent costs related to the effects of capital spending in the budget. C.2.3. Budgeting for Investment › Improve the protection of capital expenditures to ensure they are not diverted to other expenditures. C.2.4. Plan for maintenance funding › Develop a standard methodology for determining › Include budget lines on maintenance in the budget law maintenance requirements for all types of infrastructure for all types of infrastructure assets. assets. C.2.5. Improve project selection › Mandate the use of the explicit project selection criteria to ensure the implementation readiness of projects before start of implementation. (P) C.2.6. Mainstreaming climate change › Adopt a primary legislation that mandates the incorporation of climate change in the budget › Prepare hazard and risk vulnerability assessments › Update the manual of procedures on public investment planning to incorporate climate change and natural disaster at each stage of project preparation 2022 COMOROS 22 Overview PUBLIC EXPENDITURE REVIEW Table 1. Policy Options to Enhance Public Expenditure Efficiency and Create Fiscal Space [P] refers to priority actions Short-term measures (less than 2 years) Medium-term and long-term measures (2+ years) C.3 Delivering Productive and Durable Public Assets C.3.1. Promote transparency in public procurement › Sensitize procurement officials to potential constraints › Introduce in the legal framework stringent sanctions for to effective competition. bidders involved in anti-competitive practices. › Nominate members to ARMP’s CRD and allocate › Require compulsory payment of the 5 percent royalty resources for its functioning. on awarded contracts to ARMP. › Require procurement plans to be prepared by all › Publish the ministries’ procurement plans. ministries before they are submitted to the DNCMP for › Make procurement information easily accessible to the review. public, including full proactive disclosure of contracts, with no barriers to fully download data and contracts. C.3.2. Improve portfolio management and oversight › Strengthen the human capacity of the CGP to › Make it mandatory for development partners to submit operationalize the aid information management system quarterly projected disbursement data on development (Development Assistance Database). assistance. › Add variables in the PIP monitoring database. C.3.3. Ameliorate the management of project implementation › Have project management units submit quarterly › Publish ex-post audit reports on projects and make reports on projects’ implementation status to line them available to the public. ministries. › Prepare project completion reports to assess their impact. C.3.4. Improve the monitoring of public assets › Adopt accounting policies and procedures to account › Provide information on the government’s assets and for and report on public assets in financial statements. liabilities in the annual consolidated statements produced by the Treasury General of the Union. D. Overview of Public Financial Management D.1. Budget reliability › Develop or acquire an integrated macroeconomic › Build the staff capacity to prepare budget proposals forecasting model to prepare a medium-term fiscal across administrative units. framework. (P) › Prepare a medium-term expenditure (budget) framework. (P) ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Overview 23 Table 1. Policy Options to Enhance Public Expenditure Efficiency and Create Fiscal Space [P] refers to priority actions Short-term measures (less than 2 years) Medium-term and long-term measures (2+ years) D.2. Transparency of public finances › Revise the presentation of the budget proposal and the › Include in the budget documentation (of the budget enacted budget law by including detailed information proposal) the following elements: quantification of on: (i) expenditures and revenues at level two of the tax expenditures; documents on the medium-term GFS classification; (ii) deficit financing; (iii) debt stock fiscal forecasts; a document presenting implications (for the current fiscal year); and (iv) special accounts. of new policy initiatives and major public investment on revenues and expenditures; more substantiated › Publish the following documents: annual executive and detailed macroeconomic assumptions; and special budget proposal; enacted budget law; in-year execution reports on SOEs and extra-budgetary entities. report; annual budget execution report; and the SAI report on the annual financial report. D.3. Management of assets and liabilities › Prepare a register of fixed assets to identify them, record their use, and plan investment and maintenance expenditures. › Prepare a fiscal risk report. D.4. Policy-based fiscal strategy and budgeting › Enforce the annual budget calendar to give budget units more time to prepare the budget proposal. (P) › Issue budget circulars that contain ceilings for administrative or functional areas as well as ministry ceilings for the entire upcoming fiscal year. D.5. Predictability and control in budget execution › Perform a census of public bank accounts held by › Establish a cash management committee to approve commercial entities. (P) annual and monthly commitment and cash plans and avoid the occurrence of arrears. › Close public bank accounts held outside the PFM system, and reconcile balances. (P) › Prepare aggregated commitment and cash plans as high-frequency documents that are updated quarterly. › Review the institutional framework governing the opening of public bank accounts in commercial banks › Prepare and publish quarterly procurement plans. to identify loopholes. (P) › Issue regulation on the preparation of annual and › Prepare a roadmap to increase the coverage of the TSA. quarterly procurement, commitment, and cash plans by spending units. › Perform an audit of domestic arrears › Establish a cash management technical team to prepare › Allocate the necessary investment and capacity building documents for the cash management committee and resources to fully operationalize SIMBA—the IFMIS—as execute the committee’s decisions a tool for budget execution › Issue regulation requiring all expense payments to be › Revise the workflow procedure and the administrative made after their approval in SIMBA, with identified and organization of the DNCMP to better align to the few exceptions deployment of the e-procurement system 2022 COMOROS 24 Overview PUBLIC EXPENDITURE REVIEW Table 1. Policy Options to Enhance Public Expenditure Efficiency and Create Fiscal Space [P] refers to priority actions Short-term measures (less than 2 years) Medium-term and long-term measures (2+ years) › Limit virements and transfers to the level set by LOFE › Deploy the e-procurement system 2012 by empowering the internal control department. › Issue public finance regulations that would strengthen › Issue the bylaw related to the procurement law the role of public procurement functions in budget promulgated in October 2022. (P) execution › Operationalize the regulation requiring the prior approval of the directorate in charge of the control of public procurement related to goods and services before awarding contracts and executing payment orders › Prepare aggregated commitment and cash plans as high-frequency documents that are updated monthly. › Prepare and publish monthly procurement plans. › Issue regulation on the preparation of annual and monthly procurement, commitment, and cash plans by spending units. D.6. Internal audit, external scrutiny and audit › Create an internal audit function and allocate adequate › Enact a new law that will govern the SAI and strengthen resources for its operation. (P) its independence › Prepare and disseminate citizen budget prior to the submission of the budget proposal to the parliament E. Health Expenditure Management E.1. Operationalize an efficient El Maarouf hospital › Finalize the masterplan to complete the construction of › Conduct an evaluation of the hospital performance and a 300-bed hospital, recruit health professionals, and its impact on the health system. invest in the health workforce. (P) › Get the hospital accredited by the Council for Health › Strengthen hospital data collection and develop a Service Accreditation of Southern Africa. monitoring and evaluation capacity. E.2. Use government health expenditures efficiently › Suspend the compulsory health insurance fund. › Publish a price list for services provided in public health facilities and pharmacies. › Improve budgeting for health, execute the budget and track expenditures. (P) › Introduce capitation grants for primary health centers. E.3. Enhance the effectiveness of pharmaceutical management › Regulate the prices of pharmaceutical products. › Strengthen supply chain and inventory management for pharmaceuticals and medical products at OCOPHARMA and health facilities. › Pursue opportunities for regional procurement. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Overview 25 Table 1. Policy Options to Enhance Public Expenditure Efficiency and Create Fiscal Space [P] refers to priority actions Short-term measures (less than 2 years) Medium-term and long-term measures (2+ years) E.4. Strengthen health workforce management and health education › Invest in human resource information systems. › Delegate responsibility for professional registration and verification of qualifications to professional councils. › Invest in human resource management to reduce high absenteeism rates. › Revise health education financing. › Manage the medical studies abroad program. › Conduct health workforce planning based on future trends. › Expand the nursing and midwifery education program. E.5. Improve health service delivery and the health of the population › Improve health data collection and analysis. › Address the growing NCD burden trough prevention, detection, and treatment. › Strengthen primary health care services and regional hospitals and invest in human capital. › Prevent accidents and injuries. › Improve access to health care for adolescents. › Regulate and invest in digital healthcare services (telehealth). › Reduce the overuse of care. › Regulate the Treatment Abroad Program. E.6. Regulate the private health sector › Conduct an assessment of the private health sector. › Regulate private sector providers to ensure high quality of care. F. State-Owned Enterprises in Comoros F.1. Improve the legal and regulatory framework › Enact an enhanced SOE law that will govern public › Issue decrees to govern public industrial and liability companies with state participation (wholly commercial establishments. owned, majority, and minority shareholding), set › Establish a strategy for the state as shareholder that dividend policies, and facilitate annual performance justifies the reasons for the state’s shareholder actions, contracts. (P) identifies objectives and means (including capital shares), and clarifies control and reporting. F.2. Improve ownership and oversight functions › Operationalize inter-ministerial committees as › Create a single entity (directorate) that will be shareholder institutions that will discuss SOE issues with responsible for supervising SOEs and act as the main the supervision directorate of the Ministry of Finance. state shareholder within the Ministry of Finance. › Train staff to perform duties related to SOE oversight. F.3. Strengthen the role of boards of directors › Professionalize the boards of directors by establishing › Revise the composition of the board of directors to appointment criteria, training directors, publishing include independent members and only one state board guides for directors, and allowing independent member. directors. › Centralize the responsibilities of the state around a single representative on SOEs’ boards of directors, who will guarantee the interests of SOEs and have the necessary administrative resources. 2022 COMOROS 26 Overview PUBLIC EXPENDITURE REVIEW Table 1. Policy Options to Enhance Public Expenditure Efficiency and Create Fiscal Space [P] refers to priority actions Short-term measures (less than 2 years) Medium-term and long-term measures (2+ years) › Equip the boards of directors with the means to function properly by creating specialized committees and clarifying what information must be provided to SOEs periodically. › Issue a decree/regulation that requires the boards of directors to adopt firm operational procedures to ensure their proper functioning. › Adopt regulations that give the state representative on the board of directors the necessary independence to ensure the proper management of conflicts of interest involving the state (including conflicts related to regulation or public policies). › Provide SOEs’ board of directors with all the responsibilities of their private commercial counterparts as provided for in private commercial law (OHADA) and limit to the strict minimum the board of directors’ decisions subject to prior approval by the government (e.g., pay scales or external debt). F.4. Improve SOE daily management › Make legal provisions for CEOs to be appointed › Transfer the decisions on recruitment plans and staffing upon their nomination by the board of directors and to SOEs’ boards of directors and their implementation concurrence by the state shareholder entities. to the CEOs according to their technical needs. › Conduct organizational and financial audits of critical › Finalize the separation of MA-MWE to identify assets SOEs. and liabilities held by SONELEC and SONEDE. › Prepare action plans to restructure SOEs based on audit › Perform audits of cross debt for all SOEs and adopt a results. clearance strategy. › Set tariffs at levels consistent with SOEs’ financial stability and sustainability. › Establish a clear policy on SOE subsidies to compensate for the implementation of government policy. F.5. Enhance transparency, reporting, and disclosure › Adopt provisions within new decrees and laws that › Encourage the Account Section (SAI) to perform regular require SOEs to regularly report financial data to the audits and require the full compliance of SOEs. Ministry of Finance. (P) › Require all SOEs to publish plans that respond to issues › Issue and implement regulations on the application of raised by the SAI. and compliance with accounting standards for financial › Publish an annual report on the financial situation of reporting, including staff recruitment. Comoros’ SOEs. › Issue a regulation that requires SOEs to have their › Require SOEs to establish internal control and audit accounts audited by external auditors on a yearly basis. functions. (P) ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Overview 27 Table 1. Policy Options to Enhance Public Expenditure Efficiency and Create Fiscal Space [P] refers to priority actions Short-term measures (less than 2 years) Medium-term and long-term measures (2+ years) F.6. Improve performance monitoring › Conclude annual performance contracts with SOEs’ boards of directors and CEOs that outline public service objectives and key reforms to be undertaken. › Require SOEs to prepare an annual management report. G. Disaster Risk Management G.1. Strengthen collaboration between the Ministry of Finance and Budget (MoFB), the DGSC and the other key sectoral ministries involved in DRR › Involve the MoFB in the development of the Disaster › Strengthen collaboration between the Ministry of Risk Management Bill and National Disaster Risk Finance and Budget (MoFB), the DGSC and the Reduction Strategy (P) other key sectoral ministries involved in disaster risk reduction › Adopt the National Disaster Risk Reduction Strategy › Enact a Disaster Risk Reduction Bill (P) › Improve disaster damage and loss assessment and recording G.2. Strengthen the National Disaster Risk Reduction Fund (budget line) › Assess the National Disaster Risk Reduction Fund › Legally establish the National Disaster Risk Reduction performance and its impact Fund › Assess Comoros emergency funding gap › Develop the Fund’s operations procedures manual › Strengthen capacities of the Budget’s department on › Develop a comprehensive Disaster Risk Financing Disaster Risk Financing Strategy › Strengthen the National Disaster Risk Reduction Fund (budget line) G.3. Integrate DRR dimension into development planning including budgetary and financial planning › Establish and implement a methodology for budget › Establish a cross-cutting and multi-sector budget tracking to increase efficiency and transparency of program for disaster risk reduction spending disaster related expenditure › Develop clear guidance and a sustainable capacity building program for government entities in conducting emergency procurement › Integrate DRR dimension into development planning including budgetary and financial planning 28 Chapter I: Macro-Fiscal Context I.1 Modest Economic Expansion Driven by Consumption Modest economic growth in a context of social, political, and institutional fragility has hindered the expansion of Comoros’ per capita income in recent years, with Cyclone Kenneth and COVID-19 hampering the country’s growth. GDP growth averaged 2.7 percent in 2011–2020, resulting in per capita GDP growth averaging 0.4 over the same period (Figure 1). The economy has been primarily driven by consumption, fueled by remittances and tourism receipts from the diaspora. Economic activity is undiversified, characterized by a small, largely informal, private sector with limited value addition. Labor force participation, especially among women (which is about half that of men), has been remarkably low, and poor quality of education has persistently undermined the contribution of human capital to productivity growth, with overall total factor productivity nearly absent. In 2020, social distancing measures and lack of tourism arrivals due to the COVID-19 pandemic lowered demand for agricultural goods as well as hotel, restaurant, and transport services, resulting in an economic contraction of 0.3 percent in 2020. The pandemic has also slowed recovery efforts from Cyclone Kenneth, which struck Comoros in April 2019 and caused significant damages, especially in the agriculture sector. Real GDP Growth and GDP per Capita Figure 1.  Demand-Side Contributors to Growth, Figure 2.  Growth, 2011–20 2011–20 annual percentage points percentage points 5 10 4 8 3 6 2 4 1 2 0 0 -1 -2 -2 -4 -3 -6 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 ▬ Real GDP growth ▬ GDP per capita growth J Private consumption J Investment (total) J Government consumption J Net exports  GDP Source: World Bank staff calculations using data from national authorities. Source: World Bank staff calculations using data from national authorities. Fueled by remittances, economic growth in Comoros is unsustainable as it has been driven by private consumption, while investment remains subdued. An overreliance on remittances has underpinned an unsustainable consumption- driven growth trajectory, with private consumption accounting for most economic growth over the past ten years (Figure 2).4 Investment, on the other hand, has remained weak, mostly driven by public capital expenditures financed by bilateral partners. Indeed, domestically financed public investment only covers around one-fifth of total public investment (the remaining is financed by donors). Insufficient credit to the private sector, unreliable infrastructure, and a poor business environment constrain private sector development and reduce the country’s growth potential. As a result, domestic credit to the private sector represented 15.9 percent of GDP, on average, between 2016 and 2020, far below the average of lower-middle-income countries (33.7 percent) and Sub-Saharan Africa (SSA) (24.3 percent). 4 Remittances are mostly used to finance household consumption, including education and health spending as well as ceremony-related consumption, with less than 1 percent spent on investment (World Bank 2021a). ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter I: Macro-Fiscal Context 29 The service sector has been the main contributor to Figure 3. Sectoral Decomposition of Growth, 2011–20 growth, led by public-sector services and mostly informal percentage points commercial activities. The contribution of the agriculture 5 sector (including fisheries) to growth has fluctuated over 4 time and has been affected by climate shocks in recent years (Figure 3).5 Meanwhile, the industry sector’s 3 contribution—mostly composed of light agroindustry in 2 the production of essential oil and spices—has remained low and at times even negative. With the exception of 1 2020 (due to the pandemic), the service sector has been 0 the main contributor to economic growth in Comoros, accounting for 1.9 percentage points of the average -1 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 growth in 2011–2020 in comparison to 0.5 and 0.1 J Agriculture J Industry J Services J Taxes and subsidies for agriculture and industry. The country’s main service Source: World Bank staff calculations using data from national authorities. subsectors include commerce, which is mostly informal and denominated by simple retail, as well as transport, financial activities, and telecommunications. I.2 Heavy Reliance on External Partners and Limited Public Service Delivery: Two Features of the Fiscal Policy The combination of a sizeable informal sector and existing structural weaknesses results in a heavy reliance of the budget on external grants and a substantial fiscal deficit (excluding grants). Comoros’ fiscal policy is characterized by low tax revenues, which averaged 7.5 percent of GDP in 2011–2020, a heavy reliance on external grants, and a substantial wage bill. Between 2011 and 2020, the overall fiscal balance averaged 0.4 percent of GDP, with grants representing at least one-third of total government revenues. On the revenue side, tax revenues are undiversified, raised primarily through customs administration (about 50.9 percent of revenues), reflecting persistent weaknesses in taxpayer registration and the tax administration. Non-tax revenues are volatile and suffer from increasingly underperforming SOEs. Excluding grants, the country recorded an overall fiscal deficit of 6.8 percent of GDP, on average, during the same period (Figure 4). Comoros’ current expenditures have been structurally above the level of domestically generated revenues, averaging 110.6 percent of the latter in 2011–2020 (Figure 5). Wages represent the bulk of government spending (averaging 59.2 percent of domestically generated revenue over the past ten years), leaving few resources to attend to development needs, including capital and recurrent spending to support the provision of public services. Limited fiscal space to address development needs explains the country’s low human capital, high poverty incidence, and poor quality of infrastructure that hamper efforts to increase productivity and private sector development. With a Human Capital Index score of 0.4 and a gross secondary school enrollment rate of 57.5 percent, Comoros’ level of human capital is low relative to peers (Figure 6 and Figure 7). In addition, there is a learning gap of three years in Comoros that represents 37.5 percent of expected years of schooling, well above aspirational peers such as Mauritius and Seychelles. The country’s poor-quality infrastructure is highlighted by its low performance on the Logistic Performance Index, which is below the average observed in structural peers and lower-middle-income countries (Figure 8). Access to electricity also remains a challenge, as it is estimated that 78.2 percent of the population had access to electricity in 2019, much lower than the average of 96.0 percent in aspirational peers (Figure 9). These challenges are also mirrored 5 Although the agriculture sector absorbs most of the country’s labor force, the bulk of agricultural production remains largely characterized by small family- owned production for own consumption. Commercial agriculture is underdeveloped and concentrated around three main export crops. 2022 COMOROS 30 Chapter I: Macro-Fiscal Context PUBLIC EXPENDITURE REVIEW Figure 4. Overall Fiscal Balance and Grants, 2010–20 Figure 5. Current Expenditures, 2010–20 percent of GDP percentage of total revenues percent of domestic revenues 15 70 130 10 60 110 50 5 40 90 0 30 70 -5 20 50 -10 10 -15 0 30 10 11 12 13 14 15 16 17 18 19 10 11 12 13 14 15 16 17 18 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 J Overall fiscal balance (incl. grants) J Overall fiscal balance (excl. grants) ▬ Current expenditures ▬ Wages and salaries  100-line ▬ Grants (rhs) ▬ Current expenditures (percent of total revenues) Source: World Bank staff calculations using data from national authorities Source: World Bank staff calculations using data from national authorities and the IMF. and the IMF. Human Capital Index and Secondary School Figure 6.  Learning Gap and Expected Years of Figure 7.  Enrollment, 2020 Schooling, 2020 percent of expected years of school years of school 0.6 120 50 14 0.5 100 12 40 10 0.4 80 30 8 0.3 60 20 6 0.2 40 4 0.1 20 10 2 0 0 0 0 A er al I s al er al s nd n s os ga ji te oa os LM SS le iu Fi la o Pe tur er on Peion ++ s s s es n or m Is lom or el rit To Perati -L Sa c m h t m au ru ra yc or So Co Co pi pi M St Se m As As Ti J Human Capital Index Q Secondary school enrollment (rhs) J Learning gap Q Expected years of school (rhs) Source: World Bank staff calculations using data from the Human Capital Source: World Bank staff calculations using data from the Human Capital Index, Logistics Performance Index, and the World Development Indicators Index, Logistics Performance Index, and the World Development Indicators (WDI) database. (WDI) database. Figure 8. Logistics Performance Index, 2018 Share of the Population with Access to Figure 9.  Electricity, 2019 2.8 100 90 2.7 80 2.6 70 2.5 60 50 2.4 40 2.3 30 20 2.2 10 2.1 0 ji A I er al s A er al I er al s al os os LM LM iu Fi SS SS Pe tur Pe tur Peion er on s s s ++ rit or or Perati c c t au m m ru ru ra Co Co M pi pi St St As As Source: World Bank staff calculations using data from the Human Capital Source: World Bank staff calculations using data from the Human Capital Index, Logistics Performance Index, and the World Development Indicators Index, Logistics Performance Index, and the World Development Indicators (WDI) database. (WDI) database. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter I: Macro-Fiscal Context 31 in the lack of progress in poverty reduction, as an estimated 44.8 percent and two-thirds of the population was poor (income-based) and multidimensionally poor, respectively in 2020.6 To close the infrastructure gap and create the foundation for long-term economic growth, Comoros signed new external loan contracts, which has resulted in a substantial increase in public debt since 2013. Since its completion of Heavily Indebted Poor Countries initiative in 2013, the country’s public debt-to-GDP ratio increased from 10.3 in 2012 to 22.0 percent in 2020, and it is estimated at 30.0 percent of GDP at end-2022 (Figure 10).7 While Comoros’ public debt is low compared to peers, it has been increasing rapidly, especially since 2016, with a debt increment of approximately 10 percent, on average, per year, higher than the peer average of 3.4 percent (Figure 11). The recent increase in the country’s debt has been due to new loans, some of which on non-concessional terms, related to large investment projects. These include two non-concessional loans to finance a large hospital project in 2018 (equivalent to 2.5 percent of GDP), a loan to finance a tourism project in 2020 (equivalent to 4.5 percent of GDP),8 and a concessional loan (equivalent to 6.9 percent of GDP) to finance the modernization of telecommunications equipment at Comores Télécom (CT), an SOE, in 2019.  rend and Composition of Public Debt, Figure 10. T Figure 11. Public Debt in Comoros and Peers 2011–20 percent of GDP percent of GDP 30 140 120 25 100 20 80 60 15 40 10 20 5 0 nd n s te os ga oa ci e e s le in om rd la o iu s Ca pe es n or m Is lom el Ve rit To -L Pr T Sa m h au & Sao yc or bo So Co 0 Se m M 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Ti J Domestic debt J External debt Source: World Bank staff calculations using data from the World Bank IMF/ Source: World Bank staff calculations using data from the World Bank IMF/ World Bank Debt Sustainability (September 2021) and WDI database. World Bank Debt Sustainability (September 2021) and WDI database. 6 World Bank (2021). Poverty and Equity Assessment Report. Washington DC: World Bank. 7 Comoros’ level of indebtedness fell from 68.8 percent in 2008 to 10.3 percent of GDP in 2013 after completion of the Heavily Indebted Poor Countries initiative. 8 Both projects are part of the government’s national development plan - Plan Comores Emergent (PCE) - which was presented to the donor community in 2019. Neither of the two infrastructure investments—the 600-bed Hospital (El Maarouf) and a 5-star luxury hotel in Galawa—were backed by solid feasibility studies nor open to international tender. 2022 COMOROS 32 Chapter I: Macro-Fiscal Context PUBLIC EXPENDITURE REVIEW Box 1. Vicious circle of fiscal policy and development in the Comoros Limited government revenues are constraining public services delivery. The government ability to provide the needed public goods and services are constrained by lower domestic revenue mobilization. The size of the government (18.8 percent of GDP) is very low in comparison to structural (47.9 percent of GDP) and aspirational (33.7 percent) peer countries (see Chapter III). In addition, public investment (7.2 percent of GDP) is low, it has been primarily financed by external partners—more than three-quarters of public investments (see Chapter IV), and it is constraining growth. Furthermore, public spending to address social issues has been below levels recorded in peer countries (Chapter III). Attempts to close infrastructure gaps have proven to be challenging without higher revenue mobilization. The country’s recent debt sustainability challenges following the contracting of a non-concessional debt are symptomatic of these structural and institutional weaknesses. The recent attempt to increase investment (through borrowing) in the tourism sector with the construction of the Galawa hotel (4.5 percent of GDP) and other critical sectors for development (i.e., digital), combined with challenging macroeconomic projections (growth, exports and revenues), triggered the deterioration of the country’s risk of debt distress to high from moderate in 2021. The low government size is also undermining the ability to stabilize the economy during shocks. The economy has been growing below its potential since 2019 Kenneth cyclone. While countries were increasing expenditures to lessen the impact of the pandemic, Comoros expenditures declined by 1.4 percentages points (see Chapter III). With low human and physical capital, growth has been low and not inclusive enough, and it represents a source of fragility. Comoros’ GDP per capita in constant USD has been stagnating over the last two decades— even slightly declining from US$1,361.6 in 1980–2000 to 1,334.4 in 2001–20. This growth dynamic can be partially explained by structural factors such as weak institutions, the small population size and geographic remoteness as they weigh on private sector development. As a result, between 2004 and 2018, poverty at $3.65 a day (2017 PPP) only declined by 1.6 percentage point in Comoros in comparison to a decrease in poverty of 10.1 percentage points in aspirational peers and 19.5 percentage points in lower middle-income countries. In 2022, poverty rate was estimated at 39.2 percent. Unfortunately, high poverty is a source of fragility, and it could be exarcebated by low GDP growth which affects government revenue: a vicious cycle. I.3 Improving State Owned Enterprises Governance and Public Financial Management for Better Outlooks and Mitigated Risks After a sluggish economic expansion in 2019–2022, Comoros’ medium-term growth prospects are favorable but prone to global uncertainty. After averaging 1.3 percentage points in 2019–22 because of the Kenneth cyclone, the COVID-19 pandemic, and the increased inflationary pressures due to Ukraine-Russia war and global value chain issues, growth is expected to rebound in 2023–24 to an average of 3.6 percent if private consumption resumes, and major public investment projects are completed within this period. These projections are based on a broad-based return to normality in the tertiary sector and stronger demand for agricultural products. In the post-pandemic era, poverty is expected to remain at a high level at 39.8 percentage points in 2022, before it declines slightly to 38.4 percentage points by 2024. However, this is contingent on Comoros’ ability to contain the economic impact of soaring prices on the economy through the adoption of adequate government mitigating measures, including for SOEs and the financial sector. The pandemic is likely to have long-lasting socioeconomic consequences, especially for the most vulnerable, who are most exposed. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter I: Macro-Fiscal Context 33 SOEs make up an important part of the Comorian economy, but they are mostly low performing and suffer from weak oversight, creating significant fiscal risks. The country’s SOEs operate across a variety of sectors (telecommunication, energy, utilities, and the financial sector). Their performance has been deteriorating in recent years, partly due to a lack of proper management and oversight. Indeed, SOE staffing and salaries are not properly managed according to company needs, with average SOE salaries well above those of other civil servants, and some SOEs are highly overstaffed.9 Additionally, SOEs do not provide systematic financial reporting to the government, and auditing is rarely performed, severely damaging transparency and accountability and affecting SOEs’ fiscal contributions. Unreliable fiscal revenues from SOEs and large contingent liabilities driven by the rapidly decreasing profitability of these companies create a substantial risk to debt sustainability. Indeed, SOE debt is high (estimated at 21 percent of GDP) and most of it is guaranteed by the State. However, the actual level of SOE debt is unclear, given the non-always officially recognized cross-debts with the State and among SOEs. In 2022, risks to debt sustainability are increasing as Comoros faces lower economic prospects due to heightened inflationary pressures, lower tax revenues, and increased spending pressures. Potential quasi-fiscal activities by SOEs are likely to generate contingent liabilities and additional public spending pressures, as Comoros has faced increased inflationary pressures since end-2021, which have worsened since the Ukraine-Russia conflict in 2022. With the subsequent increase in petroleum products on international markets, the Comorian authorities increased the price of hydrocarbon products by up to 44 percentage points on the local market in May 2022, and electricity tariffs have surged by 44 percentage points so far in 2022. Consequently, the economy is projected to increase at the sluggish rate of 1.4 percent in 2022, and tax revenue is projected to grow at a slower pace in comparison to 2021. In addition, the government is subsidizing ONICOR and bakeries to keep the retail price of rice below the market level, and to contain inflationary pressures on flour-based products. Risks to the growth outlook remain on the downside, linked to the uncertainty generated by the pandemic. A possible third wave of COVID-19 linked to new variants and growing vulnerabilities in the financial sector could undermine Comoros’ growth outlook. Moreover, the continuation of the global recession into 2022 due to the virus would continue to undermine the country’s tourism receipts and domestic activity. Fiscal risks are high, as the government is exposed to contingent liabilities from financially weak SOEs (e.g., CT). Comoros also remains highly exposed to climate shocks, with more than half of the population living in at-risk areas, which could further weigh on external and fiscal balances. Finally, GDP growth will remain below its potential as the business environment remains challenging and institutions are weak. The most recent IMF-World Bank Debt Sustainability Analysis finds that Comoros’ public debt remains sustainable, but the overall risk of debt distress has moved from moderate to high.10 The change mainly reflects higher debt service obligations associated with the two recent large concessional and non-concessional loans that are of short maturity. Meanwhile, the baseline macroeconomic conditions that affect debt-related indicators have also deteriorated, driven by the integration of expected postal bank recapitalization costs into the macroeconomic projections and pandemic- related weakening in economic performance. As a result, three out of four external debt burden indicators breach their respective thresholds11 (Figure 12).12 Comoros continues to be susceptible to export and depreciation shocks, and more prolonged and protracted shocks to the economy would also present downside risks to the debt outlook. 9 An analysis by a consulting firm to Comoros Telecom, the national telecommunications SOE, found that staff in 2019 reached 2,400 (from 1,100 in 2012), when, according to benchmarks, it would only need 410 staff. 10 A deterioration from the Debt Sustainability Analysis of the 2019 Article IV consultation. 11 Except for the present value (PV) of the debt-to-GDP ratio. 12 If successfully implemented, the ongoing SMP would provide the path for an IMF Extended Credit Facility arrangement in FY22. 2022 COMOROS 34 Chapter I: Macro-Fiscal Context PUBLIC EXPENDITURE REVIEW Figure 12. PPG External Debt under Alternatives Scenarios, 2021–31 PV of debt-to-GDP ratio PV of debt-to-exports ratio 45 600 40 500 35 30 400 25 300 20 15 200 10 100 5 Most extreme shock: Exports Most extreme shock: Exports 0 0 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 Debt service-to-exports ratio Debt service-to-revenue ratio 50 35 45 30 40 35 25 30 20 25 15 20 15 10 10 5 5 Most extreme shock: Exports Most extreme shock: One-time depreciation 0 0 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 ▬ Baseline  Historical scenario ▬ Most extreme schock  Threshold Source: IMF/World Bank Debt Sustainability (September 2021). Comoros faces substantial contingent liabilities related to SOEs and weaknesses in PFM. Contingent liabilities are estimated at 8.8 percent of GDP and include domestic arrears that should be validated (1.8 percent of GDP), contingent liabilities from SOEs (2.0 percent of the GDP), and contingent liabilities from the financial system (5 percent of the GDP, default). Contingent liabilities, while at the default level, could also include unknow debt and costs emerging from the restructuring of SOEs. SOEs represent a significant risk to the macroeconomic outlook because their contribution to the domestic budget averaged 37 percent of domestic revenues in 2017–18, their gross debt (including between SOEs) represents about 21 percent of GDP, and some SOEs, like CT and Société Comoriennes des Hydrocarbures, have recently recorded a deterioration in their net profits. Those downside risks could be mitigated through an implementation of PFM reforms as they could contribute to further the economic expansion or help to improve fiscal performance. PFM reforms can help to improve the efficiency public spending and achieve fiscal performance. Concerning public spending efficiency, an increase in their efficiency— through better PIM or allocation of resources—could yield between 0.03 and 0.15 percentage points of additional GDP growth between 2022 and 2050 (Figure 14). Recent empirical analyses establish a relationship between fiscal performance and selected PFM components such as: the predictability in the availability of funds for commitment of expenditures, recording and management of cash balances, debt and guarantees, effectiveness of internal audit and the availability of information on resources received by service delivery units.13 The impact of reforms in the above listed PFM areas ranges between 0.27 percent of GDP and 1.76 percent of GDP (See Figure 13). 13 Gui-Diby S. L. (2022). Public Financial Management and Fiscal Performance: Evidence from Panel Data Analyses. Applied Economic Letters, 29 (19), pp. 1784- 1790. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter I: Macro-Fiscal Context 35 mpact of Public Financial Management Figure 13. I Impact of Improved Public Spending Figure 14.  (PFM) Reforms on Fiscal Performance in Efficiency on Long Term Growth in Comoros Comoros percent of GDP percentage points 2.0 0.16 1.76 0.14 0.143 0.146 1.6 0.12 1.2 0.10 0.091 0.093 0.8 0.88 0.08 0.74 0.60 0.06 0.4 0.53 0.37 0.27 0.30 0.04 0 Availability of Precitability in Recording and Effectiveness 0.02 0.027 0.027 information on the availability management of of internal resources received of funds for cash balances, audit by service delivery commitment debt and 0 units expenditures guarantees 2022–2030 2031–2040 2041–2050 J Marginal changes J Substantial changes J D. GDP per capita growth J D. GDP growth Source: World Bank estimates based on Long Term Growth Model (LGTM) projections, and Gui-Diby (2022). Note: Marginal changes refer to an increase by 0.5 point of the PEFA score, and substantial changes refer to an increase of one point of the PEFA score. To address these challenges to the country’s economic outlook, the government should implement reforms across different sectors, and this PER provides the underpinning analyses to design such reform agenda. Specifically, there is a need to increase the mobilization of domestic revenues, increase public expenditure efficiency to improve economic and social outcomes, and enhance SOE governance to reduce debt vulnerabilities. In addition, increasing public expenditure efficiency, reducing the wage bill, and improving SOE governance could allow the authorities to create fiscal space and expand public service delivery, including in the health sector. Given Comoros exposition to natural and climate change disasters, and the potential socio-economic impact of some diseases, there is a need to review DiRM, and to review expenditures in the health sector. The health analyses provide policies to operationalize the El Maarouf hospital as it is a major government project that would affect the health system. For this purpose, this PER is organized as follows: Chapter 2 discusses the status of domestic resource mobilization; Chapter 3 provides an overview of the trends and composition of public expenditure; Chapter 4 focuses on public investment expenditures by analyzing their trends, composition, management, and efficiency; and Chapters 5 deals with public financial management (PFM) issues. Chapter 6 makes the case for an increase in the efficiency of public health spending while informing the implementation of the El-Maarouf Hospital project to optimize the use of health-sector resources in the future; and Chapter 7 analyzes the situation of SOEs in Comoros. Finally, Chapter 8 discusses about issues related to DiRM in Comoros. 36 Domestic Revenue Chapter II:  Mobilization Comoros’ total government revenues have been below levels observed in peer countries during the past decade. Limited domestic revenue mobilization reduces the government’s capacity to provide public services that could help unleash Comoros’ growth potential and address lingering development challenges. This chapter analyses the trends, composition, and efficiency of domestic revenues in Comoros. It concludes that the country’s domestic revenues are heavily driven by indirect taxation, but several tax instruments are not sufficiently effective due to weak tax administrations and unassessed tax exemptions. Comoros’ total government revenues are below levels observed in peer countries, and peer countries have more predictable revenues because they receive fewer external grants. The country's level of public revenue, including grants, is equivalent to half that of peer countries such as Samoa or Tonga (Figure 15). In 2016–19, Comoros mobilized 16.8 percent of GDP in government revenue, almost half that of the small peer country average of 31.4 percent. Moreover, the country is more dependent on external grants than small island aspirational peers. During the same period, while external grants represented 37.7 percent of total revenues in Comoros, they represented 33.7 percent and 3.6 percent in structural and aspirational peer countries, respectively (Figure 16). Figure 15. Total Revenues and Grants, 2011–2020 Total Revenues and Grants in Comoros and Figure 16.  Peer Countries, 2016–2019 percent of GDP percent of GDP 30 45 40 25 35 30 20 25 15 20 15 10 10 5 5 0 s nd n os s ci e ji e oa ga le iu in om rd Fi la o pe s or n m Is lom el rit Ve To 0 Pr T Sa m h au & ao yc bo Co So M 1 2 13 14 15 16 7 8 19 20 Se S 1 1 1 Ca 1 20 20 20 20 20 20 20 20 20 20 J Revenues J Grants  Average 2011–15 ▬ Average 2016–20 J Revenues J Grants Source: National authorities, IMF, and World Bank staff estimates. Driven by changes in external grants, total government revenues declined during the past five years. Total revenues and grants accounted for an average of 18.5 percent of GDP in 2011–15, before declining to an average of 17.0 percent in 2016–20, on the back of lower mobilization of grants. Total external grants mobilized declined from 8.7 percent of GDP, on average, in 2011–2015 to 6.8 percent of GDP in 2016–2020. The slight increase in domestic revenue mobilization did offset the decline in windfalls received from bilateral and multilateral partners. The country’s exceptional grants mobilization (cumulative) reached 12.6 percent of GDP in 2011–15. The grants under the Enhanced Initiative for Heavily Indebted Poor Countries have come primarily from multilateral partners (US$111.2 millions). This chapter examines the mobilization of public revenue in Comoros. It begins by describing revenue trends and analyzing their composition between 2011 and 2020, with a focus on the period 2016–20. The analysis focuses on tax collection performance compared to peer countries, tax instruments, and changes in tax policy. The chapter provides an overview of the status of the tax administration, and it presents recommendations for enhancing overall revenue collection. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter II: Domestic Revenue Mobilization 37 II.1 There is high potential to increase tax revenues that currently rely heavily on indirect taxes Tax revenues, the major component of Comoros’ domestic revenues, have been declining since 2017, and the country’s tax revenue mobilization compares poorly with that of peer countries. Tax revenues represented 79.5 percent of the country’s domestic revenues in 2016–2020, higher than 70.6 percent in 2011–15. Although its share in total revenue has increased during the past decade, tax revenues as a share of GDP has declined significantly since its peak of 10.1 percent in 2017 (See annexes 1–6 for details on existing tax instruments). Tax revenues collapsed to 6.8 percent of GDP in 2019, before recovering slightly to 7.6 percent in 2020 (Figure 17). This dynamic stems from the underperformance of direct taxes (mostly corporate income taxes [CITs]) and delays in implementing reforms that would have increased revenue mobilization (e.g., the removal of exemptions on construction materials). The exceptional mobilization of 2017 was primarily driven by temporary measures and relatively little by structural tax reforms, including more intense monitoring of tax administration performance (with weekly reviews with the minister of finance and the Presidency) and the adoption of other measures aimed at securing customs revenues. Tax revenues are also significantly below the level recorded in aspirational and structural peer countries, averaging 10.2 percent of GDP in Comoros, lower than an average of 15.5 percent of GDP in structural and aspirational peers (Figure 18).  omestic Revenue by Major Category, Figure 17. D Tax Revenue in Comoros and Peer Figure 18.  2011–20 Countries, 2016–19 percent of GDP percent percent of GDP 12 60 35 30 10 50 25 8 40 20 15 6 30 10 4 20 5 2 10 0 nd n s os ci e a e ji oa s le in om ng rd Fi la o iu pe s or m Is lom el Ve rit To Pr T Sa m h au & ao yc bo So Co 0 0 Se M S Ca 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 J Tax revenues J Nontax revenues ▬ Tax revenues, percent of total revenues and grants (rhs) Source: World Bank staff calculations based on data from the national Source: World Bank staff calculations based on data from the national authorities. authorities. Indirect taxes represent about three-quarters of total tax revenues, and their contribution to government revenues has recently increased substantially as direct taxes have been underperforming.14 The share of indirect taxes increased from an average of 74.5 percent of tax revenues in 2011–15 to 77.9 percent in 2016–2020. By contrast, the share of direct taxes in tax revenues has been relatively constant during the past decade, averaging 1.8 percent of GDP in 2016–20 and 1.7 percent in 2011–15 (Figure 20). Indirect taxes increased substantially between 2011 and 2017 and have been more resilient despite Cyclone Kenneth in 2019 and the COVID-19 pandemic in 2020. The robustness of indirect taxes during these two shocks in comparison to direct taxes was due to the decline in companies’ profits and the implementation of tax relief measures aimed at supporting the private sector. Indirect taxes benefited from more resilient private consumption, which in turn was supported by a significant increase in remittances (from 13.2 percent 14 See Annex 2 to Annex 5 for more details on indirect tax instruments scope of application and rates. 2022 COMOROS 38 Chapter II: Domestic Revenue Mobilization PUBLIC EXPENDITURE REVIEW of GDP, on average, before the pandemic to 18 percent in 2020). In addition, border closures—due to the COVID-19 pandemic—could have also limited cross-border revenue leakage (IMF 2022).15 The execution rate of tax revenues projected in the budget law has been below 100 percent since 2016. The shortfall in tax revenue collection averaged 1.6 percentage points of GDP in 2016–2020 (2.6 percentage points in 2019), higher than 0.3 percentage points in 2011–2015 (Figure 19). The underperformance reflects difficulties in tax revenue collection, but also limited revenue administration capabilities and the economic challenges the country went through in 2019 (Cyclone Kenneth) and 2020 (COVID-19). These two shocks reduced the growth rate from 3.6 percent in 2016–18 to 1.8 percent and -0.3 percent in 2019 and 2020, respectively. There has also been a lack of coordination between the tax administration, the budget office, and the national statistics office in terms of macroeconomic monitoring and forecasting, resulting in poor estimates of potential revenues.16 Figure 19. Tax Revenue and Execution Rate, 2011–20 Figure 20. Direct and Indirect Tax Revenue, 2011–20 percent of GDP percent percent of GDP 16 160 12 14 140 10 12 120 8 10 100 8 80 6 6 60 4 4 40 2 2 20 0 0 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 J Target J Collected ▬ Collection rate (rhs) J Indirect taxes J Direct taxes Source: World Bank staff calculations based on data from the national Source: World Bank staff calculations based on data from the national authorities. authorities. Tax Revenue Buoyancy in Comoros and Figure 21.  