The IMF has called for major changes to Djibouti's economic policy over the next two years as a precondition for a new poverty reduction and growth facility (PRGF). The IMF's frustration with the lack of progress made by the government under its 12-month staff-monitored programme (SMP) in 2004 was illustrated by the Fund's demand for an addition six-month SMP (for the period June-December 2005). Since its expiration in December 2005 there has been no formal announcement regarding performance under the second SMP. The IMF will remain reluctant to agree a new PRGF. However, the situation could be changed by the severe drought and famine that hit Djibouti in the first half of 2006, as the IMF has indicated that it would be prepared to consider additional long-term assistance for countries that experience drought-related balance-of-payments problems.
Nevertheless, the IMF is likely to insist that the 2007 budget, currently being prepared, shows a clear commitment to tackling the fiscal deficit before it agrees a new PRGF. If the government could also give some assurance that it was willing to address structural objectives, it is possible that, under these new circumstances, the IMF, possibly at the urging of the US (because of its strategic interests in Djibouti) would award a new PRGF by mid-2007. A new PRGF would probably have the same objectives as recent SMPs, targeting improvements in fiscal management and the overall economic environment. However, the government's success in meeting its performance targets and carrying out reforms is likely to be patchy at best, and this will probably influence both the timing and the content of any IMF decision.