Tax Revenue Capacity and Gap in Comoros Figure 22.  Peers, 2011–19 and Peers, 2016–19 percent of GDP 8 45 40 6 35 4 30 25 2 20 0 15 10 -2 5 -4 0 nd n s s nd n oa ji ci e os ga e os ga e ji oa s s lle lle Fi in om rd rd Fi la o la o iu iu s pe s n n or or m m Is lom Is lom Ve Ve he he rit rit To To Pr T Sa Sa m m au au & Sao yc yc bo bo So So Co Co Se Se M M Ca Ca J Tax revenue Q Tax revenue capacity Source: World Bank Tax Revenue Dashboard. Source: World Bank Tax Revenue Dashboard. 15 International Monetary Fund (2022). “Revenue Mobilization in Sub-Saharan Africa during the Pandemic.” IMF Special Series on COVID-19. International Monetary Fund, Washington, DC. 16 There is a lack of coordination between the budget office and revenue administrations. For instance, AGID has no dedicated expert staff or channels aimed at regularly providing tax revenue forecasts ahead of the budget preparation exercise. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter II: Domestic Revenue Mobilization 39 Compared to peer countries, Comoros has the lowest tax potential, one the lowest tax buoyancy, and one of the highest tax gaps. The country’s tax capacity remained relatively stable between 2011 and 2020, due to limited changes in its economic structure over this period. Comoros’ tax capacity only increased from an average of 18.0 percent of GDP in 2011–15 to 18.4 percent in 2016–20 (Figure 22). However, its tax gap still represents more than half of the country’s total tax potential and is largely due to the high level of tax exemptions. By contrast to the situation in peers, tax exemptions added to the significant pool of untapped large and medium taxpayers as well as to low consumption taxes (low tax rate and no VAT) in Comoros. Peer countries have a greater tax potential due to economic differences and smaller tax gaps, which in turn are due to better tax systems and administrations. Comoros’ tax buoyancy suggests that a 1 percent increase in GDP led to an increase of 1.3 percentage points of tax revenues in 2016–2019, below levels observed in Tonga, Seychelles, and Cabo Verde, albeit above levels recorded in other countries such as Samoa, Solomon Islands and Sao Tome and Principe (Figure 21). Table 2. Composition of Comorian Government Revenue percent of government domestic revenues In % of Revenue 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Domestic Revenue 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Tax Revenues 67.6 58.4 78.1 81.5 67.2 87.1 83.5 73.9 71.1 81.7 Direct taxes 18.4 13.9 20.1 19.8 17.7 19.4 25.9 16.8 11.2 15.4 Taxes on indiv. income and 5.1 4.4 5.9 5.9 4.1 7.4 6.1 6.1 6.3 7.6 profits Taxes on firms' income and 13.4 9.5 14.3 13.9 13.6 12.1 19.7 10.7 4.9 7.6 profits Taxes on real estate 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 Indirect taxes 49.2 44.5 58.0 61.7 49.5 67.7 57.6 57.1 59.9 66.3 Taxes on goods and services 10.1 11.3 17.1 16.4 14.2 13.9 16.3 11.8 14.7 16.4 Taxes on international trade 31.9 20.1 14.3 14.2 8.5 11.2 11.0 10.4 11.3 11.3 Excise duties 5.7 12.0 25.8 29.6 26.2 41.2 29.9 34.5 33.9 38.4 Other tax revenue 1.4 1.0 0.9 1.5 0.6 1.4 0.4 0.4 0.0 0.2 Nontax Revenues 32.4 41.6 21.9 18.5 32.8 12.9 16.5 26.1 28.9 18.3 Source: World Bank staff calculations using data form the national authorities. Note: See Annex 1 to Annex 6 for more details on tax instruments scope of application and rates. II.1.1 Corporate income taxes are the main source of direct taxes, but their collection is inefficient CITs are the main source of direct taxes and the main driver of tax revenue decline in Comoros, particularly during Cyclone Kenneth and the COVID-19 pandemic.17 They averaged 59.0 percent of direct tax revenues (11.0 percent of government revenues) in 2016–2020, down from 71.8 percent in 2011–15 (Table 2). After having peaked in 2017 at 2.4 percent of GDP (from 1.3 percent in 2011–15), CIT revenue collection collapsed to 0.5 percent of GDP in 2019, before recovering slightly in 2020 (Figure 23). These variations in CIT revenues are correlated with the financial situation of SOEs, which represented an average of 77.6 percent of total CIT collected between 2011 and 2015 (which increased to 62.0 percent in 2016–20), out of which Comores Telecom (CT) represented 62.6 percent and SCH and ONICOR represented 7.2 percent and 3.6 percent, respectively.18 This trend is symptomatic of not only the poor performance of SOEs but also the recent shocks that impacted the Comorian economy. The exceptional increase recorded in 2017 was due 17 See Annex 1 for more details on direct tax instruments scope of application and rates. 18 The remaining 13 major SOEs barely reach KMF 1 billion per year or around 0.2 percent of GDP. 2022 COMOROS 40 Chapter II: Domestic Revenue Mobilization PUBLIC EXPENDITURE REVIEW to the performance of SCH (an SOE that has the exclusive Figure 23. Trends in CIT Revenues, 2011–20 right to import and distribute hydrocarbon products in the percent of GDP percent islands), which collected an additional KMF 5 billion in 2.5 25 CIT revenue, representing 1.1 percent of GDP. The drop in global oil prices in 2014–16 was not passed on to the 2.0 20 administered prices, making it possible to substantially 1.5 15 improve the margins of the public company. CT, which used to be a major contributor in terms of CIT revenue, 1.0 10 has been underperforming since the liberalization of the telecommunications market.19 0.5 5 0 0 Comoros’ CIT revenue is well below its potential, as 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 evidenced by the low CIT efficiency and the higher level J CIT revenues ▬ Share of tax revenues (rhs) Source: National authorities, IMF, PwC, and World Bank staff estimates. of CIT revenue recorded in peer countries. Compared to peer countries, Comoros has the highest CIT rate but collects less revenue (Figure 24 and Figure 25). The low CIT Revenues Collected in Comoros and Figure 24.  CIT efficiency rate (2.0 compared to 13.4 in peers) reflects Selected Peers, 2016–19 low productivity of the CIT and tax administrations. The percent of GDP tax potential of large and medium taxpayers is under- 7 exploited, and there is weak identification of medium 6 taxpayers across the islands. 5 4 While below potential due to underperforming and 3 inadequate tax payments from SOEs, PITs have been 2 more robust than CITs despite exogenous shocks in 2019 1 and 2020. While the CIT has a tax base that is significantly 0 nd n s os ci e oa ga e ji s lle in om rd Fi la o sensitive to business cycles, PIT revenues are expected iu pe s n or m Is lom Ve he rit To Pr T Sa m au & ao yc bo So Co Se M to be more resilient since they are based primarily on a S Ca highly rigid tax base. The PITs collected in Comoros come Source: National authorities, IMF, PwC, and World Bank staff estimates. exclusively from wages, as taxes on income derived from investments and wealth are marginal. Driven by poor SOE CIT Efficiency and CIT Rate in Comoros and Figure 25.  performance, PIT revenues only marginally increased from Selected Peers 0.5 percent of GDP in 2011–15 to around 0.7 percent 25 40 in 2016–20 (Figure 26). SOEs’ financial situation 20 35 deteriorated during the past five years, and they may have 30 25 accumulated unpaid PITs, as they do not receive subsidies 15 20 from the central administration. In addition, before 10 15 the exogeneous shocks in 2019 and 2020, SOEs were 10 5 reporting declining PIT revenues despite having increased 5 the number of employees and their wage bill. Their PIT 0 0 s nd n os e oa s revenue contribution was based on the base salary for all te iu rd la o s or m Is lom rit ta Ve Sa m ls au bo So Co public company workers and did not include other revenues al M Ca Sm (bonus, duty allowance, etc.). If SOEs could pay their fair J CIT efficiency Q Maximum CIT rate (rhs) Source: National authorities, IMF, PwC, and World Bank staff estimates. share of the PIT, Comoros could mobilize around 0.3 to 19 ONICOR’s contribution was impacted by the reduction in local rice prices (a loss of KMF 214 per ton since 2018), and a significant quantity of rice was damaged due to humidity in the store in 2018. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter II: Domestic Revenue Mobilization 41 Figure 26. Trends in PIT Revenues, 2011–20 PIT Revenues Collected in Comoros and Figure 27.  Selected Peers, 2016–19 percent of GDP percent of GDP 0.8 6 0.7 5 0.6 4 0.5 3 0.4 2 0.3 1 0.2 0 0.1 nd n s os ji oa ci e e s lle Fi in om rd la o iu pe s or m Is om Ve he rit Pr T Sa m l au & Sao yc bo So Co 0 Se M Ca 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 J SOEs J Government sector J Private sector Source: National authorities, IMF, PwC, and World Bank staff estimates. Source: National authorities, IMF, PwC, and World Bank staff estimates. 0.5 percentages points of GDP, and additional revenues PIT Efficiency and Highest Marginal PIT Figure 28.  could be mobilized from the growing private sector. Rate in Comoros and Selected Peers 20 45 PIT revenues are below levels recorded in peers, and 40 16 PIT efficiency could be further improved considering 35 30 that Comoros’ marginal PIT rate is one of the highest 12 25 among peers. The performance of the country’s PIT 20 8 revenues is well below that recorded in aspirational and 15 10 structural peer countries (Figure 27 and Figure 28). The 4 5 difference between Comoros and its peers ranges from 0 0 1.0 percentage points of GDP (Fiji) to 4.2 percentage nd n s os e oa s te iu rd la o s or m Is lom rit ta Ve Sa m ls au points of GDP (Seychelles). In addition, the country’s PIT bo So Co al M Ca Sm efficiency is well below levels recorded in peer countries, J PIT efficiency Q PIT rate (rhs) despite Comoros having the highest marginal PIT rate Source: National authorities, IMF, PwC, and World Bank staff estimates. (30 percentage points) among peers. II.1.2 Excise revenues have been a major source of indirect tax revenue, but they remain below potential levels Excise revenues are a major source of tax revenue. They have significantly increased over the past decade and remained resilient during Cyclone Kenneth in 2019 and the COVID-19 pandemic in 2020. Despite the decline in tax revenues, excise revenues increased from 1.9 percent of GDP in 2011–15 to 3.6 percent in 2016–20 (Figure 29). Accordingly, their share of tax revenues increased from 27.5 percent to 44.9 percent between 2011–15 and 2016–20. The structure of excise revenues has also changed due to difficulties in collecting excises on hydrocarbon products and ordinary rice, but there has been some improvement in other excises levied on luxury rice and construction materials (e.g., cement). Due to a complex taxation system, a weak customs administration, and low transparency at SCH (which is mandated to collect the petroleum tax), excise on petroleum products, which accounted for about 47 percent of total excise revenues in 2011–15, only represented 35.6 percent of excise revenues in 2016–20. The excise on ordinary rice has also significantly declined over the last years, collapsing to 9.0 percent of excise revenues in 2020, down from 17.1 percent in 2011–2015, despite the significant increase in rice imports from 53.9 thousand tons in 2011–15 to 62.0 thousand tons 2022 COMOROS 42 Chapter II: Domestic Revenue Mobilization PUBLIC EXPENDITURE REVIEW in 2016–20. The excise collected on luxury rice, on the contrary, doubled from 1.5 percent in 2011–15 to 3.4 percent in 2016–20. Comoros collected an average of 3.6 percent of GDP in excise taxes in 2016–2020, which was 2.6 percentage points of GDP above the level recorded in structural peer countries (Figure 30). However, Comoros could improve the mobilization of excise taxes to the level of aspirational economies such as Samoa and Seychelles (about 6.1 percent of GDP). Indirect Taxes in Comoros in 2016–20 by Figure 29.  Excise Revenues in Comoros and Selected Figure 30.  Major Category Peer Countries, 2016–19 percent of GDP percent of GDP 8 7 7 6 6 5 5 4 3 4 2 3 1 2 0 1 nd n s ci e e ji os oa s le in om rd Fi la o iu pe s or m Is lom el Ve rit Pr T Sa m h au & Sao yc bo So Co 0 Se M Ca 2016 2017 2018 2019 2020 J Taxes on goods and services J Taxes on international trade J Excise duties J Other indirect taxes Source: National authorities, IMF, and World Bank staff estimates. Taxes on Goods and Services in Comoros Figure 31.  Taxes on International Trade in Comoros Figure 32.  and Selected Peers, 2016–19 and Selected Peers, 2016–19 percent of GDP percent of GDP 20 12 16 10 8 12 6 8 4 4 2 0 0 nd n s s nd n os ci e e ji a oa os ga oa e ji ci e s s lle lle in m ng rd rd in om Fi Fi la o la o iu iu pe s So e s n or or m m Is lom Is lom p o Ve Ve he he rit rit To To Pr T Pr T Sa Sa m m au au & Sao & Sao yc yc bo bo So Co Co Se Se M M Ca Ca Source: National authorities, IMF, and World Bank staff estimates. While the composition of taxes on goods and services has changed significantly, their contribution to tax revenue remained broadly unchanged in 2011–20, performing well below levels recorded in peer countries. Taxes on goods and services changed only marginally from about 1.3 percent of GDP in 2011–2015 to 1.5 percent in 2016–20, due to better collection of consumption taxes collected at the border while other taxes underperformed. The increase in consumption taxes collected beyond the border can be explained by the dynamic of private consumption, which is a major driver of GDP growth in Comoros. The underperformance of consumption taxes collected at the border is related to the weak customs administration, while low tax recovery and compliance could explain the underperformance of other tax instruments (e.g., duties and stamps, the licensing tax, diesel taxes, and the road-use vignette). As a result, tax collection on goods and services has been lower in Comoros than in peer countries (Figure 31). ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter II: Domestic Revenue Mobilization 43 Box 2. From Consumption Tax to VAT: Advantages and Prerequisites for a Successful Transition in Comoros The contribution of consumption taxes to tax revenues increased significantly in 2016–20, although it remains lower than in peer countries where VAT has been implemented. Consumption taxes (including internal and those collected at the border) increased from KMF 1.7 to 3.5 billion in 2011–15 and from KMF 1.8 to 2.7 billion in 2016–20. The increase followed reforms implemented in 2016–17, especially those targeting the structure of AGID and increasing the accountability of tax collectors. However, with an economy primarily driven by consumption, the performance of Comoros’ overall consumption taxes has been weak compared to the performance of VAT in peer countries. Consumption taxes represented only 1.2 percent of GDP in 2016–20, low compared to the potential estimated at 9.5 percent of GDP and the performance of VAT collection in peer countries at 8.3 percent of GDP.a The underperformance is primarily driven by exemptions, weaknesses of the tax administration, and inefficiencies associated with the consumption tax instrument. Introducing a VAT in Comoros could allow it to more Tax Collection in Comoros and Peer Figure A-2.  efficiently mobilize taxes levied on consumption. The Countries implementation of the VAT would overcome challenges percent of GDP associated with the current consumption tax, including 6 upward pressure on the price of goods and services 5 and incentives to request ad hoc exemptions because 4 of the lack of deductibility. The VAT would contribute 3 to increasing domestic revenue by improving tax discipline (companies would have an interest ensuring 2 that invoices from their suppliers and service providers 1 are correct since they can deduct them), easing the 0 s os ji s e oa monitoring of tax compliance, and encouraging the le iu Fi rd or m el rit Ve Sa m h au yc pe Co formalization of companies (to avoid being considered M Se Ca the final consumer). It would also have a positive Source: World Bank staff calculations using data from the national authorities and IMF. impact on the collection of CITs and other related Note: Tax collection refers to consumption taxes in Comoros and VAT in taxes. Moreover, the VAT would contribute to reducing peers. the cost of revenue mobilization, as the marginal cost associated with VAT collection is lower since each company in the value chain is a VAT collector. A VAT system would align the country’s tax regime with global practices and prevent competitivity losses. Comoros needs to implement the VAT as part of its WTO accession process. The neutrality of the VAT fosters international trade, particularly exports, which could ease the country’s integration into global and regional trade organizations. Local exporting companies’ competitiveness would not be undermined by a VAT regime thanks to the ability to fully deduct taxes on intermediary goods and services. This is in contrast to the current consumption tax system, which only allows for imports to be deducted and is more prone to cascading taxes along the domestic supply chain. However, a successful introduction of the VAT requires Comoros to meet certain conditions. Although the VAT is efficient in terms of resource mobilization (having been introduced in 174 out of 195 countries as of January 1, 2023), its implantation is challenging for small island countries.b As of January 1, 2023, none of Comoros’ continued 2022 COMOROS 44 Chapter II: Domestic Revenue Mobilization PUBLIC EXPENDITURE REVIEW Box 2 continued structural peers (Sao Tome and Principe, Solomon Islands, and Timor-Leste) has introduced the VAT, although Sao Tome and Principe is planning to implement it in 2023. VAT implementation requires a modern and effective tax administration and a good understanding of invoicing rules. However, the benefits of a VAT can be small for economies driven by services and when consumption is not significantly higher than imports. The successful introduction of the VAT in Comoros will require the authorities to: › Strengthen the technical and human resources of the tax administration to meet the technical needs of the VAT. › Prepare and adopt VAT implementing regulations and a tax manuscript following the introduction of the VAT to ease the transition and familiarize VAT principles in both the public and private sector. › Ensure, given the fiscal constraints, a high VAT liability or franchise threshold, so that only the largest taxpayers are required to invoice their customers with VAT and are able to deduct VAT on their inputs. › Guarantee the right to deduct VAT payments and have the authorities reimburse VAT credits to ensure the neutrality of the VAT and its effectiveness. a Estimated based on the common consumption tax rate of 10 percent (Article 152 of the tax code [CGI]), although the rate varies between 0 percent for essential goods and 25 percent for casino operations. b See Asquith R, 2023, “How many countries have VAT or GST?”, https://www.vatcalc.com/global/how-many-countries-have-vat-or-gst-174/. Taxes on international trade have been declining since 2017 because of challenging economic conditions and the need for further critical reforms, including on tax exemption management. The customs administration carried out some reforms during the past five years such as the installation and use of scanners at ports (Moroni in Grandes Comores and Mustamudu in Anjouan), the deployment of SYDONIA World, the adoption of a new custom code, and the payment of taxes via bank deposit. However, it did not yield substantial additional revenues, as revenue collection has remained broadly unchanged in nominal terms and has declined since 2017 in terms of share of GDP. While the decline in taxes on international trade was partially driven by the challenging economic situation in 2019-20 and the decline in tax rates adopted by the authorities in March 2020, it also reflected the need to further the reform agenda at the customs administration by better controlling exemptions, improving internal control systems, and furthering the collaboration with the tax administration (e.g., exchange of information). As a result, taxes on international trade remain well below levels recorded in peer countries (Figure 32). II.2 Nontax revenues are volatile and have been declining since 2018 Nontax revenues are volatile and have been declining since 2018. Comoros’ nontax revenue collection has weakened over the last five years—from 3.0 percent of GDP in 2011–15 to 2.1 percent in 2016–20 (Figure 33).20 As share of targeted revenues, the collection rate declined from 191.1 percent in 2011–15 to 89.6 percent in 2016–20. The decline and volatility were driven primarily by the sharp decline in exceptional revenues as well as weakened SOEs that were unable to pay dividends to the state as a shareholder. Moreover, despite its significant fishing potential, revenue from the country’s fishing license fees collapsed from KMF 0.5 billion in 2013 to around KMF 4.5 million in 2018–20 (6.1 percent of non-tax revenues) because of a disagreement with the European Union.21 The termination of activity at 20 See Annex 6 for more details on Nontax instruments scope of application. 21 Comoros’ economic fishing zone is 70 times the size of its land mass, increasing the potential of its fishing industry. In addition, the country has the 4th largest share of fisheries as a share of total wealth. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter II: Domestic Revenue Mobilization 45 the national fishing company in 2018 also contributed to declining fishing activities and revenues. When compared to small island peer economies, Comoros relies more on nontax revenues, though it mobilizes less in share of GDP (Figure 34). Nontax revenues are a considerable source of revenue for the Comorian Government, contributing 21.2 percent in 2016–19, more than 16.2 percent and 10.1 percent in structural aspirational peers, respectively. However, all comparable countries, with the exception of Mauritius (which collects 1.3 percent of GDP), mobilize more than Comoros: 3.2 percent and 3.4 percent of GDP for structural and aspirational peers, respectively. Nontax Revenues Collected Compared to Figure 33.  Nontax Revenues in Comoros and Peers, Figure 34.  Targeted Revenues, 2011–20 2016–19 percent of GDP percent percent of GDP percent 6 450 5 25 400 5 4 20 350 4 300 3 15 250 3 2 10 200 2 150 1 5 100 1 0 0 50 nd n s s os ji ci e oa ga e lle iu Fi in om rd la o pe s n or m Is lom rit Ve he To Pr T Sa m au & Sao yc 0 bo 0 So Co M Se Ca 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 J Target J Collected ▬ Collection rate (rhs) J Nontax revenues Q Revenues (rhs) Source: National authorities, IMF, and World Bank staff estimates. Source: National authorities, IMF, and World Bank staff estimates. II.3 There is a need to strengthen the tax administrations » Tax Administration: AGID The Comorian tax administrations suffer from major weaknesses in different areas of the tax collection cycle, and there was limited progress in improving the General Administration of Taxes and Domains (Administration Générale des Impôts et des Domaines, AGID) between 2016 and 2021. The most recent Tax Administration Diagnostic Assessment Tool (TADAT) was completed in 2016, but recent IMF TA missions confirm the relevance of its findings in 2022. Except for the tax performance area related to the existence of an independent, workable, and graduated dispute resolution process, the use of withheld taxes at source for employment income and advance payment of business income, most other tax performance areas are assessed as well below standards (D level). Tax performance suffers because of weaknesses related to the integrity of the registered taxpayer base, risk management, voluntary compliance, timely filling of tax declarations, accurate reporting declarations, revenue management, and accountability and transparency.22 The effectiveness of AGID in collecting tax revenue is impeded by difficulties in identifying and monitoring taxpayers and the implementation of a property registration mandate. Persistent weaknesses in key tax administration functions prevent AGID from ensuring taxes are collected. It is also not involved in monitoring SOEs in terms of tax declaration, collection, and controls. The tax contribution of these enterprises is monitored exclusively by the Budget Directorate and paid directly into the account of the Central Bank of the Comoros (Banque Centrale des Comores, BCC), with no 22 TADAT 2016. 2022 COMOROS 46 Chapter II: Domestic Revenue Mobilization PUBLIC EXPENDITURE REVIEW involvement from AGID. Difficulties in applying AGID's single, uniform jurisdiction across all firms contribute significantly to its inefficiency in collecting tax revenue. The taxpayer database is not regularly cleaned to exclude inactive taxpayers, making it quite opaque and hampering the efficiency of the tax administration. A clean database is an essential lever for facilitating the procedures of operators and monitoring tax compliance. In addition, AGID manages property registration, which impedes its capacity to focus on tax matters by absorbing financial and human resources. The tax administration’s outdated procedures hinder the effective management of the tax population and development of user services. The authorities have not implemented the policy procedures envisaged in the Comoros General Tax Code, including in areas related to the management of tax returns and tax control, collection, and litigation. As a result, taxpayers do not file their returns regularly. Nevertheless, AGID often sends out reminder letters to taxpayers to raise awareness and improve the regular filing of returns. The implementation of measures to digitalize tax procedures has increased the efficiency of the country’s tax system. The adoption of the integrated tax management system SIGIT in 2019, which was financed by the African Development Bank through the PRCI II/AfDB project, has improved the efficiency of the tax administration in terms of taxpayer management. The introduction of SIGIT, which resulted in the integration of all administrative tasks, from taxpayer registration to collection, represented an essential step forward in terms of managing economic activities and securing revenues. However, inadequate procedures and management practices hamper the efficient implementation of information technology tools. While there have been efforts to digitize tax procedures, there have been no changes to the management system to ensure technology is used properly. Instead of ensuring good tax management practices, there is a risk that computerization efforts can have the opposite effect. For example, at the DGE, even though the automatic taxation module has already been activated, some procedures are carried out manually to circumvent automatic digitized procedures when regular payments are not done within the legal framework. As a result, the authorities cannot guarantee compliance with rules and procedures within the current system. » Customs Administration During the past decade, customs lacked the regulatory Domestic Tax on Petroleum Products, Figure 35.  framework and necessary means to apprehend and 2012–21 control the tax base in the hydrocarbon sector. As oil KMF billion taxation remains outside the scope of customs, oil-related 9 tax revenues, which are directed to the TSA, have been 8 7.7 sporadic and declining in recent years. Although the rate 7 7.4 7.2 6.8 6.8 of the internal tax on petroleum products (Taxe Intérieure 6 sur les Produits Pétroliers) has not changed since its 5 5.3 creation, and there has been no indication of a reduction 4 in fuel consumption, revenues have been declining 3 2.7 3.2 3.0 3.4 significantly since the beginning of 2016 (Figure 35). 2 1 Thus, the absence of a regulatory framework and means of 0 intervention hampers the effectiveness of customs services 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 in terms of fuel taxation. The lack of customs control Source: World Bank staff calculations using data from the Comorian authorities. of the hydrocarbon sector compromises the legibility, predictability, and security of government revenues. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter II: Domestic Revenue Mobilization 47 The effectiveness of the customs administration is also impeded by an inadequate legal framework. Comoros’ Customs Code has not been completed, as its implementing legislation and instructions on customs clearance procedures have not been finalized. The Customs Code was promulgated in 2017 and complies with current international standards such as the World Customs Organization’s revised Kyoto Convention as well as the World Trade Organization’s Agreement on Customs Valuation and Agreement on Trade Facilitation. To be fully applicable, the Customs Code must be supplemented by ad hoc implementing legislation. Drafts of some of these legal texts have been submitted to the minister of finance and budget for approval, while others have yet to be drafted. Customs operations are characterized by a lack of risk management and low efficiency. The Prevention and Litigation Directorate is not able to centralize information on customs fraud and the performance of its services in terms of litigation. It is therefore unable to create a customs risk map that could guide actions related to control services. Comoros’ system of tax exemptions suffers from a lack of transparency. The implementation of the codification/ classification of exemptions recommended by the IMF in 2016 would provide the authorities with insights into revenue lost because of measures not subject to taxation under ordinary law. To strengthen the framework governing exemptions, a specific additional tax code could be created for exemptions granted under the exceptional measures taken by the authorities following the damage caused by Cyclone Kenneth and the COVID-19 pandemic. Moreover, customs has no decision-making and internal control systems. As a result, the authorities lack visibility into the workload and performance of services. Indeed, the quality of governance depends on having regular and comprehensive information on an organization’s workload and performance. Without access to the relevant information tools, it is difficult to internally measure the workload and performance of services. Finally, although staff training and management has been strengthened, the efficiency of the customs administration is hampered by an inadequate methodology to reform the administration. The authorities have made efforts to improve human resources management to align agents’ grade to their qualifications, and a significant effort was made to strengthen training as part of the plan covering the period 2018–20. However, the reorganization of the administration, which has been done on a directorate-by-directorate basis, has hindered the overall readability of the reform and generated overlapping competencies with other directorates. Also, the new customs jobs covering areas such as intelligence, risk analysis, post-clearance controls, and investigations have not been clearly defined. II.4 Policy Options to Enhance Domestic Resource Mobilization in Comoros A significant transformation of the country’s tax and customs administrations and policies is needed to lessen the dependence on volatile external grants and create more fiscal space for public investment. In the short run, this should be achieved, ideally, through a combination of measures that include: (i) strengthening the capacity of the revenue administration (including the tax and customs administrations); and (ii) enforcing tax policies. 2022 COMOROS 48 Chapter II: Domestic Revenue Mobilization PUBLIC EXPENDITURE REVIEW II.4.1 Strengthening the capacity of the tax and customs administrations is a core element of the strategy » Tax Administration To strengthen the capacity of AGID, the authorities may consider: › Streamlining AGID’s mandate to focus on tax matters. Refocusing on core tax administration competencies would allow the AGID to deliver on its core mandate (mobilizing more tax revenues). The tax administration, which is suffering from limited human resources and technical competencies, despite being overstaffed, could free up highly competent staff and resources internally to concentrate on AGID’s core mandates. The remaining staff with limited qualifications and experience in tax matters could be used to staff the country’s new land administration. Moreover, this reform will de facto end the duality of leadership and pave the way for the restructuring of AGID with the creation of an effective tax department (Direction Générale des Impots). › Focusing on core tax competencies to improve the efficiency of the revenue administration. Under the current organization, AGID is not benefiting from economies of scale because of the difference in the nature of the activities (tax and cadaster). The tax activities and other related missions are also competing with non-core activities. A realignment of its core missions would allow the tax administration to improve its operational capabilities and ease the functioning of the tax administration. › Optimizing AGID’s identification and monitoring of taxpayers. The taxpayer database should be regularly cleaned and purged of inactive taxpayers, as the effectiveness of the tax and customs administrations depends on taxpayer registration integrity. The registration of taxpayers must be done in synergy with the customs administration, and the data need to be of high quality to guarantee the effectiveness of AGID’s operations regarding taxpayers (e.g., monitoring declarations, managing taxpayers, issuing reminders, ensuring control of data, and facilitating the recovery of data). › Strengthening the DGE’s capacity to improve its efficiency. The management, control, and collection skills of DGE staff need to be improved, and AGID should secure the portfolios of both the DGE and the Directorate of Small and Medium Enterprises (Direction des Petites et Moyennes Entreprises). While taxpayers in Moroni, Anjouan, and Moheli are easily identified, efforts must be made to identify businesses located outside the heart of these cities to understand the country's fiscal potential. The authorities could leverage the staff of the Investigation and Research Brigade (Brigade d'enquête et de recherches) to ensure the proper account of Comoros’ largest taxpayers. The objective is to restore AGID's jurisdiction over all taxpayers (including SOEs), and to especially strengthen the oversight of SOEs and ensure their tax compliance. › Modernizing the tax administration to increase tax revenues. The process of automating tax procedures, which began with the deployment and generalization of SIGIT, should be reinforced by a system of automatic declaration of taxable resources. This could be done by creating a shared information system between the country's public and private entities and the tax administration. The authorities could also strengthen the use of SIGIT. Furthermore, AGID's governance issues could be addressed by introducing performance management mechanisms that ensure an active management of taxpayers. The necessary implementation of a performance culture within AGID could strengthen the quality of all operations. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter II: Domestic Revenue Mobilization 49 » Customs Administration To strengthen the capacity of the customs administration, the authorities may consider: › Supplementing the Customs Code with implementing legislation and instructions on customs clearance procedures to ensure the efficiency of the customs administration. The authorities need to review, modify, and validate the application decrees of the Customs Code, draft the missing implementing legislation related to the Customs Code, and implement the instructions on customs clearance procedures. › Optimizing the control of exemptions to reduce revenue losses from tax exemptions. This includes: (i) strengthening immediate and post-clearance monitoring of exemptions; (ii) integrating into the Customs Code a special purpose exemption regime that requires beneficiaries of preferential taxation to report their use and consumption of exempted goods annually; (iii) establishing a clear and detailed system for classifying exemptions; and (iv) creating an additional code for exemptions granted under the special post-Kenneth and post-COVID-19 arrangements. › Improving staff management and training to strengthen the capacity of the customs administration. The authorities need to reform the custom administration organization to: (i) remove operational functions from the scope of competence of central services; (ii) revise staffing levels and redeploy staff based on needs identified through intelligence, risk assessment, or customs investigations; and (iii) organize operational training sessions and develop professional training plans for all customs agents. › Strengthening risk management and securing revenues through the implementation of internal control and decision-making information systems. The progressive development of an internal control system (self-checking grid, supervision grid, etc.) by prioritizing the most sensitive procedures related to mobilizing and securing revenues would allow the authorities to better understand the custom administration’s workload and performance related to customs services. II.4.2 Better enforcement of tax policy could generate revenues and reduce revenue volatility Improving domestic revenue collection requires the enforcement of tax policy. The Comorian authorities plan to strengthen fiscal policy and increase tax revenues by 0.3 percent of GDP each year starting in 2022. The aim is to increase domestic resource mobilization and close the country’s tax gap. To improve the enforcement of Comoros’ tax policy, the authorities may consider: › Reducing unjustified and discretionary customs exemptions. The removal of tax exemptions could generate KMF 4.6 billion in tax revenues. As an initial measure, the authorities could abolish sales tax exemptions for construction materials. › Strengthening the management of large and medium taxpayers while improving the collection of arrears. This could generate tax revenues worth KMF 2-3 billion. The government could improve the identification of medium taxpayers through regular controls. There is also a need to accelerate the recovery of tax arrears, which could generate about KMF 770 million in tax revenues. 2022 COMOROS 50 Chapter II: Domestic Revenue Mobilization PUBLIC EXPENDITURE REVIEW › Reforming oil taxation and strengthening customs control of the hydrocarbon sector. Granting the custom administration the exclusive right to tax petroleum products could allow the government to mobilize an additional KMF 1.8 billion in revenues. › Broadening the tax base. Expanding the range of goods covered by excise duties and increasing excise duty rates (e.g., on metals and precious stones, furniture, and luxury clothing) could not only improve revenue mobilization but also reduce tax revenue volatility. Other measures include expanding the coverage of the consumption tax to include essential consumer goods and increasing the statutory rate above the current 10 percent. › Enforcing tax procedures and modernizing the revenue administration. This could include improving the land register and taxpayer registration; strengthening the oversight of SOEs to increase their tax compliance; reducing the informal sector; and increasing synergy between tax and customs administrations. Furthermore, the tax administration could be modernized by automating tax declarations and tax payment systems and increasing and automating the sharing of information on taxable income between private and public entities and the tax and customs administrations. › Facilitating tax compliance. This involves promoting the simplification of tax and customs rate structures while streamlining procedures to reduce the number of transactions associated with tax payments. It also includes efforts to roll out information campaigns to increase tax compliance and potentially use low-end technologies to support tax compliance (SMS tax reminders, mobile tax payments, tax revenue mobile applications, etc.). › Improving trust in government spending through enhanced transparency. This involves publishing detailed fiscal data in a timely manner and implementing policies that promote visible links between government spending and the delivery of public goods and services. These efforts should be carried out locally and may include earmarking local tax contributions to community-driven projects as well as approving central government transfers that incentivize the adoption of participatory budgeting practices and local tax mobilization. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter II: Domestic Revenue Mobilization 51 Table 3. Policy Options to Improve Domestic Revenue Mobilization Short-term measures (less than 2 years) Medium-term and long-term measures (2+ years) II. Domestic Resource Mobilization II.1 Strengthening internal revenue administration capacity II.1.1. Optimize the tax administration (AGID) identification and monitoring taxpayers › Improve the identification of taxpayers, particularly › Ensure that at least 25 percent of large and medium large and medium taxpayers. (P) businesses are subject to targeted spot checks. › Initiate targeted spot checks for large and medium › Initiate documentary checks to ensure in particular the taxpayers. (P) regular payment of the personal income tax, corporate income tax and consumption taxes; particularly for SOEs and other large taxpayers. II.1.2. Strengthen the tax administration capacity to improve its efficiency › Improve, the management, control, and collection skills › Put in place a recruitment and continuing training of staff in the Directorate general of large companies plan adapted to the medium-term needs of the (DGE). administrations. › Organize training to help staff appropriate the new digital systems acquired as part of modernization to be able to use them optimally. (P) II.1.3. Modernize the tax administration to increase tax revenues. › Ensure the use and perfect integration of new systems › The process of automating tax procedures, which began deployed to the SIGIT system. with the deployment and generalization of SIGIT, should be reinforced by a system of automatic declaration of › Harmonize the various digitization projects to taxable resources and their payments. guarantee their interoperability. › Set up internal control and support mechanisms to ensure compliance with SIGIT procedures and the operation of all functions › Enact a law and issue the related implementation decree to restructure the tax administration. (P) II.2 Strengthening customs revenue administration capacity II.2.1. Modernize procedures to ensure efficiency of customs administration › Supplementing the Customs Code with implementing legislation and instructions on customs clearance procedures. II.2.2. Prevent forgone revenues › Strengthening immediate and post-clearance › Integrating into the Customs Code a special purpose monitoring of exemptions. (P) exemption regime that requires beneficiaries of preferential taxation to report their use and › Establishing a clear and detailed system for classifying consumption of exempted goods annually. exemptions. (P) › Initiate documentary checks to ensure the regular payment of the excises particularly on tobacco and alcohol. 2022 COMOROS 52 Chapter II: Domestic Revenue Mobilization PUBLIC EXPENDITURE REVIEW Table 3. Policy Options to Improve Domestic Revenue Mobilization Short-term measures (less than 2 years) Medium-term and long-term measures (2+ years) II.2.3. Improve staff management and training to strengthen the capacity of the customs administration › Remove operational functions from the scope of › Put in place a recruitment and professional training competence of central services. plans for all customs agents. › Revise staffing levels and redeploy staff based on needs identified through intelligence, risk assessment, or customs investigations. › Organize operational training sessions II.2.4. Strengthen risk management and securing revenues › Implement internal controls and decision-making › Leverage SYDONIA World to set up a national litigation information systems with a focus on the most sensitive application. procedures. › Define the nature and method of managing litigation entries used by the services; organize the circuit of litigation cases and invite the heads of customs centers to produce regular litigation reports (monthly or quarterly). II.3 Better Enforcement of the Tax Policy II.3.1. Limit (or recover) revenue losses › Effectively grant the custom administration, the › Prepare a report on tax expenditures as an annex to the exclusive right to collect the tax on petroleum products. budget law. › Reduce unjustified and discretionary customs exemptions. (P) › Implement the arrears recovery plan. II.3.2. Enforce tax procedures and modernizing the revenue administration › Improve the land register and taxpayer registration. › Strengthening the oversight of SOEs to increase their tax compliance. › Automate the sharing of information on taxable income between private and public entities and the tax and customs administrations. II.3.3. Increase tax compliance › Simplify tax and customs rate structures while › Publish detailed fiscal data in a timely manner and streamlining procedures to reduce the number of implementing policies that promote visible links transactions associated with tax payments. between government spending and the delivery of public goods and services. › Roll out information campaigns to increase tax compliance. › Leverage low-end technologies to support tax compliance (SMS tax reminders, mobile tax payments, tax revenue mobile applications, etc.). Trends and Composition Chapter III:  53 of Public Expenditures Due to low total government revenues, total public expenditures have below levels observed in peer countries during the past decade, limiting thus the government capacity to provide public services that would help unleashing Comoros growth potential, and addressing lingering development challenges. This chapter analyses the trends and composition of public expenditures to infer their impact on development outcomes. It concludes that the fiscal rigidity, due to the still sizeable wage bill (Assessed in proportion of government revenues), is declining but remains important. However, the budget allocated to attend social development challenges remains low, and under-executed, in comparison with other sectors. III.1 Public Expenditures Significantly Increased but Remained Below Peers’ Levels Comoros’ public expenditures have increased significantly over the last decade. Although total public expenditure slightly declined from 20.1 percent in 2019 to 18.7 percent of GDP in 2020, it has been on an upward trend since 2010, increasing by an average of 4.9 percent per year during the last decade (Figure 36). The dynamics of public expenditure in this fragile, conflict, and violence-affected country reflect the different environmental and institutional challenges facing the country. Public expenditure increased by 5.1 percentage points of GDP in 2015–17 in the wake of the electoral cycle (legislative and presidential elections), while it increased by 1.7 percentage points in 2012, mainly due to severe flooding, and 1.0 percentage point of GDP in 2019, mainly due to Cyclone Kenneth. The increase in public expenditure was also nurtured by the exceptional increase in government revenue following the sale of the country’s second mobile license and overoptimistic government revenue projections,23 as well as by the significant level of grants the country received from development partners (totaling 41.3 percent of government revenues in 2010–20). A large component of public expenditure is tied to donor financing, which takes the form of project financing, technical assistance, or budgetary support. In 2020–21, the changes in the country’s fiscal position reflected the need to adjust its fiscal stance during the pandemic and support the economic recovery. Contrary to most other countries impacted by the pandemic, Comoros registered a contraction (-1.4 percentage points of GDP) of total public expenditure in 2020. The decline was driven primarily by deferred investment (0.6 percentage points of GDP) and goods and services expenditures (0.6 percentage points of GDP), while other expenditures, such as technical assistance financed by partners, declined by 0.3 percentage points. The decline in public wage expenditures (0.2 percentage points of GDP) was aligned with the government objective of containing the public wage bill, while the decline in other public expenditures were related to COVID-19 containment measures. The authorities’ pandemic-related measures led to a mechanical freeze on certain goods and services expenditures and the postponement/cancellation of certain technical assistance missions or projects. Nonetheless, public expenditures increased significantly in 2021, on the back of the government’s post-pandemic recovery plan. 23 The mobile license was awarded to a consortium between Telma Mobile (which leads the consortium), SOFIMA, and NJJ Capital in October 2015. 2022 COMOROS 54 Chapter III: Trends and Composition of Public Expenditures PUBLIC EXPENDITURE REVIEW Figure 36. Total Public Expenditure, 2010–20 Total Public Expenditure in Comoros and Figure 37.  Peers, 2016–20 KMF billion percent of GDP percent of GDP 120 25 80 70 100 20 60 80 50 15 40 60 30 10 40 20 5 10 20 0 nd n s os oa ci e ji s e a te lle iu ng i n om rd Fi la o pe s es or m Is lom 0 0 rit Ve he To Pr T -L Sa m au & Sao yc or bo Co So 10 11 12 13 14 15 16 17 18 19 20 M Se m Ca 20 20 20 20 20 20 20 20 20 20 20 Ti ▬ KMF billion ▬ Percent of GDP (rhs)  Excl. foreign financed (rhs) Source: World Bank staff calculations based on data from national Source: World Bank staff calculations based on data from national authorities. authorities. The Government of Comoros spends relatively less than its counterparts in peer countries.24 The government’s total spending was, on average, only about half of that of peers in 2016–20 (Figure 37). During this period, Comoros’ government budget averaged 18.8 percent of GDP, much lower than the average of 33.7 percent for aspirational peers, which include Seychelles, Mauritius, Tonga, and Cabo Verde. The difference is even more significant when compared to structural peers (47.9 percent of GDP). During the COVID-19 pandemic in 2020, structural and aspirational peers increased their public expenditures by 3.4 and 6.3 percentage points of GDP, respectively, to save lives and ease the impact of the crisis on the population (Figure 38). By contrast, public expenditure declined by 1.4 percentage points of GDP (or 1.9 percentage points of GDP if foreign-financed expenditures are excluded) in Comoros in the same year (Figure 39). This could be explained by the limited impact of the pandemic on the country. For example, the government did not need to create a significant amount of COVID-19 health centers, and when compared to countries such as Seychelles and Mauritius, Comoros’ economy was relatively spared by the economic impact of the pandemic. Comoros, which relies less on tourism than peer countries, registered a mere 0.3 percent decline in GDP growth, much lower than 14.9 percent in Mauritius. In Mauritius, the government put in place a significant package to support the health sector (0.28 percent of GDP) and the overall economy, including a wage subsidy to employers and support to tourism-related sectors, the national airline, the banking sector (2.3 percent of GDP to the Development Bank of Mauritius), and households (e.g., free electricity and transfers to the most vulnerable).25 The Comorian authorities supported the economy in 2020 mostly through tax revenue measures (e.g., tax relief by reducing import taxes on food and medicines by 30 percent). Mauritius also had more fiscal space than Comoros at the beginning of the pandemic, which allowed it to implement a significant policy response. Scaling up public expenditures to the level registered in peer countries requires improving expenditure efficiency and, most importantly, mobilizing revenues. Comoros was facing significant fiscal constraints at the outset of the COVID-19 pandemic and relied on donors to fund its COVID-19 fiscal policy. In 2019–20, foreign-financed expenditures increased by 0.5 percentage points of GDP, while government expenditures (excluding foreign financed) declined by 1.9 percentage points. In addition, programs to support vulnerable households have been by the World Bank. An increase in the delivery of public goods and services (e.g., health, education, and basic infrastructure), which is already 24 Structural peer countries include small island countries like Comoros that share the same economic fundamentals: Sao Tome and Principe, Timor-Leste, and Solomon Islands. Tonga, Samoa, Fiji, and Cabo Verde are aspirational peer countries with similar structural characteristics as Comoros but that have registered faster per capita growth and managed to develop the tourism sector. In addition, aspirational ++ peer countries include Mauritius and Seychelles, which are the two fastest growing economies among aspirational peers and are small African islands that became high-income countries in recent years. 25 See IMF Policy Tracker https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter III: Trends and Composition of Public Expenditures 55 significantly lower in comparison to peers, particularly aspirational peers, will necessitate higher and better spending, which in turn will require greater revenue mobilization. ncrease in Public Expenditure in Comoros Figure 38. I Contribution to the Decline in Public Figure 39.  and Peer Countries, 2020 Expenditure, 2020 percentage points of GDP percent of GDP 18 0.6 0.390 0.038 16 0.4 0.2 -0.154 14 0 -0.188 12 -0.2 -0.265 10 -0.4 -0.6 -0.378 8 -0.8 6 -1.0 4 -1.2 -0.619 -1.4 -1.380 2 -1.6 0 ts s ed e s ce es re re er rie nd nc en tu itu an ic sf Fu a la rv di ym -2 nd r. en st an sa se en si pa fo int Tr pe nd n s te os ga oa ji So de ci e s as d xp d lle iu Fi in om la o an ex & Sao s M e a an es st n or m r Is lom le rit al M p Ve he To re -L Pr T Sa m al es ic s au ta yc od te or bo Co t hn ag pi To Se In m Go Ca Ca c W Te Ti J Increase J Decrease J Total Source: World Bank staff calculations using data from the national Source: World Bank staff calculations using data from the national authorities. authorities. Comoros’ public finance statistics are weak. Except for the functional classification where disaggregated fiscal statistics are not available, the data used in this chapter cover the Union of the Comoros and its three islands for major aggregates. However, differences in budget classification compared to international standards, changes in budget classification between years, along with the absence of a harmonized, centralized and fully operational IFMIS at the national level, render data compilation challenging. As a result, the data obtained remain weak and incoherent for certain periods and do not allow the performance of certain expenditures analyses. Some statistics, such as subsidies and transfers, may be inaccurate because SOEs receive implicit subsidies that are not reported in the administrative accounts. Up to 2022, several SOEs still collect their subsidies before making payments to the central administration for different tax instruments. III.2 Fiscal Rigidity Remains Important Despite an Increase in Capital Expenditures III.2.1 Public Capital Expenditures Increased Significantly The composition of the country’s public expenditures has significantly changed over the last decade, with the proportion of capital expenditures rising. Between 2010 and 2020, the proportion of current expenditure (capital expenditure) as a share of total expenditure decreased (increased) from 74 percent (26 percent) to 57 percent (43 percent). The change in the structure of government expenditures reflects the growing effort of the authorities to contain current expenditures and the support of development partners to increase the stock of public capital to accelerate the country’s economic growth. Current expenditures increased from 9.2 percent of GDP in 2010 to 12.2 percent in 2017, before falling to 10.7 percent of GDP in 2020(Figure 40). Although current expenditures have been relatively contained—declining by 12.5 percent, or 1.5 percentage points of GDP, between 2017 and 2020, the rigidity of the budget remains. Current expenditures still absorbed more than half of total public expenditures and around 115 percent, on average, of total government revenues (excluding grants), of which 103.9 percent come from primary current expenditures, between 2016 and 2020. They 2022 COMOROS 56 Chapter III: Trends and Composition of Public Expenditures PUBLIC EXPENDITURE REVIEW have increased even more when assessed as a share of total revenue (excluding grants), as they are up from an average of 104.3 percent in 2010–15. This difference stems from the low revenue mobilization effort compared to the increase in GDP. In 2010–17, current expenditures increased by an average of 7.0 percent per year, while GDP and domestic resource mobilization increased by 4.3 percent and 3.1 percent, respectively. Figure 40. Public Expenditure Composition, 2010–20 percent of GDP percent of government revenues, excluding grants 25 200 20 150 15 100 10 50 5 0 0 10 11 12 13 14 15 16 17 18 19 10 11 12 13 14 15 16 17 18 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 J Primary current expenditures J Capital expenditure J Primary current expenditures J Capital expenditure J Other current expenditures J Interest payments J Other current expenditures J Interest payments Source: World Bank staff calculations using data from the national authorities. Note: Other current expenditures include foreign-financed project maintenance and technical assistance. III.2.2 Current Expenditures Declined but Remained Dominated By Wages » III.2.2.1 Public Wage Bill Was Contained but It Represents a Major Source of Fiscal Rigidity The public wage bill contributed the most to the containment of recurrent expenditures over the last years. While other recurrent expenditures increased by an average of 5.7 percent of GDP per year between 2010 and 2020, the public wage bill contracted by 0.3 percent over the same period (Figure 41). After having reached 5.7 percent of GDP in 2016, the wage bill as a share of GDP has been on a downward trend, settling at 5.2 percent of GDP in 2020. Accordingly, the share of wages and compensation in government current expenditures declined from 60.3 percent in 2010 to 53.3 percent in 2020. Although the country devoted fewer resources to its public servants in 2020 than in 2016 (by 0.5 percentage points of GDP), the weight of these expenditures places significant strain on the country’s budget. They alone absorbed 56.1 percent of government revenues (excluding grants) between 2016 and 2020. Measures to contain the wage bill include freezing public salaries and hiring around the country. However, the fragmentation of the country’s human resource management between the Islands and the Union added to the lack of control of the wage bill, and the huge heterogeneity in the implementation of reforms between the Islands explain the slow changes. To contain the wage bill, the government intends to pursue reforms to identify ‘ghost workers. While Comoros’ wage bill is relatively lower than that of peer countries in terms of the size of the economy, it is substantially higher in terms of government revenues. Its wage bill, which has been relatively well contained over the last decade, is significantly lower than that of almost all peer island countries. Except for Mauritius, which has a slightly higher public wage bill (6.6 percent of GDP), all other peers have wage expenditures that are between 20 percent to more than 100 percent higher than those registered in Comoros (Figure 42). Structural peer countries dedicate, on average, 10.7 percent of GDP to their public servants, while aspirational peers (excluding Mauritius) devote an average of 9.9 percent of GDP to wages and compensation. However, when compared to these peers, Comoros’ public wage bill ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter III: Trends and Composition of Public Expenditures 57 places significant strains on the country’s public finances and crowd out other priority spending, and this category of expenditure represents a major source of fiscal rigidity. Public servant salaries consume 32.0 percent and 37.8 percent of government revenues (excluding grants) in structural and aspirational peers, respectively, lower than 55.6 percent in Comoros. Figure 41. Evolution of Public Wages, 2010–20 Public Wage Bill in Comoros and Peers, Figure 42.  2016–20 percent of GDP percent percent of GDP percent 6 70 14 60 60 12 50 5 10 50 40 4 8 40 30 3 6 30 20 4 2 20 10 2 1 10 0 0 Ca ds n s os s i ci e oa Se rde To e a j lle iu Fi in om t ng la o pe es or 0 m Is om 0 rit Ve he Pr T -L n Sa m au l & Sao yc or bo So Co 10 11 12 13 14 15 16 17 18 19 20 M m 20 20 20 20 20 20 20 20 20 20 20 Ti J Government revenues excl. grants (rhs) J Current expenditures (rhs) J Public wage bill Q Government revenues excl. grants (rhs)  Public wages Source: World Bank staff calculations using data from the national authorities and Government Finance Statistics (GFS). » III.2.2.2 Transfers Have Declined in Levels but There is an Increased Support to Social Sectors Since it reached a historical peak of 2.3 percent of GDP in 2017 (up from 1.1 percent of GDP in 2010), the share of the budget allocated to transfers and pensions has been on a downward trend. It further fell by 0.5 percentage points to 1.7 percent of GDP in 2020 (Figure 43). The dynamic of subsidies and transfers in Comoros during the last decades reflects not only the country’s administrative and political environment, but also challenges associated with the allocation of expenditure between ministries and the persistence of discretionary allocation. The significant increase in transfers recorded in 2017 stemmed from the boom in pooled expenditures (dépenses communes), which were multiplied three-fold between 2016 (0.2 percent of GDP) and 2017 (0.6 percent of GDP). The creation of new institutions and agencies after the election (i.e., the waste management agency, national vanilla office, and the national laboratory for public works and building) added to the exemption from university fees for students from modest families, which help explain the significant increase registered in transfers. Nonetheless, over the period 2016-2020, the composition of transfers has changed, with a growing proportion of social transfers and the removal of transfers to the Islands. The decline in transfers allocated to the Islands—which are in charge of the management of schools and local health centers—has been accompanied by a significant increase in social expenditures (Figure 44). This decline in transfers to the Islands highlights the transfer of responsibilities of education and health from the Islands to the Union in accordance with the 2018 Constitution. Transfers to the agriculture, fishing, and environment sectors increased from 0.1 percent of GDP in 2016–17 to 0.6 percent and 0.7 percent of GDP in 2018 and 2019, respectively, while transfers to the economic sector collapsed by almost the same proportion during the same period. In addition, although they represent less than 10 percent of transfers, transfers to other sectors (including defense/security, sovereign, judiciary, and infrastructure) increased in 2016–20, driven primarily by an increase in sovereign-sector expenditure (more than two-fold) and transfers to the infrastructure sector, which reached 0.1 percent of GDP in 2020 (from non-existent in previous years). 2022 COMOROS 58 Chapter III: Trends and Composition of Public Expenditures PUBLIC EXPENDITURE REVIEW Evolution of Current Transfers, 2010–20 Figure 43.  Current Transfers by Key Economic Sector, Figure 44.  2016–20 percent of GDP percent percent of GDP 2.5 30 2.5 25 2.0 2.0 20 1.5 1.5 15 1.0 10 1.0 0.5 5 0.5 0 0 0 10 11 12 13 14 15 16 17 18 19 20 20 20 20 20 20 20 20 20 20 20 20 2016 2017 2018 2019 2020 J Government revenues excl. grants (rhs) J Current expenditures (rhs) J Social J Economic and administrative management  Current transfers J Islands J Pooled expenditures J Production J Others Source: World Bank staff estimates using data from the national authorities. Source: World Bank staff estimates using data from the national authorities. Comoros’ current transfers and subsidies are low in Transfers and Subsidies in Comoros and Figure 45.  comparison with small island peer countries. Transfers as Peer Countries, 2016–20 a share of GDP are 4.9 percentage points, on average, lower percent of GDP in Comoros than in structural peer countries (except for 16 Solomon Islands), such as Timor-Leste, and 5.3 percentage 14 points, on average, lower than in aspirational peers 12 10 (Figure 45). Furthermore, while transfers declined in 8 Comoros in 2019–20, despite the COVID-19 pandemic, 6 they increased significantly in peer countries over the 4 same period. In 2019–20, subsidies and other expenses 2 related to transfers increased by 9.9, 2.5, 1.4, 1.0, 0.7, 0 nd n s os ji ga te oa e and 0.5 percentage points of GDP in Seychelles, Mauritius, s le Fi rd la o iu s es n or m Is lom el Ve rit To -L Sa m h au yc or bo So Co Fiji, Samoa, Cabo Verde, and Sao Tome, respectively, Se M m Ca Ti compared to a contraction of 0.2 percentage points of Source: National authorities, IMF, and World Bank staff estimates. GDP in Comoros. » III.2.2.3 Goods and Services Expenditures Have Been on Downward Trend Goods and services expenditures have been on a downward trend since 2017. As a share of GDP, expenditures on goods and services increased from an estimated 2.1 percent in 2011 to 3.5 percent in 2017 (or from 22.0 to 34.5 percent of government revenues, excluding grants), an increase of nearly 65.4 percent, before falling to around 2.6 percent of GDP in 2020, a decrease of 26 percent (Figure 47). The significant increase, particularly in 2014–17, was attributable mainly to the organization of national consultations (assise nationale) and the organization of elections.26 Furthermore, a restructuring of goods and services expenditures is noticeable, with a slight decline in pooled expenditures (which accounted for 57 percent of total expenditures in 2016–19, up from 39.1 percent in 2020) and a significant increase in sovereign and defense-related expenditures (Figure 48). This decline in pooled expenditures originated more from a reduction in goods and services because of the pandemic (e.g., reduction of foreign travel, training, electricity consumption at the office, etc.) rather than a clear government strategy to improve the classification of expenditures. 26 Legislative elections were held in 2015 and presidential elections in 2016. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter III: Trends and Composition of Public Expenditures 59  oods and Services Expenditures in Figure 46. G Goods and Services Expenditure Dynamics, Figure 47.  Comoros and Peer Countries 2010–20 percent of GDP percent percent of GDP percent 18 70 4 40 15 60 50 3 30 12 40 9 30 2 20 6 20 3 10 1 10 0 0 s nd n s os ci e ji e oa ga le iu in om Fi rd la o pe s n or 0 m Is lom 0 el rit Ve To Pr T Sa m h au & Sao yc bo So Co 10 11 12 13 14 15 16 17 18 19 20 M Se 20 20 Ca 20 20 20 20 20 20 20 20 20 J Goods and services expenditures Q Government revenues excl. grants (rhs) J Government revenues excl. grants (rhs) J Current expenditures (rhs)  Goods and services expenditures Source: National authorities, IMF, and World Bank staff estimates. Source: National authorities, IMF, and World Bank staff estimates. In comparison with peer countries, Comoros devotes Goods and Services Expenditure by Sector, Figure 48.  a relatively small part of the budget to goods and 2016–20 services. Its goods and services expenditures are around percent of GDP 5 percentage points, on average, lower than those of 4 peers (Figure 46). However, when assessed as a share of government revenues, the country’s spending on goods 3 and services (30.4 percent) is higher than the average of peer countries (29.8 percent). Among its eight peer 2 countries, Comoros is only spending more on goods and services than Mauritius as a share of GDP, although it 1 ranks 4th in terms of share of government revenues. 0 2016 2017 2018 2019 2020 J Pooled expenditures J Sovereign J Islands J Defense J Others Source: National authorities, IMF, and World Bank staff estimates. » III.2.2.4 Interest Payments are Low but Have Increased Rapidly While interest payments are low, they have increased fairly rapidly. When assessed both as a share of GDP or government revenues (excluding grants), Comoros’ debt service obligations are relatively small in comparison to peer countries. The country’s spending on interest payments amounted to around 0.1 percent of GDP (1.5 percent of government revenues), on average, between 2016 and 2020, while structural and aspiration peers dedicated 0.3 percent (1.2 percent) and 2.0 percent (7.6 percent), respectively, during the same period (Figure 49 and Figure 50). The upward trend in interest payments follows the recent increase in non-concessional debt with short maturity contracted by the government, which puts the country at high risk of debt distress. Comoros’ participation in the Enhanced Initiative for Heavily Indebted Poor Countries led to a reduction of its stock of debt worth US$77.1 million (net of Heavily Indebted Poor Countries assistance) in nominal terms, or a reduction factor of 56.3 percent, saving the country US$83 million in debt service over a period of 29 years. However, the country’s budget dedicated to interest payments is currently close to levels recorded before the completion point (end-2012). While interest payments between 2017 and 2020 increased by 261.1 percent in Comoros, they declined by 10–27 percent in Sao Tome and Principe, Samoa, and Tonga, and they increased by an 2022 COMOROS 60 Chapter III: Trends and Composition of Public Expenditures PUBLIC EXPENDITURE REVIEW average of only 12.1 percent in other aspirational peers (Cabo Verde, Mauritius, and Seychelles). Only in the Solomon Islands did interest payments increase at a similarly high level (average of 203.6 percent) over the same period. If current trends continue, the country’s interest payments are projected to reach 0.9 percent of GDP and constitute close to one-tenth of government revenues (excluding grants) by 2024. Figure 49. Interest Payments, 2010–20 Interest Payments in Comoros and Peer Figure 50.  Countries percent of GDP percent percent of GDP 0.35 4 3.5 14 0.30 3.0 12 3 2.5 10 0.25 2.0 8 0.20 2 1.5 6 0.15 1.0 4 0.10 1 0.5 2 0.05 0 0 n n s Co te os ci e a oa e s lle iu in om ng rd la o & Sao ds pe es or 0 0 m Is lom rit Ve he To -L Pr T Sa m au yc or bo So 10 11 12 13 14 15 16 17 18 19 20 M Se m 20 20 20 Ca 20 20 20 20 20 20 20 20 Ti J Government revenues excl. grants (rhs) J Current expenditures (rhs) J Interest payments Q Government revenues excl. grants (rhs)  Interest payments Source: National authorities, IMF, and World Bank staff estimates. Source: National authorities, IMF, and World Bank staff estimates. III.2.3 Capital Expenditures are Volatile and Dominated by Externally Funded Financing Public investments have been volatile and increasing Figure 51. Capital Spending, 2010–20 over the last years. Total capital expenditures increased percent of GDP percent by 54.8 percent between 2010–15 and 2016–20, 9 40 ranging from an average of 4.7 percent to 7.2 percent 8 of GDP (Figure 51). Although they are primarily financed 7 30 by foreign partners (78 percent, on average), the 6 government’s contribution to financing public investment 5 20 4 increased significantly between 2017 and 2019 3 (29.1 percent), ending three years of low contribution 10 2 (15 percent). The decline in investment in 2020 was due 1 to the postponement of domestically financed capital 0 0 expenditure projects worth around 1.6 percent of GDP 10 11 12 13 14 15 16 7 18 19 20 1 20 20 20 20 20 20 20 20 20 20 20 or 59.4 percent of planned investments. Accordingly, J Domestically financed investment J Foreign-financed investment the volatility in public investment is primarily driven by ▬ Domestically-financed investment, government revenues excl. grants (rhs)  Contribution to investment financing (rhs) domestically financed investments and the unpredictable Source: National authorities, IMF and World Bank staff estimates. foreign financed execution rate. The government’s contribution to infrastructure financing is low, and there are still significant unclassified budgetary investment items. Except for 2018 and 2019, when they accounted for 31.4 and 10.3 percent, respectively, of domestically financed investment, government-funded infrastructure investments represented a small share of total capital spending over the last decade. Expenditures related to economic and administrative management and pooled expenditures (which are discretionary managed by the budget ministry) accounted to 23.5 and 30.0 percent, respectively, of total capital ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter III: Trends and Composition of Public Expenditures 61 spending in 2016–20 (Figure 52). Nonetheless, the share of domestically financed investment in social and production sectors have increase over the last three years. Comoros’ total capital expenditures as a share of GDP perform relatively well in comparison to peer countries. While the country’s total public investment (domestically and foreign financed) ratio in 2016-20 is lower than the level recorded in structural peers such as Timor-Leste (21.1 percent of GDP) and Solomon Islands (9.0 percent of GDP), it is higher than in aspirational peers (4.9 percent, on average) (Figure 53). However, Comoros lags behind all peer countries in terms of domestically financed capital expenditures. Domestically Financed Capital Expenditure Figure 52.  Capital Expenditures in Comoros and Peer Figure 53.  by Sector, 2016–20 Countries in 2016-20 percent of GDP Percent of GDP 3.0 25 2.5 20 2.0 15 1.5 10 1.0 5 0.5 0 s nd n al s oa e os ga te ) s ly le tic o rd la o iu s es n es or or m Is lom el Ve rit To -L Sa om m m h au yc or bo So (d Co Co 0 Se M m Ca 2016 2017 2018 2019 2020 Ti J Pooled expenditures J Islands J Production J Social J Economic and administrative management J Infrastructure J Others Source: National authorities, IMF and World Bank staff estimates. Source: National authorities, IMF, and World Bank staff estimates. III.3 Social Public Expenditures Could Be Increased to Reach Levels Recorded in Peer Countries In Comoros, public expenditure dedicated to Figure 54. Public Expenditure by Function, 2016–20 development and resilience is low, while general percent of GDP public services expenditure absorbs a significant share 14 of total expenditure. General public services averaged 12 46.2 percent of total expenditure in 2016–19, before 10 declining to 31.3 percent in 2020. Economic affairs- related expenditure (e.g., agriculture, fishing, transport, 8 and communication), which are critical for the country’s 6 socioeconomic development, have been on a downward 4 trend since 2017—ranging from 24.8 percent of total 2 expenditure in 2017 to 10.7 percent in 2020. By contrast, peer countries such as Samoa and Solomon Islands 0 2016 2017 2018 2019 2020 dedicated only 21.6 and 18.4 percent, on average, of total J General public services J Defense J Public order and safety expenditure to general public services in 2017–20, while J Economic affairs J Environmental protection J Housing and community amenities J Health economic affairs-related expenditure represented 30.4 J Recreation, culture and religion J Education J Social protection and 24.5 percent, respectively, of total expenditure. Source: National authorities and World Bank staff estimates. 2022 COMOROS 62 Chapter III: Trends and Composition of Public Expenditures PUBLIC EXPENDITURE REVIEW Education Expenditures in Comoros and Figure 55.  Health Expenditures in Comoros and Peers, Figure 56.  Peers, 2016–20 2016–20 percent of GDP percent of GDP 6 5 5 4 4 3 3 2 2 1 1 0 0 Comoros Comoros Mauritius Samoa Cabo Verde (Edu Islands) Comoros Cabo Verde Mauritius Samoa Source: National authorities and World Bank staff estimates. Source: National authorities and World Bank staff estimates. Human capital development-related public expenditure is low in Comoros. The country’s score on the Human Capital Index is one of the lowest among peer countries, health and education expenditures are significantly lower in Comoros than in aspirational peers. Assuming that island expenditures are allocated exclusively to education and health expenditures, the country still lags behind peer countries. In 2016–20, Cabo Verde, Samoa, and Mauritius dedicated around 4.6 percent of GDP to education and 3.2 percent of GDP to health, while Comoros spent only 0.4 percent of GDP on education (2.3 percent if the Islands are included) (Figure 55 and Figure 56). Even if its health expenditures are low, they increased from 0.3 percent of GDP in 2016 to 1.8 percent of GDP in 2019, before settling at 1.2 percent of GDP in 2020. Environment Expenditures in Comoros and Figure 57.  Social Protection Expenditures in Comoros Figure 58.  Peers, 2016–20 and Peers, 2016–20 percent of GDP percent of GDP 1.4 8 1.2 7 6 1.0 5 0.8 4 0.6 3 0.4 2 0.2 1 0 0 Comoros Mauritius Cabo Verde Samoa Comoros Samoa Cabo Verde Mauritius Source: National authorities, IMF, and World Bank staff estimates. Source: National authorities, IMF, and World Bank staff estimates. While the country has been subject to significant shocks over the last years, the government has dedicated few resources to protect the environment and the most vulnerable households. Between 2016 and 2020, Comoros’ spending on the environment and social protection was extremely low, averaging 0.01 and 0.1 percent of GDP, respectively (Figure 57 and Figure 58). Mauritius, Cabo Verde, and Samoa, which face similar challenges as Comoros, spent an average of 0.9 percent of GDP on the environment and 4.5 percent of GDP on social protection during the same period. Nonetheless, public expenditures dedicated to improving citizen resilience have increased since the 2019 ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter III: Trends and Composition of Public Expenditures 63 Cyclone Kenneth and following the COVID-19 pandemic. Although they are still low in comparison to peers, social protection expenditures multiplied by 8.3 between 2017 (0.03 percent of GDP) and 2019–20 (0.3 percent of GDP, on average). III.4 There are Opportunities to Improve Budget Execution in Social Sectors Comoros’ total government budget execution is relatively high, although it declined from 108.2 percent in 2016 to 90.7 percent in 2020  (Figure 59). The current expenditure execution rate averaged 104 percent in 2016–17 and was the primary driver of overspending during this period. By contrast, the capital expenditure budget execution rate has been persistently underperforming. While it increased from an average of 67.6 percent in 2016–18 to 80.7 percent in 2019, it fell to 43.8 percent in 2020. Most of the government’s investment projects were postponed because of the COVID-19 pandemic in 2020. Figure 59. Expenditure Execution Rate, 2016–20 Current Expenditure Execution Rate, Figure 60.  2016–20 percent of approved budget percent percent 120 140 160 120 140 100 120 100 80 100 80 60 80 60 60 40 40 40 20 20 20 0 0 0 Wages & Goods & Transfers Interest 2016 2017 2018 2019 2020 salaries services J Total domestically financed expenditures J 2016–2019 approved budget Q 2020 approved budget (rhs) ▬ Current expenditures ▬ Capital expenditures Source: National authorities, IMF, and World Bank staff estimates. Source: National authorities, IMF, and World Bank staff estimates. Goods and services expenditures have been the main source of the country’s high budget execution. While the budget execution rate for wages and salaries was 100.8 percent in 2016–20, expenditures on goods and services had an execution rate that was 16.7 percent higher than initially planned in the budget (Figure 60). These higher-than- projected expenditures, particularly in 2017 (+51.2 percent) were due to expenses related to national consultations (assises nationales) and other expenses related to the elections and the referendum. Transfers also contributed to the high budget execution rate, as these expenditures’ initial budget was exceeded by 32.1 percent in 2016–17, reflecting the government’s promises to support vulnerable families (e.g., by removing university fees for modest families) and the creation of new institutions that were not planned and included in the initial budget approved by Parliament. The execution rate for interest payments, on the other hand, was extremely volatile, reflecting the difficulties in debt management and reporting between the Treasury and debt management office. For instance, the execution rate for interest payments increased from a low 38.8 percent in 2019 to a high 141.1 percent in 2020. This underperformance translated into an important accumulation of debt arrears. While the country regularized/rescheduled 0.3 percent of GDP worth of debt service payments and arrears in 2020 under the G20 Debt Service Suspension Initiative, it still has around US$6.0 million, or 0.54 percent of GDP, in remaining arrears.27 27 As of the end of May 2021, the country owed US$4.7 million (0.4 percent of GDP) to the Arab Bank for Economic Development in Africa, US$0.8 million (0.1 percent of GDP) to EXIMBANK India, and US$0.5 million (0.04 percent of GDP) to the OPEC Fund for International Development. 2022 COMOROS 64 Chapter III: Trends and Composition of Public Expenditures PUBLIC EXPENDITURE REVIEW Expenditures critical to the socioeconomic development of the country are under-executed, while other administrative and sovereign expenditures perform well. For expenditures dedicated to island administrations, sovereign and pooled expenditures had a budget execution rate of 96 percent in 2016–19, much higher than an average of 69.6 percent for spending in the social, production, and economic sectors. The execution rate for infrastructure-related expenditure is also low at an average of 75 percent. In Comoros, the COVID-19 pandemic has not translated into significant improvements in the budget execution rate in socioeconomic sectors. While the budget execution rate in economic and administrative management increased from an average of 67.2 percent in 2016–19 to 99.6 percent in 2020, it declined from 72.9 percent to 64.9 percent in the social sector, and from 68.8 percent to 59.1 percent in the production sector during the same periods (Figure 61). Expenditure Execution by Administrative Figure 61.  Expenditure Execution by Functional Figure 62.  Classification Classification in 2016–20 percent percent percent percent 120 120 120 160 140 100 100 100 120 80 80 80 100 60 60 60 80 60 40 40 40 40 20 20 20 20 0 0 Education Health Recreation, Defense Economic culture, and religion Environmental protection protection affairs General public services Social community Housing and amenities Public order and safety 0 0 r d rit d m mincon on n s fe ure al emati c & ry nd itu ole cu an ig Ju es ci y enon ia ti re ct ag tr i So la t m uc c nd Po se e ve ru di Is ns an is o od So st Pr fra De pe ad E In ex J 2016–2019 approved budget Q 2020 approved budget (rhs) J 2016–2020 approved budget Q 2020 approved budget (rhs) Source: National authorities, IMF, and World Bank staff estimates. The budget execution rate for expenditures critical for human capital development is low. While the execution rate was an average of 105.4 and 103.2 percent for general public services and defense expenditures, respectively, in 2016–19, it was only 72.7, 62.1, and 30.2 percent for education, health, and social protection expenditures, respectively, during the same period (Figure 62). During the COVID-19 pandemic in 2020, the budget execution rate for social protection expenditure increased to 70.5 percent (40 percentage points), while it declined to 41.2 and 32.8 percent for health and education expenditure, respectively. The budget execution of housing and community amenities and recreation/culture expenditures recorded the most significant improvements, with the former increasing from an average of 84.9 percent in 2016–19 to 145.7 percent in 2020, and the latter increasing from 78.3 to 133.6 percent in the same period. These higher-than-budgeted expenditures may stem from an unrealistic budget. Between 2019 and 2020, the budgets for these expenditures declined by 25.8 percent and 70.8 percent, respectively. III.5 Policy Options The Government of Comoros could consider adopting the following reforms to improve public expenditure planning, budgeting, and execution: › Address weaknesses in the country’s public expenditure data. The unreliability of data reflects the challenges the administration faces during the whole budget cycle—from budget planning to reporting actual spending. The classification between investment and current expenditures (especially foreign financed expenditures) is unclear. To carry out the necessary analysis, the World Bank team reclassified expenditures, following discussions with ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter III: Trends and Composition of Public Expenditures 65 both the IMF and national authorities, to make the classifications clearer. The authorities have confirmed the country’s data challenges and are working toward addressing them. › Improve the quality of budget reporting by reducing undefined budgetary items. A significant part of Comoros’ budget is still classified as pooled expenditures, and a significant part of the budget is omitted for the administrative or functional classification for certain periods. Pooled expenditures (dépenses communes) are not classified properly, and around 2.5 percent of GDP in 2020 had not been classified by sector. Moreover, the authorities do not include foreign financed investment in their functional classification. › Improve budget realism and debt management. The volatility of Comoros’ budget execution suggests that the budget is unrealistic. Involving Parliament in the budget process and ensuring an effective collaboration between different services involved in the budget cycle will be critical to improve budget realism. Also, the directorates involved in for the preparation of the country’s national development plan Emerging Comoros Plan (Plan Comores Emergent, PCE) could be at the heart of the budget preparation cycle. Finally, better coordination between the directorate of debt and the Treasury, which are respectively in charge of external and internal debt, could help improve the forecasting of interest payments liabilities and their execution and reporting. › Provide more granular spending data at the Union and Island level to improve the efficiency of public spending. Enhancing data collection and reporting at the subnational level while also providing disaggregated spending data at the subnational level could allow the government to identify the parts of the country that are the most in need of government support and ensure a fair redistribution of the public resources. › Establish adequate procedures to realize an adequate budget execution for social sectors. Given the current level of budget execution and Comoros social outcomes, there is a need to prioritize the budget execution of those sectors. It could be done by: » Clarifying the authority granted by the government operation law (Art. 22, 61) to the minister of finance to freeze or cancel budget appropriations in order to ensure better budget execution, cash management, and fiscal discipline. If not well defined, this authority could undermine critical spending in social sectors. It is also important that MDAs prepare annual and monthly commitment and cash plans to provide sufficient visibility over critical spending. » Strengthening the ex-ante control exercised by the financial controller (FC) towards controlling employment ceilings and on high-stakes expenditure in order to lighten controls on other low-stakes expenditure. In fact, Decree No. 12-159/PR of August 8, 2012 entrusts the financial controller with the mission of assisting the Minister “in the implementation of measures intended to prevent any deterioration in the budgetary balance and participates in the implementation of budgetary regulation.” 2022 COMOROS 66 Chapter III: Trends and Composition of Public Expenditures PUBLIC EXPENDITURE REVIEW Table 4. Policy options to improve public expenditure’s reliability and execution28 Short-term measures (Less than 2 years) Medium-term and long-term measures (2+ years) III. Public expenditures29 III.1. Improve budget reporting and reliability of public expenditures data. › Reclassify undefined budget items and reduce allocations to items labeled “other”, including “common expenses”. › Enhancing data collection and reporting at the subnational level while also providing disaggregated spending data at the subnational level. › Adopt an improved budget classification to be implemented at the national level. (P) III.2. Establish adequate procedures to achieve an adequate budget execution for social sectors. › Prioritize funding release to service delivery units in health and education sectors. (P) › Publish quarterly reports on budget execution and annual statements of government financial operations. (P) › Increase budget allocation and execution for capital and maintenance expenditures. 28 See Table 7 and Table 11 for exhaustive policy options to improve public investment management and public financial management. 29 See Table 7 and Table 11 for exhaustive policy options to improve public investment management and public financial management.  ublic Investment: Chapter IV: P 67 Trends, Composition, and Management Comoros economic expansion and productivity growth are both constrained by the lack of essential infrastructures. Lack of public investment in essential infrastructure constrains overall productivity and thins service delivery, thus contributing to slow progress in poverty and equality, including among islands. This chapter analyses the trends, composition, the management, and the efficiency of public investment in Comoros. It concludes that public investments have been volatile and increasing over the last years but there is a need to improve the planning functions, ensure that investment is allocated to the right sectors, enhance monitoring mechanisms, and enforce the public procurement law to deliver productive and durable assets. Due to shortcomings in the above-mentioned functions, it finds that public investment efficiency is low in Comoros despite an increase during the past decade. Over the past five years, Comoros registered modest economic growth in a context of social and institutional fragility. Between 2016 and 2020, GDP and per capita GDP growth averaged 2.5 percentage points and 0.5 percentage point, respectively. The economy has been primarily driven by consumption, fueled by remittances and tourism receipts. Lack of access to basic services such as piped water facilities, electricity, and health centers highlights the challenges of poverty and inequality in Comoros, including among the Islands and between rural and urban areas. The country’s growth potential would greatly benefit from improved infrastructure. In December 2019, the government announced an ambitious national development strategy (PCE) that focuses on developing the public investment infrastructure up to 2030. However, Comoros has limited fiscal space to make the capital expenditures envisaged under the program, with investment projects mostly dependent on unpredictable donor finance. Historically, domestically financed public investment covers only around one-fifth of total public investment, with the remainder financed by donors. Lack of resources for capital expenditures reflects not only low revenue mobilization but also the absence of strategic budgeting and investment planning. Publicly financed projects are usually carried out with a limited screening of viability, including proper economic and financial assessments, which severely affects the quality and efficiency of public infrastructure. This chapter aims to shed light on public investment expenditures and the PIM cycle in Comoros. The analysis takes stock of existing good practices and identifies key constraints to efficient public investment in the country before making recommendations. The chapter covers: (i) the trends and composition of public investment; (ii) the efficiency of public investment; (iii) practices and key bottlenecks in PIM; and (iv) recommendations. IV.1 Volatility and External Funding Characterized the Increase in Public Capital Expenditures Public investment in the country was volatile but broadly increased between 2010 and 2020. Although not correlated to the fiscal balance, public investment in Comoros went through three different periods in 2010–20: (i) an expansionary period between 2010 and 2012; (ii) a contractionary period between 2013 and 2017; and (iii) a fiscal expansionary period between 2018 and 2020 (Figure 63). Public investment accounts for a substantial share of the government budget. It increased from an average of 25.7 percent of total public expenditures in 2010–12 to an average of 36.8 percent in 2013–21. CHAPTER IV: PUBLIC INVESTMENT: TRENDS, 2022 COMOROS 68 COMPOSITION, AND MANAGEMENT PUBLIC EXPENDITURE REVIEW Public Investment and Fiscal Balance, Figure 63.  Share of Public Investment by Source of Figure 64.  2010–21 Financing, 2010–20 percent of GDP percentage points 9 3 100 8 2 90 7 1 80 70 6 0 60 5 -1 50 4 -2 40 3 -3 30 2 -4 20 1 -5 10 0 -6 0 10 11 12 13 14 15 16 17 18 19 10 11 12 13 14 15 16 17 18 19 20 21 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 J Public investment ▬ Fiscal balance J Domestic J Foreign Source: World Bank staff estimates based on data from national authorities Source: World Bank staff estimates based on data from national authorities and the IMF. and the IMF. Public investment is predominantly financed by external Figure 65.  Execution Rate of the Foreign Financed donors, and the public investment program (PIP) suffers Investment Program, 2016–20 from a low and falling budget execution rate, which percentage points represents a major concern for public service delivery. 50 Foreign financed public investment averaged 76.6 percent 44 40 of total investment spending in 2010–20 (Figure 64). While the share of capital expenditure financed by 33 30 domestic resources reached a high of almost 36 percent in 29 30 2012–13, it averaged a mere 23.4 percent between 2016 20 and 2020. Projects financed by development partners are 16 the mainstay of the investment budget, and this situation 10 will persist in the medium term. The budget execution rate 0 of the PIP has been on a declining trajectory in recent 2016 2017 2018 2019 2020 years, decreasing from 44 percent in 2017 to 30 percent Source: World Bank staff estimates based on data from national authorities and the IMF. in 2020 (Figure 65). This low execution rate not only signals a waste of investment opportunities, it also leads to the delay and even failure of many investment projects. To increase budget execution rate, the authorities must improve the budgeting of public investment, enhance project management, and strengthen communication with development partners. Almost all capital expenditures are made by the union government, and they are mainly focused on building transport and energy infrastructure and enhancing health and nutrition services. On average, 98.2 percent of investment spending is executed by the union and 1.8 percent by the Islands. Externally financed projects are centrally assessed, budgeted, and executed. In 2016–20, the share of foreign financed investment expenditures represented 27.4 percent in transport, 14.4 percent in energy, 14.1 percent in health and nutrition, 8.8 percent in water and sanitation, 8.3 percent in education and training, and a mere 4.4 percent in the environment sector (Figure 66). Government policy places adaptation to climate change and sustainable management of natural resources at the center of environmental protection policies. Among the projects in the PIP, support focuses on: (i) developing the Mohéli Marine Park; (ii) creating a national network of terrestrial and marine protected areas; (iii) improving the multisectoral and decentralized management of the environment to achieve the objectives of the RIO conventions; (iv) strengthening the resilience of Comoros to disaster ADDRESSING FISCAL CHALLENGES CHAPTER IV: PUBLIC INVESTMENT: TRENDS, TO FOSTER AN INCLUSIVE GROWTH COMPOSITION, AND MANAGEMENT 69 risks related to climate change and variability; (v) capacity building for adaptation and resilience of the agriculture sector to climate change; and (vi) co-improving the management of coastal resources for sustainable livelihood. Figure 66. Allocation of Foreign Financed Investment Budget by Sector, 2016–20 percent of total investment expenditure Tourism Water and sanitation 0.1 8.8 14.4 0.9 1.8 Social protection Energy 14.1 Culture, youth and sports Transport Health and nutrition Commerce, bank, employment 6.9 27.4 Administrative and economic governance Environment 8.2 Education and training 5.3 2.6 4.3 4.6 Agriculture, fisheries and livestock Postal, telecommunication and information Source: World Bank staff estimates based on data from the General Planning Commission. IV.2 There Are Opportunities to Improve Public Investment Management Across the Cycle IV.2.1 Planning Sustainable Levels of Public Investment Remains Challenging » IV.2.1.1 A Medium-Term Expenditure Framework Which Encompasses Fiscal Targets and Rules Would Support Planning In Comoros, there is no MTEF prepared prior to budget preparation. The 2012 State Financial Operations Law (LOFE) introduced medium-term programming and budgeting. Its Article 45 (requires the budget proposal to be accompanied by medium-term budget documents. In addition, the manual of procedures on the planning of public investments suggests the adoption of a medium-term budgeting approach alongside the three-year public investment plan. However, the budgetary process is not linked to any medium-term planning, as Comoros prepares neither a medium-term fiscal framework nor an MTEF, and the budget law only presents yearly data. The PIP only covers the fiscal year, and it is imperative to introduce multi-year budget programming with the establishment of an MTEF. While the MTEF is not intended to be a substitute for the budget, it can provide insights into the direction of medium-term fiscal policies and the future fiscal impact of current policies. » IV.2.1.2 A Result Framework Could Strengthen the National and Sectoral Planning The PCE 2020–2030 constitutes a medium and long-term strategic framework for public policies, but it does not have an associated results framework. The plan contains a Priority Action Program that sets out the development objectives of both programs and projects, with financing estimates from the national government and Official Development Assistance partners. The Priority Action Plan also includes estimates of the total cost of individual projects. Sectoral plans exist, and the General Planning Commissariat (Commissariat General au Plan, CGP) provides overall strategic guidance on national development planning, including the cost of projects. The process to estimate project costs is, however, broad and does not consider the overall financial constraints. As a result, national and sectoral plans have not been generally effective in guiding the strategic selection of projects to be included in the PIP, and only some of the projects in the national and CHAPTER IV: PUBLIC INVESTMENT: TRENDS, 2022 COMOROS 70 COMPOSITION, AND MANAGEMENT PUBLIC EXPENDITURE REVIEW sectoral plans are found in the PIP. In addition, according to the manual of procedures, national and sectoral plans and the resulting projects should lead to the development of the three-year PIP. Finally, the PCE does not have a clear results framework that would facilitate the monitoring of results and help to ensure that public investment projects contribute to the achievement of key development objectives. » IV.2.1.3 More Coordination between Central and Subnational Governments is Needed Coordination between central and subnational government authorities is limited to the development of regional development plans. The CGP coordinates with the Islands to create regional development plans through the Islands’ regional planning directorates. Transfers of domestic resources from the central government are the primary funding source for the Islands. These transfers, which are used to fund operating costs, the payment of salaries, and investments, are not based on a transparent rules-based system. Moreover, the PIP does not list public investment projects that are executed by subnational governments. The Islands’ externally financed investment projects are centrally assessed, budgeted, and executed, and island authorities follow their implementation and participate in annual implementation reviews. However, the regional planning directorates do not report directly to the CGP, and no reports are produced on the execution of investments projects at the island level. The coordination between the CGP and regional planning directorates needs to be improved around the monitoring and evaluation of investment projects. Regional planning directorates could submit to the CGP at least bi-annually reports on the implementation of externally and domestically financed projects executed at the island level. Current coordination mechanisms do not assess contingent liabilities from public investment projects implemented at the subnational level or through PPPs. Contingent liabilities arising from capital projects and fiscal risk are not discussed when validating projects to be included in the PIP. Strengthening the ex-ante assessment of infrastructure projects in terms of long-term fiscal sustainability and fiscal risks should be a priority. As part of the evaluation of domestically and externally financed projects submitted to the CGP, and prior to approval, a dedicated unit could be responsible for systematically evaluating major projects from the viewpoint of long-term fiscal sustainability, including long-term liabilities and fiscal risks such as explicit and implicit contingent liabilities. The assessment report by the dedicated unit could include the identification of mitigation measures for the accepted fiscal risks and contingent liabilities if the project is proposed for approval. » IV.2.1.4 Systematic Project Appraisal Could Enhance Planning There is no systematic project appraisal approach, and results are not published. The CGP sends each year a project sheet30 to ministries and project implementation units to collect information on projects to be included in the annual public investment plan. These are reviewed by the CGP, which validates their relevance and ensures their links with government priorities. According to the manual of procedures, projects must be appraised before being included in the PIP. The quality of the projects proposed to the PIP is highly dependent on this appraisal phase. However, investment projects are not subject to systematic appraisal, except some projects financed by development partners. Project appraisal is mainly done or financed by development partners. To ensure efficient PIM, domestically and externally financed investment projects should undergo project appraisal before being selected to be included in the PIP. The main components of project appraisal should include:31 (i) a compilation of all relevant data (i.e., geographic, climate, socioeconomic, and technical); (ii) an overview of alternative technologies for the project; (iii) a detailed risk and sustainability assessment; 30 The project sheet is included in the annex. 31 Adapted from Rajaram, A., and others, eds., 2014, The Power of Public Investment Management: Transforming Resources into Assets for Growth, (Washington, DC: World Bank). ADDRESSING FISCAL CHALLENGES CHAPTER IV: PUBLIC INVESTMENT: TRENDS, TO FOSTER AN INCLUSIVE GROWTH COMPOSITION, AND MANAGEMENT 71 (iv) a detailed estimate of costs and benefits for a selected alternative project, with a preliminary design; and (v) an assessment of the project’s social and environmental impact. IV.2.2 Procedures to Allocate Resources to Sectors and Projects Could Be Enhanced » IV.2.2.1 Resource Allocation Could Benefit from an Exhaustive Budget and a Multi-year Budgeting The budget does not include aggregate capital spending targets for domestically or externally financed projects in the medium term. It is supported by a list of projects in the PIP, which is prepared on an annual basis. Since the MTEF is not yet operational in Comoros, there are no multiyear ceilings for total capital spending by line ministry. Budget documentation forecast capital spending over the medium term. Improving multiyear budgeting for capital spending is a high reform priority, as a multiyear perspective for public investment in the budget process is critical to significantly increase public investment to meet the development goals laid out in the PCE. Budget ceilings (for the budget year and forward years) for total capital spending, including for new projects, are important to improve the realism of budget requests and the visibility of funding for forward years. The PIP, which is not exhaustive, is often approved with substantial delays during the fiscal year. The Ministry of Finance prepares the budget law, and the CGP prepares the PIP, often after many delays. The initial budget law only contains an estimated PIP. The project sheets completed by the ministries and project implementation units are often submitted very late to the CGP. The final version of the PIP is included as an annex to the revised budget law, which is approved toward the end of the year. However, some capital expenditures are undertaken by public enterprises and establishments with no disclosure in the budget documentation. Albeit marginal, there is no detailed information on domestically funded public investment projects, as they are not reflected in the PIP. Outlays are appropriated on an annual basis, with multiyear commitments not included in budget documentation, and there is a risk of underfunding domestically funded investment. The PIP, which mainly includes externally financed projects, is prepared on an annual basis, but budget documentation does not include information on total project costs. Virement from capital to current spending within the national budget is allowed under the amended finance budget law under certain circumstances for government-financed capital projects. Section 2 (budget modification) and Article 23 of 2012 LOFE states that, “If the purpose of the modification is to make virement from capital to wages or goods and services spending, it is subject to the prior authorization either of the Minister in charge of finance or of the commissioner in charge of finance depending on whether it is the Union or the autonomous island.” Thus, there is no mechanism in place to protect the funding of ongoing projects from being diverted to new projects. » IV.2.2.2 Maintenance Funding is Mainly Financed by External Partners and a Standardized Approach is Required Available data suggest that investment maintenance is mainly financed by external partners. Between 2016 and 2020, the total maintenance cost of investment projects averaged 2.3 percent of total government expenditures, with 81.6 percent financed by development partners (Table 5). Domestically financed maintenance expenditures are mainly for road maintenance (89.2 percent) and information technology and equipment maintenance (9.0 percent). These expenditures are mainly executed by the administrative and economic sectors. There is, however, no disaggregated data on externally funded maintenance costs. CHAPTER IV: PUBLIC INVESTMENT: TRENDS, 2022 COMOROS 72 COMPOSITION, AND MANAGEMENT PUBLIC EXPENDITURE REVIEW There is no standardized methodology to determine project maintenance costs. Comoros does not have a standard methodology for determining the budget required for routine maintenance needs or major improvements to existing assets. Developing a standard methodology for determining maintenance requirements for all types of infrastructure assets and budgeting for them is a high reform priority, as this would ensure savings over the facilities’ lifecycle. Current inadequate practices for determining routine maintenance may result in poorly maintained facilities. Table 5. Maintenance Costs KMF million 2016 2017 2018 2019 2020 Maintenance of buildings and building facilities 0.0 0.0 0.5 0.8 1.4 Maintenance of IT equipment, machines, and technical 26.8 48.1 35.2 36.6 34.8 equipment Maintenance and repair of motor vehicles, aircraft, and 0.0 0.0 11.0 11.0 11.0 ships Maintenance and repair of military equipment 0.0 0.0 0.0 0.0 0.0 Maintenance of roads, water and electricity networks, 0.0 0.0 0.0 0.0 0.0 engineering structures, and infrastructure Maintenance of cemeteries and green spaces 0.0 0.0 0.0 0.0 0.0 Fire safety 0.0 0.0 0.0 0.0 0.0 Other upkeep, maintenance, and security costs 0.0 0.0 0.0 0.0 0.0 Road maintenance 874.4 0.0 0.0 927.4 0.0 Domestically financed project maintenance 901.2 48.1 46.7 975.7 47.1 Foreign-financed project maintenance 1,378.0 1,415.0 1,559.0 1,262.0 3,324.2 Total project maintenance 2,279.2 1,463.1 1,605.7 2,237.7 3,371.3 % of total expenditures 2.7 1.8 1.7 2.1 3.3 % of government revenues 5.8 3.1 2.9 4.5 6.9 Source: National authorities (administrative accounts for domestically financed projects and externally financed LOFE). » IV.2.2.3 Explicit Criteria Could Enhance Project Selection Which is Performed at the Central Level Although a pipeline of non-appraised projects exists in the PCE’s Priority Action Program, project selection is centrally performed without explicit criteria. Project proposals submitted by line ministries are reviewed by the CGP, which validates their relevance, ensures their links with government priorities, and includes them in the annual PIP. The manual of procedures on public investment planning contains general project selection criteria. In practice, not all the criteria are used in the selection process of domestically financed projects. However, projects included in the PIP, which are mainly externally financed, have previously been appraised by the financing partners. Other domestically financed projects may also be selected for financing during the fiscal year. There is an immediate need for project selection criteria to ensure an effective implementation of projects that could accelerate inclusive growth. It is therefore recommended that all major projects should be subject to a review by the steering committee to ensure their quality and readiness, with explicit and objective criteria to maximize their economic, social, and environmental impact. This would also help to avoid the selection of projects that are not ready for implementation and thereby avoid delays and cost overruns during project implementation. ADDRESSING FISCAL CHALLENGES CHAPTER IV: PUBLIC INVESTMENT: TRENDS, TO FOSTER AN INCLUSIVE GROWTH COMPOSITION, AND MANAGEMENT 73 Box 3. Project Selection in Comoros The manual of procedures of public investment in Comoros proposes a list of general criteria for project selection. The manual procedures however mentions that sectors only retain relevant criteria while they can add sector specific criteria. Below is the list of general criteria: › Projects must meet the criteria of consistency with the strategic development objectives of the sector concerned; › The projects envisaged must be included in the sectoral development plans; › Projects should not already be targeted by other development projects that target the same target populations; › The modalities of organization and management of the project must be clearly defined in advance; › The indicators of activities, results and impact as well as the data collection system must be specified in the project; › Projects must have a proven promising character: a project is promising if it makes it possible to reduce a bottleneck or if it can serve as a lever or catalyst for economic and social development (e.g. structuring projects). › The technical feasibility of the project has been proven (feasibility study). › The assessment of the number of direct and indirect beneficiaries; › Estimated number of local jobs created; › The estimate of expected revenues; › The estimate of the expected production; › The percentage (%) of local raw materials used; › An adequate environmental impact assessment has been carried out, and the scope of the additional studies to be carried out has been determined; › The project presents a clear strategy to ensure that the benefits (impacts) effectively benefit the identified vulnerable groups (i.e. the poor, women, children, the disabled as well as the elderly or sick) according to the identified localities; › The project presents a clear strategy to ensure the reduction of inequalities; › The project must actually constitute an investment expenditure and not an operating expense. › The CGP is tasked with the establishment of explicit indicators that would help to decide on the inclusion of the project in the public investment plan. Source: Government Project Preparation Manual. IV.2.3 The Delivery of Productive and Durable Public Assets is Hampered by Weak Procurement Practices, Monitoring and Oversight » IV.2.3.1 Public Procurement should be Mainstreamed in Public Investment Management Current procurement law and regulations generally provide a pro-competition and transparent framework, but the public procurement function is weak, as evidenced by the low coverage of expenditures. The law on the award of public contracts and the delegation of public services (n°11-027/Au), also known as the Public Procurement Code (CMP) of Comoros, was adopted in December 2011 and promulgated in February 2012. The provisions relating to the preparation, award, and execution of contracts are broadly in line with international standards and good procurement practices. CHAPTER IV: PUBLIC INVESTMENT: TRENDS, 2022 COMOROS 74 COMPOSITION, AND MANAGEMENT PUBLIC EXPENDITURE REVIEW The CMP indicates that public procurement must be awarded after competition between potential co-contractors of the administration, mainly through calls for tenders. Procurement through open tenders is therefore the default mode of procurement. The use of other procurement methods must be justified by the contracting authority and authorized in advance by the National Directorate for the Control of Public Procurement and Delegation of Public Services (Direction nationale de contrôle des marchés publics et délégations de service public, DNCMP). Direct contracting procedures must be exceptional and in accordance with the provisions of Section 4 of the CMP on direct contracting. However, data on public procurement are not sufficiently reliable, which suggests that the country’s public procurement function is weak (see Section V.5). Indeed, the DNCMP encounters difficulties in providing statistics on awarded contracts because it does not receive all the contracts before they are awarded. As a result, several contracts are awarded without being submitted to the DNCMP. Based on the CMP, the Public Procurement Regulatory Authority was created to respond to complaints filed by bidders, but this institution is not effective in Comoros. According to Article 1 of Implementing Decree No. 12-131 of May 31, 2012 (consistent with the 2011 Law on public procurement), the Public Procurement Regulatory Authority (Autorité de Régulation des Marchés Publics, ARMP) is a public legal person endowed with administrative and financial autonomy. It is directly attached to the Presidency of the Union and depends on a state subsidy and a 5 percent royalty on awarded contracts to operate, although the royalties have never been collected. ARMP has a dispute settlement committee (Comité de réglement des différends, CRD), which is a tripartite body composed of two lawyers (one member from civil society and one member from the administration), a representative from the private sector, and the president of ARMP. The CRD is responsible for examining reports of irregularities from interested parties or those known to any other person before, during, or after the award or execution of public contracts or the delegation of public services. However, ARMP’s CRD is not operational because of lack of resources to pay the members’ allowances and delays in the nomination of new members. While the five-year mandate of the previous members has ended, the new members of the CRD have not yet been nominated. As a result, no appeal lodged by bidders has been handled, and no decision on the complaints has been issued or published. Effective competition in infrastructure procurement should be fostered. Ex-post infrastructure procurement reviews should aim to identify the factors preventing effective competition. The ministries should be required to produce procurement plans, send them to the DNCMP, and published them. All contracts should be submitted and reviewed by the DNCMP before being awarded. Procurement officials should be sensitized to potential constraints to effective competition. Stringent sanctions for bidders involved in anti-competitive practices should be introduced in the legal framework, leading to effective deterrence. Administrative and judicial processes for addressing bidders’ complaints should be revised, including independent reviews and fast-track procedures. Members of ARMP’s CRD should be nominated, and resources need to be allocated for its proper functioning. Procurement information, including the full proactive disclosure of contracts, should be made easily accessible to the public, with no barriers to fully download data and contracts. » IV.2.3.2 Efforts Are Required to Improve Portfolio Management and Oversight The institutional design for overseeing the implementation of the public investment portfolio is not conducive to adequate collaboration between central and regional administrations. The CGP, created by Decree N°01-106CE of September 04, 2011, is directly linked to the General Secretariat of the Presidency. It is made up of three general directorates: the General Directorate of Statistics and Forecasting, the General Directorate of Programming and Technical Coordination of Aid, and the General Directorate of Strategic Planning and Population. The CGP is represented at the level of the Islands by regional departments responsible for participating in the design, development, implementation, and monitoring of programs for the Islands. According to Decree No. 09-105 / PR of August 27, 2009, the CGP is responsible for, among other things, the design, development, monitoring, and evaluation of the execution of development plans, ADDRESSING FISCAL CHALLENGES CHAPTER IV: PUBLIC INVESTMENT: TRENDS, TO FOSTER AN INCLUSIVE GROWTH COMPOSITION, AND MANAGEMENT 75 programs, and projects. However, there is a lack of collaboration between the CGP and the regional planning departments that report directly to the island governor. The monitoring and evaluation of policies and programs remains characterized by weak monitoring of the execution of public investment projects. The monitoring of investments financed by external resources is managed by the CGP outside of the official budget system, and the PIP’s execution reports are not very detailed. The reports only contain planned and executed project budgets classified by sector and source of financing, while critical information such as the initial cost of the project, project status, starting and closing date, and detailed expenditures is not available, preventing policy makers from performing an analysis on the project life cycle. The CGP has an aid information management system called the Development Assistance Database that is used to track development aid and manage Official Development Assistance. However, the system is not functioning because of human resource constraints. As a result, the report of the court of accounts "deplores the lack of traceability of the financial operations of these external resources, especially since the Public Treasury and the General Directorate of the Budget are not involved in the management of these resources.”32 Similarly, the execution of domestically financed projects is reported on in the annual budget execution report produced by the Directorate of Budget, but the report only includes aggregate execution data. » IV.2.3.3 Improved Monitoring Public Assets is Needed to Deliver Productive and Durable Assets The Government of Comoros has neither patrimonial accounting nor a register of public assets. Due to the absence of patrimonial accounting, which can be used to provide an overview state assets and liabilities, financial assets are not presented in any of the documents transmitted to the Assembly of the Union before the vote on the budget law. In addition, the annual consolidated statements produced by the government do not provide information on assets and liabilities. The only information available on financial assets and liabilities is presented and aggregated in the government’s financial operations table. The government chart of accounts, inspired by the Organization for the Harmonization of Business Law in Africa (OHADA) standard, is not yet fully applied, and financial statements do not follow International Public Sector Accounting Standards or comparable national standards. Furthermore, the annual verification of the Accounts Section is limited to income and expenditure operations and does not cover assets and liabilities. Finally, the depreciation of fixed assets is not recorded in operating statements. It is vital that the authorities adopt accounting policies and procedures to account for and report on public assets in financial statements. IV.2.4 Public Investment Management and Public Asset Management Could Be Improved by Mainstreaming Climate Change The Union of Comoros is highly vulnerable to climate change, and this situation is expected to result into substantial economic, human, and financial losses. The Notre Dame vulnerability GAIN index shows that Comoros vulnerability to climate change effects has been deteriorating between 1995 and 2020 with Comoros now being the 33rd most vulnerable country in 2020. With 33 percent of the value added being generated from the agriculture and fishery sectors in 2020 and food imports representing about 41.3 percent of total merchandise imports, the economic consequences of the climate change impact on food nutrition systems could be substantial. In addition, the number of people affected by natural disasters (including cyclones, drought, flooding, and volcanic eruptions) has increased to about 350 thousand people (about half of the country’s population) in 2010–2019 from less than 50 thousand people in 1980–99, according to International Disaster Database (EM-DAT). 32 Public Expenditure Financial Accountability (PEFA), Comoros, October 2016, PEFA Secretariat. CHAPTER IV: PUBLIC INVESTMENT: TRENDS, 2022 COMOROS 76 COMPOSITION, AND MANAGEMENT PUBLIC EXPENDITURE REVIEW In its national determined contribution (NDC), the Government of Comoros has identified climate change as a source of vulnerability that could erase development achievements. The Government of Comoros identified tropical storms, floodings, episodes of drought as events, with an increased occurrence, that threaten Comoros. The average costs due to natural disasters has been estimated at 0.39 percent of GDP during the period 1980–2017 with substantial heterogeneity between events, and this estimate is likely to be below the real level because of poor data. Comoros identifies agriculture and biodiversity as the sector which are the most vulnerable to climate change, and it cites the following as other impacted sectors or areas: forest, coastal zones, fishery, water resource, health, and socio-economic infrastructures.33 Entry Points for Mainstreaming Climate Change in Public Investment Management and Public Asset Figure 67.  Management Climate- Climate- informed CBA, Vetting sensitive Green Review high mechanism procurement. Account of Ex-post audit investment climate risk screening risk climate climate in of climate planning and assessment for of the Mid-year projects enforcement reallocations maintenance investment guidance pipeline PIM Strategic investment Appraisal Independent Selection Implement Adjustment Operations Evaluation guidance review Planning Acquisition Operation & Maintenance Disposal Definition, evaluation, Asset valuation, Rehabilitation, Decompose of assets, performance strategy, ... transfers, ... maintenance, depreciation, removal from financial obsolesce, ... statement, ... PAM Identification of critical Changing maintenance resilient infrastructure schedule Climate-informed Asset vulnerability Adapt to account uncertainty Waste management, asset registry assessment recovery and recycling Structural measures Information technology (higher bridge) Source: World Bank staff representation based on the Public Investment Management Reference Guide, World Bank (2020).34 There are different opportunities to incorporate climate change in the PIM, and public asset management cycles. Integrating climate change issues in PIM could be undertaken at different stages of the project implementation cycle (Figure 67). However, for a country like Comoros which is an early stage of the integration of those issues in its procedures, the focus could be on the following steps: strategy and design, project appraisal, independent review, and project selection. At the planning and design stage, it is possible to incorporate climate horizons and resilience aspects in investment planning tools such as policies, sector strategies, asset management plans, land-use plans and other planning tools. For new investment, climate change issues and natural disaster vulnerabilities could be integrated at the project identification, prescreening, project appraisal, and selection for budgeting of public investments. The systematic screening of projects across the different stages aims to detect any potential major climate impact or vulnerability to climate risk. PAM would also require some adjustment and it will be based on vulnerability assessment (Figure 67). The capacities to incorporate the climate change dimension in PIM and PAM would require additional data and the creation of information system on exposure to hazards, and the impact of climate change on the infrastructure, and the adoption of a primary legislation that would require the authorities to mainstream climate change in public expenditures. 33 Union des Comores (2021). Contribution déterminée au niveau national (CDN révisée). Rapport de synthèse 2021-2030. Moroni. (Available https://unfccc.int/ sites/default/files/NDC/2022-06/CDN_r%C3%A9vis%C3%A9e_Comores_vf.pdf / accessed on November 9, 2022). 34 https://openknowledge.worldbank.org/handle/10986/33368. ADDRESSING FISCAL CHALLENGES CHAPTER IV: PUBLIC INVESTMENT: TRENDS, TO FOSTER AN INCLUSIVE GROWTH COMPOSITION, AND MANAGEMENT 77 In Comoros, as in many other African countries, climate risks are not yet integrated into public investment and assets decisions at all levels. While Comoros acknowledges the significant impact of climate change on the country in its National Determined Contribution, capacities, institutional processes, and tools to screen public projects and integrate climate change in asset management are lacking. The Government lacks a climate change long-term strategy, a climate informed legislative framework and climate informed policy. Climate data to inform investments is either fragmented or lacking. IV.3 Public Investment Efficiency Could Be Further Increased There is less access to quality physical infrastructure in Comoros than in most structural35 and aspirational36 peer countries. The share of the population with access to electricity increased from an average of 70.8 percent in 2010–15 to 81.9 percent in 2016–20 (Figure 68). These rates are lower than the rates in all peer countries, except Solomon Islands. In addition, the poor state of the country’s roads results in many deaths due to road traffic injuries. In 2016–20, the road traffic mortality rate (per 100,000 people) averaged 26.6 percent, higher than in all peers, except Sao Tome and Principe (Figure 69). Figure 68. Access to Electricity Figure 69. Mortality Caused by Road Traffic Injuries share of population per 100,000 people 120 30 100 25 80 20 60 15 40 10 20 5 0 0 nd n s s nd n ci e os te e ji ga oa s ji oa te s a e os ci e le le iu iu in om ng rd rd in om Fi Fi la o la o & Sao s Co e s pe es es n or or m m Is lom Is lom el el rit rit p Ve Ve To To Pr T -L -L Pr T Sa Sa m m h h au au & Sao yc yc or or bo bo So So Co M M Se Se m m Ca Ca Ti Ti J 2010–15 J 2016–2020 J 2010–15 J 2016–2020 Source: WDI. Source: World Bank, Health Nutrition and Population Statistics. Comoros’ education and health outcomes are very poor. The share of children of primary school age who are out of school has increased over time, from 12.7 percent in 2010–15 to 16.4 percent in 2016–20 (Figure 70). These rates are higher than those observed in peer countries. In the health sector, the under-five mortality rate is very high at 70.1 per thousand live births, higher than the average of both structural and aspirational peers (Figure 71). The data envelopment analysis (DEA) was used to estimate the efficiency of public investment in Comoros. As discussed in Stata (2010), the DEA is an optimization method to assess efficiency through the maximization of outputs and the minimization of inputs. Efficiency scores range from 0 (lowest efficiency) to 1 (highest efficiency). The results are based on a two-stage output-oriented DEA model with decreasing returns (Li and Lee 2010).37 35 Structural peers are Sao Tome and Principe, Timor-Leste, and Solomon Islands, as these shared similar features with Comoros between 2009 and 2019 in terms of GDP per capita, population size, development of the tourism sector, trade in services, level of poverty, and government effectiveness. 36 Aspirational peers are Tonga, Samoa, Fiji, Cabo Verde, Mauritius, and Seychelles. While these countries share similar structural characteristics as Comoros, their per capita growth has been significantly faster, and they have managed to develop their tourism sectors. 37 Stata 2010; Li and Lee 2010. CHAPTER IV: PUBLIC INVESTMENT: TRENDS, 2022 COMOROS 78 COMPOSITION, AND MANAGEMENT PUBLIC EXPENDITURE REVIEW Out-of-School Rate for Children of Primary Figure 70.  Figure 71. Under-Five Mortality Rate School Age percentage points per 1,000 live births 18 90 80 15 70 12 60 50 9 40 6 30 20 3 10 0 0 s nd n s nd n ga ji oa s So ste C a ipe e e os ga s e oa ci e ji te os le le iu iu Fi in om rd rd in om Fi la o la o & Sao s So e s es n n or or m m Is lom Is m el el rit rit e p Ve Ve To To -L Pr T Pr T -L Sa Sa o m m h h c au au l & Sao yc yc or or bo bo Co Co M M Se Se m m Ca Ti Ti J 2010–15 J 2016–2020 J 2010–15 J 2016–2020 Source: World Bank, Education Statistics - All Indicators. Source: World Bank, Health Nutrition and Population Statistics. Table 6 highlights the results of the DEA in terms of public sector performance and investment efficiency in Comoros and peer countries. Four indicators were used to assess public sector performance and investment efficiency: (a) the out- of-school rate for children of primary school age for both boys and girls; (b) the road traffic mortality rate (per 100,000 people); (c) the under-five mortality rate (per 1,000 live births); and (d) access to electricity (share of population). Public investment spending was used as an input to the model. Performance and efficiency scores range from 0 (worst) to 100 (best). In terms of performance, a score of 100 would mean that the country has achieved the highest levels of development outcomes, while an efficiency score of 100 would mean that the country is efficiently using available resources to deliver development outcomes. Table 6. Public Sector Investment Performance Efficiency in Comoros and Selected Countries Public Sector Performance Public Investment Efficiency Country Indicator 2010–2015 2016–2020 2010–2015 2016–2020 Comoros 54.3 59.2 57.0 60.3 World 73.6 77.6 76.0 79.2 Emerging markets and developing economies 71.9 76.1 74.2 77.6 Advanced economies 95.4 96.1 98.8 98.9 Small states 81.3 84.1 84.9 85.7 Aspirational peers 86.5 86.8 90.3 88.4 Structural peers 66.0 75.2 68.7 76.6 Cabo Verde 72.8 77.5 75.7 79.0 Fiji 88.6 88.0 92.2 89.7 Mauritius 88.2 90.1 90.9 91.8 Samoa 87.6 89.5 92.1 91.2 Sao Tome and Principe 62.4 72.1 65.5 73.4 Seychelles 89.6 89.9 94.1 91.6 Solomon 70.1 75.3 73.3 76.7 Timor-Leste 65.6 78.1 67.3 79.6 Tonga 92.0 85.8 96.8 87.4 Source: World Bank staff estimates based on DEA. ADDRESSING FISCAL CHALLENGES CHAPTER IV: PUBLIC INVESTMENT: TRENDS, TO FOSTER AN INCLUSIVE GROWTH COMPOSITION, AND MANAGEMENT 79 Public sector performance and investment efficiency have over all improved over time in the selected countries. Public sector performance in Comoros increased between 2010 and 2020, but it is still below fellow EMDEs, small states countries, aspirational peers, and structural peers. Public investment expenditures have generally contributed to higher levels of development outcomes in peers than in Comoros, as all peer countries have been using their resources more efficiently. Between 2016 and 2020, Comoros’ investment efficiency score of 60.3 implies that the country could reduce its public investment spending by 39.7 percent and produce the same level of development outcomes. Public investment in Comoros has negligeable effects on improving infrastructure and has not fully delivered the expected economic benefits, suggesting that its efficiency could be improved. In the context of fiscal constraints, increasing public investment efficiency to maximize the use of public resources is critical for the country to meet its infrastructure needs. Strengthening PIM could improve the efficiency and impact of public investment. IV.4 Policy Options Table 7. Policy Options to Improve Public Investment Management Short-term measures (Less than 2 years) Medium-term and long-term measures (2+ years) IV. Public Investment Management IV.1 Planning Sustainable Levels of Public Investment IV.1.1. Introduce medium-term budgeting › Introduce multiyear budget programming with › Pilot the MTEF in two selected ministries (education and the establishment of a medium-term expenditure health). framework MTEF. (P) › Deploy the MTEF in the remaining ministries, and relevant public administrations. IV.1.2. Implement national and sectoral planning › Ensure alignment of the public investment program with the Plan Comores Emergent (PCE) Priority Action Plan (PAP) and sectoral plans. › Design a results framework for the PCE. IV.1.3. Improve the coordination between central and other government entities › Regional planning directorates should submit to the › Create a dedicated unit at the CGP responsible for CGP at least bi-annual reports on the implementation systematically evaluating major projects from the of externally and domestically financed projects for the viewpoint of long-term fiscal sustainability, including Islands. long-term liabilities and fiscal risks such as explicit and implicit contingent liabilities. › Produce assessment reports that identify mitigation measures for accepted fiscal risks if a project is proposed for approval. IV.1.4. Conduct project appraisals › Conduct appraisals of domestically and externally financed investment projects before their inclusion in the PIP. CHAPTER IV: PUBLIC INVESTMENT: TRENDS, 2022 COMOROS 80 COMPOSITION, AND MANAGEMENT PUBLIC EXPENDITURE REVIEW Table 7. Policy Options to Improve Public Investment Management Short-term measures (Less than 2 years) Medium-term and long-term measures (2+ years) IV.2 Ensuring Public Investment is Allocated to the Right Sectors and Projects IV.2.1. Introduce multiyear budgeting for public investment › Create a three-year public investment program (PIP). IV.2.2. Improve budget comprehensiveness and unity › Harmonize the PIP and budget preparation calendars. › Include capital projects of public enterprises and establishments in the PIP. › Include PPP projects in the PIP and future recurrent costs related to the effects of capital spending in the budget. IV.2.3. Budgeting for Investment › Improve the protection of capital expenditures to ensure they are not diverted to other expenditures. IV.2.4. Plan for maintenance funding › Develop a standard methodology for determining › Include budget lines on maintenance in the budget law maintenance requirements for all types of infrastructure for all types of infrastructure assets. assets. IV.2.5. Improve project selection › Mandate the use of the explicit project selection criteria to ensure the implementation readiness of projects before start of implementation. (P) IV.2.6. Mainstreaming climate change › Adopt a primary legislation that mandates the incorporation of climate change in the budget › Prepare hazard and risk vulnerability assessments › Update the manual of procedures on public investment planning to incorporate climate change and natural disaster at each stage of project preparation IV.3 Delivering Productive and Durable Public Assets IV.3.1. Promote transparency in public procurement › Sensitize procurement officials to potential constraints › Introduce in the legal framework stringent sanctions for to effective competition. bidders involved in anti-competitive practices. › Nominate members to ARMP’s CRD and allocate › Require compulsory payment of the 5 percent royalty resources for its functioning. on awarded contracts to ARMP. › Require procurement plans to be prepared by all › Publish the ministries’ procurement plans. ministries before they are submitted to the DNCMP for › Make procurement information easily accessible to the review. public, including full proactive disclosure of contracts, with no barriers to fully download data and contracts. ADDRESSING FISCAL CHALLENGES CHAPTER IV: PUBLIC INVESTMENT: TRENDS, TO FOSTER AN INCLUSIVE GROWTH COMPOSITION, AND MANAGEMENT 81 Table 7. Policy Options to Improve Public Investment Management Short-term measures (Less than 2 years) Medium-term and long-term measures (2+ years) IV.3.2. Improve portfolio management and oversight › Strengthen the human capacity of the CGP to › Make it mandatory for development partners to submit operationalize the aid information management system quarterly projected disbursement data on development (Development Assistance Database). assistance. › Add variables in the PIP monitoring database. IV.3.3. Ameliorate the management of project implementation › Have project management units submit quarterly › Publish ex-post audit reports on projects and make reports on projects’ implementation status to line them available to the public. ministries. › Prepare project completion reports to assess their impact. IV.3.4. Improve the monitoring of public assets › Adopt accounting policies and procedures to account › Provide information on the government’s assets and for and report on public assets in financial statements. liabilities in the annual consolidated statements produced by the Treasury General of the Union. 82 Overview of Public Chapter V:  Financial Management While it is acknowledged that PFM systems play an important role in the implementation of the fiscal policy and to improve fiscal performance, Comoros most recent PFM assessment (in 2016) finds several issues in this real of public governance. This chapter aims at reviewing progress to improve the PFM system between 2016 and 2022. It finds that the country’s PFM system is not sufficiently adequate to effectively implement government policies, and the overall system has not been improved between 2016 and 2022. Challenges facing the country’s PFM system at different stages of the budget cycle include the facts that: (i) budget transparency and credibility are low; (ii) control over budget execution is insufficient, and budget risk management is not adequately assessed; (iii) budget execution monitoring reports do not present the required level of depth and are not publicly disseminated; and (iv) there is a need to increase the autonomy of the Supreme Audit institution, and to ensure that issues (reported by SAI) are addressed. In Comoros, PFM is organized by the LOFE 2012 and implemented under the coordination of the Ministry of Finance. Between 2016 and 2022, government financial operations were regulated by LOFE 2012 (LOFE - Loi des operations financières de l’Etat 2012). The Ministry of Finance, Budget and Planning is responsible for PFM, and it proposes revisions to fiscal policy and ensures its implementation according to the approved budget law. The draft budget law, prepared under the supervision of the Ministry of Finance, is shared (in hard copy or electronically) with all credit administrators and the chief financial officers of all ministerial departments and public institutions. Following the constitutional reforms of July 2018, a new LOFE was promulgated in August 2022, but it has not yet been implemented, which is why it is not discussed in this PER. The country’s PFM system is not sufficiently adequate to effectively implement government policies, and the overall system has not been improved between 2016 and 2022. Challenges facing the country’s PFM system at different stages of the budget cycle include the facts that: (i) budget transparency and credibility are low; (ii) control over budget execution is insufficient, and budget risk management is not adequately assessed; (iii) budget execution monitoring reports do not present the required level of depth and are not publicly disseminated; and (iv) the draft Settlement Law is transmitted late to the Accounts Section of the Supreme Court and in a fragmented manner. Between the completion of the 2016 Comoros PEFA assessment and April 2022, PFM has not improved in Comoros. For example, transparency in PFM deteriorated significantly, and the Ministry of Finance did not have an operational website in 2016–22 that the public could use to access relevant fiscal and budget information. The assessment presented in this chapter provides detailed information on the status and changes in different PFM components by using the 2016 PEFA framework as reference, and it is based on documents received from the authorities and discussions held during a virtual mission held on February 14–25, 2022. This chapter is organized into seven sections to cover selected parts of the PEFA framework (PEFA 2016). Sections 1 and 2 deal with budget reliability and transparency of public finances, respectively; Section 3 provides some insights into the management of public assets and liabilities; Section 4 covers issues related to policy-based fiscal strategy and budgeting; and Section 5 deals with predictability and control in budget execution. Finally, Section 6 assesses issues related to accounting and reporting, while Section 7 evaluates procedures related to external scrutiny and audit. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter V: Overview of Public Financial Management 83 V.1 Fiscal Transparency Can Be Improved As… » …Budget Classifications Could Be Enhanced to Provide Adequate Level of Information Comoros’ budget classification and reporting in the budget law does not provide the adequate level of information to support an efficient design and implementation of fiscal policy. While the country has both functional and economic budget classifications, the draft and approved budget laws present shortcomings that could undermine the government’s capacity to adequately allocate resources and monitor budget execution. The draft and approved budget laws present expenditures organized by economic and administrative classifications, revenues and expenditures are only presented at an aggregated level, and budget allocations are not organized by the Classification of the Functions of Government (COFOG). In addition, the budget follows a very succinct economic classification framework, with little information on the nature of expenditures beyond a set of title categories for the operating budget and an overall budget line for the domestic investment budget. While the authorities have launched a reform to comply with international classifications, there has been limited progress in improving budget classification and reporting. Decree 09-084 of July 20, 2009, on the budget nomenclature was revised in 2013 to include functional, geographic, and programmatic classifications. However, its implementation has been delayed due to capacity and coordination constraints and the lack of deployment of the integrated financial management system (SIMBA). As a result, there is information missing in draft and approved budget laws and their related decrees. Individual sources of tax revenue representing all revenues from taxes (e.g., income, profit and capital gains tax revenue, goods and services tax revenue, and revenue from international trade tax and excise duties) are not presented in the published budget law. There are also no details on non-tax revenues such as estate income, financial and privatization proceeds, corporate income, budgetary aid, grants, and other sources of funding. » …There is Need to Prepare Additional Budget Documents to Support the Budget Law Consideration There has been no change in the completeness of budget documentation accompanying the draft budget. The draft law transmitted to the National Assembly is accompanied by an explanatory memorandum, a budget presentation note, and 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). Details on financing are not provided in the budget documentation transmitted to the Union Assembly. There are also several shortcomings in the budget documentation that supports the (draft) budget law. The budget law presents information on domestic and external debt service, debt amortization for year N+1, and the amount of interest, but it does not indicate the total amount of debt or the level of new borrowing. Moreover, multiyear expenditure estimates are not presented, and information on financial assets is not presented in any of the documents transmitted to the Assembly. There is a budget law annex that presents detailed information on revenues and expenditures, which is transmitted to Parliament before enactment, but it is not published with the budget law. The format of the budget execution law is not always consistent with the format of the approved budget law. Finally, information on future commitments and the long-term sustainability of public finances is not presented in the budget law. In the draft budget law, only a few estimates of some sources of financing for the overall balance are presented. The financing to be sought often remains significant, as reflected in the 2020, 2021, and 2022 budget laws, and exact sources of financing are not identified. Estimates of donor aid are not always indicated in the PLF because of 2022 COMOROS 84 Chapter V: Overview of Public Financial Management PUBLIC EXPENDITURE REVIEW the lack of integration of aid from technical and financial partners into the national budget framework. In most cases, the amounts are not known, and the information varies greatly from one document to another. This also explains the lack of credibility of the budget during its execution. The Comoros’ Development Assistance Database, which was financed by the United Nations Development Programme and the European Union in 2011 and has been partially updated by donors since 2013, is no longer operational, and no other platform has been set up.38 » …Central Government Operations Outside Financial Reports Are Needed to Enhance Budget Analysis The table of government operations and the budget acts have not presented extrabudgetary operations since 2016. The published budget law only includes operations of the general budget. The draft budget law also presents the amounts of the special accounts, but the explanatory memorandum makes no reference to their execution and includes no narrative discussion. For example, a share of the Internal Tax on Petroleum Products (Taxe Intérieure sur les Produits Pétroliers), which is earmarked for road maintenance, is not accounted for in the annual financial statements. Budget laws allocate transfers to several funds, such as the Road Maintenance Fund, the Natural Disaster Risk Reduction Fund, Fonds de Consolidation des Acquis Démocratiques, and the health sector counterpart funds. However, the execution of expenditures from these funds is not recorded in the annual financial statements. In particular, the Road Maintenance Fund, which is also used for government consumption and military maintenance, is not accounted for in the annual financial statements. » …Enhanced Public Access to Fiscal Information Is Needed to Build Trust Budget transparency, which was already low in 2016, has further deteriorated. There has been a clear regression in transparency since 2016, mainly due to the poor state of several websites such as the Ministry of Finance’s website and more recently the website of the tax authorities. Comoros scored 0/100 in the latest Open Budget Index (OBI) assessment, a deterioration compared to the previous assessment (4/100). As of April 2022, the 2018 Budget Law, Ordinance No. 19-001/PR on the State Budget for 2019, and Decree No. 21-146/PR promulgating Law No. 21-025/AU of 28 December 2021 on the 2022 Budget Law can be found on the customs’ website, but the decrees that promulgate the 2020 and the 2021 budget laws are not available. Until 2016, the quarterly budget execution reports, as well as the annual report of the Islands and the Union, were published on the website of the Ministry of Finance. Since the Ministry of Finance's website is no longer in use, no budget execution monitoring reports are published. However, execution and annual reports are still available within the Ministry of Finance. Information on the different steps of the budget cycle is incomplete, and none of the reports produced by the public administration are accessible to external stakeholders. This includes the reports of the Accounts Section on budget execution. Most public administrations, including the Ministry of Finance, did not have a website in 2016-22 (only the customs and tax administrations currently have functional websites).39 As a result, neither civil society nor the population has easy access to information on how the State manages its budget. An annex to the draft budget law presents revenues and expenditures in detail, as well as the debt repayment schedules, but it is not published. Furthermore, revised budget laws are not published, even after their enactment. Most recently, the 2021 revised budget law was not published after its approval, while the 2022 approved budget law was not available on a government website, although some elements 38 http://dad.synisys.com/dadcomoros (Not operational). 39 https://www.agid.gouv.km/fr/index.php and https://douane.gov.km/fr/ (Accessed on April 21, 2022). ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter V: Overview of Public Financial Management 85 were available on an external foreign website.40 Quarterly and annual execution reports have not been available to external stakeholders for six years in a row. V.2 There is a Need to Prepare Fiscal Risk and Public Asset Management Report Fiscal risks are not reported and measured in Comoros. The 2012 Law on Government Financial Operations does not require the central administration to prepare a report on fiscal risk that would be included in the supporting documentation of the draft budget law. Such a report has never been annexed to a draft budget law. Risks related to external exogenous factors are sometimes referred to in the government financial reports, but the main contingent liabilities are not assessed. The government does not publish a report on public asset management.41 Asset accounting has never been implemented within the government, and public assets are not accounted for in the draft laws of regulation produced by the MFBSB. Excluding the BCC, which produces an annual balance sheet, public institutions do not publish information on public assets. For the central administration, some information on various public assets can be found in the BCC's annual report. V.3 Better Forecasting and Enforced Budget Processes Are Required to Design an Adequate Policy-Based Fiscal Strategy » Developing Robust Macroeconomic and Fiscal Forecasts and Medium-Term Expenditure is Needed for Budgeting The government does not produce robust macroeconomic Real GDP Growth: Budget Law Projections Figure 72.  and fiscal forecasts that could support a sustainable vs. Recorded, 2016–21 fiscal strategy and efficient budget allocation. Comoros percentage points has not yet set up a macroeconomic framework committee 5 that would bring together several stakeholders to prepare 4 macroeconomic forecasts. As a result, the country does not produce macroeconomic projections for the budget 3 year or for the two following fiscal years, and macro-fiscal 2 sensitivity analyses are not performed. LOFE 2012 requires the preparation of an economic programming document 1 with a multiannual budgetary plan, which has not 0 prepared. Comoros has still not despite training provided -1 by the World Bank, Comoros does not use a comprehensive 2016 2017 2018 2019 2020 2021 macro-fiscal model to perform an analysis and inform the J Projected real GDP growth - Budget Law J Real GDP growth - INSEED Source: World Bank staff calculations based on data from INSEED and Budget budget law. For instance, in budget law documentation Laws. (assumptions), the government only provides real GDP growth for the projected years, and there are significant differences between observed and projected rates (Figure 72). 40 http://www.droit-afrique.com/pays/comores/#documentation (Accessed on April 21, 2022). 41 This remains unchanged from what the team observed in 2016. 2022 COMOROS 86 Chapter V: Overview of Public Financial Management PUBLIC EXPENDITURE REVIEW The explanatory memorandum, which is annexed to the draft budget law that is sent to Parliament, presents political orientations that underpinned the preparation of the draft budget law. It gives some information on how the proposed budget relates to the government's budget policy objectives. However, it does not include a sensitivity analysis, and the budget proposals do not provide details on how the new policy proposals will affect revenues and expenditures. Moreover, there is no information on public policies intended to directly benefit the country's poorest households. For example, humanitarian partners responded quickly with emergency aid in the aftermath of Cyclone Kenneth, and the Directorate of Civil Security helped in the distribution of foreign aid. It was not clear, however, to which extent the needs of the most vulnerable were met.42 » Enforcing Budget Preparation Processes Could Result into an Effective Participation of Relevant Stakeholders There is a budget calendar that has been institutionalized but not implemented. The budget calendar is set by Order No. 15-037/VP-MFEBICEP/CAB of 01/07/2015, which establishes the timetable for the budget process. According to this timetable, the preparation of the macroeconomic fiscal framework and the economic programming document with the multiannual budgetary plan should be carried out between April 1 and 15, and ceilings should be shared with the budget units during this period, so they can adequately prepare and present their detailed estimates. However, in practice, the MFBSB prepares the budget and sends the budget circular only around September to institutions, sectoral Table 8.  Transmission Dates of Budget Circular to ministries, and island governors (Table 8). The budget Prepare the Budget Law circular, which should be sent in April, does not mention Budget Law Dates sectoral or ministerial ceilings and only provides selected Budget Law 2018 12 September 2017 recent macroeconomic forecasts. It is the only document Budget Law 2019 29 August 2018 that is used to support the draft budget law. Before the Budget Law 2020 7 September 2019 new constitution, the ceilings are discussed at budget Budget Law 2021 7 September 2020 conferences held between representatives of the union Source: MFBSB. government and the Finance Ministries of the Islands just before sending the draft budget to Parliament. There has been limited participation of external stakeholders in Comoros’ budget preparation process. There is no independent institution in charge of budget analysis in the country, and there is no legal requirement that the government needs to establish a mechanism to ensure public participation in the budget preparation or execution process. The executive has not taken concrete measures to incorporate vulnerable/underrepresented individuals or organizations into the preparation of the draft budget law. For the preparation of the 2022 budget, the minister of finance organized a workshop to present the main features of the budget bill.43 However, the workshop only included a presentation of the draft bill and a debate instead of a process foreseen by the budgetary calendar, and it was also held very late, just before the finance bill was sent to Parliament. 42 IMF 2019 article IV consultation—staff report. June 2020. 43 The main features of the Draft budget 2020 was presented on October 28, 2019, and the Draft Budget 2022, which was presented on November 6, 2021, was also presented to economic operators, the civil party, and members of liberal professions. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter V: Overview of Public Financial Management 87 » Legislative Scrutiny of Budgets Could Be Improved with Enhanced Budget Documentation and Consultations The annual budget proposal is generally submitted to Parliament 60 days before the end of the calendar year. The October parliamentary session is used to analyze the budget proposal. The budget proposal should be submitted to the General Secretariat of the Assembly before it opens on the first Friday of October. If the deadline is met, Parliament would have 90 days to examine it. However, the government is allowed to send the budget proposal any time before October 30 (Table 9). In most cases, the proposal is sent just before the deadline, and Parliament has about 60 days to consider the annual budget proposal. Table 9. Dates for Transmitting the Budget to Parliament and Approval Budget Law Transmission Dates Approbation Dates Budget Law 2018 25 December 2017 Budget Law 2019 30 October 201844 5 January 2019 (ordinance) Budget Law 2020 2 January 2020 (ordinance) Budget Law 2021 16 December 202045 Source: MFBSB. Budget law proposals have been submitted according to existing regulations during the past five years, excluding the years 2019 and 2020 during which the budget laws were promulgated by ordinance. The 2016–2018 budget proposals followed existing regulations (LOFE 2012) and were voted on before the end of the year. However, the 2019 and 2020 draft budgets were sent to Parliament by October 30, but members of parliament refused to examine them because they were not accompanied by the reports of the Accounts Section on the execution of the previous year’s budgets. As a result, the 2019 and 2020 budgets were promulgated by ordinance. Parliament has certain prerogatives to adjust the budget, including the ability to reallocate resources to programs it deems insufficiently funded. For instance, the legislature has used its authority to: (i) amend the 2018 executive's budget proposal; (ii) review the distribution of the single administrative fee; (iii) integrate the PIP into the budget; and (iv) refuse to increase the customs duty on cement. However, the minutes of these meetings are not available on any website. In addition, according to Article 60 of LOFE, "No additional article, no amendment to a finance bill may be proposed by the Union Assembly, except if it tends to eliminate or effectively reduce an expenditure, to create or increase revenue. Similarly, the Assembly may not propose the creation or abolition of a programme, a subsidiary budget, or a special Treasury account.” This is a classic restriction that can be found in several African countries. The budget proposal is only reviewed by Parliament’s finance committee, and there is no formal mechanism for citizens to provide their views during the budget preparation and approval process. The draft budget proposal is not examined by sectoral committees. The finance committee of the National Assembly also reviews amendments tabled by some members of parliament, but it does not publish a report containing its conclusions and recommendations before the budget is submitted to the main floor for adoption. There is also no formal mechanism for citizens to participate in budget discussions. On rare occasions, a body such as the Citizens' Initiative for Budget Transparency has been able to observe the work of the finance committee, but only as an observer, without a previously established procedure or mechanism. 44 http://lagazettedescomores.com/economie/finances-publiques-/-chayihane-%C2%AB-le-projet-de-loi-de-finances-2019-a-%C3%A9t%C3%A9-soumis-dans- les-d%C3%A9lais-%C2%BB-.html. 45 https://lagazettedescomores.com/politique/la-loi-de-finances-2021-adopt%C3%A9e-%C3%A0-l%E2%80%99unanimit%C3%A9-.html. 2022 COMOROS 88 Chapter V: Overview of Public Financial Management PUBLIC EXPENDITURE REVIEW V.4 Predictability and Control in Budget Execution Could Be Improved by… » …An Enhanced Predictability of In-Resource Allocation While the government uses a TSA hosted at the BCC, it is not effective to support cash management, and the Ministry of Finance does not have an accurate picture of potential accounts held outside the public accounting system. The TSA was created in 2015, and there is a convention between the BCC and the Ministry of Finance. Although all government operations, except those related to foreign financed projects, are channeled through the TSA, this is not the case for transactions relating to extra-budgetary entities and public administrative bodies. The Ministry of Finance should request the opening of all public accounts before they can be opened at the BCC. However, the public accounts and treasury directorate at the Ministry of Finance has reported that public entities are still opening accounts in commercial banks, and there are sub-accounts under the TSA that are created without informing the public accounts and treasury directorate. Without centralization and ensuring that this directorate has an exhaustive list of accounts, the Ministry of Finance does not have accurate information on its liquidity daily. SAI has noticed that account balance reconciliation was not performed by the treasury directorate before sending the budget execution law to the Supreme Court for its review. Finally, there are substantial differences between revenues reported by different entities such as AGID and the Treasury in 2017 (Ref. SAI Report on Budget Law 2017, p. 31). The coverage of the TSA could increase as soon the authorities have adopted a roadmap to extend its coverage to all transactions related to extra-budgetary entities, public administrative bodies, and foreign-funded projects.46 The is no cash management plan in Comoros and there is no official cash management committee. The country’s stock of arrears is underestimated and not regularly reported. The government recorded a stock of salary arrears (civil servants and contractual staff) equivalent to KMF 4.6 billion (about 0.9 percent of GDP) at end-2020, which was accumulated between 1991 and 2020. However, there is no specific account of arrears to suppliers, domestic debt, or social contributions. The monitoring of expenditure arrears is carried out by the Public Accounts and Treasury Directorate (Direction du Trésor et des Comptes Publics), while external debt service arrears are monitored by the debt directorate, with support from an information management system. The independent commission that was set up to carry out arbitration is not yet operational, and there is a need to reconcile all the available information on arrears issues, an audit has been commissioned by the authorities. The results of the audit are expected by end-2022 and will inform a clearance strategy. » …A Strengthened Public Procurement Function The Comorian legislative framework provides for the separation of the functions for the award, a priori control, and regulation of public contracts. The management of public contracts is governed by Law 11027/Au on the award of public contracts and delegation of public services of December 2011. Implementing Decree n°12-131 of May 31, 2012, established the main bodies responsible for regulating, awarding, and the control of public contracts as well as for the delegation of public services, namely: (i) the market management units and delegation of public services (cellules de gestion des marchés et délégation de services publics); (ii) the DNCMP for a priori control; and (iii) ARMP for a posteriori control, in which a tripartite (but not equal) representation of the administration, the private sector, and civil society is provided for. Decree No. 12-198 of October 12, 2012, also allowed for the appointment of ARMP's permanent secretary. 46 https://www.imf.org/-/media/Files/Publications/CR/2022/French/1COMFA2022001.ashx. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter V: Overview of Public Financial Management 89 Comoros’ public procurement function remained weak between 2016 and 2021, as procurement institutions (whose mandate needs to be strengthened) did not have adequate resources. The country’s institutional framework for public procurement has not become operational, as neither the DNCMP nor ARMP have had sufficient prerogatives and means of operation. ARMP and DNCMP staff have not been sufficiently trained to carry out the validation of procurement documents (DNCMP) or to audit and carry out the ex-post review of procurement processes (ARMP). For instance, there is no exhaustive history of contract awards during this period because the DNCMP had not set up a centralized database, and the archives disappeared with each change of government. The information provided by the DNCMP between 2017 and 2020 is incomplete (only a few contracts were recorded) (Table 10). Furthermore, exceptions to open tenders must be justified in accordance with the CMP. However, the DNCMP was unable to provide reasons explaining the non- recording of contracts by direct agreement between 2018 and 2020, even though this is common practice in Comoros. For example, the audit report of the Accounts Section of the Supreme Court on Société Comorienne des Hydrocarbures (SCH) highlights a contract worth KMF 100 million that was awarded without a procurement plan or call for tenders, which is contrary to Article 62 of the decree implementing Law No. 11027/AU of December 29, 2011, on the award of public contracts and delegation of public services.47 Table 10. Public Procurement Contracts, 2017–20 KMF million Direct agreement Restricted tender Open tenders Years Number Amounts Number Amounts Number Amounts 2017 1 57.56 3 11.56 3 59.81 2018 - - 2 296.06 1 129.30 2019 - - 2 363.96 1 85.45 2020 3 n.a. 7 543.42* Source: DNCMP. Note: *This amount relates to only two contracts. The amount of the other contracts is not available. In addition, there is a need to fully assess SOEs’ procurement practices because they are also subject to the CMP. Results from audits performed by the Audit Section of the Supreme Court between 2018 and 2019 show weaknesses in procurement procedures carried out by the SCH.48 They revealed, among other things, the absence of tender documents, proof of submission and award of contracts, and published contract notices, as well as the failure to transmit the provisional award of contracts to ARMP. Moreover, annual procurement plans, and tender notices are generally not produced. Instead of using the open tender procedure, which is the rule, contracts are often awarded by direct agreement. There is no available information on the procurement complaint system. ARMP does not provide any information on the outcome of procurement complaints, which are not published on any website. While it was planned for 2016, the website of ARMP was never developed. ARMP's CRD, which is responsible for receiving complaints of irregularities from stakeholders, has dealt with several appeals from bidders after its establishment. However, no decision on the complaints has been provided by ARMP in recent years. The DCMP does not have a website, but an e-procurement solution has been prepared with the support of the World Bank. A procurement law that makes provisions for the digitalization of procurement transactions has been promulgated in October 2022 but it has not yet been implemented. During the next three years, additional activities will be carried out to deploy the system within different public administrations. 47 Final audit report on SCH. Section des Comptes de la Cour Suprême - March 16, 2020. 48 Idem. 2022 COMOROS 90 Chapter V: Overview of Public Financial Management PUBLIC EXPENDITURE REVIEW » …Better Internal Control of Non-Salary Expenditure Budget execution is not adequately controlled and monitored because of an ineffective use of the IFMIS across administrations. While Comoros has had an IFMIS (SIMBA) since 2016, the system does not process all expenditures. It reduces the administrative capacity to have a consolidated budget of the Union of the Comoros as well as that of each of its constituent entities (i.e., central administration of the Union, Ngazidja, Anjouan, and Mohéli), thereby limiting their capacity to effectively control budget execution. A data collection mission in Anjouan, Moheli, and Ngazidja in March- April 2022 revealed that government financial operations had not been recorded in SIMBA since 2019 in Anjouan and Ngazidja, while some records exist in the Moheli system for the period 2016–21. As a result, budget execution reports are produced based on data that are unreliable and contain many errors. Moreover, when budgeted expenditures are executed using SIMBA, their payment by the Treasury is rarely implemented through the IFMIS, and available data are only reported up to the payment order stage. The government’s internal control function is weak, Figure 73.  Virements and Transfers as a Share of as evidenced by both the level of expenditures paid Approved Budget, 2016–20 outside the regular approval process and the changes percentage points made in the budget. LOFE 2012 allows transfers and 50 virements, provided that they remain within 10 percent of 40 the approved budget (appropriation), and those changes are approved by the financial controller. However, 30 between 2016 and 2020, the internal control function always approved changes to the budget that were above 20 the 10 percent limit in non-exceptional circumstances, although the changes in 2019 could be explained by 10 the emergency posed by Cyclone Kenneth (Figure 73). 0 In addition, end-year paid expenditures (recorded by 2016 2017 2018 2019 2020 the Treasury) averaged 48 percent in 2017–18, above J Virements J Transferts  Limit (LOFE, 2012) Source: World Bank staff calculations based on data from SAI reports the level (payment order stage) recorded by the budget (2016–20). directorate. This could mean that the Treasury executed payments outside the regular budget execution procedure, with the aim to eventually regularize expenses. While the end-year difference between payment orders and paid expenditures declined to 5 percent in 2020, the overall issue of the strict adherence to LOFE 2012 may remain an issue. » …The Establishment of an Internal Audit Function No adequate internal audits have been performed in Comoros. In the absence of internal procedures, the General Inspection of Finance (IGF) was not able to verify the quality and compliance of internal controls applied by the financial services of both the Union and the Islands. An internal audit charter has been put in place in all ministries to prescribe modern internal auditing methods, and internal auditors have been trained with financing from donors, particularly the African Development Bank. However, appropriate structures have not been put in place, and no internal audits are performed. Moreover, the IGF does not appear in the new organigram of the MFBSB. Most of the IGF’s inspections of the central administration have not been satisfactory. In 2017, the IGF presented a preliminary report on the University of the Comoros to the president of the Republic, and it revealed that it was inspecting other public entities, including Moroni Terminal, Autorité portuaire des Comores (APC), Japanese donation (rice), Office nationale d’importation et de Commercialisation du riz (ONICOR), AMPSI, and Anacem. However, no further information ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter V: Overview of Public Financial Management 91 about IGF activities has been disclosed. The IGF sent its reports to the MFBSB and the president but did not disclose them to the public. More importantly, it did not produce any annual report on its activities, and the internal audit was not monitored by SAI. It is therefore impossible to know which ministries and public entities have been inspected, what were the conclusions of the audits, and whether auditees took remedial actions in response to the recommendations. V.5 Standardization and Exhaustiveness Are Needed for Better Accounting and Reporting » Uniform, Comprehensive, and Accurate In-Year Budget Reports are Critically Needed While only produced for internal consumption, budget execution monitoring reports do not follow a uniform presentation over time, and they are neither comprehensive nor accurate. Data presented in quarterly budget execution monitoring reports, which are produced by the General Directorate of Budget (Direction Générale du Budget), show revenues by category and expenditures by economic or administrative classification at an aggregated level. Domestic revenue sources and grants are reported in the fourth quarter report, but external and domestic borrowing data are not reported. Executed expenditures are reported at the payment order stage, and while the share of government transactions processed outside the normal expenditure approval process is significant, it cannot be determined due to lack of data. Quarterly and annual budget reports generally compare actual expenditures under the revised budget law instead of the initial budget law, hampering a complete analysis of budget execution. Moreover, the structure of the reports is not consistent from one year to the next. For instance, the 2018 budget execution report presents only executed amounts and the rate of execution of expenditures against the 2018 revised budget law by economic classification for each public entity, but it does not present budget execution data by administrative classification. The 2019 report presents a cross- tabulated matrix showing forecasts in the LFR and actual expenditure by ministry and major economic category. The 2020 report presents forecasts and actual expenditure by economic and administrative classification, albeit in separate tables. » Annual Financial Reports Reflect Shortcomings Observed on In-Year Reports, and Lack Additional Information Annual budget reports suffer from similar shortcomings to those of quarterly execution reports, and they lack additional information and display some data inconsistency. Indeed, data produced for various reports (e.g., budget execution reports, data transmitted by the General Directorate of Budget, IMF reports, and the report of the Accounts Section of the Supreme Court) are not consistent across reports. There are also no estimates of the difference between planned and actual expenditure dedicated to directly supporting the poorest population, nor are there data on the differences between the initial estimates and executed transactions related to extra-budgetary funds. Finally, annual reports are sometimes labelled ‘performance reports,’ but they do not contain performance indicators, as program budgeting has not yet been implemented. While national legislation on reporting is consistent with international standards, budget execution laws (draft and approved) do not represent consolidated annual financial statements. National legislation requires that the execution budget law of year N-1 is presented to Parliament with the budget proposal (draft law) of year N+1, as well as SAI report on the budget execution in N-1. However, the budget execution law (2018-2019 draft and 2020 approved) does not contain information on financial and tangible assets, guarantees, and long-term obligations. Data on arrears or extra- 2022 COMOROS 92 Chapter V: Overview of Public Financial Management PUBLIC EXPENDITURE REVIEW budgetary accounts, which are recorded and monitored on spreadsheets, are not mentioned either. Finally, there are inconsistencies between the data produced by the Treasury and the administrative accounts. These inconsistencies are highlighted each year in the external audit report on budget execution, and they can be explained by the fact that the General Directorate of Public Accounts and Treasury (Direction Générale de la Comptabilité Publique et du Trésor) does not consolidate the accounts managed by different public entities before transmitting information to SAI. V.6 Increasing the Autonomy of the Supreme Audit Institution is Needed External audits are performed by SAI, but its governing law is not consistent with the 2018 Constitution. Organic Law 05-012/AU of 27/06/2005 of June 2005 on the Supreme Court was abolished by Ordonnance No. 19-003/PR of October 2019. This ordonnance, which organizes the Supreme Court, including the Account Section that has the mandate to perform the external audit of public finances, public enterprises, and public establishments, is, however, not consistent with 2018 Constitution, which requires Comoros to adopt an organic law to govern the Supreme Court. SAI faces challenges to perform audits because financial reports from some public entities are either not submitted or are transmitted after the legal deadline. In its external audit report, SAI stressed the reluctance of some Islands to provide their management accounts and their failure to comply with audit deadlines and produce reports in an inappropriate format. For instance, for the preparation of the external audit report on the 2018 Budget Law, SAI reported that the management accounts of both Anjouan and Moheli were not transmitted. For the 2019 Budget Law, SAI started receiving financial reports on June 11, 2020, while the legal deadline was May 31, 2020.49 This may explain the adoption of the 2018 and 2019 budget laws by ordinance, as Parliament did enact the related budget proposals, which were submitted without the draft budget execution law and the external audit report of the previous fiscal years. The 2021 Supreme Audit Institution Independence Index Figure 74.  Supreme Audit Institution Independence (SAI-2I) shows that the SAI constitutional framework, Index, 2021 transparency in the process of appointment of the index head of SAI, financial autonomy, and staffing present 10 9 weaknesses. Comoros has a low score of only 4/10 in this 8 index and ranks 101st out of 122 countries assessed. On 7 6 the positive side, Comoros performs well on two indicators: 5 SAI to decide on the audit scope, and right and obligation 4 3 on audit report. However, Comoros SAI-2I is lower than 2 the SSA average (Figure 74), and 31 SSA countries are 1 0 ahead of Comorosm, while Comoros is only above five SSA Rw i s a ea os e ci e ti e da & Sao ge in lle ric ag rd in om ou pe or a in countries. The key driver behind this low SAII performance at an Ve er he er Af ib Pr T Gu w m av av Dj yc Es h bo Co ut Se A ld is explained by weak or low: constitutional framework, Ca SS So or W transparency in the process of appointment of the head Source: World Bank (2021). Supreme Audit Institutions Independence Index 2021 Global Synthesis Report. EFI-Insight Governance. Washington DC: of SAI, financial autonomy, and staffing. While there is no World Bank. data on the budget of the Accounts Section of the Supreme Court, the total executed budget of the Comorian Supreme Court was KMF 532.6 million (equivalent to US$1.1 million) in 2020. It shows that the Accounts Section’s budget is likely below the projected budget (US$2.18 million) based on the average of global benchmarks’ (European Union, United States of America, United Kingdom, and South Africa) budgets per capita. To improve the financial autonomy and staffing, the Government could take stock of the global experience (Box 4). 49 The provisions of Article 64 of Law No. 12-009/AU of 21 June 2012 stipulate that, “For the purpose of drafting the budget execution law, the General Finance Administration Account (GFAA) shall be produced no later than the end of May of the year following the year of execution of the budget to which it relates.” ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter V: Overview of Public Financial Management 93 Box 4. Global Experience on SAI Financial Autonomy and Staffing  he International Organization of Supreme Audit Institutions (INTOSAI) has issued two documents that are T internationally accepted as reference points for Supreme Audit Institutions Independence: The Lima Declaration of 1977 and the Mexico Declaration of 2007.  The financial independence Section II, subsection #7 of the Lima Declaration states three key points: › Supreme Audit Institutions shall be provided with the financial means to enable them to accomplish their tasks. › If required, Supreme Audit Institutions shall be entitled to apply directly for the necessary financial means to the public body deciding on the national budget. › Supreme Audit Institutions shall be entitled to use the funds allotted to them under a separate budget heading as they see fit.  he Mexico Declaration expands on the Lima Declaration and highlights key principles regarding SAI Independence. T The eight-pillars state that SAIs must have “Financial and managerial/administrative autonomy, and the availability of appropriate human, material, and monetary resources.” › SAIs should have access to sufficient and reasonable human, material, and monetary resources—the Executive should not control or direct the access to these resources. SAIs manages their own budget and allocate it appropriately. › The Legislature or one of its commissions is responsible for ensuring that SAIs have the proper resources to fulfill their mandate. › SAIs have the right of direct appeal to the Legislature if the resources provided are inadequate to allow them to fulfill their mandate. I n the United States of America, the Government Accountability Office (GAO) determines its own budget and requests its directly from the US legislative (the request goes to the Subcommittee on Legislative Branch, Committee on Appropriations, in both the House of Representatives and Senate).a A similar procedure exists in Spain, Belgium, Czech Republic, and other European Union countries. However, in South Africa, the Audit General determines their own budget. Then, to generate income they charge government institutions for the audits. Several public entities are mandated to perform an annual audit by the South African law, and it guarantees the SAI income.b a. https://www.gao.gov/assets/gao-22-900397.pdf (Accessed in August 2022). b. https://www.gov.za/sites/default/files/gcis_document/201409/a25-04.pdf (Accessed in August 2022). 2022 COMOROS 94 Chapter V: Overview of Public Financial Management PUBLIC EXPENDITURE REVIEW V.7 Policy Options Table 11. Policy Options to Improve Public Financial Management Short-term measures (Less than 2 years) Medium-term and long-term measures (2+ years) D. Overview of Public Financial Management D.1. Budget reliability › Develop or acquire an integrated macroeconomic › Build the staff capacity to prepare budget proposals forecasting model to prepare a medium-term fiscal across administrative units. framework. (P) › Prepare a medium-term expenditure (budget) framework. (P) D.2. Transparency of public finances › Revise the presentation of the budget proposal and the › Include in the budget documentation (of the budget enacted budget law by including detailed information proposal) the following elements: quantification of on: (i) expenditures and revenues at level two of the tax expenditures; documents on the medium-term GFS classification; (ii) deficit financing; (iii) debt stock fiscal forecasts; a document presenting implications (for the current fiscal year); and (iv) special accounts. of new policy initiatives and major public investment on revenues and expenditures; more substantiated › Publish the following documents: annual executive and detailed macroeconomic assumptions; and special budget proposal; enacted budget law; in-year execution reports on SOEs and extra-budgetary entities. report; annual budget execution report; and the SAI report on the annual financial report. D.3. Management of assets and liabilities › Prepare a register of fixed assets to identify them, record their use, and plan investment and maintenance expenditures. › Prepare a fiscal risk report. D.4. Policy-based fiscal strategy and budgeting › Enforce the annual budget calendar to give budget units more time to prepare the budget proposal. (P) › Issue budget circulars that contain ceilings for administrative or functional areas as well as ministry ceilings for the entire upcoming fiscal year. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter V: Overview of Public Financial Management 95 Table 11. Policy Options to Improve Public Financial Management Short-term measures (Less than 2 years) Medium-term and long-term measures (2+ years) D.5. Predictability and control in budget execution › Perform a census of public bank accounts held by › Establish a cash management committee to approve commercial entities. (P) annual and monthly commitment and cash plans and avoid the occurrence of arrears. › Close public bank accounts held outside the PFM system, and reconcile balances. (P) › Prepare aggregated commitment and cash plans as high-frequency documents that are updated quarterly. › Review the institutional framework governing the opening of public bank accounts in commercial banks › Prepare and publish quarterly procurement plans. to identify loopholes. (P) › Issue regulation on the preparation of annual and › Prepare a roadmap to increase the coverage of the TSA. quarterly procurement, commitment, and cash plans by spending units. › Perform an audit of domestic arrears › Establish a cash management technical team to prepare › Allocate the necessary investment and capacity building documents for the cash management committee and resources to fully operationalize SIMBA—the IFMIS—as execute the committee’s decisions a tool for budget execution › Issue regulation requiring all expense payments to be › Revise the workflow procedure and the administrative made after their approval in SIMBA, with identified and organization of the DNCMP to better align to the few exceptions deployment of the e-procurement system › Deploy the e-procurement system › Limit virements and transfers to the level set by LOFE 2012 by empowering the internal control department. › Issue public finance regulations that would strengthen the role of public procurement functions in budget › Issue the bylaw related to the procurement law execution promulgated in October 2022. (P) › Operationalize the regulation requiring the prior approval of the directorate in charge of the control of public procurement related to goods and services before awarding contracts and executing payment orders › Prepare aggregated commitment and cash plans as high-frequency documents that are updated monthly. › Prepare and publish monthly procurement plans. › Issue regulation on the preparation of annual and monthly procurement, commitment, and cash plans by spending units. D.6. Internal audit, external scrutiny and audit › Create an internal audit function and allocate adequate › Enact a new law that will govern the SAI and strengthen resources for its operation. (P) its independence › Prepare and disseminate citizen budget prior to the submission of the budget proposal to the parliament 96  ealth Expenditure Chapter VI: H Management The country’s health system faces enormous challenges. The population is expected to double within 30 years. Comoros’ Human Capital Index score is only 0.41, including due to high stunting rates. While child mortality has dropped and communicable diseases are declining, changing demographics have led to an increase in chronic diseases, which are costlier to treat. The analysis identifies five key issues. First, government health spending has increased and mainly finances hospital care and the health wage bill. Low budget execution for non-wage recurrent categories and a lack of transparency in spending contribute to high prices for patients. Second, the pharmaceutical program is underfunded and combined with weak procurement has resulted in high stockout rates for essential medicines and service disruption. Third, only half of health staff are on the government payroll, and more than half of them do not show up for work. Fourth, service use in public health facilities is extremely low, resulting in low staff productivity and high patient payments for treatment abroad and specialized care. Fifth, the government has embarked on a major reform to reconstruct the El Maarouf national hospital which would result into a substantial increase in health expenditures. Policy options are proposed based on these findings to ensure the efficient use of health resource and improve population health. Introduction This is the first World Bank PER of the health sector in Comoros. It responds to a request from the government for World Bank analytical support and advice on: (i) the effectiveness of health spending; and (ii) the government’s investment decision regarding the El Maarouf hospital. The old hospital was demolished in 2016, and the reconstruction of the new hospital is ongoing.50 Considering the fiscal impact and the possible effect on the health workforce and future operational expenditures, this chapter includes a detailed analysis of the hospital context. The analysis uses data collected by the government on health expenditures and health service use between 2017 and 2020. Data from the 2019 National Health Accounts (NHA) are used to identify spending by development partners and private sources. A detailed analysis is conducted of the health workforce and pharmaceutical supplies, given their importance for the new hospital and for public spending. VI.1 Comoros Has A Growing Population with a Changing Disease Burden Comoros’ population is expected to grow substantially, and life expectancy is set to increase. The country’s population of about 760,000 people in 2020 is expected to reach 1.4 million by 2050. About half of the population lives in Ile de Ngazidja (Grande Comoros), home of the capital Moroni, while 43 percent of people live in Ile de Ndzuwani (Anjouan) and 7 percent in Ile de Mwali (Moheli). Urbanization is expected to accelerate from 30 percent in 2020 to 41 percent by 2050.51 The population is young, as 39 percent of people were under the age of 15 in 2020 (Figure 75). Life expectancy is projected to increase from 64 years in 2020 to 69 years by 2050. With an aging population, age- related noncommunicable diseases (NCDs) such as heart disease, diabetes, and cancer will become more frequent. In addition, urbanization can be harmful to the health of the population, particularly for the urban poor, who often live in overcrowded areas and are exposed to environmental risks, violence, and traffic accidents. 50 Présidence de l’Union des Comores. 2016. Beit-Salam | El Maarouf : un nouveau Centre Hospitalier, Universitaire et moderne pour les Comores. 51 World Bank 2021a. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter VI: Health Expenditure Management 97 Figure 75. Comoros Population Pyramid, 2020 and 2050 A. Population in 2020 B. Population in 2050 age age 100 100 80 80 60 60 40 40 20 20 0 0 250 200 150 100 50 0 50 100 150 200 250 250 200 150 100 50 0 50 100 150 200 250 J Males J Females J Males J Females Source: United Nations 2019. The country’s human development outcomes are low. About 45 percent of the population lives below the national poverty line, adult literacy is low at 59 percent, and only 60 percent of children attend secondary school. Malnutrition is also a concern, with 31 percent of children stunted in 2012. Child marriage is high at 32 percent and contributes to high fertility rates and poor maternal health outcomes.52 The fertility rate is, however, expected to decline from 4 to 3 children per woman by 2050, due to better access to modern contraceptives and reproductive health care, a ban on child marriage, and increased opportunities for women.53 Because of the country’s poor human development outcomes, Comoros’ Human Capital Index score is only 0.41, suggesting that a child born today can expect to be only 41 percent as productive as a child benefitting from ideal education and health services. Comoros’ disease burden is already at a later stage of the epidemiological transition. By 2017, child mortality had dropped to 13 per 1,000 children, and infant mortality stood at 44 per 1,000 live births.54 The prevalence of communicable diseases, such as malaria, diarrhea, and respiratory infections, has been declining, and cases tend to be treated effectively in primary care settings. But changing demographics and a growing urban population have led to more NCD cases, including cancer and diabetes, and traffic accidents (Figure 76).55 The cost of traffic fatalities and injuries was estimated at US$90 million, or 8.8 percent of GDP, in 2016.56 Risk factors such as relatively high obesity rates (20 percent of the population) and unhealthy urban living are expected to accelerate this changing disease burden.57 Addressing these challenges is important through a strong health system in Comoros. The number of new COVID-19 cases has increased steadily. By December 2022, the Ministry of Health (MOH) reported 8,977 cases and 160 COVID-19-related deaths, although the actual number could be much higher. Comoros has administered 835,021 vaccine doses by October 2022 and fully vaccinated 37 percent of the population.58 52 World Bank 2020. 53 World Bank. WDI. https://data.worldbank.org/indicator/SP.ADO.TFRT?locations=KM. 54 Union des Comores 2022. 55 IHME Comoros. http://www.healthdata.org/comoros. 56 World Bank 2021. Comoros Road Sector Public Expenditure Review. 57 Ali et al. 2019. 58 World Health Organization, 2022. https://covid19.who.int/region/afro/country/km. 2022 COMOROS 98 Chapter VI: Health Expenditure Management PUBLIC EXPENDITURE REVIEW Figure 76. Top 21 Causes of Age-Standardized Deaths, 2020 and 2040 both sexes, age-standardized, deaths per 100,000 A. 2020 rank B. 2040 rank 1. Cardiovascular diseases 1. Cardiovascular diseases 2. Diarrhea/LRI/other 2. Neoplasms 3. Neoplasms 3. Diarrhea/LRI/other 4. Diabetes/urog/blood/endo 4. Diabetes/urog/blood/endo 5. HIV/AIDS & tuberculosis 5. Neurological disorders 6. Neurological disorders 6. Unintentional inj 7. Unintentional inj 7. Digestive diseases 8. Digestive diseases 8. HIV/AIDS & tuberculosis 9. Neonatal disorders 9. Chronic respiratory 10. Chronic respiratory 10. Neonatal disorders 11. Nutritional deficiencies 11. Cirrhosis 12. Cirrhosis 11. Transport injuries 13. Transport injuries 12. Nutritional deficiencies 14. Self-harm & violence 14. Other non-communicable 15. Other group I 15. Self-harm & violence 16. Other non-communicable 16. Other group I 17. Maternal disorders 17. Mental disorders 18. War & disaster 18. War & disaster 19. Mental disorders 19. Maternal disorders 20. Musculoskeletal disorders 20. Musculoskeletal disorders 21. NTDs & malaria 21. NTDs & malaria J Communicable, maternal, neonatal, and nutritional diseases J Non-communicable diseases J Injuries Source: Institute of Health Metrics and Evaluation. 2017. https://vizhub.healthdata.org/gbd-foresight/. The government’s health policy recognizes the enormous needs in the sector. The country’s national health policy 2015–2024 aims to improve health outcomes through an effective and equitable health system.59 The policy has three specific objectives: (i) ensuring universal access to health care and nutrition services; (ii) strengthening the legislative framework, health management, and partnerships with the private sector; and (iii) improving resource management. However, government regulations, policies, standards, and guidelines are yet to be developed and implemented to reach the objectives presented in the national health policy by 2024. VI.2 Total Health Spending Increased with Higher Funding from All Sources Total health expenditures (THE) have increased substantially since 2015. THE include expenditure financed from all sources, including the government, development partners, households, and health insurers. Between 2015 and 2019, THE almost doubled in nominal terms from KMF 19.2 billion to KMF 34.5 billion (Annex 7), resulting in an increase from 4.5 to 6.6 percent of GDP (Figure 77). This increase was driven by higher spending from all sources, including the government, whose share reached 33 percent of THE in 2019 (Figure 78 and Annex 7). In 2019, capital and recurrent expenditures represented 22 percent and 78 percent of THE, respectively. Based on NHA data, total recurrent spending on hospital care doubled between 2015 to 2019 (Annex 8). The health system is still largely financed by patients’ OOP. Although the share of OOP has declined since 2015, it remains very high at 48.5 percent of THE in 2019. In 2019, more than one-third of households’ OOP were for reproductive health care (36 percent), followed by care for respiratory diseases (27 percent) and trauma care (17 percent). Funding from development partners also increased, mainly to finance vertical disease programs (e.g., for Malaria) as well as vaccination programs. 59 Union des Comores 2014. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter VI: Health Expenditure Management 99 The union government manages a growing share of THE. From 2015 to 2019, the share of THE managed by the union government increased from 21.6 percent to 50.0 percent, driven by higher infrastructure spending related to the reconstruction of the El Maarouf hospital (Table 12). In 2019, about 38 percent of THE were spent in Ile de Ngazidja (Grande Comoros). Regional differences in total and per capita spending are caused by higher spending on hospitals (which serve the entire population) and specialized care in urban areas. In the absence of household survey data on service use, regional differences in health expenditures cannot be used to determine regional inequalities.  otal Health Expenditures as a share of Figure 77. T Figure 78. Total Health Expenditures by Source GDP, 2015 and 2019 percent percentage points 7 100 11.8 14.4 6.6 6 80 5 4.5 60 48.5 4 76.8 3 40 2 20 33.0 1 10.4 0 0 2015 2019 2015 2019 J Government (GHE) J Compulsory insurance J Voluntary health insurance J NGO J Enterprises J Households OOP J Development partners Source: Ministère de la Santé 2021. Based on Annex 7. Source: Ministère de la Santé 2021. Based on Annex 7. Note: THE exclude government spending on medical research and education. Table 12. Total and Recurrent Health Expenditures by Region, 2015 and 2019 Total Health Expenditures in KMF million Of which: Union government and Islands Recurrent per capita 2015 in % 2019 in % in KMF 2019 Union Government 4,148.9 21.6% 17,216.5 49.9% 12,414 Islands: Mwali (Moheli) 581.5 3.0% 696.2 2.0% 12,976 Ndzuwani (Anjouan) 3,112.2 16.2% 3,374.1 9.8% 9,880 Ngazidja (Grande Comoros) 11,393.9 59.2% 13,215.5 38.3% 33,415 Total KMF Million 19,236.5 100% 34,502.3 100% Source: Ministère de la Santé 2021. Note: THE = infrastructure capital expenditure + recurrent expenditures by all sources. VI.2.1 Government Health Spending Increased But Low Budget Execution for Non- Wage Expenditure Contribute to High Patient Payments Comoros’ public health spending has increased to a level comparable to that of neighboring countries. By 2020, government health expenditures reached 1.6 percent of GDP and 8.3 percent of general government expenditures (Figure 79). Government recurrent spending has increased steadily, while capital spending has fluctuated over the years, with records recorded in 2019 (Figure 80). Capital spending is mainly financed by the government (97 percent in 2020), with development partners funding the rest. In 2020, Comoros’ government health expenditure was comparable to that of Tanzania and Madagascar (Figure 81). 2022 COMOROS 100 Chapter VI: Health Expenditure Management PUBLIC EXPENDITURE REVIEW Figure 79. Government Health Expenditures Government Capital and Recurrent Health Figure 80.  Expenditures percent of GDP KMF million 12 12,000 10.8 10 10,000 8 8.3 8,000 7,232 1,880 6 6,000 4 4,000 2,806 6,541 2.8 2 2.2 37 4,164 2,000 0.5 1.6 1,970 1,825 0 in percent in percent of general 0 of GDP government expenditure 2015 2018 2019 2020 J 2015 J 2019 J 2020 J Capital J Recurrent Source: Rapport d’exécution budgétaire, Direction Générale du Budget, Source: Rapport d’exécution budgétaire, Direction Générale du Budget, Comoros 2020. Annex 9. Comoros 2020. See Annex 9. Government Health Expenditures by Figure 81.  Health Budget Execution Rates, 2018 and Figure 82.  Country, 2018–20 2020 Percent of GDP percentage points 5.0 54 Total 51 4.5 4.5 0 4.0 Medical equipment 3.9 56 3.5 3.8 3.5 27 3.0 3.2 Construction 45 2.5 2.8 74 2.0 2.4 2.5 2.5 Overseas treatment 97 2.1 1.5 1.9 1.4 1.5 1.6 1.6 1.7 Maintenance 02 1.0 0.5 Goods and services 0 11 0 Transfers to 98 Eswatini Seychelles Ghana LMIC Tanzania Comoros (2020) Madagascar SSA average Rwanda Mauritius Sao Tome & Principe Cabo Verde Caribbean Jamaica South Africa Dominican Rep. providers 91 Transfers to 102 providers for wages 49 119 Salaries 73 0 20 40 60 80 100 120 J Execution 2020 J Execution 2018 Source: Direction Générale du Budget, Comoros 2020; WDI 2018 data for Source: Rapport d’exécution budgétaire, 2020. See Annex 10. other countries. Weak budget management has resulted in consistently low health budget execution. In 2020, only 54 percent of the government’s health budget was executed, representing a marginal increase from 51 percent in 2018 (Figure 82 and Annex 10). The budgets for salaries as well as for transfers to providers including to pay for wages were more than fully disbursed, and the relatively small budget for overseas treatment was also largely disbursed. However, the budgets for goods and services and maintenance costs were not fully spent. Only 27 percent of the construction budget was implemented in 2020, down from 45 percent in 2018. As a result, most public health spending in 2020 was on the reconstruction of the El Maarouf hospital, wages and salaries for health staff, and direct transfers to hospitals (Table 13). Government spending on overseas treatment was at a low 0.8 percent in the same year, as these expenses are usually paid by patients. The country’s consistently low budget execution rates point to weaknesses in the budget preparation and execution process, as well as to a weak deliberation process between the MOH and the Budget Department at the Ministry of Finance. Lack of budget oversight leads to low budget execution and high levels of reallocation across sectors, to the detriment of health spending. The health budget is decentralized to the Islands, which have fiscal autonomy and are responsible for primary and secondary health care. Island health budgets are largely funded by transfers from the union ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter VI: Health Expenditure Management 101 government, which island governments can use at their discretion. This means that transfers to the Islands are executed without any imposed expenditure ceilings or targeted allocations to priority expenditure areas such as health.60 This lack of oversight leads to the reallocation of budgets across sectors. This has contributed to low health budget execution rates and payment delays, leading to stockouts at health facilities. When medical products are not available, patients are left to purchase them at a high price from private clinics and pharmacies. Table 13. Government Health Expenditures by Economic Classification, 2018 and 2020 KMF million Government health expenditures (GHE) 2018 % of total 2020 % of total Salaries 289.86 6.3% 1,286.38 15.3% Transfers to hospitals for wages 805.55 17.4% 1,404.72 16.7% Transfers to hospitals 657.39 14.2% 3,781.04 44.9% Overseas treatment 72.66 1.6% 65.90 0.8% Goods and services - 2.57 0.0% Maintenance - 0.19 0.0% Capital investment Construction 2,721.23 58.8% 1,880.46 22.3% Medical equipment 84.74 1.8% - 0.0% GHE in million KMF 4,631.43 100% 8,421.26 100% GHE in million US$ ($1 = 430 KMF) $10.77 $19.58 Source: Rapport d’exécution budgétaire, 2020. See Annex 10.  iscrepancies in Government Recurrent and Capital Health Expenditures, 2020 Table 14. D KMF million Government health expenditures (GHE) 2020 (a) 2020 IFMIS Recurrent expenditures 6,540.80 4,736.33 Capital investment 1,880.46 1,880.46 GHE in million KMF 8,421.26 6,616.79 Source: (a) = Rapport d’exécution budgétaire 2020. IFMIS 2020 data reported in BOOST software. Inadequate expenditure reporting creates substantial discrepancies between the spending data reported in the government’s budget execution report and IFMIS. IFMIS captures 72 percent of recurrent health expenditures identified in the budget execution report (Table 14). The remaining 28 percent of expenditures are not captured in IFMIS, which points to weak expenditure reporting. Tracking health expenditures by expenditure category and level of care is challenging because: (i) budgeting and cash management practices do not enable accurate reporting at the national and island level; and (ii) the absence of a financial management system for health facilities limits any expenditure tracking at the facility level. The authorities have taken steps to improve the management of the wage bill in the health sector. Based on IFMIS data, almost half of recurrent spending in 2020 was on salaries of staff working in disease programs (i.e., malaria and vaccination), followed by transfers to hospitals and island governments, mainly to pay salaries for government health employees (Table 15). High wage budget execution was helped by two reforms. First, public sector wage payments for the union government, Grande Comoros, and Moheli island are now handled through a single payment system that replaced the previous separate systems for each island. Second, in 2016, the Integrated Structure and Workforce 60 World Bank 2017. 2022 COMOROS 102 Chapter VI: Health Expenditure Management PUBLIC EXPENDITURE REVIEW Management (GISE) software was launched, which is a personnel and payroll management system for government employees. However, GISE leaves out contracted and voluntary health workers who are directly hired by health facilities. Government transfers to hospitals finance mainly salaries for staff at the El Maarouf hospital. In 2020, the government spent 27 percent of recurrent health expenditures on direct transfers to five hospitals, mainly to finance wages of hospital staff and some operational costs at the El Maarouf hospital (Figure 83). The salary transfers to Anjouan, Ngazidia, and Moheli islands were for public employees working in public health facilities and administration. The newly introduced health insurance is not functional. Figure 83. Transfers to Hospitals, 2020 In 2017, a decree was issued to introduce compulsory health KMF million insurance to improve access to health care. According 1,000 to the NHA, formal sector employees’ contribution to 800 compulsory health insurance totaled KMF 181.5 million in 2019, representing a mere 0.5 percent of THE (Annex 7). 600 However, based on 2020 IFMIS data, the government did 400 not finance any insurance contributions for government employees (Table 15). IFMIS includes three expenditure 200 lines under health insurance: operational expenses, wages and salaries, and construction costs related to public 0 Hopital Hopital Hopital Hopital Hopital Bambao Samba health facilities. There was, however, neither a budget El-Maarouf Mtsanga Anjouan De Fomboni De Hombo Nkouni allocation nor any expenditure recorded under any of J Personnel expenditures J Operational costs J Dialyse these expenditure lines in 2020. It is therefore unclear Source: IFMIS 2020 data reported in BOOST software. how the insurance contribution payments identified in the 2019 NHA have been used by the government. Table 15. Government Recurrent Health Expenditures, 2020 KMF million Recurrent health expenditures 2020 percent of total Disease programs salaries 2,058.38 43% Hospital salaries and operations 1,295.27 27% Anjouan island salaries 451.70 10% Ngazidja island salaries 429.86 9% Central government 236.54 5% Moheli island salaries 171.04 4% Pharmaceutical salaries and operations 93.54 2% Inspection - 0% Insurance payments to providers - 0% Total, in million KMF 4,736.33 100% Source: IFMIS 2020 data reported in BOOST software. VI.2.2 Pharmaceutical Management is Underfunded leading to Small Quantity Procurement and High Prices for Patients Pharmaceutical procurement is centrally managed. Agence Nationale des Médicaments et des Evacutions Sanitaires at the MOH is the regulator and supervisor for pharmaceuticals and medical evacuation. In 2017, the newly created agency Comorian Office of Pharmaceutical Products (OCOPHARMA) replaced Centrale d’Achat des Médicaments de l’Union des ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter VI: Health Expenditure Management 103 Comores, which was founded in 2013. OCOPHARMA is financially autonomous and operates under the oversight of the Ministries of Health and Finance. In 2021, OCOPHARMA employed 99 staff, including 10 staff at El Maarouf hospital.61 Several factors have resulted in high pharmaceutical stockouts at health facilities. In 2021, OCOPHARMA reported stockout rates of 31 and 33 percent for pharmaceuticals at its central store and regional depots, respectively. Stockouts of pharmaceuticals lead to interruptions in the supply chain to health providers, inefficiencies and high consumer prices. Stockouts are caused by low levels of procurement and an underfunded pharmaceutical budget. In addition, high transportation costs between the Islands slow down delivery and contribute to long stockout periods. The 2020 Service Availability and Readiness Assessment found stockout rates of more than 70 percent in public health facilities, and it reported that only 28 percent of 24 essential medicines were available.62 The availability of pharmaceuticals seems to be better at private facilities and pharmacies and in urban areas. An e-prescription system does not exist to collect pharmaceutical consumption data from providers and consumers to better plan procurement and prevent stockouts. OCOPHARMA and hospitals import small quantities at high prices. OCOPHARMA imports commodities from international vendors through a competitive bidding process, and it sells them to public and private health facilities and pharmacies by adding a margin to the import price. By the end of 2021, it had to launch urgent calls for pharmaceuticals on the international market due to stockouts, usually at higher prices. Because of the small quantities ordered, OCOPHARMA pays a high import price. In 2014, Comoros imported pharmaceuticals at significantly higher prices than other countries, including Burundi, Mauritius, and Sudan.63 Hospitals also import medical commodities in small quantities directly from international vendors and wholesalers but at considerably higher prices compared to pooled procurement. Private wholesalers import from foreign suppliers at higher prices and sell to private pharmacies and clinics. The pharmaceutical budget is underfunded. In 2020, only 2 percent of government recurrent health expenditures were related to pharmaceutical management at OCOPHARMA and the national medicine agency (Table 16). This covered a mere 0.7 percent of OCOPHARMA’s operational expenses of KMF 448.9 million (US$984,000) from January to October 2021 (Annex 11), which led OCOPHARMA to look for other sources of pharmaceutical products. Between January and October 2021, OCOPHARMA purchased pharmaceutical products worth US$1.676 million and sold them to health facilities and pharmacies at wholesale prices, with a gross result of 49 percent of revenues. After subtracting its operational expenses, OCOPHARMA achieved a 20 percent net gain in 2021. In addition, development partners, including the United Nations Population Fund, United Nations Children’s Fund, and the Global Fund, deliver in-kind commodities for disease programs (e.g., malaria and tuberculosis). This unreliable funding situation affects OCOPHARMA’s credibility on the national and international market. Patients pay a very high price for pharmaceutical products under the current system. Prices for pharmaceuticals are not regulated in Comoros. In 2015, prices for generic medicines procured by the public sector were on average four times higher than the international reference price for all medicines surveyed, and the price of generics in the private sector was 20 percent higher than in the public sector. Prices for the same products also differed across the Islands, with the highest prices charged by providers in Grande Comoros.64 The high price of pharmaceuticals has led to high total pharmaceutical expenditures of 17 percent of total health spending, largely financed by patients (Annex 8). Regional procurement systems can yield significant benefits in terms of lower prices and better quality for small countries. In the Caribbean, a regional electronic procurement platform has been used since 2013 to acquire 61 OCOPHARMA 2021. 62 Ministry of Health Comoros 2020. 63 Kassim et al. 2015. 64 Kassim et al. 2015. 2022 COMOROS 104 Chapter VI: Health Expenditure Management PUBLIC EXPENDITURE REVIEW pharmaceuticals and medical supplies at low prices, and it has reportedly helped enhance the transparency of the procurement process, with contract awards published online.65 This web-based, collaborative procurement system facilitates the full lifecycle of the tendering process, both for buyers and suppliers. This type of arrangement could be explored by Comoros in collaboration with its regional neighbors and eventually Sao Tome and Principe. Table 16. Government Expenditures by Pharmaceutical Agency, 2020 KMF Agence Nationale des Expenditures Médicaments et des OCOPHARMA Total évacuations sanitaires Medical Evacuations (treatment abroad) 27,897,300 27,897,300 Personnel expenditures 2,500,000 2,500,000 Operational expenditures 60,000,000 3,141,350 63,141,350 Total in KMF 90,397,300 3,141,350 93,538,650 Source: IFMIS 2020 data reported in BOOST software. VI.2.3 High Absenteeism Rates, Unemployment and a Drop in Nursing Students Point to Health Workforce Management and Planning Issues There is a lack of data and analysis on the health workforce that could inform future staff planning. In 2020, the government spent about 32 percent of health expenditures on salaries and wages for health workers. Comoros has 1.6 nurses and midwives per 1,000 people, which is close to the lower-middle-income country average of 1.9 nurses. In 2017, the country reported more physicians per 1,000 people than Lesotho and Rwanda, but fewer than the average of SSA (Figure 84). A census conducted in 2017 by the Ministry of Public Service identified 2,848 health workers, but only half of them were public employees hired by island governments (Figure 85).66 Health facilities also employ contractual health staff and voluntary workers, and many of them are nurses who are paid by health facilities but do not have the same benefits as public employees. About 20 percent of health staff are above the age of 45 and will retire in 10 to 15 years, but the MOH has not taken steps to plan the future health workforce. Weak staff management has resulted in high absenteeism and concerns about staff qualifications. More than half of the country’s medical professionals do not show up for work, as indicated by an extremely high staff absenteeism rate of 54.5 percent in public health facilities. Absenteeism is particularly high among physicians in public hospitals: 73 percent of them are absent while scheduled to work because they are treating patients in private practice,67 which has contributed to a growing but unregulated private sector. Comoros sends its medical students to study abroad, which is less expensive than opening a medical school in the country. Since medical education is one of the most expensive fields of study, many small countries send their students to study abroad instead of opening a medical faculty locally. Similarly, Comorian medical, pharmaceutical, and dental students study at universities across Africa, Europe, Canada, and China. The government has plans to open a medical faculty, but it has not analyzed its cost implications.68 In 2020, the University of Comoros already received 10 percent 65 https://procurement.oecs.org/epps/home.do. 66 WHO and Ministry of Health Comoros 2018. 67 Union des Comoros 2018. 68 WHO and Ministry of Health Comoros 2018. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter VI: Health Expenditure Management 105 of the union government’s education budget.69 Government tertiary education expenditures are expected to increase substantially with a medical faculty, and it is therefore less expensive for the government to continue sending medical students to study abroad.  hysicians per 1,000 People, 2017 Figure 84. P Comoros’ Health Workers, 2017 Figure 85.  2.5 53 2.0 2.12 Government 1.5 employees (1,494) 1.28 1.30 1.0 0.93 0.73 0.78 0.5 0.14 0.14 0.14 0.19 0.21 3 Private 0.28 0.33 (94) Contracted by 0 health facilities 10 (978) Es 7) a i s e a da o bo SA Sr de ka Ja C a tin lle ol bw an ic I th 01 M an S r an a m Ang wa Ve so he L/ Volunteer Gh (2 ba m iL Rw Le (282) yc os 34 m Se Zi or Ca Co Source: WDI and Union des Comores 2021. Source: Union des Comores 2021. Note: Total 2,848 health workers in 2017. There is no process for verifying the qualification of health professionals who studied abroad. The Comoros’ Ministry of Foreign Affairs translates foreign degrees of medical graduates based on a certificate from the respective Ministry of Foreign Affairs in the country where the health professional studied or previously worked. However, the professional’s qualifications are not verified based on information collected from the original university and former employers. This lack of verification endangers the health of patients, as it results in health staff being hired based on fraudulent degrees and leads to illegal medical practice, which is being addressed by neither the MOH nor the medical council.70 The country’s public health school offers limited training for a declining number of nursing students. In 2019, the government spent KMF 8.6 million on medical and health education and research (Annex 7). The public health school at the local university in Moroni provides a three-year training program for nurses and midwives.71 However, the school is not accredited, the curriculum is outdated, and its diplomas are not recognized internationally. While it has the capacity to enroll 150 nursing students, enrollment has dropped from 97 students in 2013 to 55 in 2016. Even though training for nursing assistants is not offered, they make up an important share of the workforce. Most nursing students are from the capital Moroni, as geographic barriers make access to nursing education more difficult for people living in remote areas.72 Few nursing graduates find work in the public sector. In the past three years, less than 5 percent of nursing graduates were hired to work in the public sector, a dramatic drop from about 40 percent in 2008.73 Most nursing graduates try to find work in the growing private sector or as contractual or voluntary staff at public health facilities. Many young nurses who cannot find work get discouraged and drop out of the health labor force entirely, and some may leave Comoros to gain relevant professional experience abroad. 69 World Bank 2021b. 70 WHO and Ministry of Health Comoros 2018. 71 https://univ-comores.km/formations/offre_formation.php. 72 World Bank 2015. 73 WHO and Ministry of Health Comoros 2018. 2022 COMOROS 106 Chapter VI: Health Expenditure Management PUBLIC EXPENDITURE REVIEW VI.3 Low Health Service Use Resulted in Low Staff Productivity, Costly Use of Emergency Care, and High Patient Payments for Overseas and Specialized Treatment Health service use is low and has resulted in emergency room crowding. The last Demographic Health Survey was conducted in 2012 and found unequal access to health care across socioeconomic groups and regions, as well as catastrophically high health spending among the richest households.74 The country’s child vaccination rates range between 70 and 80 percent, contraceptive use is a mere 14 percent, and only 43 percent of pregnant women get vaccinated against Tetanus. Hospital bed occupancy rates are also low, ranging from 20 to 60 percent, although the El Maarouf and the Hombo hospitals report high numbers of emergency cases. Considering the low use of health centers, it is very likely that many patients go to emergency rooms instead of seeking primary care. Low service use has resulted in extremely low staff productivity and concerns about the quality of care. 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—not enough to ensure quality of care. The Service Delivery Indicator survey also found large variations in the number of patients seen per provider across health facilities in 2020.75 Comoros does not regulate minimum volume standards for providers to ensure quality of care, which means that providers are allowed to deliver services even if the corresponding international quality threshold cannot be met. The country’s high cesarean section rate points to unnecessary service delivery and is costly for patients. According to the World Health Organization, the cesarean section rate in any population is normally between 5 and 15 percent. In Comoros, this rate is considerably higher at 23.4 percent, higher than in several OECD countries (including France) and far above the SSA average of 4.9 percent. A cesarean section is also a high-cost procedure for patients, who pay about €600 for the procedure,76 and it poses a higher risk than a normal delivery, resulting in higher maternal mortality. The authorities need to analyze and address the reasons for Comoros’ high rate of cesarean sections. Anecdotal evidence suggests that Comorians travel by boat to Mayotte to receive health care. A household survey conducted in Mayotte in 2015 identified 42 percent of the population as Comorians. However, Comorians living in Mayotte are less likely to receive care when sick, and this is particularly the case for young men.77 More detailed data are needed to better understand people’s care-seeking behavior. The financial implications of overseas treatment are catastrophically high for patients. In 2017, l’Agence Nationale des Médicaments et des Evacuations Sanitaires was created to regulate overseas treatment. In 2017, 1,152 patients were evacuated, mainly to Madagascar, Tanzania, and Mayotte. In 2018, the government spent KMF 72.6 million (US$169,000) on medical evacuations (Annex 10), which is about US$146 per evacuated patient. This puts a heavy burden on patients and their families, who pay, on average, about US$12,800 per evacuation.78 Some people purchase private health 74 World Bank. 2016. Union of the Comoros. Demand Driven Technical Assistance for Improving Service Delivery. 75 Union des Comores 2020. 76 https://www.chine-magazine.com/lhopital-danjouan-neuf-mais-sans-personnel/ ; https://www.rtl.be/info/monde/international/un-hopital-flambant-neuf- menace-de-faillite-aux-comores-le-prix-des-soins-est-trop-eleve-1111875.aspx. 77 PIES 2019. 78 Union de Comores 2021. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter VI: Health Expenditure Management 107 insurance to get some coverage for overseas treatment, increasing household spending on private insurance, which reached KMF 830 million (US$1.82 million) in 2019, according to NHA data.79 Health data collection is inadequate for current policy needs. The MOH’s health management information system is not being used to collect valid and reliable data from health facilities and hospitals. The ministry’s annual statistics report includes tables with incomplete data and does not follow best practices. As a result, it cannot be used to conduct regular analysis to evaluate program performance. Substantial investments in data and analysis capacity will be needed to inform health policy decisions. VI.4 El Maarouf National Hospital Needs to be Carefully Managed to Prevent Idle Capacity and Distortions for the Sector The public health sector includes 5 hospitals and various other facilities. There are 2 national hospitals: the El Maarouf hospital in Moroni with 200 beds and the Bambao hospital in Anjouan80 with 120 beds, as well as 3 regional hospitals (centres hospitaliers de référence insulaire): Samba hospital in Grande Comores, Hombo hospital in Anjouan, and Fomboni hospital in Moheli. In addition, 6 medical-surgery centers and 17 health centers provide care across the Islands. However, the country’s 5 hospitals are not accredited by the Council for Health Service Accreditation of Southern Africa,81 and several health centers are without access to electricity and clean water sources. The MOH is currently finalizing a health service map (carte sanitaire) for facility planning. Without this map, local politicians have built and upgraded their health facilities without the necessary funding to assume new responsibilities.82 Because of underfunded budgets, hospitals charge user fees to patients to raise revenues and pay for their operational expenses. In 2019, the NHA estimated that patients’ OOP payments for hospital care reached US$15.9 million or $19.80 per capita. While Comoros does not collect reliable data on the number of hospitalizations, current estimates show that its hospitals treat about 31,787 patients per year. This means that patients at Comorian hospitals pay, on average, about US$500 per hospital stay, or 36 percent of GDP per capita, which is catastrophically expensive for patients. In 2016, the government prepared a financing request of €120 million for El Maarouf to build and equip the new hospital with 650 beds on 5 floors.83 The old El Maarouf hospital with 350 beds was constructed in 1954 and demolished in 2016. Construction started for a new hospital with 33 specialties, 650 beds, and teaching and medical research functions, with support from the Chinese government.84 The hospital, which will become a university hospital, will have financial and administrative autonomy under the auspices of the Ministries of Finance and Health. By November 2021, the government had mobilized €30.5 million (including a €25 million non-concessional loan from the Eastern and Southern African Trade and Development Bank—of which US$18.7 million have been disbursed—and €5.5 million from the government) and was seeking additional funds to finalize the project’s 6 components (i.e., medical, construction, equipment, human resources, university and medical research, and hospital management) and operationalize the hospital. 79 See, for example: http://agr.amanassurances.com/. 80 Hôpital de l’Amitié Comoro-Chinoise de Bambao-Mtsanga. 81 https://cohsasa.co.za/. 82 WHO and Ministry of Health Comoros 2018. 83 Union des Comores 2021. 84 In April 2018, the Ministry of Finance handed the construction over to CSYIC, a Chinese SOE. https://en.csyic.com.cn/product/32.html. 2022 COMOROS 108 Chapter VI: Health Expenditure Management PUBLIC EXPENDITURE REVIEW An oversized hospital could lead to idle capacity. With 650 beds, the El Maarouf hospital will be considerably above the efficient hospital size of 200–300 beds and will substantially increase the country’s bed ratio. In 2020, Comoros had 1,718 hospital beds in the public sector (including 200 beds at El Maarouf), resulting in 2.1 beds per 1,000 population, similarly to the bed ratio of Tunisia. If El Maarouf had 300 beds, the bed ratio would increase to 2.3 per 1,000 population. With 650 beds it will increase the ratio to 2.7 beds, similar to that of New Zealand. Therefore, the El Maarouf hospital operating costs and resources will need to be carefully managed. The practical use of the proposed El Maarouf hospital needs to be assessed in the current and future health context. Reliable electricity and water supply for a multi-story hospital will be a major constraint for the workflow and patient safety. The proposed burn treatment center and neurosurgery unit would require multi-disciplinary care teams of experienced medical specialists and health professionals who are not available in the Comoros. Comoros needs to therefore carefully plan such a high-cost investment. Adequate staffing will be a major concern and could affect access to care. The El Maarouf hospital, with 650 beds, plans to employ 2,121 staff, including 212 physicians and 808 nurses. This will be a substantial increase and would require hiring more than 1,300 additional health workers, including 131 medical doctors and 480 nurses. Additional recruitment internationally and among the unemployed locally would increase the health workforce for the entire sector by 47 percent to 4,184 health workers. The impact on the payroll will depend on whether additional staff will be public employees or contractors. If they all become public employees, government spending on health wages could double. If El Maarouf will increase its workforce with contractors financed by user fees, access to care will be affected. There are important lessons to be learned from Bambao hospital in Anjouan. In 2017, this 120-bed hospital had 311 staff, but only 22 percent of them were public employees paid by the government. All other staff were volunteers without a contract. To get paid, they charged high user fees to patients.85 As a result, Bambao hospital saw very few patients in 2018 because it was too expensive.86 Based on the MOH statistics, the annual number of maternity cases at Bambao dropped from 149 in 2018 to 117 in 2020, and the number of pediatrics cases fell from 300 to 105 during the same period, as patients preferred to seek care at the El Maarouf and Hombo regional hospital in Anjouan. If health staff quit their current posts to work at El Figure 86. Projected Government Health Expenditures Maarouf, this could have a large impact on the provision percent of GDP of care for the poor who seek care at these other facilities. 3.5 3.2 In fact, this situation already happened after the opening 3.0 2.9 2.9 3.0 3.1 of Bambao hospital. The regional hospital in Anjouan lost 2.5 so many health staff to Bambao that some services had 2.2 2.4 2.2 to be closed temporarily,87 and the same could happen 2.0 1.6 2.0 2.1 1.8 with the new El Maarouf hospital. As a result, El Maarouf 1.5 would create distortions for the entire health sector and 1.0 negatively affect the provision of care across the country, 0.5 with the highest impact likely being felt by the poor. 0 Hence, staffing will need to be carefully planned across 2019 2020 2021 2022 2023 2024 2025 the sector. ▬ El Maarouf with 650 beds ▬ El Maarouf with 300 beds Source: Staff calculations. See Annex Table 12. 85 WHO and Ministry of Health Comoros 2018. 86 https://la1ere.francetvinfo.fr/mayotte/anjouan-hopital-neuf-reste-desert-615304.html. 87 WHO and Ministry of Health Comoros 2018. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter VI: Health Expenditure Management 109 El Maarouf with 650 beds will likely double health expenditures as a share of GDP. A large hospital is likely to put a strain on government finances, and the authorities need to take steps to mitigate any negative fiscal impact of the new hospital (Annex 12). With a 650-bed hospital (Scenario 1), recurrent expenditures are expected to increase annually by 20 percent due to an increase in government expenditures on wages, maintenance, and utility costs. Moreover, government health expenditures are projected to jump to and remain at 3 percent of GDP (Figure 86). The World Bank recommended a smaller El Maarouf hospital with 300 beds and about 1,000 staff. The total project investment for a smaller hospital would have been about US$68.7 million, which would increase Comoros’ government health expenditures to about 2 percent of GDP, comparable to the SSA average of 1.9 percent. A smaller hospital would have resulted in lower costs, and it would reduce the health expenditure impact by almost 1 percentage point of GDP (Figure 86). It would also save the government about US$70 million in future debt. Investments of this size are usually driven by a hospital masterplan to guide the most cost-effective investment and to provide a vision for the hospital within the broader health sector and fiscal context. VI.4.1 The Private Health Sector Is Unregulated and Not Monitored In its national health policy for 2015–2024, the government aims to enhance partnerships with the private sector. In Comoros, there is a vibrant but unregulated private health sector that includes 21 clinics, 2 polyclinics, 32 medical practices, 7 laboratories, and 32 pharmacies in 2020. Since there are no private-public partnerships (PPPs) in the health sector, the authorities could consider different models of public-private collaboration based on the experience of other countries (Table 17). However, these models require a strong regulatory framework, adequate planning, and setting standards for service delivery. Table 17. Types of Public-Private Collaboration Models in Health Care Specialized clinical or The public sector identifies specialized services or diagnostics (e.g., laboratory or imaging) to diagnostic services be provided by a private operator. Managed equipment Includes the initial purchase, installation, financing, maintenance, and replacement of a services broad range of medical equipment. Management contract The private provider operates a public health facility against a management fee. Health facility PPP The government retains control of clinical services, while the private sector provides detailed design, construction, or refurbishment of infrastructure. May include the provision of hard facility management or a mix of hard/soft facility management. Integrated PPP The private sector provides all assets (including the design, construction, or refurbishment of infrastructure) and services (including clinical) on a long-term basis, typically ranging from 10 to 30 years. Source: IFC. 2021. Public-Private Partnerships (PPP) in healthcare. Successful public-private collaboration relies on strong government capacity. When signing a service delivery contract with the private sector, the government pays a private provider to deliver certain services deemed important for the public good. To be sustainable over time, these types of contracts need to be affordable for the government. They must include measurable performance indicators that define what the government pays for, and they need to ensure a balanced allocation of risks between both parties. The government needs to regularly monitor and evaluate service delivery and financing and follow up on contract obligations. Contracts may need to be adapted if circumstances change, such as the government’s fiscal situation, patient demand for the service provided, or staffing requirements.88 This 88 IFC 2021. 2022 COMOROS 110 Chapter VI: Health Expenditure Management PUBLIC EXPENDITURE REVIEW means that strong contractual and monitoring capacity at the government is a prerequisite for successful collaboration with the private sector. PPPs tend to fail in environments marked by weak capacity, which is a constraint for Comoros’ health sector. PPPs can fail because of weak political commitment and legislation, an inadequate financial impact analysis, limited experience with PPPs, and the government’s weak monitoring and evaluation capacity to follow up on contractual obligations, which was the case with the hospital PPP in Lesotho (Box 5). PPPs can also fail if the private partner has weak financial and technical capacity, or if they are not integrated into the wider health system. In Comoros, these are all high-risk factors for a PPP. The government would have to substantially invest in addressing these risks before considering a PPP in the health sector to ensure an equal partnership between the government and a private provider. Box 5. Experience with PPPs in Lesotho’s Health Sector Lesotho’s tertiary hospital, the Queen Mamohato Memorial Hospital (QMMH) network, has been managed under a PPP between the government and a consortium of investors. From 2011 to 2021, the QMMH network has become the largest health care provider in Lesotho. The PPP contract between the QMMH and the government defined a unitary payment per case to treat a defined number of patients per year. If the QMMH treated more patients, a higher unitary payment applied. Over the past decade, the QMMH has delivered consistently more cases than originally expected. In 2018, its bed occupancy was 99 percent, and the patient satisfaction rate had increased to 97 percent. Meanwhile, public hospitals reported an extremely low bed occupancy rate of 32 percent, as poor service quality has led patients to seek care at the QMMH, resulting in a growing number of patients at the QMMH requiring relatively low complexity of care. Good staff performance at the QMMH has been facilitated by staff adherence to treatment protocols, the use of management systems, and accountability strategies, as well as by improved infrastructure and cleanliness. QMMH staff also use a biometric clocking system to ensure a responsible workforce. Despite the hospital’s high workload and strong performance, the government spent only 29 percent of its recurrent health expenditures on care provided by the QMMH network in 2016/17. Despite the success, the QMMH PPP failed for several reasons. First, the government raised salaries for public sector staff to levels unaffordable by the QMMH, resulting in higher wages at lower-level hospitals. These wage differences led to strikes at the QMMH, which affected the provision of care and resulted in the firing of striking staff in March 2021. Second, a lack of government support negatively affected contractual payments to the QMMH and communication with the government. Finally, repeated disputes about the financing of the PPP led to the premature termination of the PPP, effective on August 31, 2021, when the QMMH was handed over to the Government of Lesotho. Source: World Bank 2022. VI.5 Policy Options The Comorian government is committed to universal health coverage and improving the health of the population. To support the government in these efforts, two sets of policy options emerge based on the analysis presented in this PER. The first set of policy options focuses on the El Maarouf hospital investment, while the second includes short- and medium-term policies to strengthen the health system (Table 18). ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter VI: Health Expenditure Management 111 » A Phased Approach for the El Maarouf Hospital During the next five years, hospital construction could be completed. Health professionals will need to be recruited, and strong monitoring and evaluation capacity at the MOH and health facilities would be needed to regularly assess progress and possible adverse effects. This first phase would be concluded with an evaluation. Phase 1: Now until 2027: i. Finalize the masterplan to position the hospital within the broader health system and create a realistic budget. Identify targets in the masterplan for an efficient and financially sustainable hospital, including for medical, technical, operational, and infrastructure investments. Complete the hospital construction. ii. Recruit health professionals internationally and among the non-working and retired population and invest in a responsible health workforce. iii. Strengthen data collection and build monitoring and evaluation capacity to regularly assess progress and financial implications and identify adverse effects that need to be addressed. iv. Aim for the El Maarouf hospital to get accredited by the Council for Health Service Accreditation of Southern Africa.89 v. Conduct an evaluation on the hospital performance and its impact on the health system. Phase 2: Years 2027–2032: Adjust hospital and health sector capacity based on the recommendations from the Phase 1 evaluation. The government could also consider contracting a private company to provide laboratory or imaging services that would be financed by the government. However, this requires a strategic approach and strong government commitment to work with the private sector. » Strengthen the Health System to Improve Population Health In parallel, the government is advised to support the overall performance of the health system. Several of the following recommendations can be implemented by the government in collaboration with ongoing support from development partners, including the World Bank health project. a. Use government health expenditures efficiently Suspend the compulsory health insurance fund. Since this insurance fund is not operational, the government would immediately stop collecting money from employees for this insurance program. Improve budgeting for health. Identify key budget lines that matter for recurrent expenditures (such as wages and pharmaceutical procurement). Define the medium-term health budget based on an analysis of the minimum 89 https://cohsasa.co.za/. 2022 COMOROS 112 Chapter VI: Health Expenditure Management PUBLIC EXPENDITURE REVIEW health package. Review past expenditures of under-funding and reduce future budgets accordingly to build in more realism and improve budget credibility. Develop realistic budgets for non-wage categories. Provide budget allocations to OCOPHARMA to purchase pharmaceuticals and medical commodities. Publish the health budget online in a timely manner. Execute the budget to ensure health service delivery. Agree to protect and prioritize the key budget lines in cash funding decisions. Commit cash release to the reformed budget over the year, timely and complete. Improve tracking of expenditures. Conduct an annual public health expenditure tracking exercise at the national and island level and publish results on the MOH webpage. Review the health sector-relevant Chart of Accounts within the IFMIS to more accurately capture current expenditure trends. Improve reporting on non-wage recurrent spending not captured in the system. This could include developing a basic manual expenditure tracking template and installing IFMIS in larger institutions such as OCOPHARMA and hospitals. Support health facilities with financial management practice. Publish a price list for services provided in public health facilities and pharmacies. Develop a list of prices and agree with all providers on the price to be charged to patients for health services. Make the list widely available, including in health facilities, and request that patients only pay the price on the list. In the medium term, introduce capitation grants for primary health centers. Capitation grants should be transferred as mobile payments to health centers’ bank accounts to ensure transparency. The size of the capitation amount would be based on the size of the local population and can be adjusted by management indicators to reward efficiency. The use of financial reporting in health facilities is a prerequisite. b. Invest in pharmaceutical management and procurement Strengthen supply chain and inventory management for pharmaceuticals and medical products at OCOPHARMA and health facilities. Examine the current tendering process and identify opportunities to strengthen procurement efficiency of medicines. Ensure the continuous availability of generics and essential NCD medicines. Introduce an electronic procurement platform and an e-prescription system to collect relevant data from pharmacies and health providers. Regulate prices. Identify opportunities to reduce and harmonize prices and margins. Cut margins at OCOPHARMA, health facilities, pharmacies, and wholesalers. In the longer term, pursue opportunities for regional procurement. Explore pooled procurement arrangements with neighboring countries and the UN/WHO to increase volumes and benefit from lower prices, especially for high-cost NCD medicines and equipment. Based on the experience of the Caribbean islands, a regional electronic procurement platform could be developed to acquire pharmaceuticals and medical supplies.90 Such a web-based, collaborative procurement system would facilitate the full lifecycle of a tendering process, for both buyers and suppliers. Comoros, in collaboration with its regional neighbors, including Seychelles, Madagascar, Mauritius, and Mayotte, could explore such as joint procurement approach and benefit from cross-country knowledge and capacity building. 90 https://procurement.oecs.org/epps/home.do. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter VI: Health Expenditure Management 113 c. Transform health workforce management and education Invest in human resource information systems. Establish a centrally managed HR database for the health sector that includes public employees and contracted staff hired by health facilities and is linked to GISE. Leverage online platforms for recruitment (jobs portal) and conduct analysis to inform hiring and planning. Reduce high absenteeism rates. As in Lesotho, health facilities in Comoros could use a biometric clocking system to monitor staff attendance, and hospital managers could assess staff performance against a job description on a “balanced scorecard.” Delegate responsibility for professional registration and technical verification of qualifications to professional councils. Support medical and nursing councils in setting up a lean registration system, including an online portal for the professional registration of nurses and medical doctors. Establish data exchange mechanisms with foreign universities and councils, beginning with France, Canada and China. Conduct health workforce planning based on future trends. A systematic analysis will be critical to better understand current and future workforce needs, and to plan investments in health education. Results will help inform the budgets for the health workforce and medical and health education. Expand the nursing and midwifery education program in line with international best practice. Facilitate the training of nurses in rural areas by opening branches of the Moroni nursing school in Anjouan and Moheli. Collaborate with nursing schools from other countries and aim for international accreditation. Provide funding for equipment, faculty and research positions to attract researchers from the diaspora to teach at the public health school. Measure the academic performance of students. Introduce a clinical practice program in hospitals for students and graduates to facilitate their entry into the health workforce. Manage the medical studies abroad program. Analyze the cost-effectiveness of the agreement for medical studies with other countries to identify accredited universities for Comorian students. Set high learning performance standards for students to qualify for government assistance to study medicine abroad. In the medium term, revise education financing for health studies. Allocate funding to the public health school based on academic performance and health workforce planning based on future trends. d. Continue to improve health service delivery and population health Strengthen health data collection and analysis. Strengthen the Health Management Information System and collect accurate data from public and private providers. Conduct regular analysis to inform health policy decisions and publish annual reports on the MOH website. Institutionalize NHA to evaluate health spending and conduct a follow up Demographic Health Survey. Explore opportunities with Mayotte for joint surveys and analysis on health care-seeking behavior by Comorians. Support primary health care and regional hospitals and invest in human capital. Strengthen the primary health care and regional hospital system to prevent emergency department crowding at national hospitals and ensure access to reproductive health care. Invest in early childhood development to reduce stunting and improve a child’s long-term wellbeing. 2022 COMOROS 114 Chapter VI: Health Expenditure Management PUBLIC EXPENDITURE REVIEW Reduce potential overuse of care. Identify reasons for the overuse of emergency departments in hospitals and for the high use of cesarean sections. Reduce the use of cesarean sections, including by strengthening the antenatal care program and primary care as a first responder for patients. Target adolescent girls and boys. Train nurses and midwives in adolescents’ health risks, such as starting childbearing, and adolescent reproductive health issues. Ensure easy access to reproductive health care for youth. Implement a public health campaign targeted at parents, men, and adolescents to prevent child marriage. Use school health programs and digital health to inform youths about their reproductive health and provide confidential and free information about modern contraception to young people.91 Address the growing NCD burden. Enable access to NCD care through regular screening for high blood pressure, diabetes, and cancer in primary care and regional hospitals. Establish a national cancer registry. Regulate the Treatment Abroad Program to make it efficient, transparent, and means-tested. Overseas treatment will be needed for highly specialized care not available in Comoros, and this should be done in collaboration with regional neighbors. The Agence Nationale des Médicaments et des Evacutions Sanitaires should negotiate volume contracts with least-cost, high-quality specialty hospitals in neighboring countries, and treatments should be reimbursed based on bundled payments for each diagnostic. The program should be means-tested to ensure higher income groups are charged higher co-financing fees. A webpage with information on destination hospitals and financial implications would ensure transparency. Prevent accidents and injuries. Invest in road safety to reduce high mortality and morbidity from traffic accidents. Publish annual statistics of accidents. Introduce a quick medical emergency response system and train medical personnel in trauma care to improve the survival rate of injured victims. e. Regulate the private health sector Conduct an assessment of the private health sector. The assessment should identify formal and informal providers, their ownership, the type of providers, and other private business related to health (e.g., laundry or cleaning services that could be contracted). It should also include an analysis of the legal and policy context, and identify potential opportunities for future collaboration with the private sector. Regulate private sector providers. Register private sector providers and allow only accredited private providers to operate. Regulate dual practice by government employees who also work in the private sector. 91 Gichangi et al. 2022.f ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter VI: Health Expenditure Management 115 Table 18. Policy Options to Improve Health Outcomes Short-term measures (Less than 2 years) Medium-term and long-term measures (2+ years) VI. Health Expenditure Management VI.1. Operationalize an efficient El Maarouf hospital › Finalize the masterplan to complete the construction of › Conduct an evaluation of the hospital performance and a 300-bed hospital, recruit health professionals, and its impact on the health system. invest in the health workforce. (P) › Get the hospital accredited by the Council for Health › Strengthen hospital data collection and develop a Service Accreditation of Southern Africa. monitoring and evaluation capacity. VI.2. Use government health expenditures efficiently › Suspend the compulsory health insurance fund. › Publish a price list for services provided in public health facilities and pharmacies. › Improve budgeting for health, execute the budget and track expenditures. (P) › Introduce capitation grants for primary health centers. VI.3. Enhance the effectiveness of pharmaceutical management › Regulate the prices of pharmaceutical products. › Strengthen supply chain and inventory management for pharmaceuticals and medical products at OCOPHARMA and health facilities. › Pursue opportunities for regional procurement. VI.4. Strengthen health workforce management and health education › Invest in human resource information systems. › Delegate responsibility for professional registration and verification of qualifications to professional councils. › Invest in human resource management to reduce high absenteeism rates. › Revise health education financing. › Manage the medical studies abroad program. › Conduct health workforce planning based on future trends. › Expand the nursing and midwifery education program. VI.5. Improve health service delivery and the health of the population › Improve health data collection and analysis. › Address the growing NCD burden trough prevention, detection, and treatment. › Strengthen primary health care services and regional hospitals and invest in human capital. › Prevent accidents and injuries. › Improve access to health care for adolescents. › Regulate and invest in digital healthcare services (telehealth). › Reduce the overuse of care. › Regulate the Treatment Abroad Program. VI.6. Regulate the private health sector › Conduct an assessment of the private health sector. › Regulate private sector providers to ensure high quality of care. 116 State-Owned Enterprises Chapter VII:  in Comoros SOEs make up an important part of the Comorian economy and the government budget (About 43 percent of the government budget), but they are mostly low performing and weakly oversighted, creating significant fiscal risks. This chapter sheds light on SOEs in Comoros, analyses the institutional framework, and provides insights on SOEs oversight, management, performance monitoring, and transparency on reporting. It concludes that, while acknowledging recent developments in the appointment and composition of SOE boards, Comoros needs to update its outdated legal and regulatory framework to improve transparency, oversight, and accountability. Due to weak governance, the financial situation of Comoros SOEs substantially deteriorated between 2017 and 2020. Finally, it also finds that it is necessary to develop an effective SOE oversight function, design institutions that would allow a professionalization of boards, and enhance performance monitoring. VII.1 State-Owned Enterprises: Overview and Institutional Framework Comoros has a substantial number of SOEs across different sectors that weigh heavily on the economy. SOEs are present in the trade and wholesale (e.g., rice and hydrocarbon products), transport, telecommunications, water and energy, banking, pharmaceutical, and communications (e.g., written press and news broadcasting) sectors. There are two major categories of SOEs in Comoros: (i) national companies with public capital (NCPC), which are PLCs wholly owned by the government and governed by private commercial law; and (ii) public industrial and commercial establishments (PICEs), for which government control is exercised through public laws and regulations. Based on the close-to-exhaustive list of SOEs provided by the authorities (SAI, Ministry of Finance, and sector line ministries), there are thirteen SOEs in Comoros, and the value added of eight SOEs represented about 7.4 percent of GDP (nominal) in 2020 (Table 19 and Table 20). However, the value added is concentrated in four SOEs: SCH (48 percent), CT (18 percent), ONICOR (18 percent), and Société Nationale de l’Electricité des Comores (SONELEC) (10 percent). Table 19. Value Added of Selected SOEs, 2018–20 KMF million Value Added SOEs 2018 2019 2020 2018–20 Société Comorienne des Hydrocarbures (SCH) 12,618 13,210 18,579 44,407 Comores Câbles (CC) 234 1,101 1079 2,414 Comores Télécom (CT) 16,169 13,927 11,779 41,875 Aéroport des Comores (ADC) 4,593 2,274 1,143 8,010 Autorité portuaire des Comores (APC) 594 569 1,163 Office nationale d’importation et de commercialisation du riz 4,143 2,340 2,215 8,698 (ONICOR) Société nationale d’exploitation et de production des eaux 733 719 1,452 (SONEDE) Société nationale de l’électricité des Comores (SONELEC) 3,362 2,499 3,201 9,062 TOTAL 41,713 36,653 38,715 117,081 Source: World Bank staff calculations based on SOEs’ financial statements. Table 20. List of SOEs in Comoros, 2018–20 Acronym Name Legal Creation Date Products/Services Turnover Turnover Turnover Technical Supervision Status -2018 -2019 -2020 and Regulatory Agency SCH Société NCPC 1987 › Importation and 38,430 39,389 38,169 Ministry of Comorienne des wholesaling hydrocarbon Energy, Water and Hydrocarbures products, especially petrol, Hydrocarbons diesel, and jet fuel. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH › Bottling gas. CC Comores Câbles NCPC 2013 (Operational since › -Financing, owning, 515 1,609 1,400 Ministry of 2017) – decree n°13-086/PR establishing, where Telecommunications on the status of the national appropriate leasing, company Comores Câbles operating, and maintaining electronic communication networks. › Implementing, operating, and ensuring access to networks. CT Comores Télécom NCPC 2006 (decree n°06-003/ › Marketing fixed and 16,998 14,236 14,654 Ministry of PR on certain amendments mobile communications Telecommunications to the provisions of decrees and the internet. n°04-042/PR and n°04- National Agency 043/PR of 1 April 2004 on › Management of non-cable for the Regulation the status of the national infrastructure. of Information and telecommunications Communication company [CT] and the Technology (ANRTIC) national postal and financial services company [SNPSF]) ADC Aéroport des NCPC 2018 › Ensuring the embarkation 2,085 2,547 1,056 Ministry of Transport Comores and disembarkation of and ANACM passengers, cargo, and (National Agency for mail at airports. Civil Aviation and Meteorology) › Handling services. 117 Chapter VII: State-Owned Enterprises in Comoros 118 Table 20. List of SOEs in Comoros, 2018–20 Acronym Name Legal Creation Date Products/Services Turnover Turnover Turnover Technical Supervision Status -2018 -2019 -2020 and Regulatory Agency SCP Société NCPC Created in 2013 (merger of › Harbor mastering. 642 Ministry of Transport Comorienne des the ports of the Islands) and ports operational in 2021; decree › Technical and commercial n°13-141PR of 14 December management of ports. 2013 promulgating law n°13-011/AU of 2 December 2013 on the statutes of the SCP ONICOR Office nationale PICE 1982 (Act No. 82-017/AF of › Importation and 14,079 11,539 14,191 Ministry of Economy Chapter VII: State-Owned Enterprises in Comoros d’importation 13 August 1982) wholesaling of ordinary et de rice (state monopoly). commercialisation du riz SONEDE Société nationale NCPC 2018 (demerger of MA- › Production, transport, and 830 1,090 Ministry in charge of d’exploitation et MWE) (Decree n°018-081/PR distribution of water. Energy and Water de production des on the status of the National eaux Electricity Company) SONELEC Société nationale NCPC 2018 (demerger of MA-Mwe) › Production, transport, and 7,221 7,081 8,190 Ministry in charge of de l’électricité des (Decree n°018-081/PR on distribution of electricity. Energy and Water Comores the status of the National Electricity Company) › Infrastructure management. COM’AIR Com’Air assistance PICE Ministry of Transport OCOPHARMA Office Comorien PICE 2017 des produits pharmaceutiques ORTC Office de radio et PICE 2014 communication des Comores Not covered in the PER Al-Watam Al-Watam PICE 2011 SNPSF Société nationale PICE 2004 des postes et des services financiers Source: Ministry of Finance, SOEs, and SOEs’ financial statements. PUBLIC EXPENDITURE REVIEW 2022 COMOROS Note: A company is an SOE if a government unit, another public corporation, or a combination of government units and public corporations control the entity. Control of an SOE is defined as the ability to determine the general policy of the enterprise. This control can be exercised through the ownership of more than 50 percent of the capital of a company governed by private commercial law (usually a PLC). If control is exercised through public law or regulations in the company’s statute, the company is a PICE. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter VII: State-Owned Enterprises in Comoros 119 Between 2016 and 2021, the legal status of some SOEs has changed from PICE to PLC in the water, energy, and transport sectors. In 2018, MA-MWE (the electricity and water SOE) was divided into SONELEC and Société nationale d’exploitation et de production des eaux (SONEDE) to handle the production and distribution of electricity and water, respectively. Until 2018, the airports in Anjouan, Moheli, and Moroni were independently managed. The creation of the Aéroport des Comores (ADC) brought together these airports under the same firm, and the implementation of the 2013 law that created the SCP in 2021 resulted in a similar consolidation of the country’s ports. Box 6. Distinctive Characteristics of PICEs A PICE benefits from being a public body with prerogatives that are exorbitant to public law. Specifically, a PICE:  › cannot have its property seized; › can own a public domain and proceed to expropriations; › can issue enforceable titles; and › cannot be subject to liquidation or receivership procedures. Since it does not have access to capital, a PICE is subject to certain constraints. Specifically, a PICE:  › collects royalties (redevances, which strictly cover costs) instead of prices; › cannot use arbitration clauses on litigation issues (interpretation or execution); › must purchase goods and services on the basis of the public procurement law; › is subject to the principle of specialty (in the field of activity), which is stricter than the principle of the corporate purpose of private companies; › has a complex legal regime due to being a combination of public and private law; › can have its staff, except the chief executive officer and accountant, be subject to public law, with elements of private law; and › benefits from the government’s implicit guarantee and thus represents a contingent liability for the central government. Source: World Bank. However, the legal reforms of some SOEs have not been completed at the operational level. For example, the creation of SONELEC and SONEDE from MA-MWE has only been completed in terms of human resources, with employees legally divided between both firms. The separation has not yet been completed for fixed assets and liabilities, including receivables and short-term debt (Box 6). As a result, SONELEC and SONEDE do not have opening balance sheets (Table 21). Instead, the balance sheets of these two firms only show the debt and receivables since the companies were created. Both firms mainly settle past debt if their non-payment would threaten the continuity of their operations (supplier debt). These delays, which can only be explained by difficulties in evaluating certain assets and attributing them to one company or another, make short- and long-term management difficult due to a lack of financial visibility and certainty about the actual ownership of assets. As these undistributed assets are not included on their balance sheets, these companies’ financial statements do not reflect their real financial situation. A similar problem exists for Comores Câbles (CC) and CT in terms of debt and receivables before the transfer of fixed assets relating to cables from CT to CC. 2022 COMOROS 120 Chapter VII: State-Owned Enterprises in Comoros PUBLIC EXPENDITURE REVIEW Table 21. Comparison of Key Financial Indicators of MA-MWE and SONELEC (KMF million) MA-MWE (PICE) (2017) SONELEC 2019 (NCPC) Capital 3,522 3,522 Revaluation surplus 5,181 5,181 Retained earnings -5,067 -5,066 Net result for the year -2,868 -2,704 Result pending appropriation -14,248 -19,747 Investment subsidy 5,818 8,391 Grantor's interest 23,235 20,255 Total equity 15,574 11,148 Source: Cabinets Mazars Fivoarana (2018). Travaux de réhabilitation des comptes des exercices 2015-2016-2017, états financiers consolidés, August 2018, Moroni: Cabinets Mazars Fivoarana, and SONELEC (2019 Financial Statement). Beside firm-specific regulations, the oversight and management of SOEs is governed by two presidential decrees and one law. Law No. 06-001/AU, promulgated on January 6, 2006, (2006 SOE Law), along with Implementation Presidential Decree 07-151/PR, signed in 2007 (2007 decree), provides the overall framework for categorizing, managing (e.g., board composition and appointment of chief executive officers (CEOs) and regional directors), and supervising SOEs in Comoros.92 The most recent decree, No. 21-077/PR of August 2021 (2021 decree), was a major reform that reorganized the composition and functioning of SOE boards, but it has not yet been implemented. Thus, the country's overall institutional framework for SOEs still exhibits some weaknesses. VII.2 A Revision of the Legal and Regulatory Framework is Warranted to Improve SOE Governance The 2006 SOE law does not provide enough guidance to adequately distinguish between PLCs and PICEs, and it is skewed toward public administrative agencies. The 2006 SOE Law governs state capital interventions, and it provides exceptions to legislation that is applicable to commercial and industrial companies. OHADA Uniform Act of April 17, 1997, on commercial companies and economic interest groups governs commercial and industrial firms.93 The law is organized as follows: (i) four articles define the categories of SOEs; (ii) one article sets the legal regime (public vs. private) under which SOEs operate; (iii) one article discusses the creation of firms with public capital and PICEs; (iv) six articles discuss the board composition and appointment of the CEO and regional directors, their supervision, and the closure of “national enterprises;” and (v) thirteen articles focus on PAEs. However, it does not set out the necessary legal criteria for distinguishing between companies with public participation and PICEs. The 2006 SOE Law is no longer in line with the 2018 Constitution. While the 2006 SOE Law, which is still in force, deals with SOEs with the status of PLC, PICEs, and PAEs, Article 90 of the 2018 Constitution states that "the law shall (also) determine the rules concerning: the management of public enterprises [firms with public capital]." This provision requires Comoros to adopt a regulating law for SOEs with the status of PLCs, but not for PICEs and PAEs. For PICEs and PAEs, the 2018 Constitution is not explicit, as these two categories of SOEs should be governed by presidential decrees, according to Article 92 of the 2018 Constitution. The articles of the 2006 SOE Law that deal with public enterprises operating under private laws (PLCs) do not provide guidance for firms with joint public-private capital or adequately define the shareholders. Articles 6–12 of the 2006 92 Loi n°06-001/AU du 02 janvier 2006 portant réglementation générale des sociétés à capitaux publics et des établissements publics. 93 Article 5 of the SOE Law includes fields for both SOEs and PICEs. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter VII: State-Owned Enterprises in Comoros 121 SOE Law only deal with national companies that are wholly owned by Comoros, and the Law does not deal with cases where the State is a minority shareholder or a majority shareholder in a PLC. According the 2006 SOE law, the only form of state capital intervention appears to be a national company, which would not be significantly different from a PICE. This limits the scope of a joint public-private PLC in Comoros, as the institutional framework does not adequately guide state intervention in such a scenario. Finally, the 2006 SOE Law does not designate the State’s shareholder representatives or ownership entities, even though it stipulates that these public companies are connected or linked to “the ministerial department of the union government, the islands or adequate entities.” Moreover, the 2006 SOE Law does not deal with financial supervision, nor does it adequately define the link between SOEs and other line ministries that should contribute to the definition of their medium- and long-term strategies. The 2006 SOE Law does not address issues related to conflict of interest, transparency, shareholder strategy and functions, or dividend policy. The Law does not establish any principle for regulating conflicts of interest involving the State when it financially intervenes in a company, which is commonplace (e.g., the State in its role as regulator, client, or manager of general public policies such as measures to address unemployment or poverty). The 2006 SOE Law does not require SOEs to be transparent in terms of providing financial and performance data to the central administration and reporting to Parliament. It does, however, require the adoption of a deontology code. The 2006 SOE Law does not allow the representative of the State on the board of directors to: (i) develop a coherent and integrated shareholder strategy justifying the State's capital intervention and ensuring the appropriate balance between autonomy and intervention; or (ii) ensure that the reasons for the capital intervention are fulfilled while preserving the firm’s financial sustainability.94 Lastly, the 2006 SOE Law does not discuss the dividend policy that governs SOEs. Decree No. 07-151/PR of September 3, 2007, which specifies the 2006 SOE Law on the management and administration of SOEs with the status of PLCs and PICEs, contains derogations that contradict other laws.95 The 2007 decree deals with the board of directors, management, staff management, and supervision. However, it contains legislative provisions that constitute derogations from the provisions of the OHADA Uniform Act. For instance, the 2007 decree stipulates that: (i) the CEO is appointed by the president of the Republic instead of the board; (ii) auditors are appointed by the minister of finance instead of the General Assembly (Article 546, OHADA Act); and (iii) board members are appointed by senior public officials instead of the General Assembly. These derogations breach the principle of the hierarchy of norms and regulations, as the OHADA Act is at a legislative level or above, and the scope of the 2007 decree is limited to companies that are wholly owned by the State. VII.3 The Ownership and Oversight Function is Weakened by the Current Regulations, and Informal Practices Since the 2006 SOE Law was vague on SOE supervision, the 2007 decree tasked inter-ministerial committees with monitoring SOEs, with limited success. The 2007 decree (Articles 13-14) provides for the technical and financial supervision of SOEs that are PLCs or PICEs, and it facilitated the creation of an inter-ministerial supervisory committee (Comité interministériel de tutelle) for each public institution, which is only responsible for: (i) examining the reports from the board of directors and a report from the auditors; and (ii) making recommendations as necessary. This committee is made-up of at least 12 members (representatives of the ministries in charge of finance, economy, and technical supervision of the Union and the autonomous islands) and is coordinated by the ministry in charge of finance 94 This includes striking a balancing between providing SOEs too much autonomy in their strategic and operational management and interfering too much in their governance. 95 Décret n°07-151/PR fixant certaines modalités de gestion et d’administration des sociétés à capitaux publics et établissement publics à caractère industriel et commercial. 2022 COMOROS 122 Chapter VII: State-Owned Enterprises in Comoros PUBLIC EXPENDITURE REVIEW of the Union. However, the committee has too many members, the technical ministries are usually not aware of the inter-ministerial committee’s mandate, and there is no requirement for committee members to have specific technical and financial expertise. In addition, the committee does not have a mandate in areas such as board nomination or SOE performance contracts. Finally, there is a lack of coordination between SOEs and the technical ministries, as well as between SOEs and the Ministry of Finance. There is weak supervision of technical ministries because board activities have been suspended, and there is no institutionalized platform to organize the dialogue within the supervisory technical ministries and between these ministries and SOEs. The country’s legal texts (particularly the 2007 decree) provides for the technical supervision of SOEs by sectoral ministries. However, ministries are poorly equipped to do so, and none of the ministries responsible for supervising SOEs (notably the ministries in charge of energy, telecommunications, transport, and the economy) has a specialized monitoring department with the necessary staff and skills. With the suspension of board activities since 2006, the ministries’ statutory representatives on the board of directors can no longer perform their management duties within the SOEs. Exchanges of information and dialogues are organized periodically between the supervisory ministries and SOEs at varying levels (e.g., minister or secretary general [SG] on the ministry side; CEO, SG, or directors on the SOE side). These are informal and most often held at the request of the ministries, with no fixed periodicity, even though they seem to generally occur monthly. Exchanges of information and dialogues are not institutionalized. SOEs transmit annual financial statements to the technical supervisory ministries and the accompanying annual activity reports, but they receive no feedback from the authorities. The regular practical exchanges appear to be focused on the action plans drawn up annually by the SOEs, along with their follow-up during the year.96 The Ministry of Finance does not provide clearly identifiable financial supervision, and there is no dedicated department to supervise SOEs. The country’s legal texts, including the 2021 decree,97 do not specify the financial supervision that the Ministry of Finance must exercise over SOEs in terms of their economic and budgetary importance and the risks they may pose to public finances. Within the Ministry of Finance, there is no department responsible overseeing SOEs and shareholder responsibilities. The organizational regulation that created the General Directorate of Public Accounts and Treasury in 2012 includes a provision for creating a department within the Public Accounts Directorate (Direction de la Comptabilité Publique) to receive, analyze, and verify accounts and review them (mise en état d’examen) before they are submitted to SAI. However, this department has not been created, and the General Directorate of Public Accounts and Treasury does not receive SOEs’ financial statements. Similarly, the General Directorate of Budget does not have a department dedicated to SOEs, and it does not monitor the budget execution of SOEs. SOEs are required to prepare and transmit their forecasts as provided for in the annual budget circular (Lettre de cadrage budgétaire annuelle). The Secretary General of the Ministry of Finance and SOEs’ chief financial officers participate in an annual workshop organized by the Ministry of Finance that discusses and validates the forecasts of public bodies and entities.98 VII.4 The Current Regulations Do Not Allow a Professionalization of the Board of Directors The 2006 SOE Law provides guidance on the composition of SOE boards of PLCs and PICEs, but it is weak in terms of the composition of boards and selection procedures for board members. The 2006 SOE law does not provide companies with an appropriate legal basis that is consistent with the emerging concept of the State as shareholder. The composition of the board of directors does not allow it to exercise its strategic role, and board responsibilities are not 96 This information on exchanges between ministries and SOEs are based on oral information provided by ministries and SOEs only. 97 It does not specifically provide a seat on the board of directors for a representative of the Ministry of Finance. 98 This workshop could not be held in 2022 due to the COVID-19 pandemic. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter VII: State-Owned Enterprises in Comoros 123 clearly listed. Without a mandate or accountability for achieving explicit objectives, it is difficult for the State to fulfill its role transparently and efficiently as a shareholder. Article 8 of the 2006 SOE Law aims to essentially ensure a balance of power between the Islands, the Union, and Parliament. The law does not, however, encourage the professionalization of the board of directors, as it does not specify the selection procedure or the criteria for choosing members, nor does not it outline dismissal procedures for board members. It also does not allow private shareholders or independent professionals to join the boards, thereby hampering efforts to add independent board members with specific skills that could professionalize the board of directors. While the 2007 and 2021 decrees attempt to provide additional guidance on SOE boards, some provisions contradict the 2006 SOE Law, and they do not allow the professionalization of SOE boards. The 2021 decree describes the mandate and functioning of SOE boards and provides non-exhaustive guidance on the potential capabilities of board members (Article 5).99 It also specifies the composition of the board of directors by expressly including representatives of the supervisory ministries and representatives of civil society, and the decree gives the staff representative a deliberative vote. However, the composition of SOE boards outlined by the 2021 decree contradicts the 2006 SOE Law (Box 7). It is unclear if the provisions regarding the board composition are restrictive or whether they can be extended (within the limit of the total number of directors) to intuit personae appointments of independent directors outside the administrative field or sector-specific organizations. Finally, the decree does not provide for an obligatory representative of the MFBSB or, even better, for a sole representative of the State shareholder.100 Box 7. Composition of SOEs’ Board of Directors According to the 2021 Decree A  n SOE’s board of directors consists of a minimum of 6 and a maximum of 12 members, including a representative of: › The Presidency of the Union; › The supervisory ministry(ies), with one representative per ministry; › The executives of the autonomous islands (one representative per island); › The staff, elected by his or her peers; and › Civil society organizations operating in the sector concerned.  owever, the 2006 SOE Law does not provide for the appointment of a representative of civil society, and H Parliament is no longer represented by two representatives. Source: Decree No. 077/PR of 9 August 2021 on the reorganization of the composition and functioning of the boards of directors of state-owned companies and public establishments, and Law No. 06-001/AU of January 2, 2006, on the general regulation of public capital companies and public establishments. 99 Representatives of ministries and executives must have the necessary competency and be active civil servants of the administrative entities that appointed them (Article 5).. 100 The 2007 and 2021 decrees provide for financial supervision without specifying the modalities. 2022 COMOROS 124 Chapter VII: State-Owned Enterprises in Comoros PUBLIC EXPENDITURE REVIEW VII.5 There is A Need to Redesign the Procedures for the CEO appointment, and to Rebalance the CEO Autonomy in Staff Recruitment The 2006 SOE Law and the 2007 decree undermine CEO appointment procedures and create constraints for SOEs that are PLCs and operate like commercial firms. The 2006 SOE Law provides for the appointment of the CEO by the board of directors, which removes a fundamental prerogative of the State as the main shareholder. It only specifies that the choice of CEO is “subject to rules of competence, probity and the balance of the islands.” According to the 2007 decree, the director general is appointed by the president of the Union, which is contrary to the law of 2006 but appropriate to the specificities of SOEs. However, there is no provision for this appointment to be made proposed by the board of directors. Moreover, the function of the budget authorizing officer, which makes sense in public accounting regulations in terms of being separate from the public accounting officer, is not adapted to SOEs that are not PICEs and cannot operate under public accounting principles (e.g., the rule of payment after service has been rendered). In addition, while the 2021 decree states that the board of directors shall adopt the public enterprise’s organization chart that has been proposed by the CEO, the 2007 decree imposes an internal structure on central and regional directorates that is uniform for all SOEs, which can only be done for public administrative establishments (and possibly for some PICEs). Finally, the 2007 decree stipulates that the minister of finance appoints the director of the administrative and financial department (together with the minister of technical supervision) and the accounting officer, who reports to the minister of finance but those staff are not subject to the general regulations of public accounting. The 2007 decree grants too much autonomy to SOEs’ CEOs in the management of their staff, including their recruitment, but the adoption of the 2021 decree represented some progress. Up to 2021, recruitment had been decided by the CEO within the annual budget, and neither the board of directors nor any administrative entity needed to approve a recruitment or jobs plan. It is only in the 2021 decree that the board of directors was granted the authority to appoint and dismiss management staff based on the CEO proposal. The management of SOEs is heavily constrained by the State’s price setting mechanisms that aim to ensure public goods and services at affordable prices. The administered price regime imposed on SOEs, with some exceptions, supports the main objective of stabilizing prices and making sure that products and services are accessible. SOEs are highly constrained by administrative measures in the management of their margins, which are still not subject to competition. Except for CT, all the country’s SOEs are in a monopolistic position, and their prices are very rigid (Table 22). This strict general regulation of prices by the public authorities aims to ensure broad access for the population to basic goods (e.g., water, electricity, and rice) and a competitive supply of inputs and public services for private use. However, SOEs’ contribution to these public policy objectives is not evaluated in Comoros, and there is no mechanism to financially compensate SOEs that carry a significant public policy burden. Only SONELEC receives a subsidy, which is not determined by pre-established rules (except for the part that compensates for the difference between the price charged by SCH and the selling price of electricity). Except for CT, the managers of all SOEs do not have control over their margins, which means that they have no visibility into their competitiveness. The recruitment of staff is not adjusted to the company’s own needs and is used as a means of reducing chronic underemployment, particularly among young people. All past audits have noted a rapid increase in the wage bill of SOEs (except for CT) between 2017 and 2020, (Table 23). They recommended the urgent implementation of a strategy to reduce overstaffing and the adoption of a more rational management of human resources based on technical requirements. Without exception, the managers of all public enterprises confirm the existence of overstaffing and attribute it to: (i) the political will to provide jobs to the population; and (ii) clientelism, the extent of which cannot be assessed. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter VII: State-Owned Enterprises in Comoros 125 Table 22. Price Systems for Selected Comorian SOEs SOE Selling Price Regime Level and Timing Price Regime Regulated by Competition of Changes for Inputs a Competition Authority Société › Price set by the › No indexation › Fixed by the No › Sells mainly to Comorienne des State market SONELEC (20%) Hydrocarbures › Last modification (SCH) done in 2016 Comores Câbles › Royalties paid › Fixed annually › International ANRTIC › Monopoly (CC) by operators and approved price of cables › Wireless network (CT and Telma by the National ("fair and Comores) (23% ICT Regulatory reasonable") of turnover) Authority (ANRTIC) for maintenance and depreciation of cables Comores Télécom › Price set by the › Sharp drop in › Purchase from CC ANRTIC › Duopoly (CT) State before mobile voice › One cable 2017 prices installed by CT › Price set by (CANASA) competition since 2017 under the control of the regulatory agency Aéroport des › Airport charges › No change since › National Agency ANACM › Monopoly Comores (ADC) set by the State 2012 for Civil Aviation › Prices imposed (regulatory and Meteorology by companies agency has (ANACM) only technical competences) Autorité portuaire › Fees set by the › Fixed since 1995 No › Monopoly des Comores (APC) State Office nationale › State-fixed price › Few changes › Competitive No › Monopoly for d'importation for ordinary (2 in 15 years) (restricted ordinary rice et de rice (90% of consultation, commercialisation › Last change in turnover) with 3 or 4 du riz (ONICOR) April 2018 at international › Free for luxury 253,000 FC per suppliers) rice tonne) Société nationale › Price fixed by the › 220 FC per m3 No › Monopoly d'exploitation et State for 20 years de production des eaux (SONEDE) › Increased to 500 FC per m3 in 2020 2022 COMOROS 126 Chapter VII: State-Owned Enterprises in Comoros PUBLIC EXPENDITURE REVIEW Table 22. Price Systems for Selected Comorian SOEs SOE Selling Price Regime Level and Timing Price Regime Regulated by Competition of Changes for Inputs a Competition Authority Société nationale › Price set by the › No indexation › Purchase from No › Monopoly de l'électricité State SCH (thermal oil des Comores › Stable › Development of plants) at 235 FC voltaic energy (SONELEC) › 132FC per KWh per liter) (produced by (high level) INNOVENT and VIGOR, with purchase obligation by SONELEC at a price fixed by the State at 98 FC and 103FC) Com'Air assistance › Fees (aircraft/ › Stable since › ANACM › Monopoly, but (COM'AIR) passenger/ 2012 regulated by the baggage) International Civil Aviation › Price fixed by the Organisation State (ICAO) Source: SOEs. Table 23. Evolution of Staff Costs, 2017–2020 KMF million SOE 2017 2018 2019 2020 Reference Growth rate years over the reference period Société Comorienne des Hydrocarbures 1,069 1,138 1,361 1,385 2020–2017 30% (SCH) Comores Câbles (CC) 140 156 138 201 2020–2017 44% Comores Télécom (CT) 6,284 6,226 5,758 4,611 2020–2017 -27% Aéroport des Comores (ADC) (sur la période considéré Aéroport de Moroni 902 951 2018–2017 5% seul) Autorité portuaire des Comores (APC) 430 489 512 2019–2017 19% Office nationale d'importation et de 296 315 453 590 2020–2017 99% commercialisation du riz (ONICOR) Société nationale d'exploitation et de 176 430 production des eaux (SONEDE) 1,443 2020–2017 38% Société nationale de l'électricité des 1,236 1,664 Comores (SONELEC) Source: SOEs’ financial statements. Note: Not all available data relate to the same period; the "reference year" column defines the two years of comparison of SOEs’ staff costs, with the growth rate in the last column. To consider changes in the structure of certain companies, the comparison period has been limited to comparable perimeters (ADC, APC). SONELEC and SONED can only be compared together with the company from which they originated (MA-MWE). While comparability is not always complete, the conclusions are reliable. With the available data, it is not possible to distinguish between changes in staff numbers and changes in wages. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter VII: State-Owned Enterprises in Comoros 127 VII.6 There Is a Need to Increase the Effectiveness of Performance Monitoring Due to poor performance, SOEs’ boards of directors were dismantled in 2016 and replaced by a supervision and performance committee. Poorly composed, endowed with imprecise powers, and founded on an incoherent legal basis and unclear legitimacy, the boards of directors of SOEs with PLC status were not able to fulfill their assigned roles and duties. They were limited to formally approving SOEs’ financial statements, and their increasing dependence on the government, which used them as a direct policy instrument, led to serious financial and operational failures, as highlighted by several audits and diagnostics prepared by the IMF and the French Development Agency. As a result, the government suspended the board activities of all SOEs in 2016, and it centralized the governance, supervision, and performance monitoring functions of SOEs within the Ministry of Finance in a specialized committee, the Supervision Committee of Public Enterprises Performance (Comité de supervision de la performance des entreprises publiques, CSPEP), with broad powers to supervise and intervene in SOEs (Box 8).101 Finally, the 2006 SOE Law and the subsequent regulations do not provide specific guidance on external audits, internal control, or internal audits.  omposition, Functioning, and Mandate of the Supervision Committee of Public Enterprises Box 8. C Performance  he CSPEP was established by Decree No. 18-050 of June 14, 2018, and the SOEs’ board of directors have not T reconvened since the issuance of the decree. It was made up of: › The Minister in charge of finance, who is its chairman; › The secretary general of the government; › Three representatives of the Ministry of Finance; › A representative of the Ministry of Economy; and › A representative of the Ministry of Transport. t met once a quarter or, exceptionally, at the request of its chairman. The committee was also supported by an I administrative and financial technical unit. The mandate of the CSPEP was to:  › Determine the strategic orientation of public enterprises, in conformity with sectoral policy defined by the State; › Ensure the proper functioning of SOEs; › Carry out a strategic diagnostic of SOEs; › Authorize investments decided by the SOEs’ board of directors; › Analyze and steer financial and operational results; › Screen and approve procurement proposals; and › Define a roadmap for public enterprises.  It could also propose to the competent authority sanctions against managers. Source: Decree No. 18-050 of 14 June 2018 on the creation of a committee to supervise the performance of SOEs. 101 The Supervision Committee of Public Enterprises Performance was established by Decree No. 18-050 of June 14, 2018, and the SOEs’ board of directors have not reconvened since the issuance of the decree. 2022 COMOROS 128 Chapter VII: State-Owned Enterprises in Comoros PUBLIC EXPENDITURE REVIEW The CSPEP, whose mission was too ambitious and whose resources were too limited, was also unable to fulfill its mandate and replace the boards of directors. The powers attributed to the CSPEP established it as a de facto centralized board common to all SOEs, and its authority exceeded those attributed to a supervisory body and overlapped with that generally conferred to SOE boards. It was made up of senior government officials, without a dedicated technical team tasked with preparing key policy documents. The CSPEP faced various obstacles that hampered its overall functioning. First, it lacked an active and effective intermediation of the board with SOEs. Second, it could not maintain a close relationship with the CEOs of all SOEs, nor could it master such a wide array of technical, economic, and financial problems facing SOEs. Finally, it suffered from the absence of an updated, effective, and efficient information system on SOEs. As a result, the CSPEP gradually ceased to meet, and the 2021 decree on boards of directors formally ended its legal existence, without institutionalizing the government’s monitoring of SOEs’ performance. SOEs are not encouraged by the State to develop a strategic vision and outline medium-term goals, and there is no performance contract between SOEs and the State. The majority of public enterprises do not have strategies that are consistent with PCEs (the very notion of strategy seems to be poorly understood in many SOEs). The CGP has no specific responsibility or specialized department to help SOEs create a strategic vision for their activities and develop strategies. The previous procedure that involved having the board of directors adopt a strategy and validating it with the Union Council has been abandoned. Similarly, the enterprise contracts102 provided for in the legal texts are no longer established, and they have not been replaced by mission letters. In practice, there is no systematic effort to stimulate the development of a strategic culture in SOEs, the CGP, or the Ministry of the Economy. The strategic actions undertaken by some SOEs are individual initiatives taken by their CEOs. VII.7 Enhanced Data Quality and Coverage Could Help Strengthening Transparency, Reporting, and Disclosure for Better Governance Accounting information is scarce and poorly controlled. SOEs establish annual accounts, normally according to the standards of the OHADA Uniform Act. Accountants are appointed by the minister of MFBSB but are not necessarily public accountants. The application of the personal and pecuniary liability responsibility regime of the public accountant to their operations is not applied in practice by the Accounts Section of the Supreme Court (débet judgement).103 SOEs do not perform internal audits, and only three SOEs (CT, ONICOR, and SCH) submit their accounts to auditors, and for some of them, the auditors explicitly state that the result is neither a certification nor an audit, but an attestation. Only the auditor for CT gave an opinion on the sincerity and regularity of the accounts. The public accounting directorate of the Ministry of Finance does not receive the accounts and does not have the means to analyze them, and the supervisory ministries are not responsible for the analysis. While Ordonnance No. 19-003/PR (Article 231) mandates the Accounts Section of the Supreme Court to audit SOEs, SAI does not have the resources to systematically audit the accounts, but it can make observations about accounting irregularities that it finds during its controls. Accounting data are not very reliable. Many serious irregularities are often found when the accounts of SOEs are audited by auditors or examined by the Chamber of Accounts. For example, the last accounting audit (2019) for CT shows that the accounts are certified with reservations by the auditor (Box 9). The accounts of MA-MWE, which provided electricity and water before the creation of SONELEC and SONEDE, were audited by an auditor for the period 2015–17, as these accounts had not been established after 2014 and the auditor deemed the accounts in 2017 as neither regular nor sincere. The audit noted serious anomalies in the accounting system affecting the very foundation of accounting, such 102 Classic contracts of objectives and means in which the objectives of the companies, the public service missions entrusted to them, and the means made available to them by the State are fixed. 103 For example, the accounting officer shall pay out of his personal funds the expenses paid without the necessary supporting documents. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter VII: State-Owned Enterprises in Comoros 129 as: (i) retained earnings not being carried forward; (ii) bank account balances not being justified by bank reconciliation statements; (iii) omissions in the recording of certain operations; and (iv) accounting operations being entered manually due to a lack of interface between the various applications and the accounting software. Box 9. Comores Telecom’s Accounting Anomalies Identified by the Auditors in 2019 The auditors of Comores Telecom’s accounts noted that:  › The accounts receivables belonging to CT toward CT and its employees totaled KMF 1,853,566,996. › The difference between GPTO (the accounting software) and the financial statements totaled KMF 2,500 million (out of a total of KMF 52,095 million in net assets and KMF 17,348 million in resources), which is not justified. › The current system does not provide details on the state account, as state receivables have not been identifiable and registered in an auxiliary account since 2019. › No procedure for recovering state receivables has been initiated by the company. › No provisioning policy for receivables is clearly defined. › The procedures followed to award public contracts after a call for tender do not comply with the manual of procedures or with the CMP. › CT’s equity investment in CC has not been recorded in the financial assets’ accounts. Source: CT external auditor’s report. There are important discrepancies between data reported by SOEs and the Directorate of Budget. SOEs’ accounting data differ from the data on budget execution prepared by the Budget Directorate. Between 2018 and 2020, there were significant differences between taxes paid by SOEs and what they received from the state budget (Table 24). Table 24. Comparison of Taxes and Duties for Selected SOEs, 2018–20 Taxes and Duties (KMF million) SOE 2018 2019 2020 DGB SOE Discrepancy DGB SOE Discrepancy DGB SOE Discrepancy Société Comorienne des Hydrocarbures 7,443 6,720 723 6,836 7,424 -588 7,002 6,796 206 (SCH) Comores Câbles 24 -24 4 -4 51 72 -21 (CC) Comores Télécom 2,660 65 2,595 2,954 64 2,890 1,374 65 1,309 (CT) Aéroport des 57 10 47 53 46 7 8 2 6 Comores (ADC) Autorité portuaire 26 50 -24 37 76 -39 16 n.a. 16 des Comores (APC) 2022 COMOROS 130 Chapter VII: State-Owned Enterprises in Comoros PUBLIC EXPENDITURE REVIEW Table 24. Comparison of Taxes and Duties for Selected SOEs, 2018–20 Taxes and Duties (KMF million) SOE 2018 2019 2020 DGB SOE Discrepancy DGB SOE Discrepancy DGB SOE Discrepancy Office nationale d'importation et de 1,998 2,022 -24 2,088 1,945 143 1,482 2,186 -704 commercialisation du riz (ONICOR) Société nationale d'exploitation et n.a. n.a. 1 -1 20 2 18 de production des eaux (SONEDE) Société nationale de l'électricité 180 n.a. n.a. 239 313 -74 115 449 -334 des Comores (SONELEC) Com'Air assistance 36 n.a. n.a. 51 nc 51 11 nc 11 TOTAL 12,184 8,891 3,293 12,207 9,873 2,334 10,052 9,572 480 Source: General Directorate of Budget (Direction Générale du Budget, DGB) and SOEs’ financial statements. VII.8 The Performance of State-Owned Enterprises Deteriorated Between 2017 and 2020 The performance of the country’s SOEs deteriorated between 2017 and 2020, with important disparities among them. For eight SOEs with available data, total net income, although positive, declined from KMF 3,148 million in 2017 to KMF 927 million in 2020 (Table 25). However, aggregate data on total net income for Comoros’ SOEs hide important disparities among firms. First, without SCH, SOEs’ total net income would be negative. Second, while the situation of several SOEs worsened in 2020, the financial situation of SONELEC may warrant a deeper analysis, as its net income was negative during two consecutive years (2019 and 2020). This deterioration could be partially explained by the surge in staff costs. Table 25. Financial Performance Indicators for Selected SOEs, 2017–20 KMF million 2017 2018 2019 2020 SOEs Net Net Net Net Income EBITDA (1) Income EBITDA (1) Income EBITDA (1) Income EBITDA (1) Société Comorienne des 3,588 4,712 2,109 1,959 1,980 1,625 4,940 10,389 Hydrocarbures (SCH) (2) Comores Câbles (CC) 114 54 195 959 179 731 89 730 Comores Télécom (CT) 1,996 11,825 400 5,870 312 3,626 247 6,005 Aéroport des Comores 197 291 1,808 2,040 -291 -273 -855 -870 (ADC) ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter VII: State-Owned Enterprises in Comoros 131 Table 25. Financial Performance Indicators for Selected SOEs, 2017–20 KMF million 2017 2018 2019 2020 SOEs Net Net Net Net Income EBITDA (1) Income EBITDA (1) Income EBITDA (1) Income EBITDA (1) Autorité portuaire des Comores (APC) Office nationale d'importation et de 121 1,509 133 -176 184 -614 -927 -956 commercialisation du riz (ONICOR) Société nationale d'exploitation et de -2,868 n.a. n.a. n.a. 562 556 304 287 production des eaux (SONEDE) Société nationale de l'électricité des Comores n.a. n.a. -2,705 -3,657 -2,871 -3,296 (SONELEC) TOTAL (SCH, CC, ADC, ONICOR, SONELEC + 3 ,148 221 927 SONEDE) TOTAL (CC, ADC, ONICOR, SONELEC + -440 -1,759 -4,013 SONEDE) Source: SOEs’ financial statements. Note: (1) Earnings before interest, taxes, depreciation, and amortization; (2) Net income has been calculated as the gross result in the financial statements divided by 2 to take account of the corporate income tax (50 percent for SOEs in Comoros); (3) n.a. refers to not available. According to available unaudited data on SOEs, the overall financial situation remains weakened by the high level of receivables and cross debt, although the estimated liquidity ratio has broadly improved, and there is limited long-term debt. The SOEs’ financial statements show that the overall current (liquidity) ratio improved from 1.5 in 2018 to 2.01 in 2020.104 The bulk of SOE debt is short term (mainly supplier account and social and fiscal debt) related to operations and should therefore be interpreted in relation to current assets (stocks and receivables, mainly receivables from clients). However, the liquidity ratios of SONELEC, SONEDE, ONICOR, and ADC seem to be vulnerable to shocks (Table 26). In addition, an IMF report shows widespread cross debt related to commercial debt and receivables (between suppliers and public customers) as well as tax debt. For instance, the cross debt and receivables declared by the creditor amount to KMF 33,842 million out of KMF 40,504 million of short-term debt held by SOEs (about 85 percent of debt and receivables), and this debt is contested and not yet ascertained, weakening the credibility and validity of the estimated liquidity ratios. The fiscal relationships between SOEs and the state are mainly anchored around SOEs’ tax payments, while dividend payments and government subsidies are limited to selected SOEs. Like all Comorian firms, SOEs are subject to taxes, and the main sources of government revenues are: (i) the single tax on petroleum products (TUPP); (ii) the import tax on ordinary rice; and (iii) telecommunication taxes and fees (e.g., taxes on incoming international calls, payroll taxes, 104 The current (liquidity) ratio is the ratio between current assets and current liabilities, which is a standard indicator for assessing a company’s ability to finance its current liabilities with current assets. Ideally, it should be above 1, but investors are generally interested in a liquidity ratio that ranges between at least 2 and 3. 2022 COMOROS 132 Chapter VII: State-Owned Enterprises in Comoros PUBLIC EXPENDITURE REVIEW telecommunication license fees, and corporate taxes). However, SOEs’ tax and dividend payments declining between 2018 and 2020 (Table 27). State subsidies to SOEs are not governed by explicit rules and did not appear in the administrative accounts of the central administration in 2016–20. During this period, the central administration paid KMF 8,207 million to SOEs, which is more than the dividends received. SONELEC (previously MA-MWE) is the only firm that has clearly benefited from subsidies, according to the budget laws (2020–18). Table 26. Debt, Claims, and Liquidity of Selected SOEs KMF million SOE year Short term Of which Net Provisions Gross Total Equity and Current debts tax and receivables receivables balance long-term liquidity social sheet debts ratio security (Current assets and cash/short term debts) 2018 12,156 3,770 9,698 9,698 29,842 17,546 1.07 SONELEC 2019 11 936 4 813 2,735 2,735 23,357 11,148 0.53 2020 12 716 4 871 12,829 12 829 20 821 8,068 1.30 2019 87 29 470 470 647 560 6.98 SONEDE 2020 238 51 939 939 1,110 872 4.31 2018 4,727 1 100 820 1 805 2,625 5,892 1,165 1,13 ONICOR 2019 4,307 1 585 1,640 749 2,389 5,949 1,349 1.13 2020 4,602 1 487 1,720 1 364 3,084 5,613 221 1.26 2018 6,713 495 9,816 7,734 17,550 55,506 47,757 2.07 CT 2019 4,823 -969 12,481 4,871 17,352 52,095 46,374 3,24 2020 3,795 -864 14,617 4,740 19,357 49,865 44,934 4.95 2018 879 25 1,198 1,198 4,748 3,869 1.48 CC 2019 934 204 1,711 1,711 9,374 8,440 1.92 2020 568 46 1,467 100 1,567 8,862 8,294 3.46 2018 574 258 1,001 231 1,232 115,886 115,222 1.84 ADC 2019 962 610 1,424 231 1,655 115,608 114,530 1.57 2020 1,152 813 1,157 202 1,359 114,689 113,414 1.09 2018 17,161 7,374 6,261 13,635 17,916 557 0.82 SCH 2019 17,455 10,400 3,460 13,860 18,606 953 0.86 2020 9,398 10,781 3,460 14,241 25,583 15,987 2.24 Source: SOEs’ financial statements. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter VII: State-Owned Enterprises in Comoros 133 Table 27. Fiscal Transactions between SOEs and the State, 2018–20 KMF million SOE 2018 2019 2020 Total Taxes Paid by SOEs Société Comorienne des Hydrocarbures (SCH) 22,537 21,747 2,236 Comores Câbles (CC) 51 72 191 Comores Télécom (CT) 9,762 7,565 3,863 Aéroport des Comores (ADC) 144 199 41 Autorité portuaire des Comores (APC) 82 119 40 Office nationale d'importation et de commercialisation du riz (ONICOR) 5,710 5,821 204 Société nationale d'exploitation et de production des eaux (SONEDE) 20 34 11 Société nationale de l'électricité des Comores (SONELEC) 675 622 427 Com'Air assistance (COM'AIR) 105 143 37 Société nationale des postes et des services financiers (SNPSF) 316 424 112 TOTAL 39,404 36,751 7,167 Dividends Paid by SOEs SCH 1,013 - 621 CT 2,914 2,566 381 ONICOR 106 81 112 TOTAL 4,034 2,647 1,115 Government Subsidies Received by SOEs Société nationale de l'électricité des Comores (SONELEC) 3,000 3,207 2,000 Source: Ministry of Finance (Directorate of Budget). 2022 COMOROS 134 Chapter VII: State-Owned Enterprises in Comoros PUBLIC EXPENDITURE REVIEW VII.9 Policy Options Table 28. Policy Options to Improve State Owned Enterprises Governance Short-term measures (Less than 2 years) Medium-term and long-term measures (2+ years) VII. State-Owned Enterprises in Comoros VII.1. Improve the legal and regulatory framework › Enact an enhanced SOE law that will govern public › Issue decrees to govern public industrial and liability companies with state participation (wholly commercial establishments. owned, majority, and minority shareholding), set › Establish a strategy for the state as shareholder that dividend policies, and facilitate annual performance justifies the reasons for the state’s shareholder actions, contracts. (P) identifies objectives and means (including capital shares), and clarifies control and reporting. VII.2. Improve ownership and oversight functions › Operationalize inter-ministerial committees as › Create a single entity (directorate) that will be shareholder institutions that will discuss SOE issues with responsible for supervising SOEs and act as the main the supervision directorate of the Ministry of Finance. state shareholder within the Ministry of Finance. › Train staff to perform duties related to SOE oversight. VII.3. Strengthen the role of boards of directors › Professionalize the boards of directors by establishing › Revise the composition of the board of directors to appointment criteria, training directors, publishing include independent members and only one state board guides for directors, and allowing independent member. directors. › Centralize the responsibilities of the state around a single representative on SOEs’ boards of directors, who will guarantee the interests of SOEs and have the necessary administrative resources. › Equip the boards of directors with the means to function properly by creating specialized committees and clarifying what information must be provided to SOEs periodically. › Issue a decree/regulation that requires the boards of directors to adopt firm operational procedures to ensure their proper functioning. › Adopt regulations that give the state representative on the board of directors the necessary independence to ensure the proper management of conflicts of interest involving the state (including conflicts related to regulation or public policies). › Provide SOEs’ board of directors with all the responsibilities of their private commercial counterparts as provided for in private commercial law (OHADA) and limit to the strict minimum the board of directors’ decisions subject to prior approval by the government (e.g., pay scales or external debt). ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter VII: State-Owned Enterprises in Comoros 135 Table 28. Policy Options to Improve State Owned Enterprises Governance Short-term measures (Less than 2 years) Medium-term and long-term measures (2+ years) VII.4. Improve SOE daily management › Make legal provisions for CEOs to be appointed › Transfer the decisions on recruitment plans and staffing upon their nomination by the board of directors and to SOEs’ boards of directors and their implementation concurrence by the state shareholder entities. to the CEOs according to their technical needs. › Conduct organizational and financial audits of critical › Finalize the separation of MA-MWE to identify assets SOEs. and liabilities held by SONELEC and SONEDE. › Prepare action plans to restructure SOEs based on audit › Perform audits of cross debt for all SOEs and adopt a results. clearance strategy. › Set tariffs at levels consistent with SOEs’ financial stability and sustainability. › Establish a clear policy on SOE subsidies to compensate for the implementation of government policy. VII.5. Enhance transparency, reporting, and disclosure › Adopt provisions within new decrees and laws that › Encourage the Account Section (SAI) to perform regular require SOEs to regularly report financial data to the audits and require the full compliance of SOEs. Ministry of Finance. (P) › Require all SOEs to publish plans that respond to issues › Issue and implement regulations on the application of raised by the SAI. and compliance with accounting standards for financial › Publish an annual report on the financial situation of reporting, including staff recruitment. Comoros’ SOEs. › Issue a regulation that requires SOEs to have their › Require SOEs to establish internal control and audit accounts audited by external auditors on a yearly basis. functions. (P) VII.6. Improve performance monitoring › Conclude annual performance contracts with SOEs’ boards of directors and CEOs that outline public service objectives and key reforms to be undertaken. › Require SOEs to prepare an annual management report. 136 Disaster Risk Chapter VIII:  Management The Union of the Comoros is exposed to a wide range of natural disasters and is one of the most vulnerable countries in the world to climate change, which adversely affects its development and exacerbates existing social and economic vulnerabilities. This chapter provides an overview of Comoros’ exposure to natural disasters, and it reviews the government’s strategy on disaster preparedness, response, and rehabilitation, as well as the underpinning legal and institutional frameworks. It concludes that DiRM is not explicitly documented in the national budget, and there is a need to strengthen the PFM of disasters, including by improving transparency. Despite Comoros’ high exposure to natural disaster shocks and climate risks, there has been no recent review of disaster-related public expenditures. This PER was prepared in consultation with the Ministry of Finance and Budget as a first diagnostic to provide a comprehensive account of natural disaster-related public spending and to help further improve the flow of funds following disasters and climate-related shocks. Despite the consultation, there is limited information on disaster expenditure, making it difficult to quantify the total fiscal cost of disasters and evaluate the efficiency of related public spending. This chapter provides an analysis of public expenditure planning for disaster risk reduction (DRR) in Comoros and highlights the country’s level of public spending on DRR. It includes an overview of Comoros’ exposure to natural disasters, and it reviews the government’s strategy on disaster preparedness, response, and rehabilitation and the underpinning legal and institutional frameworks. The chapter also reviews financing mechanisms and presents a risk- sensitive budget review, which uses the policy marker developed by the Development Assistance Committee (DAC) of the Organization for Economic Co-operation and Development (OECD). VIII.1 Comoros is exposed to natural and climate change-related disasters Comoros is exposed to a wide range of natural disasters and is one of the most vulnerable countries in the world to climate change, which adversely affects its development and exacerbates existing social and economic vulnerabilities. Tropical cyclones, volcanic eruptions, floods, and earthquakes are the types of disasters that frequently affect Comoros (Table 29). The country’s archipelago has recently faced increased seismic activity, with an underwater volcano located about 50km from Mayotte island. In the last 40 years, Comoros has been hit by 15 adverse natural events that have affected more than 800,000 people.105 Comoros is the 33rd most vulnerable country and the 166th most ready country on the Notre Dame Global Adaptation Initiative Matrix.106 Comoros is especially vulnerable to climate change because of its dependence on agriculture and natural resources. The country is dependent on resources such as vanilla, clove, ylang-ylang, and fisheries, and its vulnerability is exacerbated by a rapid and largely unregulated urban expansion, high poverty and unemployment, and rapid environmental degradation, including coastal erosion. Climatologists forecast an increase in average temperature, a decrease in annual precipitation, an increase in the number of dry years, and rising sea levels in the next 30 years. For Comoros, a sea level rise by 20 centimeters by 2050 would displace at least 10 percent of the population.107 105 EM-DAT: The Emergency Events Database – Université Catholique de Louvain (UCL) - CRED, D. Guha-Sapir - www.emdat.be, Brussels, Belgium. 106 Notre Dame GAIN Country Index: https://gain.nd.edu/our-work/country-index/rankings/. 107 World Bank. 2019. Country Partnership Framework (CPF) FY20-24, 2019. Washington, DC: World Bank. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter VIII: Disaster Risk Management 137 Table 29. Natural Disasters and Losses in Comoros, 1980–2022 Hazards Occurrence Total deaths Total affected Earthquake 1 0 10,000 Flood 2 6 67,637 Storm (Tropical cyclone) 8 67 470,174 Volcanic activity 4 1 284,200 Source: Centre for Research on the Epidemiology of Disasters (CRED), EM-DAT: International Disaster Database. Box 10. The Impact of 2019 Cyclone Kenneth on Public Finances  ne of the most devastating tropical cyclones in the country’s history, Cyclone Kenneth, struck Comoros in 2019. O More than 40 percent of the population, or 345,131 individuals across the three islands, were affected by the cyclone, with 185,879 people in need of humanitarian aid,a 153 injured, 11,969 displaced, and 6 fatalities recorded. About 11,900 houses were damaged, including 4,854 houses fully destroyed. Cyclone Kenneth had a significant impact on public infrastructure, including roads, ports and airports, dykes, hospital and schools, buildings, and water and electricity networks. On May 8, 2019, the government established an inter-ministerial committee at the Ministry of Economy and Investment Planning to manage the aftermath of the disaster.b The following day, on May 9th, the government declared a state of natural disaster throughout the entire country.c  amages and losses were estimated at US$185,4 million and reconstruction reached US$277.5 million. The D financing gap was estimated at US$227.2 million,d after deducting for commitments from the national budget and development partners as well as contributions from households and the private sector.  yclone Kenneth rapidly exhausted the limited annual budget allocation for contingent expenditures, forcing the C government to adopt exceptional ex-post financing options, such as retaining 10 percent of civil servants’ salaries for the months of March and April 2019.e The sums withdrawn were collected by the Treasury and deposited in a Special Account at the BCC.  ollowing Cyclone Kenneth, the IMF recommended the development of a natural disaster resilience strategy F comprising three pillars: (i) enhancing structural resilience, which requires infrastructure and other investments; (ii) building financial resilience, which involves creating fiscal buffers; and (iii) boosting post-disaster (including social) resilience, which requires contingency planning and investments to allow for an effective disaster response. While pillars i and iii are being implemented, the implementation of pillar ii remains critical. a Decree No19-047 of May 8, 2019. b Decree No19-058/PR dated May 09, 2019. c Government of the Union of the Comoros (2019) Damage Assessment of Cyclone Kenneth & Recovery and Reconstruction Plan. d Decree No19-045/PR of April 27, 2019 on the financing mechanism, for the repair of the damage caused by cyclone Kenneth. e IMF 2019 Article IV Consultation-Staff Report. This exposure to natural disasters translates into a significant source of fiscal and socioeconomic risks. Disasters that affect a country’s population and damage key public assets and infrastructure have an impact on a country’s fiscal balance, especially in political fragile states such as Comoros that have weak public administrations (Box 10). GDP growth for 2019 was revised down from 3.1 to 1.3 percent to account for the effect of Cyclone Kenneth. The cyclone disproportionality affected poor households and people living in rural areas who do not benefit from remittances and are less resilient to exogenous shocks. As a result, a proportion of the population was prevented from moving out of poverty or was even pushed back further into poverty. Given limited mitigating factors, the IMF estimates the impact of natural 2022 COMOROS 138 Chapter VIII: Disaster Risk Management PUBLIC EXPENDITURE REVIEW disaster shocks at 10 percent of GDP.108 Therefore, a deliberate approach to the PFM of disasters is becoming increasingly important to mitigate their adverse fiscal, social, and economic impact. VIII.2 While the government has incorporated climate change at the strategic level, several recommendations have not yet been implemented The government is committed to strengthening the country’s resilience to natural and climate-related disasters. Launched in 2019, PCE seeks to build a country resilient to the risks of natural and man-made disasters. It details the tools and human, material, and financial resources needed to reduce the vulnerabilities of communities and institutions and ensure an efficient response to emergencies. Among its programs, the PCE includes measures to improve DiRM as well as institutional and human capacity. Comoros’ previous national development plan demonstrated the government’s historic commitment to DiRM. Before the adoption of the PCE in 2019, the Strategy for Accelerated Growth and Sustainable Development (Stratégie de croissance accélérée et de développement durable révisée, SCA2D) 2018–2021 (Objective 1.6) committed the government to strengthening disaster and climate change resilience and integrate DiRM into the country’s development planning process. Specific objectives included strengthening: (i) emergency and civil protection capacity; (ii) the capacity of the Karthala observation center; (iii) scientific knowledge and information systems to predict disasters; and (iv) institutional preparedness and capacity of the population and public authorities to respond to disasters. While the government developed the National Disaster Risk Reduction Strategy (Stratégie Nationale de Réduction des Risques de Catastrophes, SNRRC) in 2015, its core recommendations have not yet been implemented. The strategy includes 6 strategic axes and 27 programs to substantially reduce losses and damages due to disasters and strengthen community resilience while integrating DiRM into sustainable development efforts. It also includes an analysis of a desirable funding mechanism for a sustainable and flexible DRR financing framework, divided between: (i) budget allocation for prevention and mitigation (pre-disasters); (ii) an emergency response fund (crisis management); and (iii) budget allocation for rehabilitation and construction works (post-disasters). However, these recommendations have not yet been implemented, neither the fund nor the platform is operational, and the legal framework for the official declaration of emergency that triggers access to the fund does not exist. A new National Disaster Risk Reduction Strategy (NDRRS) was being developed in 2022, with support from the UNDP, and ongoing reforms are expected to address the country’s strategic, financial, and sectoral shortcomings. VIII.3 Legal and Institutional Framework VIII.3.1 The legal framework is limited and derived from different legislations The legal framework that guides DiRM and disaster risk financing is limited and derived from various legislations. The legal framework addressing DiRM is comprised of: (i) Environmental Law Decree No. 94-100 / PR, Article 70, detailing commitments to contingency plans (response in crisis situations); and (ii) Public Health Law and Social Action Law No. 95-013 / PR, Chapter VI (stipulated in Articles 179, 180, and 181), describing measures to combat natural disasters. However, other decrees such as the code of urbanism and habitat, forestry law, etc., do not consider major risks. Comoros 108 IMF Country Report No. 20/198. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter VIII: Disaster Risk Management 139 is yet to develop a specific law to provide legal support for DiRM and related activities. At the time of this review, a DiRM law was being developed with support from the United Nations Development Programme (UNDP), which is critical for effective DiRM in Comoros. VIII.3.2 Institutional Arrangements The Directorate General of Civil Security is the leading government body in charge of DiRM in the Comoros. In 2007, the government established the Center for Relief Operations and Civil Protection (Centre des Opérations de Secours et de la Protection Civile), which was merged in 2012 with the Civil Security to become the Directorate General of Civil Security109 (Direction Générale de la Sécurité Civile, DGSC) under the Ministry of Civil Security. The DGSC is recognized as the main government body in charge of disaster management. It is mandated to protect the population, assets, and the environment, and to coordinate the development of a national DiRM policy and ensure its implementation. The DGSC is organized around four institutions: (i) the Cabinet of the Relief and Preparedness Coordination Center; (ii) the Relief and Preparedness Coordination Center (Centre de Coordination des Opérations de Secours et Préparartion), which is instrumental in the coordination and management of the emergency response down to the local level; (iii) the sub- division for studies and prevention and the sub-division for resources and logistics (which is among the authorities responsible for accounting for resources (national and international) made available during a crisis (Article 17); and (iv) the fire department. The DGSC is represented on each island by a Regional Direction for Civil Security. In addition, disaster risk coordination is institutionalized through the National Platform for Disaster Risk Reduction, which is not yet operational. The DGSC is responsible for the platform’s national coordination, including: (i) guiding national platform actions; (ii) ensuring resource mobilization, management, and accounting related to support provided to victims; and (iii) approving annual programs and activity reports. Every ministry is represented on the national platform. Despite its official establishment in 2010,110 the government did not use the platform during Cyclone Kenneth in 2019, establishing instead an ad-hoc inter-ministerial committee. Lack of financial resources to support the platform’s activities and low human capacity related to DRR within ministries have impeded critical multi-stakeholder coordination around DiRM activities. There are other institutions that are part of the DiRM institutional framework, but they are unable to perform their duties due to limited financial and human resources. The National Civil Aviation and Meteorology Agency (Agence Nationale de l’aviation civile et de la météorologie) and the Karthala Volcano Observatory (Observatoire Volcanologique du Karthala) under the National Center for Scientific Research at the Ministry of National Education, Higher Education and Scientific Research have the mandate to monitor hydrometeorological risks and volcano and seismic risks, respectively. However, both institutions face severe constraints in carrying out their missions due to financial and operational capacity limitations. VIII.4 There is a need to design and implement financing mechanisms for disaster management Comoros does not currently have a coherent strategy to manage the financial impact of natural disasters. Although there are several funding mechanisms (both government and donor), there is no overall strategy for these different 109 Decree No. 12-054. 110 Decree No. 12-181. 2022 COMOROS 140 Chapter VIII: Disaster Risk Management PUBLIC EXPENDITURE REVIEW mechanisms to interact coherently and to efficiently support public service delivery before or after the occurrence of natural disasters. » Ex-Ante Mechanisms While there is a contingency budget line, detailed budget execution data are unavailable. Since 2015, there has been a budget line (Natural Disaster Risk Reduction Fund) under the Ministry of Finance and Budget for common expenditure dedicated to DRR,111 referred to in the national budget as the capital transfer for DiRM. As per the 2015 Finance Law, the amount allocated to this budget line represented 5 percent of the budget in 2015, averaging 2 percent of the budget in 2016–2020 (Table 30). Its resources are provided for in the Finance Law each year, and even though the Ministry of Finance and Budget confirmed the execution of resources following the 2017-18 floods, the amount executed was not shared. Table 30. Account Status of the Natural Disaster Risk Reduction Fund 2015 2016 2017 2018 2019 2020 Allocation (in KMF million) 1,488.8 545.6 1,219.0 353.2 1,219.0 1,219.0 Execution (in KMF million) - - - - 88.6 824.4 Allocation (in % of approved budget) 6 2 2 1 2 2 Source: Ministry of Finance and Budget. Resources from the National Disaster Risk Reduction Fund can be used for all interventions related to reconstruction and recovery efforts following a disaster. When a disaster occurs, the relevant ministry and/or the DGSC makes an official request to access resources, and a multi-institutional committee, comprising among others the Presidency and the Ministry of Finance and Budget, is established to manage the response funds. Currently, there is no operations manual, and there does not appear to be clear criteria or thresholds for triggering the use of the fund or for the composition of the committee. There are additional potential contingency funding sources, but they are limited or a budget has not been specifically allocated. In terms of unallocated budget, the National Assembly, the Presidency, and some ministries112 have a contingency budget line for DiRM, but there was no funding allocated over the period reviewed. The DGSC’s operating budget and budget execution have been quite volatile, although some improvements were recorded in 2019–20. The DGSC’s allocated operating expenses fluctuated between 2016 and 2020 (Table 31). Only 13 percent of the allocated budget was executed during this period, with the execution rate being a mere 1 percent in 2017. There is not enough information available to explain this discrepancy. The annual budget remains limited and cannot cover emergency response expenses across the three islands (let alone risk reduction and preparedness activities). In addition, the DGSC receives substantive support from development partners, which could not be assessed in this analysis. During the preparation of the 2023 Budget Law, a contingency line entitled “acquisition, construction and rehabilitation of the Karthala observatory” in the amount of KMF 300,000,000 (US$611,000) has been discussed to be allocated to the DGSC in response to the yellow volcano alert triggered by the government on August 17, 2022. 111 The Ministry of Finance and Budget received support from the United Nationals Office for Disaster Risk Reduction (UNISDR) and the Indian Ocean Commission (IOC) under the joint “ISLANDS programme for Financial Protection against Climatic and Natural Disasters” for its establishment. 112 Ministry of Justice (Justice Cabinet and General Direction for FOP, National Commission for Human Rights and Freedom), Ministry of Finance (general directorate for economic affairs and external trade), Vice Presidency in charge of Economy, planning, industry, craft, tourism, investment, private sector and land affairs, Ministry of National Education, higher education, scientific research (General Secretary), Ministry of Interior (DGSC). ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter VIII: Disaster Risk Management 141 Table 31. DGSC Operating Expenses 2016 2017 2018 2019 2020 Allocation in KMF 19,000,000 1,752,000,000 252,000,000 212,130,000 182,130,000 Execution in KMF 12,750,000 14,250,000 65,600,000 100,580,000 129,870,000 Source: Ministry of Finance and Budget. Public infrastructure is not covered by insurance in Comoros. The reconstruction of public infrastructure cannot benefit from the private resources of insurance companies, as public infrastructure assets are not insured. In addition, Comoros signed the Africa Risk Capacity (ARC) Group Treaty and has a memorandum of understanding in place since April 18, 2016, to cover the ARC engagement. Comoros could explore the feasibility of subscribing to parametric insurance products to cope with severe natural shocks. It is important to note that DRR efforts decrease the scope for risk financing mechanisms, bringing risk premiums down and making insurance more affordable. DRR investments and risk financing mechanisms should therefore be jointly considered to identify the optimum public finance policy. » Ex-Post Mechanisms During a disaster, the Government of Comoros levies a tax Humanitarian Assistance from Figure 87.  to finance the emergency response. Following the 2019 Development Partners Cyclone Kenneth, the government retained 10 percent of US million civil servants’ salaries for the months of March and April 0.25 0.233 2019113 as an “exceptional solidarity measure.” The funds 0.20 were collected by the Treasury and deposited in a Special 0.181 Account opened at the BCC. 0.15 0.15 Resources from development partners contribute 0.10 0.089 significantly to the government’s disaster response, but data remain limited and incomplete. Due to Comoros’ 0.05 0.054 0.014 limited national budget, public investment needs are 0 largely covered by its economic and financial partners, 2012 2013 2014 2015 2016 2017 2018 2019 2020 mainly through multilateral and bilateral aid (China, ▬ Emergency response ▬ Reconstruction relief and rehabilitation ▬ Disaster prevention and preparedness France, Turkey, the Gulf countries, etc.). As with the national Source: OECD Credit Reporting System Online Database. budget process, support from foreign partners varies from year to year (Figure 87). The Comoros Public Investment Program (2016–2020) was shared for review but was not sufficiently exhaustive in the area of DiRM. In addition, it was difficult to clearly distinguish expenses related to risk reduction from those related to response or reconstruction. The majority of assistance from development partners is directed toward emergency response, which increased dramatically during Cyclone Kenneth in 2019, which also triggered support for reconstruction and rehabilitation. Assistance for disaster prevention and preparedness was mainly provided during the 2017 flooding events. 113 Decree No19-045/PR of April 27, 2019, on the financing mechanism to address damages caused by Cyclone Kenneth. 2022 COMOROS 142 Chapter VIII: Disaster Risk Management PUBLIC EXPENDITURE REVIEW VIII.5 A risk-sensitive budget review shows that the DiRM cycle is skewed toward disaster response A risk-sensitive budget review was conducted for the period 2016–2020, but it faced limitations because of data quality. It details DRR-related public expenditure and identifies the extent to which the central government has planned or invested, implicitly or explicitly, in DRR. It analyzed the expenditures of the National Assembly, the supreme and constitutional courts, the Presidency, and 12 ministries114 as well as common expenses managed by the Ministry of Finance and Budget. It then identified expenditures with “significant” (but not main) DRR objectives and DiRM-related projects that would not have been undertaken without the principal DiRM objective. In Comoros, the names of budget lines are not consistent from one year to the other, making the analysis difficult. The review covers total expenses under domestic financing, as indicated in the revised budget laws. It estimated investments and operating expenses related to DiRM at an average of KMF 1.4 billion (US$2.9 million) in 2016–2020, representing 2.57 percent of the total budget of around KMF 57 billion (US$116 million) (Table 32). The review did not include expenditures related to infrastructure resilience, as there was no clear contribution going beyond routine maintenance. Table 32. Disaster Risk Management Total Expenses under Domestic Financing 5 years- 2016 2017 2018 2019 2020 Institution Designation Average Marked Marked Marked Marked Marked Marked Ministry of Post, telecommunication, Directorate General digital economy, of Civil Aviation and 53,561,806 53,561,806 information in Meteorology charge of marine and air transport Ministry of National Education, higher National center for 67,282,065 69,788,004 73,394,138 69,243,259 96,334,632 75,208,420 education, scientific scientific research research Ministry of Interior National Directorate 19,000,000 1,752,000,000 252,000,000 212,130,000 182,130,000 483,452,000 for Civil Protection Ministry of finance Capital transfer and budget - for disaster risk 545,550,000 1,219,000,000 353,183,818 1,219,000,000 1,219,000,000 911,146,764 common budget management Total 631,832,065 3,040,788,004 678,577,956 1,500,373,259 1,551,026,438 1,480,519,544 Total allocated 32,070,291,504 56,528,503,190 53,939,843,001 75,372,807,605 69,839,603,382 57,550,209,736 budget Share of total 1.97% 5.38% 1.26% 1.99% 2.22% 2.57% budget Source: Author’s calculations based on Comoros national budget 2016–2020. Note: The Karthala Volcano Observatory is under the National Center for Scientific Research. The budget review also estimates the marked investments and operating expenses related to the DiRM cycle, and it shows that expenditures are skewed toward disaster response. The review presents the five-year average for the significant and principal marked executed budget (Table 33). Most of the budget is identified as ‘principal’ because it mainly covers DiRM-related agencies’ operating expenses. Disaster response is the most important budget category 114 Ministry of Health, Solidarity, Social Protection and Gender Promotion; Ministry of Justice, Islamic Affairs, Public Administration and Human Rights; Ministry of Foreign Affairs, International Cooperation, in charge of Comorians abroad; Ministry of Finance and Budget; Ministry of Post, Telecommunication, Technology and ICT; Ministry of Agriculture, Fishing and Environment; Ministry of Economy, Investment in charge of economic integration; Ministry of National Education, Higher Education and Scientific Research; Ministry of Interior, information, Decentralization in charge of relations with institutions; Ministry of Justice, Employment, professional integration, culture and sports; Ministry of marine and air transport, in charge of tourism and craft; Ministry of Land Use planning, Urbanism in charge of lands affairs. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Chapter VIII: Disaster Risk Management 143 (US$2.8 million), largely due to the Natural Disaster Risk Reduction Fund contingency budget line, demonstrating the need for an integrated approach to DiRM. Table 33. Average Allocated Marked DRR Budget across the DiRM Cycle, 2016–2020 Investment per DiRM cycle Significant (KMF) Principal (KMF) Total (KMF) Total (US) Prevention - 75,208,420 75,208,420 127,692 Preparedness - 53,561,806 53,561,806 108,485 Response - 1,394,598,764 1,394,598,764 2,824,647 Reconstruction - - - - Average annual budget allocation - 1,523,368,989 1,523,368,989 3,085,765 (2016–2020) Share of total budget (KMF 57,550,209,736) 3% 3% Source: Author’s calculations based on Comoros national budget 2016–2020. VIII.6 Conclusion and Policy Options This chapter reviewed the GoC’s spending on DiRM. The country’s ministries do not explicitly define DRR in their programs and activities. Nevertheless, the application of the OECD DAC DRR policy marker shows that the government allocated an average of KMF 1.4 billion (US$2.9 million) on disaster-related prevention, preparedness, and response between 2016 and 2020, representing 2.57 percent of the total DRR budget. Based on the findings outlined in this chapter, the authorities should consider the following policy options: › Explicitly document risk reduction investments in the national budget to better assess the country’s DiRM investments. This documentation should include appropriate classification and coding of activities in the national budget. › Strengthen the National Disaster Risk Reduction Fund (budget line) by streamlining procedures and revising the design and operations to improve fund allocation, management, utilization, and transparency. › Enhance collaboration between the Ministry of Finance and Budget, the DGSC, and the other key ministries involved in DRR. The involvement of the Ministry of Finance and Budget in the development of the DiRM bill and strategy is instrumental to create a more integrated approach to DiRM while monitoring the implementation of the strategy and linking to disaster-related financing risk. 2022 COMOROS 144 Chapter VIII: Disaster Risk Management PUBLIC EXPENDITURE REVIEW Table 34. Policy Options to Enhance Disaster Risk Management Short-term measures (Less than 2 years) Medium-term and long-term measures (2+ years) VIII. Disaster Risk Management VIII.1. Strengthen collaboration between the Ministry of Finance and Budget (MoFB), the DGSC and the other key sectoral ministries involved in DRR › Involve the MoFB in the development of the Disaster › Strengthen collaboration between the Ministry of Risk Management Bill and National Disaster Risk Finance and Budget (MoFB), the DGSC and the Reduction Strategy (P) other key sectoral ministries involved in disaster risk reduction › Adopt the National Disaster Risk Reduction Strategy › Enact a Disaster Risk Reduction Bill (P) › Improve disaster damage and loss assessment and recording VIII.2. Strengthen the National Disaster Risk Reduction Fund (budget line) › Assess the National Disaster Risk Reduction Fund › Legally establish the National Disaster Risk Reduction performance and its impact Fund › Assess Comoros emergency funding gap › Develop the Fund’s operations procedures manual › Strengthen capacities of the Budget’s department on › Develop a comprehensive Disaster Risk Financing Disaster Risk Financing Strategy › Strengthen the National Disaster Risk Reduction Fund (budget line) VIII.3. Integrate DRR dimension into development planning including budgetary and financial planning › Establish and implement a methodology for budget › Establish a cross-cutting and multi-sector budget tracking to increase efficiency and transparency of program for disaster risk reduction spending disaster related expenditure › Develop clear guidance and a sustainable capacity building program for government entities in conducting emergency procurement › Integrate DRR dimension into development planning including budgetary and financial planning ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Bibliography 145 Bibliography Ali, R., Hannoun, Z., Harraqui, K., Zeghari, L., et al. 2019. Profile of diabetes and cardiovascular risk factors in adults Anjouan Island (Comoros). The Pan African medical journal, 33, 140. https://doi.org/10.11604/ pamj.2019.33.140.19016 Gichangi P, Gonsalves L, Mwaisaka J, et al. 2022. 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Plan National de Développement des Ressources Humaines Pour la Sante (PNDRHS) 2018–2022. 2022 COMOROS 146 Appendix PUBLIC EXPENDITURE REVIEW Appendix Annex 1. Direct Tax Instruments Components Description Direct tax instrument: Taxes on individuals’ profits and income Tax on individuals’ income Tax paid by employers on salaries with a progressive rate ranging from 5 to 30 percent for seven different salary ranges, increasing by 5 percent from one salary range to the other. 150 000 KMF to 500 000 KMF = 5% 500 000 KMF to 1 000 000 KMF = 10% 1 000 000 KMF to 1 500 000 KMF = 15% 1 500 000 KMF to 2 000 000 KMF = 20% 2 000 000 KMF to 2 500 000 KMF = 25% 2 500 000 KMF to 3 500 000 KMF = 30% > 3 500 000 KMF = 30% Tax on returns on investment It accounts for 15 percent of the dividends and interests paid. capital Direct tax instrument: Taxes on firms’ profits and income Single professional tax Tax on profits for companies with a turnover of less than KMF 20 million. The contribution is valued at one to four times the cost of the operating license. Taxes on corporates’ profits The tax rate on corporate profit is set at 35 percent. However, if the turnover exceeds KMF 500,000,000, the tax rate is set at 50 percent for: (i) public establishments of an industrial and commercial nature; and (ii) industrial or commercial enterprises that are joint-stock companies and in which the Union of Comoros, the Islands, the territorial authorities, or public institutions hold directly or indirectly the totality of the capital share. In no case may the corporate tax be less than a flat minimum equal to 1 percent of the turnover. Direct tax instrument: Taxes on firms and individuals’ real estate ownership Taxes on built and rented Taxes with an annual rate of 20 percent of the rental value of the property and 30 property percent for commercial and industrial premises. Enrolment taxes Real estate transactions tax ranging from 2 to 9 percent of the value, a property publication tax of 2 percent, an enrolment fee of 1 percent, and a land matriculation fee of KMF 10 000. Tax on property appreciation Tax with a rate of 20 percent of the taxable appreciation gain. gains Source: AGID and Agence Nationale pour la Promotion des Investissements (ANPI). ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Appendix 147 Annex 2. Indirect Tax instrument: Taxes on International Trade and Transactions Tax Description Unique import tax Tax with rates of 0 percent, 5 percent, or 20 percent depending on the imported products (CIF). An administrative fee of 1 percent of the customs duties (or 3 percent of the CIF value for exempted imports) is added to the tax. Unique specific tax A specific tax on certain imported goods (e.g., meat and busses), and its value depends on the weight, volume, or value of certain goods. Imported rice is subject to its own tax of 40 KMF/kg or 150KMF/kg, depending on the type of rice. Tax on petroleum products The tax is fixed between 115 KMF/liter to 230 KMF/liter at the standard rate, and the kerosene tax amounts 10 KMF/liter. Special tax for fiscal purposes The tax applies to alcohol and tobacco, with the rate ranging between 3 percent and 250 percent. Exports duties While export duties have been removed, 1 percent is levied on exports (FOB) for the Union of Chambers of Commerce, Industry and Agriculture. Ad valorem tax This provision has been replaced by ad valorem valuation of containers and imported goods (see customs code). Source: Comorian authorities, including ANPI. Annex 3. Indirect Tax Instrument: Excise Duties Tax Description Domestic tax on alcohol Tax rate of 350 percent. Domestic tax on tobacco Tax rate of 300 percent. Domestic tax on cement Tax rate of 15 percent. Taxes on metals and precious Excise taxes with a rate of 5 percent on the exports of platinum and gold, 2.5 stones percent on other metals and precious stones, and 0 percent on imports of metals and precious stones. Tax on the consumption of - ordinary rice, domestic tax on petroleum products, over tax on the consumption of luxury rice, etc. Source: Comorian authorities, including ANPI. 2022 COMOROS 148 Appendix PUBLIC EXPENDITURE REVIEW Annex 4. Indirect Tax Instrument: Taxes on Goods and Services Tax Description Domestic taxes on goods and services Consumption tax The tax applies to the final consumption of goods and services of individuals and firms, including SOEs and private companies such as hotels, restaurants, supermarkets, banks and financial institutions, transit agencies, etc. The normal statutory rate is 10 percent, however, special rates apply to specific items, such as 3 percent for water, private school fees, and inter- island airfares; 5 percent for catering, banking, and international transport services; 7.5 percent for mobile telephony; 25 percent for casinos; and 0 percent for essential consumer products. Activity patents Taxes paid in advance for receiving authorization to carry out economic activities, except for activities related to the agriculture and artisanal sectors. They constitute a fixed amount for each category or sector of activity and a proportional amount that is a share of the rental value (i.e., 10 percent of the annual rental value). Taxes on insurance contracts Tax rate of 3 percent on life, marine, and rental insurance; 15 percent on fire insurance; and 4 percent on other insurance policies. Vignettes Taxes are subject to special procedures. Diesel tax Tax is subject to special procedures. Other taxes (e.g., hotel, transporter licenses, taxes on Taxes are subject to special procedures. domestic consumption, etc.) Registration fees and stamps Stamps duties, registration fees, visa fees, and secured - civil registry documents Domestic taxes on imports Import consumption tax, import license, import license for - luxury rice, import license for alcoholic beverages, import tax on agricultural products, import tax on animals, import tax deposit, other import duties and taxes Source: Comorian authorities, including ANPI. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Appendix 149 Annex 5. Indirect Tax Instrument: Other Taxes Tax Details Tax on vanilla Tax rate of 5 percent of the export selling price per kilogram of dried vanilla, according to the 2021 annual budget law. Tax on Clove Tax of KMF 200 per kilogram of dried clove, according to the 2021 annual budget law. Tax on Ylang Ylang Tax rate of 7.5 percent of the export selling price per liter of Ylang-Ylang oil, according to the 2021 annual budget law. Tax on the national audiovisual spectrum, environmental - tax, taxes on plastics, right-hand driving tax, etc. Source: Comorian authorities. Annex 6. Nontax Instruments Nontax instrument Description Government real estate income Collected by AGID and includes administrative rents, port royalty payments, fees for using radio frequencies, companies’ royalty payments, administrative royalties, demurrage charges, national audiovisual royalties, telecommunication license fees, etc. Administrative duties and fees Includes inheritance duties, leasehold rights, taxes on real estate advertisement, phytosanitary fees, administrative directorates (Ministry of Education, Ministry of Foreign Affairs, Ministry of Economy and Commerce, Ministry of Justice, etc.), exams regies, mining and civil engineering service regies, yachts and camps, national and international fishing license fees, telecommunication license fees, mining research license fees, admission fees and sectoral assistance, etc. Fines, penalties, and Includes fees related to garnishment procedures and proceedings. confiscations SOEs’ income Includes dividends received by the government from the activities of SOEs such as SCH, ONICOR, COMORES-TELECOM, SONELC, SONEDE, SNPSF, ADC, BIC, BCC, MORONI TERMINAL, AIMPSI, etc. Prefecture revenue - Social contributions - Exceptional revenue - Revenue from day-to-day - management Source: Comorian authorities. 2022 COMOROS 150 Appendix PUBLIC EXPENDITURE REVIEW  ealth expenditures by sources in KMF and in % of total health expenditures, 2015 and 2019 Annex 7. H Sources 2015 In % 2019 In % Government (GHE) 2,007,071,727 10.4% 11,396,060,276 33.0% Compulsory insurance contributions 26,520,207 0.1% 181,560,848 0.5% Voluntary private health insurance contributions 9,965,265 0.1% 830,167,883 2.4% NGO 26,002,485 0.1% 123,205,921 0.4% Enterprises 115,356,275 0.6% 281,284,926 0.8% Household out of pocket 14,778,445,738 76.8% 16,720,911,456 48.5% Development Partners 2,273,150,046 11.8% 4,969,052,540 14.4% Total health expenditures (THE) in KMF 19,236,511,743 100% 34,502,243,850 100% Of which: Recurrent health 19,036,705,081 99% 27,044,257,279 78% Capital investment 199,806,663 1% 7,457,986,572 22% Note: Medical education 10,925,813 8,680,000 Source: Ministère de la Santé (2021). Note: Total excludes spending on medical research and medical education. Total recurrent health spending financed by all sources, by type of care, in KM 2015 and 2019 Annex 8.  Type of care 2015 % distribution 2019 % distribution Hospitals 8,129,868,441 42.7% 13,335,204,775 49.3% Pharmaceuticals 4,000,421,515 21.0% 4,646,843,102 17.2% Preventive care 822,398,710 4.3% 3,512,866,272 13.0% Ambulatory care 1,036,969,959 5.4% 1,431,902,513 5.3% Laboratory and diagnostics 1,265,658,755 6.6% 1,437,754,843 5.3% Imagery 720,784,909 3.8% 826,047,730 3.1% Administrative costs 2,928,080,718 15.4% 1,773,857,895 6.6% Development partners 132,522,074 0.7% 79,780,150 0.3% Total recurrent, KM 9,036,705,081 100.0% 27,044,257,280 100.0% Source: Ministère de la Santé (2021). Note: Recurrent excludes capital expenditures (infrastructure and equipment).  overnment health expenditures, by recurrent and capital, in KMF, 2015–2020 Annex 9. G Government 2015 2018 2019 2020 expenditures Recurrent health 1,970,112,806 1,825,457,438 4,164,193,938 6,540,798,230 Capital investment 36,958,921 2,805,971,552 7,231,866,338 1,880,460,185 Total, in KMF 2,007,071,727 4,631,428,990 11,396,060,276 8,421,258,415 Source: Ministère de la Santé (2021) for 2015 and 2019. Rapport d’exécution budgétaire. Comores 2020. ADDRESSING FISCAL CHALLENGES TO FOSTER AN INCLUSIVE GROWTH Appendix 151 Annex 10. Government health budget and actual expenditures, in KMF, 2018 and 2020 2018 2020 Gov health expenditure Budget Actual Execution Budget Actual Execution Distribution Actual Salaries 395,695,650 289,855,125 73% 1,081,708,523 1,286,381,160 119% 15.3% Transfers to providers 1,627,598,852 805,552,220 49% 1,373,111,972 1,404,718,909 102% 16.7% for wages Goods and services 15,050,141 - 0% 22,650,141 2,572,500 11% 0.0% Transfers to providers 725,500,396 657,388,228 91% 3,870,509,745 3,781,043,361 98% 44.9% Maintenance 7,277,390 - 0% 9,077,380 185,000 2% 0.0% Overseas treatment 75,000,000 72,661,865 97% 89,346,760 65,897,300 74% 0.8% Capital investment Construction 6,000,000,000 2,721,228,180 45% 7,040,000,000 1,880,460,185 27% 22.3% Medical equipment 150,000,000 84,743,372 56% 2,005,000,000 - 0% 0.0% Total in KMF 8,996,122,429 4,631,428,990 51% 15,491,404,521 8,421,258,415 54% 100.0% Source: Rapport d’exécution budgétaire. Comores 2020. Annex 11. OCOPHARM Financial Report, in KMF and US$, January–October 2021 Jan–Oct 2021 in In % of total OCOPHARM Revenues and Expenditures in US$ KMF million revenues Total revenues from pharmaceuticals 1,508.69 3,306,362.04 Expenses Purchase of pharmaceuticals 664.82 1,456,984.44 Procurement 99.96 219,059.83 Total pharmaceutical purchases 764.78 1,676,044.27 51% Gross result 743.91 1,630,317.77 49% Other expenses (transport, etc) 190.01 416,414.64 Taxes 0.42 918.26 Salaries and wages 256.85 562,886.26 Other management cost 1.65 3,605.08 Total operational expenses 448.92 983,824.24 30% Total expenditures 1,213.70 2,659,868.51 80% Net result 295.00 646,493.53 20% Source: OCOPHARAMA RAPPORT D'ACTIVITÉ AU 31 OCTOBRE 2021. Note: Exchange rate US$1 = KMF 456.30. 2022 COMOROS 152 Appendix PUBLIC EXPENDITURE REVIEW Annex 12. Financial Impact of the El Maarouf hospital investment in Comoros, in million US$ Actual Projections Total 2019 2020 2021 2022 2023 2024 2025 Nominal GDP in million US$ (IMF) 1,186 1,253 1,336 1,419 1,506 1,602 1,698 Scenario 1: El Maarouf w/ 650 beds (E120M) Gov health expenditure (GHE) in 2.2% 1.6% 2.9% 2.9% 3.0% 3.1% 3.2% % of GDP GHE in million KMF 11,396 8,421 16,534 17,842 19,412 21,296 23,556 GHE in million US$ ($1 = 430 KMF) 26.50 19.58 38.45 41.49 45.14 49.52 54.78 Gov recurrent health spending in 9.68 15.21 15.21 18.25 21.90 26.28 31.54 million US$ Gov project cost El Maarouf w/ 650 beds (E120M) in million US$ ($1 = 16.8 4.4 23.2 23.2 23.2 23.2 23.2 137.4 0.8 Euro) Scenario 2: El Maarouf w/ 300 beds GHE as a share of GDP 2.2% 1.6% 1.8% 2.0% 2.1% 2.2% 2.4% GHE in million US$ ($1 = 430 KMF) 26.50 19.58 24.71 27.75 31.40 35.78 41.04 Gov recurrent health spending in 9.68 15.21 15.21 18.25 21.90 26.28 31.54 million US$ Gov project cost El Maarouf w/ 300 beds (E 60M) in million US$ ($1 = 16.8 4.4 9.5 9.5 9.5 9.5 9.5 68.7 0.8 Euro) Source: Union des Comores (2021) and Government financial data. Note: Assumption for government recurrent health spending: 20% annual growth starting 2022. 2022 Comoros Public Expenditure Review Addressing Fiscal Challenges to Foster an Inclusive Growth